Re-thinking Energy Saving Project Subsidies

Tuesday, February 3rd, 2015
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The Australian Government plans to open the first round of reverse auctions to allocate the $2.5 billion Emission Reduction Fund later in Q1 2015.

Commercial and industrial energy savings projects are well placed to access this funding. Historically, policy makers and businesses have implicitly assumed funding from these programs will provide customer discounts. This need not be the case, and in many instances it makes more commercial and policy sense to target subsidies further up the supply chain.

The Emission Reduction Fund (ERF) is the centrepiece of the Australian Government’s direct action plan to reduce greenhouse gas emissions. The Government has committed $2.5 billion over the next five years to purchase abatement through a series of reverse auctions. Businesses with projects that result in abatement can apply to have their projects declared an “eligible offsets project” and participate in these auctions. Contracts will be awarded to proponents who bid to deliver abatement at lowest cost.

As one of the lowest cost sources of abatement, energy efficiency projects are well placed to succeed in these auctions and access ERF funding[1]. Projects must be able to empirically demonstrate savings using approved methods. A number of methods have already been released based on improved NABERS ratings or formal measurement and verification techniques. The kinds of projects that could use these methods include:

  • commercial building upgrades that increase NABERS ratings,
  • industrial process improvements that reduce energy or fuel consumption, or
  • higher efficiency lighting, HVAC, refrigeration, motor systems or other energy using equipment

The ERF is not the only game in town, however. Significant amounts of funding are also available through state government energy efficiency market-based schemes. Up to 2020, around $125 to $190 million is available under the NSW Energy Savings Scheme (ESS) and $270 to $400 million under the Victorian Energy Saver Incentive (ESI)[2]. Smaller amounts of funding are also available under the South Australian Residential Energy Efficiency Scheme (soon to be expanded to small business) and the ACT’s Energy Efficiency Improvement Scheme.

The ERF and state based energy efficiency programs are similar in their underlying architecture. They form part of a decade and a half of successful market-based carbon and energy policy initiatives including the Renewable Energy Target and the former NSW Greenhouse Gas Reduction Scheme (GGAS).

Historically, participating businesses and policy makers alike have tended to see these programs as a kind of streamlined customer grant or rebate mechanism. They assume that subsidies will be used to directly reduce the final cost paid by the customer to improve project rates of return and increase customer uptake.

For large energy users with a portfolio of their own ongoing energy savings projects, this approach works very well, but for energy saving product and service providers, customer rebates business models have only been viable for a limited range of technologies. The technologies that have seen the most uptake have been those that can be made free or achieve very fast paybacks through government program funded discounts or rebates. Heavily subsidised commercial lighting projects have dominated the NSW ESS, and the Victorian ESI program has seen most funding go to residential giveaways of lighting and standby power controllers.

However, the legislation does not limit the supported technologies or require that subsidies be directed to customer discounts. I believe that there is scope for business model innovation that can help drive investment across a much broader range of energy efficiency goods and services. Customer discounts can be one of the least efficient uses for subsidies.

The subsidy available for energy efficiency projects is usually small relative to the value of the lifetime energy bill savings customers receive. Only projects that are close to meeting customer IRR (internal rate of return) thresholds will be pushed over the line by a small subsidy.

However, for many projects or energy saving technologies, IRR isn’t necessarily the main obstacle. Customers are often reluctant to use their limited capex budgets to replace plant that is still operational, even if there is a business case to so. When plant fails, procurement decisions can be driven by factors like low upfront cost, and the perceived speed and low risk of like for like replacements. This is where a different approach to thinking about subsidies comes in.

Suppliers of energy saving technology can cleverly use subsidies to tackle a broader range of barriers. Funds could be combined to invest in improved distribution, sales and marketing, product development, or finance offerings. For example, if upfront cost is a barrier, energy efficiency subsidies can be effectively combined with equipment financing products to provide net negative cost deals to customers. For suppliers of high efficiency equipment, if may be more effective to use subsidies to fund sales commissions to distributors or contractors.

These government programs will provide hundreds of millions of dollars each year to businesses whose activities save energy. You should also consider which government programs and market partnerships best align with your business strategy and capabilities. If your products help your customers use less energy than they currently do, these programs can help fund your growth. If you don’t get involved, the chances are that one of your competitors will.


[1] ClimateWorks Australia (June 2011) “Fact Sheet: Energy Efficiency”
[2] Assuming current targets and demand forecasts and certificate prices between $10-15.



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