6 Obligated parties
As outlined in the Issues Paper, the obligation to meet the energy efficiency target under any
energy efficiency obligation scheme must be placed on a party (or parties) somewhere along
the energy supply chain of the eligible fuels (Figure 6.1).
Figure 6.1: Participants in the energy supply chain
A key consideration in selecting the obligation point(s) is ensuring that the scheme meets the
design principles of efficiency and simplicity. The choice of obligation point should minimise
the administrative and compliance costs of the scheme. A practical point of liability would
therefore be one that:

captures all the energy in the target base;

results in a manageable number of obligated parties;

allows the liability to be readily calculated; and

has competition between obligated parties to minimise costs.
Those who have the greatest ability to affect the end use of energy are generally best placed
to meet a target. Generally these would be located towards the end of the supply chain.
However, where the number of individual energy users is large, and therefore the
administrative cost and complexity of putting an obligation on them would be high, placing
the obligation point further up the energy supply chain reduces the number of obligated
parties and focuses the obligation on parties that have the capability to manage it.
For a national Energy Savings Initiative covering electricity and gas, there are three main
possible points of obligation: on retailers; on distributors of electricity and gas; and on large
energy users. These large users could include entities that purchase their energy from the
wholesale market (although there are very few of these in the National Electricity Market
(NEM)) or directly from a generator or other supplier for users not connected to the NEM.
Most NEM jurisdictions have introduced full retail contestability in electricity64 and all
jurisdictions have introduced full retail contestability in gas retail markets.65 Origin Energy,
AGL Energy and TRUenergy jointly supply over 80 per cent of small electricity retail
customers in the NEM.66 A range of retailers operate in the market, with 46 electricity and 26
gas retailers currently licensed in NEM jurisdictions.67
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In Western Australia, the government-owned retailer Synergy, is the sole supplier to
customers that consume less than 50MWh per annum and supplies the vast majority of
electricity customers on the South West Interconnected System. Horizon Power, a vertically
integrated utility, services the regional areas of the state. In the Northern Territory, Power and
Water Corporation (the government-owned retailer) and QEnergy Limited provide electricity
services to customers.
In contrast, electricity and gas distributors are regulated monopolies. Of the 13 electricity
distributors operating in the NEM, around half are government-owned entities.68 Western
Power, a government-owned corporation, operates the SWIS electricity network in Western
Australia. Across the state of Western Australia, there are a number of private electricity
networks including the Northwest Interconnected System and the Leinster/Mt Keith network.
In southern and eastern Australia, the gas distribution market is dominated by three privately
owned companies: Jemena, APA Group and Envestra.69 The Northern Territory has two gas
retailers – Envestra and NT Gas, though these operate in different geographic areas.70
The New South Wales Energy Savings Scheme places its energy efficiency obligation on
electricity retailers, market customers (large users which purchase energy from the wholesale
market) and some electricity generators (or ‘direct suppliers of electricity’). Liable parties
under the Victorian Energy Efficiency Target (VEET) and South Australian Residential
Energy Efficiency Scheme are electricity and gas retailers who have 5000 or more customers
(the Victorian VEET refers to liable parties as relevant entities).
The Australian Capital Territory scheme will place an obligation on all electricity retailers.
However, ‘Tier 2’ retailers with annual sales of less than 500 GWh and/or less than 5000
customers may meet their obligation by carrying out activities and/or by paying a
contribution fee for each tonne of CO2-e abatement required.71
The broad view of stakeholders that provided submissions to the Issues Paper was that
retailers represented the most appropriate entity on which to place an obligation. Supporting
arguments included that retailers have an existing relationship with customers, the necessary
systems and capabilities to manage the obligation and that this approach is used in existing
state schemes:
An annual obligation to pursue and facilitate energy efficiency projects should be
placed on holders of electricity and gas retail licences in each jurisdiction. Retailers
have existing relationships and obligations with consumers, and optimally these
would be capitalised on.
AGL Energy submission
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Origin recommends retailers as best suited as the obligation point. In terms of
successful transition from existing state schemes, all existing state schemes have
