Energy efficiency market report: Lighting strikes twice in Victoria

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Changes to product requirements and compliance matters, plus the election in New South Wales, have made for interesting times in NSW and Victoria energy efficiency markets.

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Victorian Energy Efficiency Certificates (VEECs)

Prices as at 28th February 2019

The ongoing speculation as to the future of the recently amended Schedule 21A (residential lighting replacements) was the source of serious lobbying efforts and greatly differing opinions across both late 2018 and early 2019. Once its rules were finally set, the attention then returned to actual, rather than expected supply activity and of course to the matter of the 2021-2025 target extension.

Across most of 2018 the primary focus in the VEEC market had remained on commercial lighting, as both the main source of current and expected creation. That was until the Department of Environment, Land, Water and Planning (DELWP) announced it had decided to expand the definition of Schedule 21A to allow for the replacement of compact fluorescent lighting (CFL) with LED technology.

CFLs were a revolutionary technology which dramatically improved lighting efficiency and their uptake was enormous. Yet compared to current LED technology they are less efficient, of lower lighting quality and contain mercury which is harmful if not properly recycled.

The prospect of having hundreds of highly motivated ‘retrofitters’ scouring the suburbs replacing lights and thus jump-starting residential activity once more saw VEEC prices fall sharply, from the low $20s to $17.

Considerable pushback was then directed towards the Department and the Essential Services Commission from a variety of sources and a steady progression of changes were announced. First on product requirements and then on other compliance matters, the critical one being whether to mandate the activity be undertaken by licenced electricians or not.

With the compliance regime not yet in place and products not yet approved, the impact on price across late 2018 arose from expectations of future supply, rather than any underlying activity. If Schedule 21A was to be able to operate without the requirement for a licenced electrician to undertake the install, many expected a strong increase in VEEC supply across 2019.

Though unlikely to have reached the same levels, there were those who believed it may have been akin to what was previously seen during the standby power controller and halogen downlight activity booms.

In the end, following a consultation process, the Essential Services Commission decided in February that electricians would be required to undertake the installations on an ongoing basis. A move which will dramatically reduce the pool of potential installers and increase the cost of the activity.

The spot market had ended 2018 at $18.50 and in January and most of February oscillated between the low $16s and the mid $18s, as speculation swirled on which outcome would prevail on the matter of the electricians.

After weeks of strong speculation that electricians would not be required, across early February perceptions swung in the other direction and were ultimately proven accurate, with the ESC announcing mid-month that electricians would be required on an ongoing basis. The outcome helped the market rally.

VEEC submissions declined in the back end of 2018 and, across January and February, fell to their lowest levels seen since 2015. Across the first two months of year the average weekly VEEC submission rate was just over 60k, half the rate required by the 2019 target and thus on a weekly run rate basis, has resulted a in a reduction of the VEEC surplus of circa 540k.

Yet the surplus remains large, with 5.5m VEECs currently registered or pending registration above the 2018 target of 6.1m, equivalent to 87% of the 2019 target of 6.3m with 11 months left for further creation.

There is much debate surrounding the level of activity that will be possible under Schedule 21A at current pricing and it appears that the methodology will need to get moving to fill the void left by the declining commercial lighting market. With the path now cleared for the activity to get underway, the market will be watching closely to see what level of creation results over the coming months.

The other critical issue is the next phase of scheme’s targets for the period 2021-2025 that are set to be announced this year. Recognising that delay benefits no one, the Department appears set to kick the process off early, potentially around April/May, with a final position to be announced around October.

The Victorian Government appointed an independent expert panel led by Greg Combet to advise it on the trajectory required to meet its interim emission reduction targets for 2021-25 and 2026-30, with the ultimate goal of zero net emissions by 2050. The panel will hand down its final advice by 29thMarch.

This body of work will likely inform the target setting process for the next phase of the VEEC market. With energy efficiency broadly recognised as representing low hanging fruit, there are some expecting an ambitious announcement. Whilst others see the decision to put the breaks on Schedule 21A by requiring electricians do the install as evidence that a more circumspect target is likely.

New South Wales Energy Savings Certificates (ESCs)  

Prices as at 28th February 2019

Late 2018 and early 2019 yielded differing outcomes in the ESC market with the former producing stability, while the latter brought volatility. Following the large ESC creation prior to the deadline for changes to commercial lighting on 31stOctober, supply has been somewhat subdued. Yet participants will be watching closely in the weeks ahead which is typically a time of higher ESC creation. The NSW election is another important factor, with a review of the scheme’s targets set to occur this year.

ESC registration activity is often inconsistent; the product of the creation, audit, creation system employed by the regulatory regime. And with changes to the primary source of supply (commercial lighting) having occurred on 31stOctober, there was a strong incentive to pull forward the registration of lighting upgrades that would have been negatively impacted after the change.

This resulting in circa 650k ESCs being approved in the final 2 weeks of October, thus taking another chunk out of the 2019 target. The final two months of 2018 then saw relatively healthy registration activity, especially given what had come previously, yet during this time the spot ESC market remained particularly stable, trading predominantly between $19.00 and $20.25.

Interestingly, it was in the New Year, while ESC registrations were low that the market was more volatile, with the spot softening repeatedly across January to reach a low of $17.90, before then promptly recovering to hit a high of $21 during February, ultimately closing the month at $20.20.

The cycle of Accredited Certificate Providers creating ESCs up to their pre-determined limit, then undergoing a lengthy audit before emerging to create once more has always caused fluctuations in supply. January and February are typically quieter periods for creation as many participants are in audit, having created across the back end of the previous year.

March and April are then bigger months, with ACPs emerging from audit to create ESCs in time to meet the last of the previous year’s forwards that would settle prior to the 30thApril, before then going back into audit in order to create again before the 30 June cut-off for the creation of the previous year’s ESCs.

The coming two months will be important to see what impact the changes to commercial lighting that took place late last year will have on ESC supply. Firstly because they reduced the number of ESCs created per install for many building categories, though they did also increase the number of ESCs for some of the main categories where activity takes place.

Yet perhaps more importantly the 31stOctober cut-off for the changes will likely have pulled forward ESC registration that might otherwise have come through at a more leisurely pace over the coming months. Whether or not this reduces ESC supply during this period is yet to be seen, but it is an important factor.

The Home Energy Efficiency Retrofit (HEERs) method, which underwent changes late last year to further encourage activity in the small office sector is also worthy of mention. There was some scepticism surrounding whether the smaller jobs associated with this activity would be attractive enough for participants to bother with.

After a slow start though, ESC registrations have begun to trickle through, with 62k approved thus far this year, a healthy increase on the 90k that was approved across the whole of last year. Should activity continue to increase under HEERs, it may be enough to compensate for potential reductions in that may arise in commercial lighting.

Having perhaps garnered less attention than it otherwise would have owing to the bipartisan support for the scheme, the looming NSW election (which will take place on 23rdMarch) is none-the-less significant. Both sides of politics have long supported the scheme, and both have come out with positive policies surrounding renewable energy and emissions reductions during the campaign.

Labor however is ahead on this front and its more ambitious emissions reductions policies may provide scope for greater ambition for the Energy Savings Scheme.

The election is important because 2019 is also the year in which a review of the scheme is due, with the target reaching its peak of 8.5% this year and flatlining out to 2025. The review may very well have led to changes anyway but the potential that it is employed as part of a more ambitious emissions reduction policy platform is exciting some onlookers.

Marco Stellais Senior Broker, Environmental Markets at TFS Green Australia. The TFS Green Australia team provides project and transactional environmental market brokerage and data services, across all domestic and international renewable energy, energy efficiency and carbon markets.

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