Victorian Energy Upgrades program - Response to consultation on program targets for 2021 to 2025 December 2020 - AWS
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Victorian Energy Upgrades
program
Response to consultation on program targets for
2021 to 2025
December 2020
OFFICIAL
Acknowledgment
We acknowledge and respect Victorian Traditional Owners as the
original custodians of Victoria's land and waters, their unique ability to
care for Country and deep spiritual connection to it. We honour Elders
past and present whose knowledge and wisdom has ensured the
continuation of culture and traditional practices.
We are committed to genuinely partner, and meaningfully engage, with
Victoria's Traditional Owners and Aboriginal communities to support the
protection of Country, the maintenance of spiritual and cultural practices and
their broader aspirations in the 21st century and beyond.
© The State of Victoria Department of Environment, Land, Water and Planning 2020
This work is licensed under a Creative Commons Attribution 4.0 International licence. You are free to re-use the work
under that licence, on the condition that you credit the State of Victoria as author. The licence does not apply to any
images, photographs or branding, including the Victorian Coat of Arms, the Victorian Government logo and the
Department of Environment, Land, Water and Planning (DELWP) logo. To view a copy of this licence, visit
http://creativecommons.org/licenses/by/4.0/
Disclaimer
This publication may be of assistance to you but the State of Victoria and its employees do not guarantee that the publication is without
flaw of any kind or is wholly appropriate for your particular purposes and therefore disclaims all liability for any error, loss or other
consequence which may arise from you relying on any information in this publication.
Accessibility
If you would like to receive this publication in an alternative format, please telephone the
DELWP Customer Service Centre on 136186, email customer.service@delwp.vic.gov.au,
or via the National Relay Service on 133 677 www.relayservice.com.au. This document is
also available on the internet at www.delwp.vic.gov.au.Victorian Energy Upgrades program
Response to consultation on program targets for 2021 to 2025
Contents
Definition of key terms ..................................................................................................... 3
Executive summary .......................................................................................................... 4
Victorian Energy Upgrades future targets .................................................................................................... 5
Next steps ......................................................................................................................................................... 7
1. Introduction ................................................................................................................... 9
1.1 About the Victorian Energy Upgrades program ..................................................................................... 9
1.2 Review of the future VEU program targets and associated policy ...................................................... 9
1.3 Stakeholder consultation .......................................................................................................................... 9
1.4 Responding to the impacts of the coronavirus (COVID-19) pandemic ..............................................10
2. VEU program targets .................................................................................................. 11
2.1.1 Energy affordability for consumers .................................................................................................11
2.1.2 Support for the preferred targets .....................................................................................................11
2.1.3 Climate change and new energy technology jobs .........................................................................11
2.1.4 Feasibility for industry.......................................................................................................................12
2.1.5 Coronavirus (COVID-19) impacts .....................................................................................................12
3. Market dynamics and costs: managing simultaneous changes to demand
and supply of VEECs ...................................................................................................... 13
3.1 Electricity emissions factors ..................................................................................................................13
3.2 Shortfall penalty .......................................................................................................................................14
3.2.1 Retailers’ ability to carry over shortfalls .........................................................................................15
3.3 Phase out incentives for lighting activities ..........................................................................................15
3.4 Concerns about high certificate prices: reviewing the ability of the Department to
respond to oversupply and undersupply issues .......................................................................................16
3.5 Coronavirus (COVID-19) impacts ...........................................................................................................16
4. Large energy users ..................................................................................................... 17
5. Activities ...................................................................................................................... 18
5.1 Stakeholder submissions .......................................................................................................................18
5.2 Expanding the focus of the VEU program ............................................................................................18
5.2.1 Engaging with new industries to introduce new activities ............................................................18
5.3 Project-based activities (PBAs) .............................................................................................................19
5.3.1 Allowing for export of renewable energy under the M&V method ................................................20
Victorian Energy Upgrades program 1
Response to consultation on program targets for 2021 to 20255.3.2 Emissions factors for PBAs ..............................................................................................................20
5.4 Low-cost activities and activities suitable for renters and vulnerable households .........................20
6. Supporting the transition to net-zero emissions in the gas sector ........................ 23
7. Vulnerable consumers ............................................................................................... 24
8. Future review of the VEET Act ................................................................................... 26
Appendix A Summary of consultation process ...................................................... 27
A1 Consultation process ..............................................................................................................................27
A2 Consultation documents .........................................................................................................................27
2 Victorian Energy Upgrades program
Response to consultation on program targets for 2021 to 2025Definition of key terms
Term Definition
Accredited
Persons and entities authorised by the ESC to create VEECs
person (AP)
CO2e Carbon dioxide equivalent
COVID-19 The coronavirus (COVID-19) pandemic
Department Department of Environment, Land, Water and Planning
ESC Essential Services Commission
GHG Greenhouse gases
Project-based activity – customised (and generally large scale) project activities that improve energy
efficiency at premises, for which VEECs may be created. Creation of VEECs requires a scoping
PBA approval, a project plan approval and an approved project impact report. The number of VEECs that
can be created relies on a report from an approved Measurement and Verification Professional on
the greenhouse gas emission reduction attributed to the project.
Preferred
The preferred policy package was the series of changes proposed as the preferred option in the RIS,
policy
released in December 2019 (see: https://engage.vic.gov.au/victorian-energy-upgrades/targets)
package
Prescribed Activities that result in improvements to energy efficiency, which are listed in the Regulations as able
activity to create VEECs
RIS Regulatory impact statement
The VEET
Victorian Energy Efficiency Target Act 2007
Act
SME Small to medium sized enterprise
Victorian Energy Efficiency Certificate – the certificate created by accredited person and sold to
energy retailers to meet their obligation to surrender certificates. VEECs reflect the amount of GHG
VEEC
emissions reduction associated with each prescribed activity: 1 VEEC for each tonne of carbon
dioxide equivalent emissions reduced.