retailers as the obligation and subsequent harmonisation into a national scheme will
therefore be more expedient by retaining this central feature.
Origin Energy submission
The Working Group notes that both electricity and gas retailers possess the billing,
marketing, trading and reporting systems and expertise to manage an obligation. Retailers’
relationship with energy consumers could also facilitate the implementation of energy
efficiency activities and the pass-through of scheme costs. This relationship with consumers
does not currently exist for energy generators or distributors. The issues discussed are
applicable to both gas and electricity retailers.
Importantly, competition in the energy retail sector means that there is an incentive for
retailers to minimise the costs of the scheme. As there is no competition between energy
distributors, there is no scope for competition pressures to ensure that the costs passed on to
consumers are minimised. Furthermore, as energy distributors are regulated monopolies, the
process of adjusting prices to account for scheme costs would be more complex than for
retailers.
The Working Group also notes that retailers are the primary obligated parties under the
existing and proposed state schemes. If a decision was taken to implement a national Energy
Savings Initiative, placing an obligation on retailers would assist in managing a smooth
transition from existing state schemes.
For the purposes of further analysis, the Working Group will use an obligation point that
requires electricity and gas retailers to meet an energy efficiency target under a possible
national Energy Savings Initiative.
Some large users that purchase energy from a retailer may prefer to take on a direct
obligation. 72 This would give them the flexibility to manage their own obligation, rather than
receive a pass-through cost from their retailer. The Working Group will look further at
whether it is a viable option to allow these users to opt to be an obligated party, noting that
this approach would support the principle of building flexibility into the design of a national
scheme.
Some large energy users do not purchase their energy from a retailer but from the wholesale
market or (for those outside the NEM) from a generator or supplier. If this energy use is to be
included in the target base, an additional obligation point should be selected to ensure the
relevant loads are captured.
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These large users themselves could be a point of obligation because they have the resources
and expertise to administer an obligation and are in a good position to manage their energy
use in response to an obligation. Where it was not possible to place an obligation on these
users, the next best point in the supply chain for an obligation would be on the entity that
supplied the large user (which may be an electricity generator or a gas supplier). Further
consideration will be given to the most appropriate obligation point for large users that
directly source energy once the loads in the target base are determined.
Further consideration will also be given to the question of whether to apply a threshold to the
obligation. Ideally, an obligation would be placed on all retailers to maximise the target base.
However, the cost of administering an obligation on smaller retailers may outweigh any
benefit. Accordingly, consideration will be given to excluding small retailers from an
obligation if the compliance costs would materially affect their competitiveness and thus
reduce competition in the retail market. Equally, consideration will be given to ensuring that
any threshold would not distort the market in favour of smaller retailers.
Working Group view: obligated parties
The Working Group will use as the basis for further investigation through the regulatory
impact analysis, a national Energy Savings Initiative where the obligation to meet an energy
efficiency target would be placed on electricity and gas retailers.
6.1
Approach to considering geographic coverage
The Working Group will analyse the impacts of geographic coverage on a potential national
Energy Savings Initiative, through both modelling and boarder analysis work, as part of the
regulatory impact analysis. Since the regulatory impact analysis cannot test all possible
inclusion and exclusion combinations for all potential geographic locations, some form of
rationalisation needs to occur.
For the purposes of the regulatory impact analysis, the Working Group intends to apply a
principles-based analysis of the potential geographic coverage of a national scheme. This will
allow modelling and analysis of different geographic coverage scenarios, both qualitatively
and quantitatively. This will be relevant for both an area’s inclusion in the target base and
eligibility to create certificates. This will assist in defining scenarios to be modelled in the
regulatory impact analysis, but will not limit analysis of broader geographical coverage. The
proposed process for narrowing down the approach to assessing the scheme’s geographical
coverage considers the following elements, which relate to the proposed design principles
discussed in Chapter 3:

impact of inclusion;

shared benefits;

equity; and

retail contestability.
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This will better enable the Working Group to test the potential impacts of including or
excluding various on-grid (major and minor) and off-grid users from a possible scheme.
Impact of inclusion
The inclusion of any area in a possible national Energy Savings Initiative is likely to create
costs for the area by way of the obligation to undertake activities, and to create benefits from
activities undertaken. Inclusion of each area will result in the distribution of costs and
benefits between users, and will also impact on this distribution throughout the broader
scheme. This relates to the second design principle in Chapter 3 regarding additionality. By
considering the potential costs and benefits of including any geographic area it is possible to
draw conclusions on the likely impact of inclusion on the area and the subsequent interaction
between that area and the scheme as a whole.
For example, areas which consume a large amount of energy and/or have the potential to
produce a large number of low cost certificates will likely have a greater impact on the
outcomes of an Energy Savings Initiative than areas without these characteristics.
Shared benefits
The operation of a white certificate scheme can generate both private and public benefits
since an activity which generates public benefits (for example deferment of network
infrastructure investment) can place downwards pressure on energy costs for non-participants
in the scheme. This relates to the first design principle related to efficiency.
An analysis of shared benefits will consider the likely impact of an area’s inclusion in the
scheme and the proportion of private versus public net benefits that this inclusion will
generate. Where the costs of inclusion align mainly with private benefits, this could justify
exclusion of the area from a broader scheme.
Equity
Although the geographic scope of a scheme target (and therefore obligation costs) should as
closely as possible reflect the geographic scope of certificate creation, in some cases it may
be inequitable to include or exclude certain areas. In these cases, the benefit of inclusion
needs to be weighed against the costs such an inclusion will present to the scheme as a whole.
Design principle six, relating to fairness and equity, is most relevant here.
For example, an analysis of the scale of opportunities for an off-grid mining site may reveal a
substantive quantity of low cost energy efficiency opportunities. Inclusion of this area could
capture a significant proportion of the national market for activities, but provide no shared
benefits to on-grid users who would effectively be paying for the realisation of these
opportunities. An equity consideration could help reduce the likelihood of these types of
impacts occurring in a national scheme.
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Another example of an equity consideration might include where an area would experience
high costs in complying with the scheme but not have many opportunities to offset these.
Similarly, there may be areas that would not experience high costs for inclusion in the
scheme, nor have a material impact on the scheme itself, but could potentially derive material
benefits from eligible activities. For example, the latter might apply to a small remote
community, and an equity consideration could support consideration of their treatment under
a possible national scheme.
Retail contestability
The final element of the geographic coverage analysis considers whether the geographical
region in question has retail contestability. Simply, do end users have a choice of retailer?
This will assist the Working Group to analyse whether the inclusion of certain geographical
areas might unfairly impose costs on end users in those areas. In satisfying the design
principles of simplicity, and fairness and equity, maintaining a single point of obligation for
all users of similar sectors (for example, retailers for residential users) may be desirable.
This is an important consideration, as having a choice of retailer implies that there should be
a certain level of competition. Competitive forces pressure retailers to find the lowest cost
options under a scheme, and to pass through to end users costs which more closely represent
the marginal costs of scheme compliance.
Conversely, in areas where there is no choice between retailers, the supplier still passes
through the cost of scheme compliance, but they experience significantly less competitive
pressure to find the lowest cost approach to achieving compliance. Similarly, in areas where
there are high barriers to retail-market entry the incumbent retailer will experience no
material competitive pressure to minimise the cost pass-through of a scheme.
Final recommendations on geographic coverage cannot be made until further analysis is
undertaken on the implications of including particular areas in the scheme’s target base, as
well as the potential for those areas to create certificates. The regulatory impact analysis will
assess the potential inclusion of different areas quantitatively (for example, through the
modelling process) and qualitatively (for example, when undertaking equity considerations).
The Working Group will undertake further investigation to ensure that the regulatory impact
analysis is adequately informed.
Working Group view: approach to considering geographic coverage
For the purposes of the regulatory impact analysis, a principles-based analysis of geographic
coverage will be adopted to assess (quantitatively and qualitatively) the potential impacts of
different geographic coverage for obligated parties.
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64
Victoria, South Australia, New South Wales, Queensland and the Australian Capital Territory, from Australian Energy Regulator (AER),
State of the energy market 2011, December 2011, p 108.
65
Australian Energy Regulator (AER), State of the energy market 2011, December 2011, p 108.
66
Australian Energy Regulator (AER), State of the energy market 2011, December 2011, p 12.
67
Licensed retailers obtained from the registers published online by regulators in each jurisdiction.
68
Australian Energy Regulator (AER), State of the energy market 2011, December 2011, p 56.
69
Australian Energy Regulator (AER), State of the energy market 2011, December 2011, pp 97-98.
70
Frontier Economics, Review of Implications for energy markets from climate change policies – Western Australian and Northern
Territory Elements – report to the Australian Energy Market Commission, November 2008, p 17.
71
ACT
Department
of
Environment
and
Sustainable
Development,
Energy
Efficiency,
viewed
on
13
April
2012,
http://www.environment.act.gov.au/energy/energy_efficiency
72
Large users may include, but are not exclusively, emissions-intensive trade exposed (EITE) entities. Consideration of EITEs is discussed
in Section 7.4.
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