Rollercoaster ride for energy efficiency markets as Covid wreaks havoc

Before the coronavirus hit, the Victoria energy efficiency market was in the midst of the largest shake-up in the scheme’s history with the Department of Environment, Land, Water and Planning proposing significant and wide-reaching reforms. And then the world changed. It’s been a rollercoaster ride ever since.

The Victorian Energy Upgrade (VEU) scheme has, without doubt, been the environmental market most impacted by Covid-19. Firstly, because it was in the middle of a consultation process to reform the scheme in major ways – the proposed removal of lighting, increased targets, penalty and a reduction to the emissions factor – when the crisis began.

But also, significantly, because of the nature of the activities that produce the most VEECs, like residential lighting (schedule 21), which not only involves workers attending multiple houses in a day, but is typically driven by door-to-door sales.

With coronavirus cases spiking in March, the government took the unprecedented and necessary step of suspending activity in what it called ‘high volume’ methodologies, which included the main source of VEEC supply over the past 12 months, schedule 21, in order to reduce the risk of further spreading the virus.

Apart from a brief reopening in July, the suspension has remained in place ever since, with Victoria’s second wave preventing installers from being able to go back to work.

The impact on many of those installers, like many businesses across the state, has been devastating. Some managed to pivot to commercial lighting and indeed VEEC submissions were boosted across the middle of the year by schedule 34. For those who could not, the challenge of meeting forward obligations whilst being unable to create and keeping their business afloat, have been enormous.

From the mid $37s in April when the prospect of lighting changes and the suspension of activities helped the market up, down to $29 in June when that suspension was expected to be lifted and participants assumed the lifetime of lighting would be extended owing to the disruption caused by the crisis, 2020 in the spot market has been a rollercoaster.

More recently the market has sat in a tighter range between $33.00-$35.00 as participants awaited the release of the Department’s final decision on lighting. Lighting has been the dominant creation methodology across the scheme’s history, yet LED technology is now considered business as usual by the Department, hence its desire to phase it out.

The dramatic impact of the COVID-19 outbreak including the suspension of activities as well as rising unemployment, comments from the Minister about ‘minimal’ changes for 2021 and a commitment to provide at least 6 month notice before any changes to lighting would be implemented, led many to assume an extended period across 2021 without change.

In late September however, the Department’s final position was released, with a 35% reduction in the number of VEECs received from residential lighting installs from 31 st March 2021 and the full phase out from 31 st Jan 2022.

Given residential lighting is still suspended until at least 19 th October and that when it returns door-knocking will not be allowed as a sales technique, the timeline for these changes was considerably more aggressive than many expected and the market price has since climbed.

Commercial lighting will also undergo a smaller change on 31st March, 2021 with a 15% reduction in certificates earned per install, along with another more significant change on 31st, Jan 2022.

Commercial lighting will be removed completely on 31st Jan, 2023.

The major issues of the targets for 2022-2025 as well as the scheme’s penalty price and proposed changes to the emissions factor have still not been finalised. More information on new creation methodologies is also eagerly anticipated with major questions surrounding what will fill the void left by lighting in the years to come.

With its own consultation for the next phase of the scheme underway, the ESC market has also seen significant volatility across 2020, as speculation over the future of lighting saw prices move around. A notable feature in previous years, ESC registrations were again very large in June, contrary to the expectations of many.

Having witnessed the severity of proposed changes to the VEEC scheme in late 2019, some ESC market participants began to worry that similarly abrupt changes may have been on the agenda in NSW as the Department of Planning, Industry and Environment undertook a review of the scheme across the early part of the year.

When further information was eventually released In April, the Department appeared keen to emphasise the gradual nature of the changes it would propose, including to the treatment of lighting.

Having not been as vocal in its concerns about lighting having become business as usual as its Victorian counterparts, the expectation of a phase out were not as strong as those held south of the border.

In September, the release of a consultant’s report showed recommendations to phase out lighting beginning sometime in 2022, a longer timeframe than was originally outlined in Victoria. As yet there is no word as to whether the recommendations will be adopted by the Department, though many believe it likely.

With the spot ESC price sitting around $26.00 in March, speculation surrounding the outcome of the Department’s review into the scheme and the changes it would recommend – particularly around the future of lighting – saw the market rally.

Having briefly reached $29.00 in late March, the spot climbed above the $30 mark is the second half of April, only to lose ground sharply. When the review’s details were published several days later the market continued to soften, closing May below the $26.00.

June is historically the biggest month for ESC creation as it contains the deadline (30th) for registration of the previous year’s certificate. A failure to register ESCs with an activity date of 2019 by the 30th June 2020 would see the ability to create those certificates forfeited, hence the strong incentive to clear the backlog.

A combination of slightly more subdued sentiment amongst installers with regards to sales over the preceding 12 months, in conjunction with the ongoing pandemic again saw many predict the heady figures produced in each of the last 3 years (circa 1m ESCs in each year) were unlikely to be repeated in 2020.

Ultimately, there were repeated with over 1m ESCs emerging across the month, an outcome which saw the spot price reach a low of $23.75 in the latter part of the month before a recovery of sorts began.

Having spent most of the next 2 months between $25 and $26, the market began to climb again in the lead up to the release of the lighting consultants report in early September, with the spot first climbing to $27 before a brief jump into the $28s. The market finished the month at $26.70.

Aside from the potential phase out of lighting the market is also awaiting decisions on the target’s trajectory, which is proposed to change from its current 8.5% to 13% by 2020. Information on new methodologies, as well as the exciting new peak demand reduction scheme are being eagerly awaited by participants.

Marco Stella is 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.