Victorian Energy Upgrades – a Victorian government program that provides incentives for
VEU
households and businesses to improve their energy efficiency and energy management.
Victorian Energy Upgrades program 3
Response to consultation on program targets for 2021 to 2025Executive summary
The Victorian Energy Upgrades (VEU) program is a market-based program that helps Victorians to cut their
energy bills and reduce greenhouse gas (GHG) emissions. This is done through setting state-wide emissions
reduction targets for energy retailers to meet that create a market for a range of energy efficient products and
services being made available to homes and businesses at a discount.
Since 2009, the program has delivered over 62 million tonnes of GHG emissions reductions, 54.2 terawatt
hours of energy savings, average annual bill savings of $110 for participating households and $3,700 for
participating businesses and over $4.1 billion in energy system benefits.
These energy system savings have reduced wholesale electricity prices resulting in benefits for all
Victorians. Between 2010 and 2020, the VEU program resulted in an average 2.2 per cent reduction in
electricity retail prices for households; a 2.8 per cent reduction for small to medium enterprises (SMEs); and
a 5.7 per cent reduction for exempt large energy users.
The VEU program operates under the Victorian Energy Efficiency Target Act 2007 (the VEET Act). In late
2019, the Department of Environment, Land, Water and Planning (the Department) released a Regulatory
Impact Statement (RIS) as part of the process to establish annual program targets for 2021 to 2025. The RIS
assessed the costs and benefits of different target options. The Department also proposed changes to how
these targets would be delivered, in particular by expanding the program to include a range of new activities.
This document refers to the changes proposed in the RIS as the ‘preferred policy package’.
The Department consulted with a wide range of stakeholders over December 2019 and January 2020,
including peak bodies, accredited persons, industry and members of the public. Concurrently, the
Department consulted on proposed changes to phase out incentives for some lighting upgrades.
Overall, the consultation feedback was very
Figure 1: Statements of support made by stakeholders as part of positive with stakeholders offering various
the target consultation process explicit statements of support for the program,
government incentives for the energy efficiency
industry and action being taken on climate
change.
After the impacts of coronavirus (COVID-19)
pandemic became apparent in 2020, the
Department undertook further targeted
stakeholder engagement.
The emergence of the coronavirus (COVID-19)
pandemic has had significant impacts on the
VEU program, including through the temporary
suspension of some activities to slow the
spread of COVID-19. The Department would
like to thank program participants for their
perseverance and engagement over this period.
The Department recognises that COVID-19
restrictions have had a significant impact on
businesses that participate in the VEU program
and this has been a key additional
consideration in responding to the feedback on proposals in the RIS. In addition to the consideration of
stakeholder feedback through the public consultation period, some changes have been made to the initial
proposal, particularly regarding the 2021 target year, in light of COVID-19.
The Department is confident that its final positions, as set out in this Response to Consultation, are robust to
a range of uncertainties and reflect the Hon. Lily D'Ambrosio, Minister for Energy, Environment and Climate
Change’s commitment to ensuring the program continues to deliver strong benefits to Victorian businesses
and households. The Department is also confident that these positions represent a commitment to the
program into the future and support strong investment in the energy efficiency and broader demand-side
management industry.
The Department thanks the organisations and individuals who took the time to engage in the process and
provide feedback, which it has carefully considered in arriving at its final position.
4 Victorian Energy Upgrades program
Response to consultation on program targets for 2021 to 2025In November 2020, the Minister for Energy, Environment and Climate Change announced $1.6 billion in
funding to accelerate Victoria’s transition to clean energy, create thousands of jobs, lower energy bills and
drive down emissions. This very significant investment by government will complement and further extend
the opportunities provided by the VEU program, including creating new opportunities for businesses and
supply chains.
Key elements of the funding package include:
• $17 million for the Victorian Energy Upgrades program to expand – in terms of activities and access
– and deliver strong energy saving targets into the future.
• $31 million for the new Business Recovery Energy Efficiency Fund, providing grants to help large
energy users to introduce energy efficiency and demand management technologies to reduce costs.
• $9.1 million to help small and medium businesses take up Victorian Energy Upgrades incentives and
slash their energy bills, with more outreach to help businesses access other forms of finance and
funding.
• Programs to improve the energy efficiency of homes for low income and vulnerable Victorians,
including:
o $335 million to subsidise the cost of energy-efficient heaters to replace old wood, electric or
gas-fired units in up to 250,000 low-income households. The program requirements will be
aligned with VEU requirements, and participants will be able to access both VEECs and the
subsidy, supporting the growth of the VEU program in the space heating sector.
o $112 million towards sealing windows and doors and upgrading heating and hot water in
35,000 social housing properties. This will align with VEU activities, including weather
sealing, space heating and hot water.
These grants and support programs are in addition to the subsidies that are available under the VEU
program. This will support delivery of higher cost VEU program upgrades at current certificate prices, making
it easier to deliver future targets.
Key responses to consultation
The Department will proceed with key elements of its preferred policy package but will make several
changes in response to stakeholder feedback and consideration of the impacts of COVID-19. The final
position on the matters set out below addresses a key stakeholder concern regarding the cumulative impact
of multiple changes to the program in the early years. The Department will pursue a phased approach on
these matters to assist with industry transition. This is also consistent with the Department’s consideration of
the economic impacts of COVID-19.
