The Victorian government is currently reviewing the Victorian Energy Upgrade (VEU) program and asking, “What are the big opportunities for the program in the next five years?”
In committing to an energy efficiency target 20 years ago, the Victorian government recognised the vital role it needed to play in reducing electricity bills, energy demand, and carbon emissions. Going forward, the Victorian government can again provide leadership by valuing new commodities of ‘demand flexibility’ and creating new markets.
VEU design explainer
The VEU scheme was initially designed to address the barriers to energy efficiency.
Investing in energy efficiency is in the economic interest of the average householder or business. However, the barriers are so significant that Australia had become one of the largest energy wasters in the world.
The key design element of the current VEU scheme is that it commoditises energy efficiency and allows it to be traded as energy efficiency certificates (VEECs). The government regulator allocates VEECs when the end consumer has received an energy efficiency service or retrofit.
The VEU creates a market for VEECs by placing a legal obligation on the electricity retailer to acquire and acquit their share of the annual target. This obligation creates a ‘regulated’ demand for VEECs and an incentive for industry to deliver energy efficiency directly to households and businesses. Without the existence of a market, the barriers to investing in energy efficiency would remain.
In the beginning, the target was low, allowing the EE industry to start innovating and providing a service to energy users. The success of the VEU is not only to save Victorians over $4 billion dollars in energy savings and improve energy security but also to create an energy efficiency industry.
Australia’s energy transition
As Australia’s energy system transitions to higher levels of renewable energy and becomes more decentralised, additional forms of ‘power system flexibility’ will be required. Power system flexibility is needed for electrical system security, maintaining it within safe levels, and managing electrical network constraints and congestion.
Demand flexibility is a very affordable form of power system flexibility, and it is located where it is needed – on the distribution network and in the suburbs.
Simply put, demand flexibility is realised by switching ‘Distributed Energy Resources’ (DERs) on or off from the grid. DERs include privately owned rooftop solar, hot water systems, electric vehicles (EVs), and batteries.
While more Australians are choosing DERs, most homes and businesses still don’t and could benefit from installing DERs. Of the currently installed DERs, only a fraction are enabled to deliver demand flexibility.
Need for demand flexibility to be valued
Internationally, markets in demand flexibility are emerging. However, unlike the UK, Australia has yet to undertake the energy market reforms and necessary changes to the electricity network business model.
The value of demand flexibility trading is significant. It can improve the efficiency of network investment, operation, and maintenance and deliver economic and environmental outcomes.
It has been estimated that the network investment cost savings alone are in the order of $19 billion. Without demand flexibility, almost $1000 billion will be spent on the costly duplication of energy investments in Australia’s electricity system, compared to the $600 million cost to enable DER and demand flexibility trading.
However, the opportunities and benefits will not be unlocked without valuing demand flexibility in the way that the VEU values energy efficiency and without some form of regulation to create a market for demand flexibility products.
The big opportunity
In the absence of federal and state governments aligning energy policies, individual state governments have implemented energy efficiency schemes, realising the compelling benefits they can provide. These state energy efficiency schemes could provide a regulatory framework for a demand flexibility market.
The first big opportunity is to expand the VEU scheme to include DER-enabling technology, such as comms and controls, to facilitate demand flexibility trading.
Next, set targets for demand flexibility trading, starting from a low volume, low-risk level, to allow an industry to develop. This would require a regulated obligation, including on the network service providers, to use DER-sourced demand flexibility.
The VEU program could also serve as a framework for mapping the location and level of DER services resources and capacity.
Notably, the VEU scheme would support the Victorian government’s obligation to the public regarding consumer protections, the use of their data, and consumer rights. As demand flexibility trading utilises privately owned DER assets, Victorian government oversight would ensure consumer protection and technology stewardship by setting minimum standards.
The rapid decentralisation of the electricity system and strong trends toward electrified homes and businesses means there is no time to lose.
An enhanced VEU would prepare Victorians for demand flexibility trading, create an investment environment and markets for technology and business model innovation, and the opportunity is compelling.
Declaration: Dr Vikki McLeod developed the original policy design of the Victorian Energy Efficiency Target when employed by the Victorian Government (2003 – 2007) and later administered the scheme as an employee of Essential Services Victoria (2008- 2010).
