White certificate schemes – the swiss army knife of energy policy?

Newgrange Consulting prepared a report for the Australian Energy Council looking at the development of these schemes.

RCSs are not the only way to fund policy goals through energy bills – other policies such as the NSW renewable roadmap and the ACT 100per cent renewables mandate are funded via distribution charges. In these cases, governments are awarding the relevant contracts, and so there is no need to directly involve retailers. So RCSs are used where governments do not need to be involved in the procurement- that is they are designed to deliver a general policy objective such as deployment of renewable generation or renewable fuels, or energy efficiency and governments are content to let the market find the lowest cost way to achieve the objective. This is the key advantage of a well-designed RCS – that it harnesses competition between energy retailers to find efficient solutions to policy goals. Accordingly, RCSs work best when:

• There is a single target metric
• There is a range of potential activities that can earn certificates, allowing the market to discover which are the lowest cost
• There is clarity over what constitutes qualifying activity and any audit or verification requirements are not unduly onerous
• There is a high degree of additionality – that is the scheme is funding activities that would not otherwise occur
• There is a market for activities and activities are fungible – i.e. tradeable certificates are created as a result of carrying out qualifying activities and a buyer of certificates can rely on the certificate’s bona fides
• There is robust governance and oversight of the scheme (in order to give participants confidence in certificates) without creating undue barriers to participation
• Energy retailers (and any other directly liable entities) have clarity over their individual liabilities for the compliance year, and also have some flexibility in compliance (e.g. being able to borrow or bank certificates from future or earlier compliance years)
• Administrative costs are minimised

The large scale RET is an example of an RCS that had most of these characteristics. Despite various government interventions that effectively changed the target, the scheme achieved its goals fairly well. Arguably, energy efficiency schemes also worked well in the early days. Certificate creators worked out the lowest cost way to meet these schemes was basically to provide households with low cost items such as LED lights, low flow shower heads, power meters, and standby power controllers, for free. As business users got added to the scheme, commercial lighting upgrades proliferated.

However, the evolving landscape for these schemes is leading governments to develop new objectives. Factors under consideration include:

• many of the “low hanging fruit” of energy efficiency have been fully utilised, and a step change in household energy efficiency requires more complex retrofits. While these can deliver much greater energy savings they are also more expensive and customers need toco-fund them.
• the emissions intensity of electricity is falling rapidly, so energy efficiency produces less emission reduction per MWh saved (a key goal of the schemes and still the metric by which the Victorian scheme is assessed)
• The rise of variable renewables means peak demand reduction and demand flexibility are  becoming more valuable to the grid
• Some governments are keen to get households and small businesses off gas and onto electric alternatives.

The RCSs are attractive vehicles for attempting to achieve a range of policy goals as they are already operating, and don’t require direct government funding. So governments are expanding the range of activities rewarded  - trying to make these schemes the “swiss army knife” of energy policy. Unfortunately in doing so they are losing sight of the characteristics that make these schemes effective:

• They are targeting multiple metrics – energy flexibility as well as energy efficiency by treating the former as if it were the latter, i.e. “deeming” it to represent energy efficiency even though it isn’t. NSW has at least set up a separate scheme for peak demand reduction.
• They are seeking to incentivise complex retrofits despite the evidence that the scheme has never delivered these in any great numbers, because it is much harder to engage customers in more intrusive activity that requires significant co-funding. Customers are likely to carry out a retrofit only when it suits them – i.e. remodelling their home anyway, and in doing so often choose service providers not accredited for the scheme so they don’t get the benefit.
• Victoria is keen to use its scheme to underwrite its gas substitution roadmap, which now includes mandatory switching to electric alternatives under some circumstances. But allowing mandatory activity into the scheme violates the additionality principle, so Victoria can’t be confident that these schemes  - whose costs are shared across all energy users – are then benefiting all energy users.

While these schemes have a decent track record of delivering outcomes consistent with the original policy goal, it’s becoming increasingly likely that they will evolve into increasingly complex and unworkable schemes that cease to be the most efficient way to deliver the desired outcomes.