In the RIS, the Department committed to reviewing the VEET Act and some of the measures proposed by
stakeholders as part of the RIS consultation would require changes to the VEET Act. These will be further
considered in 2021, including investigation of the following proposals:
• allowing a minor annual shortfall for energy retailers (that would then be deliverable the next year)
• introducing additional demand-side management targets to encourage a greater uptake of demand
shifting and storage technologies.
Victorian Energy Upgrades program targets
The 2022 to 2025 targets announced by the Minister for Energy, Environment and Climate Change on
8 December 2020 will deliver over 28 million tonnes of carbon dioxide equivalent (CO2e) emissions
reductions. This is equivalent to taking 8.5 million cars off the road for one year. Together with the target
announced for 2021 on 2 June 2020, over the next 5 years the VEU program will install equipment which will
lock in more than 35 million tonnes of emissions reductions.
Victorian Energy Upgrades program 5
Response to consultation on program targets for 2021 to 2025The announced targets for 2021 to 2025 will
deliver the following emissions reductions:
• 6.5 million tonnes of CO2e in 2021 (announced 2
June 2020)
• 6.7 million tonnes of CO2e in 2022
• 6.9 million tonnes of CO2e in 2023
• 7.1 million tonnes of CO2e in 2024, and
• 7.3 million tonnes of CO2e in 2025.
These targets are the most ambitious to date under the VEU program. The targets recognise the essential
role of the VEU program in reducing energy demand and cost effectively driving Victorian emissions to net
zero by 2050. The targets will also support 2,200 local jobs annually and innovation in the energy efficiency
and broader demand-side management industry.
Electricity emissions factors
The amount of energy savings to be achieved by the targets has been moderated slightly from the
consultation proposal by phasing in changes to the electricity emissions factors. The electricity emissions
factors (a technical factor that determines the amount of emission reductions attributable to a unit of
electricity saved) will be updated to reflect the decreasing emissions intensity of the electricity grid.
In response to stakeholder feedback, the transition to a lower emissions factor will be carried out at a slower
pace than what was proposed in the preferred policy package and this will reduce the overall energy savings
required to meet VEU targets.
Changes to activities
In line with the program’s objectives, the program will be expanded as proposed to provide new or revised
incentives for medium-scale solar systems, upgrades that optimise the use of solar generation on-site, smart
technologies and a greater range of fuel switching upgrades. This expands the program from its focus on
traditional energy efficiency upgrades only.
Other key changes made to the way the targets are delivered, involve the phase out of some lighting
incentives, already announced separately. These changes also reflect responses to stakeholder feedback on
the need for a longer transition period, particularly post-coronavirus (COVID-19) disruptions to activity.
Lighting incentives to be phased out, include:
• the reduction of incentives for residential lighting upgrades from 30 June 2021 followed by the
removal of incentives for these upgrades on 31 January 2022, and
• the reduction of incentives for warehouse lighting upgrades on 31 March 2021, with a further
reduction on 31 January 2022, followed by the removal of incentives for these upgrades on 31
January 2023.
Shortfall penalties
In response to stakeholder feedback and in acknowledgement of the strong compliance by energy retailers
to date, increases to the shortfall penalty will be phased in over time and the increases will be significantly
less than originally proposed in the preferred policy package.
Changes to exemptions framework
The RIS also proposed new exemption arrangements for large energy users. These will be finalised in 2021,
providing an opportunity for the Department to engage in additional consultation with large energy users and
providing additional time to understand the longer lasting impacts of COVID-19.
6 Victorian Energy Upgrades program
Response to consultation on program targets for 2021 to 2025Expected program outcomes for energy consumers
The announced targets and program changes will mean that energy consumers who do not participate in the
program are predicted to save on their energy bills both in the immediate term (providing relief from COVID-
19 impacts) and on average over the next ten years, as reduced demand reduces energy prices. The
announced package, which includes changes made following the consultation, equate to a reduction in
program costs by 27 per cent relative to the RIS proposal.
Reducing energy demand reduces prices for all consumers and this leads to benefits even for those who do
not participate. The extensive benefits that the program provides, even for consumers who do not participate,
are demonstrated by Figure 2, which models the electricity retail impacts on residential, SME and industrial
sectors due to past and future program targets.
Figure 2: Impacts of the VEU Program on electricity retail tariffs for residential, SME and industrial sectors1
Next steps
The VEU program targets for 2021-2025 were not made before 31 May 2020 because of the coronavirus
(COVID-19) pandemic. The Minister for Energy, Environment and Climate Change has announced the
targets for this period, providing clear direction to investors on the future of the program. 2
The Minister’s ambition for the program for 2021 is equal to that of 2020. The VEET Act provides that where
Greenhouse Gas Reduction Rates (GGRRs) are not set, the current GGRR will automatically roll over to the
next year. For 2021, the 2020 GGRRs will automatically roll over to 2021 and provide an effective target for
that year.
The GGRRs help retailers determine the proportion of VEECs that they are responsible for surrendering,
given the cumulative annual target. The GGRRs are based on the amount of energy acquired (and sold-
onwards) by the retailer and the proportion that their acquisitions constitute of total cumulative sales by
eligible retailers in Victoria. GGRRs are based on projections of energy use and sales and need to be
adjusted in the following year to account for actual energy acquisitions and sales from the previous year.
This ensures that the correct number of VEECs are surrendered and targets are met as prescribed. If over-
or under-delivery eventuates in 2020 or 2021 – the 2022 GGRR will be adjusted to account for this.
