Australia: Energy Efficiency – NSW Energy Savings Scheme Offers Dollars For Action
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Are you considering making improvements to the energy efficiency of your business operations or assets? Are you responsible for others becoming more energy efficient? If so, have you considered participating in the NSW Energy Savings Scheme?

What is the Energy Savings Scheme?

The NSW Energy Savings Scheme (ESS) commenced on 1 July 2009. The ESS was established through the Electricity Supply Act 1995 (NSW) and creates financial incentives for anyone who improves their energy efficiency and saves on their energy consumption.

The object of the ESS is to stimulate investment in energy efficiency and, in particular, to assist in breaking down the perceived market barriers to unlocking widespread investment in energy efficiency in the built environment.

The government's intention is to target the so-called "split incentive" barrier that exists between landlords and tenants, where building owners typically bear the up-front cost of energy efficiency improvements that deliver short term financial benefits to tenants through lower operating costs.

How does it work?

Fundamentally, the ESS requires electricity retailers in NSW to surrender each reporting year, a certain number of "Energy Savings Certificates" (ESCs). ESCs are created when anyone (whether an individual or a business) reduces their energy consumption as a result of a project or activity registered under the ESS. The person who saves energy consumption, and thereby creates an ESC, is referred to as the "Energy Saver".

The Energy Saver must also register as an "Accredited Certificate Provider" to participate in, and generate generate ESCs under, the Scheme.

The ESS target (i.e. the number of ESCs that each electricity retailer must surrender each reporting year) is a percentage of the electricity sales generated by the retailer. In the first reporting year, the target was 0.4% of annual electricity sales. The target increases each year until 2014 as follows:

• 2010 – 1.2%
• 2011 – 2.0%
• 2012 – 2.8%
• 2013 – 3.6%
• 2014 – 4.0% (i.e. 10 times greater than the initial ESS target).

A practical snapshot of the size and value of the ESC market is set out below in this update.

If a liable retailer fails to surrender a sufficient number of ESCs in any reporting year, the retailer will be liable to pay a penalty of $24.50 per megawatt-hour of the shortfall.

The ESS will continue to operate until 2020 unless it is replaced by a national scheme, the likelihood of which has significantly increased with the recent "shelving" of the Government's Carbon Pollution Reduction Scheme.

Given the further delay in implementing a national carbon price via an emissions trading scheme, state and federal governments are now committing to tackling market barriers to energy efficiency in order to achieve Australia's emissions reductions at the lowest cost.

Who is eligible to become an "Energy Saver"?

Broadly, an Energy Saver is a person or entity that is responsible for a registered activity that saves on energy consumption (referred to as a 'Recognised Energy Savings Activity').

Recognised Energy Savings Activities (RESA) are activities that increase the efficiency of electricity consumption or reduce electricity consumption by modifying, replacing, installing or removing End-User Equipment.

End-User Equipment is broadly defined and includes any equipment, process or system that consumes electricity or controls or influences the consumption of electricity. Practically, it includes lighting, HVAC systems, building management systems, fridges, freezers and other whitegoods such as dishwashers.

Energy Savers fall into two distinct categories:

• Original Energy Saver; and
• Nominated Energy Saver.

An Original Energy Saver is generally the person who is liable to pay for the electricity consumed at the End-User Equipment Site (i.e. the person named on the electricity bill). If the site is a tenancy in a commercial building with a sub-metered electricity supply, the Original Energy Saver would typically be the tenant.

A Nominated Energy Saver is simply someone nominated by the Original Energy Saver. A Nominated Energy Saver will typically be a contractor carrying out the RESA or a supplier supplying the relevant End-User Equipment in relation to the RESA. It may even extend to a manager of a facility who is arranging for work to be carried out or a retailer selling relevant End-User Equipment.

By utilising the Nominated Energy Saver provisions, a company may be able to sell or install End-User Equipment to customers and offer a discount to each customer in return for the customer nominating the company to create ESCs on its behalf.

This means that if you are a building owner or tenant wishing to improve the energy efficiency of your building/tenancy and participate in the ESS, you can approach participation in one of two ways:

• by registering yourself as an Energy Saver and then obtaining and trading the ESCs you create from your own activities; or
• by nominating your contractor or supplier as a Nominated Energy Saver in exchange for a discount on the contract price or the price of supply of the equipment.

How do you sell ESCs?

ESCs are bought and sold by private negotiation. All ESCs are held and traded on an on-line registry administered by the Independent Pricing and Regulatory Tribunal (IPART).

How is the ESC market shaping up?

The following is a snapshot of the ESC market as at 5 March 2010:

• 280,000 ESCs are estimated by the ESS Administrator to be required to meet the 2009 compliance year target (i.e. the first reporting year);
• 225,630 ESCs are registered of 2009 vintage (i.e. for accredited activity between 1 July 2009 – 31 December 2009);
• 34,069 ESCs are registered in respect of 2010 activities;
• trades in ESCs have recently tipped $20.00 (per ESC).

To deal with the slight shortfall in ESCs for year one compliance, the ESS Administrator has allowed liable retailers to carry over 50% of their liability to the second reporting period in 2010, thereby bringing the minimum demand in the first reporting year to 140,000.

With the Scheme target significantly increasing each year over the next 4 years, so too will the demand for ESCs.

What should you do?

Given the large (and pre-determined) increases to the ESS targets each year over the next 4 years, there currently exists a significant and unique opportunity to capitalise on the existing and future demand for Energy Savings Certificates.

Participation in the ESS should be considered by any company proposing to undertake improvements in the energy efficiency of its operations or any companies that are responsible for ensuring that others become more energy efficient (such as contractors, managers and consultants).

The introduction of the Mandatory Energy Efficiency Disclosure Scheme (MEED) for commercial buildings (see our previous article here) also provides property owners and tenants with a strong incentive to improve the energy efficiency of poor performing buildings and large tenancies.

Maximising the benefits offered by the ESS and any other incentive scheme requires early planning and a detailed understanding of what is required to satisfy the requirements of the scheme. ESCs can only be created by activities that have been appropriately registered under the ESS. Gadens Lawyers can assist you understand and navigate the machinations of the ESS and structure deals that fully utilise the ESS and other incentive schemes.

Tailored contracting arrangements covering key risks and taking account of the commercial machinations of the ESS are also critical to the success of a registered project. Gadens Lawyers has extensive experience in drafting and implementing innovative contracting solutions to maximise improvements in energy efficiency, including a variety of energy performance contracts and green leases.