COST RECOVERY IN ENERGY EFFICIENCY STANDARDS
AND LABELLING PROGRAMS
September 2012
Prepared by:
Contents
1
INTRODUCTION
1
2
PUBLIC POLICY ISSUES
1
3
EXAMPLES OF COST RECOVERY IN S&L PROGRAMS
2
3.1
Registration or entry fee
2
3.2
Cost-recovery for verification testing
2
3.3
Certification
3
3.4
Laboratory registration
4
4
APPROACHES TO COST-RECOVERY
4
4.1
Total costs
4
4.2
Key issues
6
4.3
The allocation of costs
7
4.4
Feasibility and timing
8
5
CONCLUSIONS
8
6
OPTIONS FOR THE VIETNAM S&L PROGRAM
9
Tables
Table 1: UK Energy Saving Trust Recommended scheme - Annual model-based fees
3
Table 2: Approximate annual expenditure on verification tests (USD ‘000s)
5
Table 3: Indicative distribution of costs
6
Table 4: Indicative costs of testing costs in Australia by product
8
Figures
Figure 1: Annual total funding spent on off-the-shelf testing (USD) (11 responding programs)
5
1 Introduction
In many economies, energy efficiency initiatives are at the heart of national policies designed to
reduce energy consumption, tackle climate change and improve energy security. In particular,
Standards and Labelling (S&L) Programs for appliances and equipment have been proven to deliver
the greatest energy savings at the lowest cost.
S&L Programs can only succeed, however, with the support of effective market compliance regimes.
These ensure that products perform as claimed and consumers receive the services they pay for.
High compliance rates benefit all stakeholders in the S&L process. Industry can operate within a fair
market that encourages investment and technological innovation. Consumers and businesses can
rely on lower energy costs. Governments achieve key environmental, energy security and economic
policy objectives.
The integrity of S&L programs depends on adequate funding of staff, infrastructure and process
delivery, however this investment is small in comparison to the value of the savings achieved. The
expenditure of countries with the most effective compliance regimes is estimated to be a mere 0.2%
of the savings achieved1. Nonetheless given the pressure on national budgets, many S&L Programs
seek alternative funding for their core activities, particularly those which ensure proper functioning
of the market.
This paper discusses opportunities and considerations for recovering the costs of energy efficiency
S&L Programs, using examples from current national programs.
2 Public policy issues
S&L Programs are justified by governments as being the most cost-effective means of overcoming
the market barriers and distortions that reduce the competitiveness of appliance and equipment
markets2. It is therefore a legitimate concern that these S&L Programs in themselves do not add to
market distortions. As a result, it should be the proper function of governments and their agents to
ensure that S&L Program requirements are adhered to. This ensures markets are not distorted by
unscrupulous suppliers undercutting those investing in more efficient products.
As with other government ‘regulatory’ functions, there is often limited public funding for regulating
product energy efficiency. Because of this some governments have adopted a ‘user-pays’ approach
to at least partially meet expenditure. This means that regulatory costs are shifted to product
suppliers, and ultimately to consumers.
Whether government or industry funded, the regulatory cost to consumers is likely to be similar
(except in developing countries where the profile of appliance purchases is highly income related).
However under a user-pays system, those buying the most products would fund a greater
proportion of the flow-on regulatory costs.
Effective product registration and compliance processes are the key to successful regulation. They
allow the impacts of policy intervention to be tracked, improved and evaluated. Registration
processes improve the transparency of the system by allowing competitors to view product
information. This enhances competitive pressure, encouraging industry to produce more efficient
appliances.
Where online registration processes are used, there are additional benefits to users, including:
1 See: 4E (2010), Record of Conference, Saving More Energy Through Compliance, London, September 2010. Available
from: http://www.iea-4e.org/files/otherfiles/0000/0133/MVE_Conference_Record_v4.pdf
2 See: IEA (2007) Mind the Gap. Available from:
http://www.iea.org/publications/freepublications/publication/name,3747,en.html
COST RECOVERY IN ENERGY EFFICIENCY STANDARDS & LABELLING PROGRAMS
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
24 hour internet access to a complete listing of all their current, past and pending
registrations.