1
Due to activities carried out to date and activities that will be carried out under the 2021 to 2025 target period
2
See Section 2. The 2021 target was announced on 2 June 2020 and targets for 2022 to 2025 were announced on 8 December 2020.
Victorian Energy Upgrades program 7
Response to consultation on program targets for 2021 to 2025For the period 2022-2025, targets will be formally set in regulations. The Department has commenced
processes to seek amendments to the VEET Act in 2021, which it expects to facilitate the setting of these
new targets.
Regulatory amendments were made on 15 December 2020 to give effect to the new shortfall penalties.
The power to specify the new emissions factors lies with the Secretary of the Department and these will be
set in the course of 2021. As previously advised by the Minister for Energy, Environment and Climate
Change, changes to the emissions factors will not occur before 31 July 2021.
During 2021, there will be further consultations on several important matters relating to future market design
and investment opportunities, including:
• There will be further consultations regarding the proposals in the RIS for a new exemption
framework for large energy users.
• The technical requirements for new types of activities – the Department issued discussion papers on
four activities on 18 December:
o upgrades to the refrigeration equipment of cold rooms
o installation of Energy Management Information Systems (EMIS) in commercial buildings
o upgrades to install lagging (insulation) on pipework heated by gas appliances
o installation of smart thermostats for residential heating and cooling systems.
• For further details, please visit: https://engage.vic.gov.au/victorian-energy-upgrades-new-activities-
consultation
• The Department intends to review the VEET Act in 2021 with consideration of a range of proposals
to enhance the operation of the VEU program and its delivery of benefits to the Victorian community,
including providing further certainty to investors, industry and retailers about next steps and potential
future investment opportunities.
In addition, the Department will continue to monitor the impacts of COVID-19 on the VEU program and make
further adjustments as necessary to support the effective operation of the program and achievement of
broader Victorian Government policy objectives.
8 Victorian Energy Upgrades program
Response to consultation on program targets for 2021 to 20251. Introduction
1.1 About the Victorian Energy Upgrades program
Victorian Energy Upgrades (VEU) is a market-based program that helps Victorians to cut their power bills
and reduce greenhouse gas (GHG) emissions. The program works by setting a state-wide target for CO2e
emissions savings that results in a range of energy-efficient products and services being made available to
homes and businesses at a discount.
The program is making a significant contribution to Victoria’s climate change and energy affordability goals. It
has delivered over 62 million tonnes of emissions reductions to date, average annual bill savings of $110 for
participating households and $3,700 for participating businesses, as well as $4.1 billion in cumulative energy
system benefits.
1.2 Review of the future VEU program targets and associated policy
The Victorian Energy Efficiency Target Act 2007 (the VEET Act) states that annual targets for reducing
emissions should be set in Victorian Energy Efficiency Target Regulations 2018 (the VEET Regulations) for
the five-year period 2021 to 2025 by 31 May 2020. Targets for the program were not set by 31 May 2020
due to coronavirus (COVID-19). The 2021 target was announced separately on 2 June 2020, while the
announcement of targets for the period 2022 to 2025 was delayed and management of the pandemic
prioritised. This also provided further time for the Department of Environment, Land, Water and Planning (the
Department) to assess impacts of coronavirus and amend proposals accordingly.
In order to establish future targets, the Department prepared a Regulatory Impact Statement (RIS) to assess
the costs and benefits of different target options. The option recommended in the RIS (the ‘preferred policy
package’) proposed:
• a set of annually increasing targets, to be met by incentives for an expanded range of upgrades
• revised program participation requirements for trade-exposed, energy intensive large energy users
– moving away from an automatic exemption model to a model where eligible facilities would be
able to apply for exemption from the program, provided they could demonstrate energy
management
• technical changes to the electricity emissions factor that would ensure CO2e emissions reductions
would be properly accounted for as the emissions intensity of the electricity grid decreases
• increased shortfall penalties to be payable by energy retailers in the event of non-compliance.
Concurrently, the Department consulted on proposed changes to phase out incentives for some lighting
upgrades. While this document refers to these changes where relevant to the final decision by the
Department on targets, a separate response to the lighting consultation has been published at
https://engage.vic.gov.au/victorian-energy-upgrades/lighting.
Further consultation will be undertaken regarding revised program participation requirements for larger
energy consumers and stakeholders can expect a decision on this in 2021.
1.3 Stakeholder consultation
The Department released a range of documents supporting consultation on the future targets through the
Engage Victoria website, including 12 technical appendices and the draft regulations. The Engage Victoria
website included fact sheets to assist stakeholders in understanding key issues. Stakeholders were invited to
share their views on the proposed changes from 4 December 2019 until 31 January 2020. A public
information session was held on 11 December 2019 and was attended by over 200 people.
The Department also met with large energy users and related organisations regarding the proposed changes
affecting them on 17 January and 27 February 2020.
The Department received a combined total of 82 submissions for the targets and lighting consultations (see
Figure 3 for a breakdown). Submissions were received from peak bodies, accredited persons (APs), industry
and members of the public.
The Department thanks all the organisations and individuals who took the time to review the material
available on the Engage Victoria website, provide submissions, participate in workshops and meetings or
provide feedback through other means. The Department has carefully considered all stakeholder feedback
Victorian Energy Upgrades program 9
Response to consultation on program targets for 2021 to 2025and reviewed the policy basis underpinning the proposed changes in light of this feedback. For further details
on the consultation process and documents, see Appendix A.
