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Lead Author: Sarah Toohey, Victorian Council of Social Service Email: [email protected] VISIONS FOR VICTORIA DRAFT WORKING PAPER: WATER GAS & ELECTRICITY Introduction In the coming years prices for electricity, gas and water will rise due to climate change impacts such as reduced rainfall, climate change mitigation measures like the Emissions Trading Scheme and the cost of large infrastructure projects like the Victorian Water Grid. These price rises, combined with further deregulation of the Victorian energy market and the progression of the National Energy Market highlight the need for a strong consumer protection framework and investment to improve household energy efficiency and promote resilience in adapting to climate change. Brumby Government’s Vision The Brumby Government’s energy statement, Energy for Victoria, outlines the four key objectives of Victorian Government energy policy: an efficient and secure system, a safe and reliable supply, affordability for consumers and environmental sustainabilityi. The Brumby Government’s approach to water is outlined in the Our Water Our Future documents, with the objective of providing “water security for Victoria’s growing population and economy in the face of drought and the challenge of climate change”ii Successes Since 2004 the Bracks/Brumby government has implemented a range of consumer protection measures that have resulted in a strong consumer protection framework for electricity, gas and water in the utilities market. These measures include a ban on prepayment meters, a wrongful disconnection payment in cases where utility companies unlawfully disconnect someone, a requirement for utility retailers to have hardship programs, the extension of the Capital Grant Scheme (now Homewise) to purchase energy efficient applicances, the expansion of eligibility for the Utility Relief Grant Scheme for low income people experiencing financial difficulty in paying their utility bills and establishing a range of rebates for energy efficiency measures. Issues of concern Price Deregulation With the removal of energy price regulation in Victoria as of 1 January 2009, consumers who have not previously engaged in the energy market will be faced with a complex system of market contracts and variable prices for their essential services. The removal of a regulated price for the standing offer means that consumers will need strong safeguards to ensure that they can get the right advice when they need it. Ensuring that consumers have the right information to be able to participate is essential in creating a competitive and effective market system. To assist vulnerable and disadvantaged households the roundtable recommends that the Victorian Government establish an energy advisory service to provide information on the energy market and assist consumers to choose an energy contract. Pricing principals The cost of infrastructure projects, like the mandatory roll out of interval metres, the Sugarloaf pipeline and the Wonthaggi desalination plant, will contribute significantly to price rises for essential services in the coming years. Similarly the impacts of a Carbon Pollution Reduction Scheme and other climate change mitigation measures will flow through to consumers in the form of higher energy prices. Given the relative inelasticity of energy demandiii for low income households (meaning that low income households find it difficult to reduce their consumption of energy in response to a price increase), the way in which these cost increases are passed on to consumers raises significant equity issues. Pricing principles that secure a minimum ‘lifeline’ supply for the essential services of electricity , gas and water, (to cover drinking water, sanitation needs, heating, refrigeration, hot water and lighting for a typical household) at an affordable rate, could be used to mitigate the impact of price rises on low income and vulnerable households. By introducing a ‘lifeline’ tariff for household energy use, low income & low usage households would receive a proportion of their usage at a lower price and as such be insulated from excessive price rises, while the market is given sufficient flexibility to pass on additional costs in an inclining block tariff structure (meaning that the price paid per unit of consumption increases the more you consume, creating a strong incentive to reduce consumption where that is possible), over and above this minimum supply rate. The application of these pricing principles on the regulated distribution tariffs for electricity and gas, and in the price determinations for water, would ensure that low income households are provided with a minimum supply of electricity, gas and water, at an affordable price for their basic needs. Effective concessions Ongoing price pressures on gas, electricity and water highlight the need for a strengthened concessions regime to protect vulnerable consumers, particularly those households in rural and regional areas that are not connected to mains gas or water supply. Prices for bottled gas and carted water are significantly higher than mains services. Extended drought will increase the