Faster approval processing by regulators.
3 Examples of cost recovery in S&L Programs
3.1 Registration or entry fee
3.1.1 Australia
Under the Australian/New Zealand S&L Program, suppliers must register all regulated products
before offering them for sale in either country. Under current legislation, product registrations are
administered by State Government regulators in Australia and the regulator for New Zealand.
Most applications are made through the Online Registration Database, a web-based registration
system available to anyone with access to the internet. Users fill in an online form and electronically
submit it to their chosen regulator for approval. The system carries out automatic checks to ensure
all mandatory information is provided and to remove data entry errors. It also performs a number of
calculations to help regulators determine if performance requirements are met. A user guide is
provided3.
A fee is required by State regulators in Australia (but not by the NZ regulator) for the processing of
registration applications for each model or family of models. These fees vary slightly; for example
the fee to register with the Queensland regulator is A$177.354 and the equivalent fee charged by the
NSW regulator is A$2055.
In Australia, new national legislation (the Greenhouse and Energy Minimum Standards Act [GEMS])
is scheduled for introduction in 2012. This will establish a single national regulator for the Australian
S&L Program. Under GEMS, there will be a new schedule of registration fees that will better reflect
the cost of registration and compliance activities undertaken by the regulator. More detail on the
rationale behind the allocation of costs is included in Section 4. While the fees have yet to be
announced, it is possible that the cost of registering a model (or family) will range between A$230
and $780.
3.1.2 Korea
A registration fee is also charged for suppliers to register products for the voluntary High-Efficiency
Appliance Certification Program. The fee is $300 USD per model.
3.2 Cost-recovery for verification testing
A number of S&L Programs require that suppliers pay full verification test costs if they challenge the
result of a preliminary screen test indicating that a model may not meet performance requirements.
For example under the Efficient Lighting Initiative (ELI), which operates in a number of economies,
suppliers must abide by a certification agreement which contains the following clause:
Should the verification testing results indicate that the product samples in the market do not
comply with ELI technical specifications, certification holders may choose to remove the
product in question from participation in ELI Program; or alternatively, they may request a
second round of performance verification testing. This second round testing shall be based
3
https://reg.energyrating.gov.au/static/common/user_guides/supplier.pdf
http://www.justice.qld.gov.au/fair-and-safe-work/electrical-safety/manufacturers-importers-and-retailers/requirementsfor-selling-electrical-equipment/fees-for-electrical-equipment-appliances
5 http://www.trade.nsw.gov.au/energy/sustainable/efficiency
4
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on product samples randomly purchased by the ELI Institute in any retail market, and tested
in a laboratory selected by the Institute, at the certification holder’s expense6.
A similar arrangement is employed in S&L programs in Australia/New Zealand and in several other
S&L Programs countries.
In Vietnam, Article 12 (Chapter VI) of Circular No.7 issued in 2012 provides for the reclamation of
testing costs from ‘enterprises’ where products are found not to meet the performance
requirements.
There are also some initiatives which cover the capital cost of the product samples used for test
purposes. For example, the US Department of Energy requires manufacturers to provide the test
units for enforcement testing at the manufacturer’s expense. In most cases an initial sample of not
less than four units must be provided.
In Australia, arrangements have been made with some industry associations and suppliers to buy
back test units originally purchased by the government. These funds are made available for further
compliance testing.
3.3 Certification
The Energy Saving Trust Recommended scheme7 is a voluntary labelling scheme for energy saving
products run by the UK Energy Saving Trust. The scheme, which endorses the best products in
specific categories, sets energy performance standards based primarily on the in-use phase of the
product’s life cycle (although other characteristics are also considered).
To achieve and maintain certification, product suppliers are required to lodge an application and pay
membership of £375, followed by an annual fee of £275. Suppliers must also pay an additional fee
every year based on the number of certified models, as shown in Table 1.
Table 1: UK Energy Saving Trust Recommended scheme - Annual model-based fees
Number of products
Product Certification fee (per product)
excluding VAT
1-10
£1000
11-25
£700
26-50
£600
51-75
£500
76-100
£400
101-150
£300
151-250
£250
Many programs use an independent organisation (or organisations) to provide third-party
certification as a condition of participation. The Canadian S&L Program is the longest running
example where certification (indicated by the Energy Efficiency Verification Mark) is required as a
condition of its mandatory MEPS and Labelling program8. More recently, the US Energy Star
endorsement label program has introduced third-party certification as an obligation for several
categories of participating products9.
6
http://www.efficientlighting.net/doc/20060911.pdf
http://www.energysavingtrust.org.uk/In-your-home/Energy-Saving-Trust-Recommended-products
8 http://oee.nrcan.gc.ca/regulations/16802#verification
9 http://www.energystar.gov/index.cfm?c=third_party_certification.tpc_index
7
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Third-party certification bodies ensure that member’s products meet specifications by methods such
as periodic testing of a sample of models. The frequency and sample size of tests may be set out in
the accreditation rules for certification bodies.
Where third-party certification is used, testing costs are borne by product suppliers, who can often
choose from a range of certification organisations10. Because of competition between certification
suppliers, certification fees are not made publicly available and vary by product category.
Anecdotally, the typical fees for certification and testing per model appear to be in the region of
US$1,000 - $2,500 for most product categories.
3.4 Laboratory registration
Most S&L Programs require that energy performance claims are supported by test results from
accredited laboratories – i.e. those able to undertake procedures according to the nominated
international or local test method. Some programs require laboratories to meet additional criteria to
demonstrate their competence.
For example, local suppliers to the Chinese mandatory energy labelling program must provide test
reports conducted by laboratories registered with the China National Institute of Standardisation
(CNIS). To achieve CNIS registration, laboratories must either be accredited to ISO17025 or receive
an on-site inspection by CNIS. Those inspected by CNIS must pay a fee to cover this expense. In
addition, CNIS registered laboratories are required to participate in at least one round-robin test
each year. Laboratories pay for the costs of participation in these round-robins.
For government funded verification testing, S&L Programs typically use independent laboratories
with a higher level of expertise. These generally receive accreditation to perform the specified test
from the national accreditation authority. These laboratories bear the cost of their accreditation.
4 Approaches to Cost-Recovery
In considering what to charge product suppliers, a reasonable approach is to identify how much it
costs an S&L Program to operate their compliance program. This can be justified on the basis that
market participants benefit from operating within a fair and uniform competitive market.
These costs comprise both fixed and variable costs for the following activities:

Administration of application for registration;

Development and maintenance of the on-line registration system;

Market surveillance to check that all regulated products are registered;

Market surveillance in retail outlets to check that all relevant products are labelled correctly;

Product purchased for testing;

Initial screen tests (assuming full verification tests are conducted at cost of supplier).
There are also likely to be costs associated with management, staff training, and similar overheads.
4.1 Total costs
The total costs of effective registration and compliance processes vary according to the program
design, scope (number of product categories) and market size. In the past, the investment by
national S&L Programs in monitoring and verification activities has been patchy. Encouragingly,
recent surveys confirm that there is now a greater focus on ensuring compliance and a
corresponding increase in expenditure10.
10
See http://www.clasponline.org/en/ResourcesTools/Resources/SLHeadlines/APEC-Compliance-Workshop
COST RECOVERY IN ENERGY EFFICIENCY STANDARDS & LABELLING PROGRAMS
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Table 2 and Figure 1 show investment by a number of national S&L Programs between 2006 and
2008 on verification testing, representing an increase of 130% over this period.
Table 2: Approximate annual expenditure on verification tests (USD ‘000s)
Country
Australia
India
Japan
Mexico
Korea
UK
US
Program
M&L
VL
TR
M&L
M&L
M&L
VL
2006
$350
$0
$0
$56
$390
n.a.
$100
2007
$450
$91
$0
$80
$400
$140
$100
2008
$550
$251
$100
$65
$335
$570
$100
Key:
M = MEPS
VL = Voluntary Labelling
M&L = MEPS and Labelling
ML = Mandatory Labelling
TR = Top Runner
Figure 1: Annual total funding spent on off-the-shelf testing (USD) (11 responding programs)
It should be noted that even where third-party certification is used, programs must still undertake
post-market verification tests to check that the certification bodies are providing adequate quality
assurance.
Verification testing is only one component of the total cost of providing adequate monitoring and
verification. Table 3 shows the approximate distribution of costs for registration and compliance
processes in the Australian system. Verification tests account for approximately one-third of total
expenditure. Australia envisages spending in the region of A$2-5-3m per annum on these activities
in future years.
COST RECOVERY IN ENERGY EFFICIENCY STANDARDS & LABELLING PROGRAMS
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Table 3: Indicative distribution of costs
Product Registration
Compliance Activities
Registration
application
processing
Admin, finance and
management
support
Technical help
for
registration
System and
database
maintenance
Store inspector
training and
equipment
Store
audit
Check-tests
30%
15%
5%
6%
2%
11%
31%
57%
43%
Note: Full verification tests are financed by industry
4.2 Key issues
Several key issues must be considered before proceeding with cost-recovery initiatives. These
include:

Which elements are best suited to cost-recovery?