Figure 3: Submissions on proposed targets for VEU for 2021-2025, by stakeholder type
1.4 Responding to the impacts of the coronavirus (COVID-19) pandemic
Following the close of the consultation period, the environment in which the VEU program operates changed
considerably. The emergence of the coronavirus (COVID-19) pandemic made it difficult for VEU businesses
to import products and required the Victorian Government to introduce various measures to protect the
health of Victorians.
As part of this effort, to slow the spread of coronavirus (COVID-19), the Department temporarily suspended
high-volume residential activities under the VEU program likely to result in frequent contact between people,
including:
• incandescent lighting upgrades
• low-flow shower rose upgrades
• weather sealing upgrades
• installation of in-home display units.
These activities were temporarily suspended from 1 April 2020, with the suspension lifting on 24 June 2020.
Following further Government restrictions, these activities were suspended a second time from 14 July 2020
with the suspension lifting on 28 October 2020 in line with the easing of restrictions. The suspension was
made in full recognition of the impact it would have on VEU businesses but in recognition of the need to
protect the health of VEU accredited persons, program participants and the Victorian community.
While Victorian Energy Efficiency Certificate (VEEC) creation slowed down during the suspension, analysis
by the Department projects that the 2020 target will be met and that there remains sufficient oversupply of
VEECs in the VEU market to help smooth the transition from lighting upgrades to other types of upgrades in
2021 and 2022. While coronavirus (COVID-19) may cause short-term price impacts in the VEEC market,
market participants can take confidence from the knowledge that 140 per cent of VEECs for the 2020 target
have been registered to date – five months in advance of the legislative requirement.
The Department also acknowledges that stakeholder submissions about future targets were unable to take
account of coronavirus (COVID-19) and it has been working closely with stakeholders to ensure full
consideration of these issues alongside issues raised in the submissions.
The Department is confident that its final position is robust to a range of uncertainties and reflects the
Minister’s commitment to ensuring the program continues to deliver strong benefits to Victorian businesses
and households.
For more information, please see the website https://www.energy.vic.gov.au/energy-efficiency/victorian-
energy-upgrades or feel free to contact the VEU team on energy.upgrades@delwp.vic.gov.au.
10 Victorian Energy Upgrades program
Response to consultation on program targets for 2021 to 20252. VEU program targets
Figure 4: Stakeholder views on target size
The following targets have been announced:
• In 2021, 6.5 million tonnes of CO2e emissions
(announced 2 June 2020)
• In 2022, 6.7 million tonnes of CO2e emissions
• In 2023, 6.9 million tonnes of CO2e emissions
• In 2024, 7.1 million tonnes of CO2e emissions, and
• In 2025, 7.3 million tonnes of CO2e emissions.
The VEU program targets set out the emission
reductions that need to be achieved each year and this
corresponds to the number of VEECs that need to be
delivered each year. The final targets align with the
targets proposed in the preferred policy package
although changes to the electricity emissions factor
(discussed below) will mean that these targets deliver
slightly less energy savings than was initially proposed.
The Department’s final position on its preferred targets was made considering several factors.
2.1.1 Energy affordability for consumers
Stakeholders who advocated for a lower target were primarily concerned about the cumulative impact of
the proposed changes in the preferred policy package on the price of the program for consumers. The price
is ultimately paid for by consumers through their energy bills.
These stakeholders (primarily energy retailers and exempt energy users who were proposed to be brought
into the VEU program and so face costs for the first time) noted that the proposed targets would greatly
increase demand of VEECs while other changes being proposed for commencement at the same time
would make it much more difficult to supply VEECs. This would increase the price of VEECs being traded
and there were concerns about the scale of price increase.
The final targets will deliver significant bill savings for participating households and small businesses, and
cost-effective emissions reductions for the Victorian community. Importantly, combining these targets with
revised electricity emissions factors, will decrease energy bills of non-participants both in the immediate
term and over the next ten years. Changes to the proposed range of activities eligible for incentives and the
penalties for energy retailers for not complying are also expected to reduce pressure on the VEEC price.
Higher targets may have had net costs for non-participants.
2.1.2 Support for the preferred targets
Of those stakeholders who provided feedback on the targets, more supported the preferred targets than
higher or lower targets (see Figure 4). Many stakeholders did not feel the need to comment on the size of
the target at all, appearing more concerned about the details of how they would be implemented.
2.1.3 Climate change and new energy technology jobs
Many stakeholders commented on the importance of reducing GHG emissions in Victoria, and this
appeared to be the primary reason for stakeholders to advocate for a higher target.
There was a recognition of the importance of the targets on jobs in the demand-side management industry.
In late March, some APs and peak bodies contacted the Department regarding the impacts of coronavirus
(COVID-19) and noted the role a strong target would play to help them recover from the economic impacts
from coronavirus (COVID-19).
The targets are ambitious, which is in line with the Victorian Government’s climate change policy objectives
to achieve net zero emissions by 2050. Lower targets would undervalue the potential for the energy
efficiency and demand-side management industry to grow.
Victorian Energy Upgrades program 11
Response to consultation on program targets for 2021 to 20252.1.4 Feasibility for industry
The targets were proposed to be delivered at the same time that the VEU program transitions to
incentivising new types of upgrades. Stakeholders noted that it may be difficult for businesses to transition
quickly enough to delivering new types of upgrades to meet a higher target, or even the preferred target.
The Department considers it feasible for businesses to transition in time to meet the preferred target, with
the adjustments made to lighting changes on 28 October 2020.