dependence of households on carted water and the international price of oil will be reflected in the price of bottled LPG. Given these impending price pressures the mechanism by which non-mains gas and water concessions are applied, indexed and distributed is in need of urgent review. Energy and Water efficiency To help mitigate the impact of energy and water price increases in the long term, investment in ongoing energy and water efficiency measures will be essential. For middle and high income households the current range of rebates for energy efficiency investments is an important incentive to encourage households to reduce their environmental impact. However rebates are only accessed by a small proportion of the population and need to be supported by broader regulatory measures. Additionally many low income households are unable to access rebates that would enable them to reduce energy costs. Insufficient up front capital, the size of the rebate and insecure household tenure are all barriers to low income households being able to invest in energy efficiency measures. To ensure that all households can actively make changes to their house that would reduce energy and water consumption, the roundtable recommends that extensive energy efficiency retrofits, similar to those offered in the WarmFront program in the United Kingdom, be targeted towards low income households. This would include measures such as roof insulation, replacing of inefficient hot water services and upgrading inefficient appliances. In addition to the initiatives outlined above, additional measures will be required to improve the energy efficiency for rental properties. As landlords do not bear the costs of increased energy prices, there is little incentive for them to invest in energy efficiency measures for their rental properties. In order to overcome this split incentive mandatory energy efficiency measures should be introduced for rental properties. These measures could be phased in with rental properties required to meet minimum energy efficiency standards at the time of re-letting. Such a policy should be part of a larger package that aims to overhaul the water and energy efficiency of the State’s entire existing and future building stock. With regard to water efficiency and minimising the impact of expensive augmentation projects on water bills it is important that the State Government takes measures to ensure that the desalination plant can be turned off at times when additional water supply is not needed. This will minimise price rises for consumers and will encourage the continued uptake of lower cost water conservation and efficiency measures. Towards a Legacy The reforms of the past four years have gone some way to ensuring that all Victorians can access essential services. By securing a strong consumer protection framework, and effective hardship policies, many Victorians are able to access the electricity, gas and water they need on a daily basis. How the Brumby Government ensures that Victorians can continue to access the essential services they need in the face of increasing prices in the coming years will be a significant challenge. The transition to a low carbon economy will in the short term create price pressures that will need to be managed and mitigated through encouraging more efficient energy use. However making an orderly transition to a clean energy economy that protects vulnerable consumers and communities will reduce the state’s carbon liability in the longer term. Through pricing principles, effective concessions, energy and water efficiency measures and the continuation of the consumer protection framework, a secure, sustainable and affordable supply of electricity, gas and water can be secured. Score: 7 out of 10 Recommendations The Victorian Government should: 1. Provide funding to an independent energy advisory service to assist consumers engaging in the energy market 2. Implement pricing principles that guarantee a minimum ‘lifeline’ supply of electricity, gas and water at an affordable price, with increasing price per unit of consumption above the lifeline supply. 3. Encourage the transition to low carbon energy supplies. 4. Ensure that all Victorians can access essential services through a concessions framework that addresses the unique circumstances of rural and regional households 5. Implement a comprehensive suite of measures to improve household energy efficiency, including the introduction of minimum energy efficiency measures for rental properties. i Department of Natural Resources and Environment, Energy for Victoria, Victorian Government, 2002, p.13, accessed 12/9/08 at http://www.dpi.vic.gov.au/DPI/dpinenergy.nsf/9e58661e880ba9e44a256c640023eb2e/b0bc44 e303ecded5ca2572b1000f1734/$FILE/Energy_for_Victoria.pdf ii Department of Sustainability and Environment, Our Water Our Future: The Next Stage of the Government’s Water Plan, Victorian Government, 2007, p.3, accessed at http://www.ourwater.vic.gov.au/__data/assets/pdf_file/0015/366/The-Next-Stage-of-theGovernments-Water-Plan-2007.pdf iii Langmore, M & Dufty, G, Domestic demand elasticises: issues for the Victorian Energy Market, St Vincent de Paul, June 2004.