Should there be full or partial cost-recovery?

What cost-recovery options are available?

What level of cost-recovery can the market withstand?

Are there likely to be impacts on particular sectors of the market at certain levels of costrecovery?
These issues are discussed below.
4.2.1 Which elements are best suited to cost-recovery?
In principle, all costs relating to maintaining an open and fair market could legitimately be funded
through cost-recovery. This means the costs associated with operating a registration (or similar)
process, as well as the monitoring, verification and enforcement of Program rules could all be
included.
An increasing number of programs require third-party certification by an independent body as a
condition of entry to the Program. While this is not cost-recovery per se, it can reduce the costs of
the Program because product suppliers pay for the certification. However, as noted above, the
Program is still required to undertake additional activities, including product testing, to ensure the
fair operation of the market.
Registration fees are used in some Programs to collect revenue, although the extent to which these
reflect actual registration costs is not known. We are aware of no examples where S&L compliance
costs are financed separately to registration costs, except for full verification tests as shown below.
As already discussed, several programs now require a supplier to fund the cost of a full verification
testing on several samples of a model that has failed a screen test. Often this is known as a
‘challenge’ test, since it is undertaken voluntarily by the supplier. This approach appears to have
been accepted by industry as a fair process.
4.2.2 Should there be full or partial cost-recovery?
Whether a program seeks full or partial cost-recovery may be determined by a combination of
necessity (i.e. inadequate funding streams from elsewhere); government policy; and an assessment
of what the market can reasonably withstand.
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As a result, there is no universal view on this question. It should be noted that S&L Programs are
increasingly seeking to introduce some cost-recovery elements to safeguard the integrity of their
programs from future funding cuts. This is an important consideration since effective compliance
regimes require consistent investment to develop and maintain staff, laboratories and expertise.
4.2.3 What cost-recovery options are available?
As shown in previous examples, several programs collect funds from suppliers during registration.
This may take the form of an annual payment, a one-off payment for a specified period, or a higher
initial fee followed by a smaller annual payment.
Since registration is the point of entry into a program, it is the ideal time to collect fees. Suppliers
must make contact with program administrators during registration, so payment at this time also
has the potential to minimise transaction costs.
4.2.4 What level of cost-recovery can the market withstand?
Although industry does not welcome additional costs, it should be noted that suppliers incur many
costs when introducing new products to market and also in maintaining market share. Regulation
cost-recovery initiatives represent a fairly small proportion of the total investment required.
In addition, effective compliance mechanisms benefit those suppliers who invest in more efficient
products by removing unfair competition from cheaper, non-compliant products. Most suppliers
understand this need for mechanisms to ensure the fair operation of competitive markets and, as
occurs in other regulated markets, are willing to make a contribution.
However, some sectors of the market are affected more than most by cost-recovery, as discussed
below.
4.2.5 Are there likely to be impacts on particular sectors of the market at certain levels of
cost-recovery?
Where a registration fee is used to recover costs, models with small sales volumes will be penalised
(since they spread the costs over fewer sales). In some product categories, particularly in the
commercial/industrial sectors11, products are offered for sale via promotional materials and not
manufactured until a sale has been concluded. As a result, suppliers often advertise a large number
of different models and variations. If each of these had to be registered, the costs could be
prohibitive.
The use of ‘family’ registrations to combine basic models and their variations can help to minimise
this impact. In addition, it may be necessary to have special rules for these types of products - for
example stipulating that all products must be registered when sold rather than when advertised.
4.3 The allocation of costs
Having determined total costs to be recovered, it is then a question of deciding how to allocate
these costs. In the majority of cases where a registration fee is applied, it is imposed on each model.
(In the UK there is an additional annual membership fee per supplier.)
If the fees were applied to suppliers or brands only, clearly this would favour those larger businesses
with multiple models. And while some regulatory costs are likely to be fixed (i.e. the development of
a website and an on-line registration facility) other costs vary according to the quantity of models
(i.e. registration processing, market surveillance and testing components). As a result, applying the
fee to the registration of each model would better reflect the costs and be more equitable.
Furthermore, costs vary considerably by product category in terms of purchase price and testing
costs. For example, the testing of commercial refrigerators or lamps tends to be far more expensive