The preferred policy package has been revised to partially retain some of the more popular opportunities
for delivering VEECs, meaning the transition to new technology areas can happen more slowly (see section
3).
2.1.5 Coronavirus (COVID-19) impacts
Since March 2020, some energy retailers have contacted the Department and reiterated their concerns
about this cumulative impact on the market, noting that coronavirus (COVID-19) would further impact the
supply of low cost VEECs.
Concerns about this cumulative impact of proposals on market dynamics and costs, including the additional
impact of coronavirus (COVID-19), were relevant to the Department’s final position on multiple elements of
the preferred policy package. These are dealt with in section 3 of this document.
12 Victorian Energy Upgrades program
Response to consultation on program targets for 2021 to 20253. Market dynamics and costs: managing
simultaneous changes to demand and supply of
VEECs
In addition to the future targets, the preferred policy package proposed:
• decreasing the electricity ‘emissions factor’ used to determine the amount of GHG emissions
avoided per certificate under the program, to reflect Victoria’s decarbonising energy system
• increasing the penalty for retailers if they fail to surrender the required number of VEECs to the
Essential Services Commission (ESC) (the ‘shortfall penalty’)
• phasing out incentives for some forms of lighting that have become commonplace (through a
separate and concurrent consultation process).
A diverse group of stakeholders expressed concerns about the cumulative impact of the multiple changes
proposed – changes to the targets, the emissions factors, the shortfall penalties and the phase out of
incentives for lighting. Most submissions considered that the proposed changes were being phased in too
rapidly.
The Department has considered the cumulative impacts of the proposed changes and the impacts of the
COVID-19 pandemic on market dynamics and costs. Its final positions seek to balance program ambition
while controlling program costs and providing assurance to market investors and program participants.
3.1 Electricity emissions factors
Table 1: Proposed and final electricity emissions factors
Emissions 2020 (current) 31 July 2021 31 Jan 2022 31 Jan 2023 31 Jan 2024 31 Jan 2025
factor
(CO2e/MWh)
2019 RIS
1.095 0.8055 0.516 0.473 0.433 0.393
proposal
Final
1.095 0.9546 0.81242 0.6738 0.5334 0.3930
position*
*The only exception to this is for annual certificate creation under the project-based activity methods, where
annual National Greenhouse Accounts factors will apply, see section 5.3.
The emissions factor indicates how much CO2e is saved per megawatt hour (MWh) of electricity avoided as
a result of undertaking energy upgrades.
The Department proposed significant reductions to emissions factors (see Table 1) including a steep
reduction in the emissions factor from 2020 to 2022 in the RIS, based on the following factors:
• that the current electricity emissions factor was set in 2015 and is out of date
• that the factor needs to decrease to reflect the impact of other emissions reduction policies on the
emissions intensity of electricity from the grid, such as the Victorian Renewable Energy Target and
the Climate Change Act 2017
• that the comparative fuel intensity of electricity versus gas products is more accurately represented
by an emissions factor that is forward looking (i.e. is an average ten year forward electricity
emissions factor that accounts for emissions savings over the lifetime of an upgraded energy
product).
While many stakeholders expressed concern about the pace and scale of the changes being proposed by
the overall preferred policy package, only a limited number of stakeholders commented on the electricity
emissions factor. Stakeholders who provided comments expressed concern that:
• the rapid decrease of the electricity emissions factor, in particular over the first two years, would
significantly increase the number of upgrades that would need to be delivered each year
Victorian Energy Upgrades program 13
Response to consultation on program targets for 2021 to 2025• the modelling that led to the emissions factor did not match their own modelling
• it would change the value of a certificate each year, which could impact market dynamics. That is,
there would be a rush at the end of each year to complete jobs and create certificates as more
energy savings would be required per VEEC the following year.
The Department accepts the importance of ensuring a smooth transition for stakeholders and has revised the
electricity emissions factors to decrease smoothly over the 2020 to 2025 period (see Table 1).
The Department is confident that the revised proposal will:
• smoothly transition the emissions factor, relieving some of the pressures in the market
• adequately account for the CO2-e reduced by the program – the revised factors are in line with
updated assumptions about the likely rate of decarbonisation of the grid
• bring down costs and mitigate impacts on consumers who do not participate in the program
estimated in the RIS,3 while providing incentives for a significant amount of additional energy
upgrades under the program, supporting the demand-management sector and ensuring the VEU
program remains the most ambitious program of its type in Australia.
This revision will reduce program costs by 27 per cent and energy savings by 16 per cent, compared to what
was stated in the RIS. It will also increase electricity savings by 29 per cent and decrease gas savings by 23
per cent from what was stated in the RIS, as the incentive for electricity saving upgrades compared to gas
savings upgrades remains higher for longer. The majority of savings will still be gas savings.
The estimated impact on non-participating consumers will be significantly lower than modelled in the RIS
because:
• the overall cost of the program has decreased. This means the cost of the program passed through
to consumers, and visible on energy bills, will also be lower.
• a greater percentage of the overall savings are projected to be electricity savings, than under the
consultation proposal. This will have flow on benefits as reducing electricity demand reduces
wholesale electricity costs.
The Department recognises that an annual change to the emissions factor will likely lead to a rush in VEEC
creation in the lead up to each change. While this could theoretically be managed through more frequent (for
example, quarterly) adjustments, this option introduces inefficiencies as well as additional administrative
burdens.
The adjustment of the emissions factor on an annual basis balances these administrative constraints with the
need to account for CO2-e emissions reductions as accurately as possible. All markets face a certain amount
of additional activity when policy changes are made, and the Department considers this will not present
unmanageable issues for VEU market participants.
In their individual contractual decisions made about VEEC futures, suppliers of VEECs should understand
that the annual change in emissions factors is likely lead to changes in the price of VEECs.
3.2 Shortfall penalty
The following shortfall penalties have been announced:
• $70 for any shortfall accrued for the 2021 target year
• $80 for any shortfall accrued for the 2022 target year
• $90 for any shortfall accrued for the 2023 target year.
In 2023, the Department will review the shortfall penalty, which will remain at $90 for 2024 and 2025 unless
adjustments are required at that time.
The shortfall penalty is the penalty an energy retailer must pay for each VEEC they are required to surrender
to the ESC and do not surrender. In the RIS, the Department proposed increasing the shortfall penalty from
its current level of $50.83 per VEEC in 2020 to $112 per VEEC for the period 2021 to 2025 inclusive. This
3
The RIS estimated that the overall impact on these consumers between 2021-2030 was neutral but that in some years, consumes would face additional
energy costs. The year with the biggest impact was projected to be 2025, and it was projected consumers would pay an additional $65 for energy that
year
14 Victorian Energy Upgrades program
Response to consultation on program targets for 2021 to 2025represented a 124 per cent increase and was based on the estimation of the benefit lost to society when an
energy retailer does not surrender a certificate. 4
Fourteen stakeholders expressed concern about the magnitude and timing of the proposed change to the
shortfall penalty. The majority requested that the current penalty be retained for 2021 and 2022 with a
deferred implementation and/or with a more gradual transition over a number of years.
Stakeholders also expressed concerns about how the increase in shortfall penalty could impact program
costs for consumers.
As previously noted, the costs incurred by retailers in purchasing VEECs are passed through to consumers.
While this has not been the case historically, retailers noted that given there would be a transition away from
well understood supply opportunities (lighting upgrades), the shortfall penalty may be used by retailers as an
indication of the price of future certificates unless the Department provided other sources of information for
making projections.
The Department accepts that where no better data is available, retailers may be guided by the shortfall
penalty rate in estimating the program costs to pass through to consumers for a given year. While the
Department maintains that the penalty is not an indication of likely certificate prices, but rather a penalty in
excess of projected maximum certificate prices, it has reduced the amount by which the penalty was
proposed to be increased to mitigate any chance that consumers may be asked to pay more than is
necessary for the program.
The Department also considered the following in arriving at its final position:
• paying penalties is treated differently for tax purposes than purchasing VEECs, making paying
penalties more expensive in most circumstances
• the revised shortfall penalty continues to be well above projected maximum certificate prices and
should be sufficient to ensure compliance
• to date, retailers have complied well with their obligations under the program.
3.2.1 Retailers’ ability to carry over shortfalls
As part of a future review of the Act, the Department will investigate the feasibility of introducing a mechanism that
allows energy retailers to accrue a minor shortfall each year.
Some stakeholders noted that market pressures resulting from an increase in demand and a reduction in
cheap supply could be somewhat mitigated if retailers were permitted to carry over some of their liability from
one year to the next (i.e. a retailer might under deliver in one year but then deliver the shortfall the following
year). One stakeholder suggested that allowing a 10 per cent shortfall, similar to the New South Wales
Energy Savings Scheme, would be appropriate.
The Department considers that annual targets are appropriate for the VEU program, as they require frequent
surrender of VEECs and ensure APs and installers can rely on a more constant cash flow.
Allowing retailers to accrue a modest annual shortfall under the VEU program will lessen the pressure on
them to buy when certificate prices spike and discourage short term price spikes, as has happened under the
VEU program on numerous occasions over the last few years.
Departmental projections suggest that 2024 and 2025 may see VEECs with relatively higher prices, as low-
cost opportunities to create VEECs in the early years reduce and the emissions factors decrease. This
means there is an ongoing advantage in purchasing VEECs sooner rather than later.
The Department will investigate the feasibility of introducing this type of mechanism as part its review of the
VEET Act in 2021.
3.3 Phase out incentives for lighting activities
Many stakeholders expressed concerns about phasing out lighting incentives at a time when greater activity
under the program would be required to meet ambitious targets and a decreasing electricity emissions factor.
4
Stakeholders can refer to the Department’s 2019 Regulatory Impact Statement on targets for the VEU program for 2021 to 2025 for further information on
how this was calculated.
Victorian Energy Upgrades program 15
Response to consultation on program targets for 2021 to 2025The Department has prepared a separate response regarding the proposed phase out of incentives for some
types of lighting upgrades, including the responses from stakeholders.
At the same time as lighting incentives are being phased out, the Department is planning on introducing a
wide range of new activities (see section 5).
Incentives for lighting activities will remain for longer.
• Residential lighting: full incentives available to 30 June 2021 and reduced incentives available to 31 January 2022.
• Warehouse and other non-office lighting: full incentives available to 31 March 2021 and reduced incentives
available to 31 January 2022 and then a further reduction until 31 January 2023.
• Streetlighting (mercury vapour): full incentives available to 31 January 2023.
• Office lighting: incentives will be retained for all major office lighting types.
More detail can be found in the Department’s Response to lighting issues available at
https://engage.vic.gov.au/victorian-energy-upgrades/lighting.
At the same time as lighting incentives are being phased out, the Department is planning on introducing a
wide range of new activities (see section 5).
3.4 Concerns about high certificate prices: reviewing the ability of the Department to
respond to oversupply and undersupply issues
As part of a future amendment to the VEET Act, the Department will investigate the feasibility of introducing a trigger
mechanism to allow the Minister to review an annual target in cases where there is extreme undersupply or
oversupply in VEECs.