11
For example, distribution transformers, commercial refrigeration, chillers, etc.
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than items such as televisions. Table 4 lists the approximate energy efficiency testing costs in
Australia for the purchase and testing of a range of regulated products.
Table 4: Indicative costs of testing costs in Australia by product
Appliance Type
Indicative Cost (A$)
Clothes Dryers
$2,800
Clothes Washers
$2,500
Compact Fluorescent Lamps
$13,100
Refrigerators
$7,600
Linear Fluorescent Ballasts
$2,100
Linear Fluorescent Lamps
$4,900
Distribution Transformers
$3,100
Televisions
$2,300
Electric Motors
$7,600
Air Conditioners
Commercial Refrigerators / Display Cabinets
$8,300
$13,500
This suggests that the registration fee should also vary by product category to reflect the costs
involved. As noted previously, the new Australian registration fee under GEMS is likely to follow this
path with a banded fee structure ranging from A$230 - A$780 per model. These fees are calculated
by allocating the fixed costs across the number of models historically registered with the Program,
and adding variable costs such as the number of tests proposed for each product category.
4.4 Feasibility and timing
The introduction of cost-recovery mechanisms has precedence in many fields, with an increasing
number of examples found in energy efficiency S&L Programs. However, major changes to the
structure and administration of existing S&L Programs can be difficult. This is due to the large
number of suppliers, retailers and other parties involved, and the effect that Program changes have
on supply chains and product development. Consequently, cost-recovery measures will be easier
and more likely to be accepted if introduced from the outset, or at a time when other major changes
are underway.
5 Conclusions
Energy efficiency S&L Programs have a demonstrated ability to deliver energy and greenhouse
savings at low cost, to enhance energy security and to promote economic development. S&L
Programs achieve this by requiring robust monitoring, verification testing and enforcement
processes. These measures promote an open and fair competitive market and therefore encourage
investment in energy efficiency. They also provide increased transparency, enable proper evaluation
of policy impacts and lead to better regulations.
The development of effective monitoring, verification and enforcement systems requires a sustained
investment to build staff and technical expertise, and increase capacity. As with regulatory functions
in other markets, an increasing number of S&L Programs are introducing fees or other cost-recovery
mechanisms to provide an assured income, alongside government or other funding. At the same
time, some S&L Programs are also seeking to minimise direct costs through the use of third-party
certification requirements.
Registration fees appear to be a popular method of charging suppliers for the costs of administering
the registration process and most compliance activities. Many programs also require suppliers to
fund ‘challenge’ testing of products which have failed initial screen tests paid for by the program.
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Registration fees are generally levied on models rather than brands or suppliers, as this best reflects
the costs involved. Since costs also vary according to product category, consideration can be given
to whether a registration fee is uniform for all product types or priced according to type.
Cost-recovery mechanisms, as with other significant changes to S&L Program design or
administration, are likely to be best received and easiest to implement if introduced from the outset,
or in tandem with other major changes. This minimises disruptions to the large number of
stakeholders in the market for appliances and equipment.
6 Options for the Vietnam S&L Program
With mandatory energy labelling beginning in 2013, it is an ideal time to consider whether to
introduce cost-recovery as part of the Program.
Ensuring adequate funding to cover the costs of registration and compliance activities is important
for new S&L Programs so that credibility of the Program can build from the outset. Cost-recovery
provides an income stream for these activities to supplement government funding. In the case of
Vietnam, this could be used to fund registration staff, on-line registration facilities, labelling surveys
and verification testing.
The independent verification testing of products will be needed in Vietnam to check that products
sold in the market are as claimed by their suppliers. This is a vital but expensive activity and
therefore cost-recovery will greatly enhance the Program’s ability to undertake sufficient verification
tests to ensure acceptable levels of compliance.
Based on the experience in other S&L Programs, the best way to recover costs is through a
registration fee paid by registrants for each model that is registered.
Since it may be too early to estimate the fees needed to recover all the costs, and to differentiate
between the respective costs of each product category, one option is to begin by introducing a
single fee per model registered. This would also be administratively easier. At a later stage,
consideration can be given to a scale of fees that better reflects costs.
In determining an initial registration fee, a figure in the region of US$200 - $300 per model could be
considered, as this is not likely to unduly prejudice any product suppliers since it is slightly less than
that used in other countries.
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