The Department will consult with stakeholders on the design of the mechanism.
Some stakeholders expressed concern that the increased program ambition could lead to high certificate
prices, because there may be an undersupply of VEECs. While high certificate prices are not necessarily a
problem as they drive more complex upgrades, stakeholders were concerned that the Department may lack
the ability to respond if the program costs were significantly higher than projected and therefore the impacts
on non-participating energy consumers would not be neutral as anticipated.
As part of a future amendment to the VEET Act, the Department will investigate the feasibility of introducing
a trigger mechanism to allow adjustment of an annual target in cases where there is extreme undersupply or
oversupply in VEECs. This will provide additional confidence to energy consumers that the program can
deliver its target either at the projected or below the projected price and provide the Department with
flexibility to become more ambitious should the need arise.
3.5 Coronavirus (COVID-19) impacts
Following the close of formal consultation, a range of energy retailers, APs, and market participants
contacted the Department to discuss the impacts of coronavirus (COVID-19) on their businesses, and on the
VEU program and the changes being proposed. The Department’s suspensions of some high-volume
activities resulted in fewer VEECs being created during those periods than would otherwise have been the
case.
Stakeholders expressed concern about the suspension of activities and the resulting slow-down in certificate
creation. They noted that given the proposal to phase out incentives for cheap lighting upgrades by the end
of 2020, the current slow-down in VEEC creation would result in fewer low-cost VEECs available to meet the
2021 target. They reiterated their concerns about the stark increase in energy upgrades required to meet the
2021 target, given coronavirus (COVID-19) will reduce the oversupply of VEECs in the market at the start of
the 2021 target year. That would further increase the amount of energy upgrades that need to be undertaken
in 2021.
Some stakeholders were concerned that the significantly reduced 2021 emissions factor would impact their
ability to meet future contracts at similar prices because it would require almost three times as many
upgrades to be carried out in order to create a certificate. They noted that they were needing to renegotiate
delivery of contractual obligations (of selling VEECs to retailers at a certain price) due to coronavirus
16 Victorian Energy Upgrades program
Response to consultation on program targets for 2021 to 2025(COVID-19), and that this may mean some contracts that were going to be delivered in 2020 may be
delivered in early 2021, when this new emissions factor applies.
The Department has arrived at its final positions in light of the current information available to it about the
coronavirus (COVID-19) pandemic and its impacts, including feedback received by stakeholders. There will
be no change to the emissions factor until 31 July 2021, and the final 2021 emissions factor will have a
significantly lower impact on the supply of VEECs than the one initially proposed. Further decisions may
need to be made, depending on how the situation evolves.
The extension of incentives for lighting upgrades is expected to deliver the low-cost and free upgrades for
consumers, and a supply of low-cost VEECs for the 2021 period. The small change in the emissions factor
for 2021 from 31 July 2021, will mean that a small percentage of additional upgrades will be needed to meet
the 2021 target which remains at a level of 6.5 million VEECs. Not only is an oversupply expected coming
out of the 2020 target year, but by continuing incentives for lighting upgrades which can be delivered at scale
and often for free, the Department is confident there will be sufficient cheap supply to meet the 2021 target
and ease the transition into the 2022 target year.
In considering whether to alter the 2021 emissions factor in light of coronavirus (COVID-19), the Department
took into account both the need to provide stimulus and support to APs post coronavirus (COVID-19) and the
need to provide additional support for households and businesses in reducing energy costs. Continuing
incentives for popular and low-cost lighting upgrades rather than reducing targets was considered the best
way in which to achieve these multiple goals.
Regarding the call from some stakeholders to allow for a shortfall in 2021, the Department notes that this
would require a VEET Act amendment and the Department will review the Act ahead of the 2022 target year.
Under Section 33 of the VEET Act, the Essential Services Commission (ESC) has the power to specify a
date other than 30 April by which energy retailers must surrender VEECs; which allows for the possibility of
extensions to the surrender date if required.
In that case, the transition from lighting upgrades to other forms of upgrades (at the same time that the
program transitions from the 2021 to the 2022 electricity emissions factor) will have fewer impacts on energy
retailers and market prices. This would also address any market pressures that may have resulted from
coronavirus (COVID-19) in 2020 and 2021.
4. Large energy users
The Department will undertake further consultation and analysis in 2021 on the design and timing of the new
approach to exemptions from the VEU program.
Currently, some businesses are excluded from the VEU program. Certain facilities and sites cannot access
incentives for energy saving upgrades and do not pay the program pass-through costs unless they choose to
‘opt in’ to the program. These sites do benefit from the reduced energy costs delivered by the program to all
Victorian energy consumers.
The preferred policy package sought to provide clear, consistent criteria for large energy users to seek an
exemption from the VEU program. It also proposed to require businesses opting out to have an energy
management system. This approach recognised that all energy users need to consider their energy use and
opportunities for improved energy management, regardless of their participation in the program.
The Department received 22 submissions about the exemption framework and held two additional
consultation sessions for large energy users on 17 January and 27 February 2020. Stakeholder feedback
was generally supportive of the proposal, with suggestions made to improve its design and implementation.
Since then, the coronavirus (COVID-19) pandemic has had significant impacts on businesses and the
economy. It is important to understand how this has affected the energy consumption of Victoria’s large
energy users and how the new framework can support them as part of the economic recovery.
Victorian Energy Upgrades program 17
Response to consultation on program targets for 2021 to 2025You can also read
