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by Imogen Hartmann, Editor, Energy magazine

As wholesale electricity and gas prices continued to soar in the first half of this year, the Energy Efficiency Council banded with a coalition of industry bodies to call on energy ministers to improve demand-side efficiency, energy management and fuel switching. Energy Magazine spoke with Energy Efficiency Council (EEC) CEO, Luke Menzel, about the critical role energy efficiency strategies will play in the current energy crisis and beyond.

Recently, industry members and policymakers alike have been grappling with the “perfect storm” that has become the National Electricity Market (NEM)’s energy crisis – a culmination of high gas and coal prices driven by shortages as a result of the war in Ukraine; unplanned outages of generators; and a cold start to winter.

The compounding of these challenges has created a serious situation in Australia’s energy markets. But while the industry is reeling from this state of affairs, Mr Menzel is focused on the retail impact of the crisis.

“From our point of view, it’s important to understand that the energy crisis will have real impacts on households and businesses,” Mr Menzel said. “As high wholesale prices flow through to higher retail prices, there will be some vulnerable people in our community who will face significant energy hardship – particularly when you factor in other cost-of-living pressures like high food and petrol prices.

“There will probably be a more immediate impact on businesses that are exposed to the spot markets in electricity, but particularly in gas. Businesses could see their electricity and gas costs go up by 400-500 per cent, which is going to be catastrophic for energy- intensive businesses.”

Unfortunately, Mr Menzel believes that there isn’t a huge amount the Federal Government can do to alleviate the circumstances in the short term, however, that doesn’t mean there’s nothing to be done about energy bill stress.

Smarter energy use is key

“We think it’s vitally important to get the message across to energy ministers, and the public – that we can make real inroads into the energy crisis by being smarter about how we use energy,” Mr Menzel said. “For example, one of the really significant things we can do to lower the spot price of electricity is to reduce the amount of gas generation that’s needed.

At the moment, gas is incredibly expensive, meaning that gas-fired generation is also very expensive – but it’s typically used as peaking generation. “If we can reduce the amount of peak demand there is – particularly in the evening – then we will significantly lower the average wholesale price of electricity.”

While the traditional approach to energy market problems has involved supply-side solutions (i.e. building more generation, building more network assets, or imposing more regulation or other interventions on energy network participants in front of the meter), Mr Menzel argues these measures simply aren’t enough to address the current crisis.

Instead, he proposes a focus on behind-the-meter solutions to put downward pressure on energy bills by making the system cheaper to run and reducing the exposure of households and businesses to high peak prices. In this sense, the energy crisis provides some opportunity for consumers, as it will draw an increased focus on actions that individual households and businesses can take to reduce their bills.

“In a lot of cases, these can be simple energy efficiency and energy management – things like draught proofing and insulation, managing energy use to take better advantage of solar generation, doing energy audits in business settings. These things can really quickly deliver significant energy savings, leading to lower energy bills,” Mr Menzel said.

Poor policy to blame

According to Mr Menzel, one of the most serious challenges for energy efficiency in Australia over the last decade has been the lack of clear and consistent policy signals encouraging businesses and households to take actions to reduce their emissions and energy usage.

Mr Menzel said that without the appropriate incentives to improve energy efficiency and productivity, the industry isn’t assembled to scale up those activities at a fast enough pace. Mr Menzel said that while there are some parts of the country that have started to do some good work in energy efficiency programs for households and businesses, there are too many jurisdictions with too little policy infrastructure in place to help encourage energy efficiency.

When the right policies and signals are in place, however, Mr Menzel said there are clear benefits. One example was the introduction of the Commercial Building Disclosure program, a national regulatory program that requires energy efficiency information to be provided when commercial office space of 1,000m2 or more is offered for sale or lease. Following the introduction of the program, the average energy usage in commercial office buildings lowered from more than 550MJ/m2 in 2010-11 to around 400MJ/m2 in 2018-19.

Australia lagging behind other countries

“It’s no secret to say that Australia doesn’t perform particularly well in energy efficiency,” Mr Menzel said. “In their latest international scorecard, the American Council for an Energy-Efficient Economy rated Australia’s performance 18th out of 25 – we’re the lowest-ranked developed economy.

“By and large that reflects poor performance in the industrial sector and transport, due in no small part to a lack of any substantial policy to improve energy efficiency or reduce emissions in those sectors.” Mr Menzel said Australia’s building performance is a “mixed bag”, with our housing stock poorly performing by global standards. This could be a result of Australia’s legacy as a “cheap energy country”, meaning that historically, it hasn’t been a priority to build energy-efficient homes.

“This presents real problems for us as we head into a world that will experience more extreme weather events – both hot and cold – and as we face an energy transition that requires us to be a little smarter about how we use energy,” Mr Menzel said. “We’re going to need our homes to shelter and protect us, and we might not be always able to rely on our air conditioners to keep us comfortable.

“That’s especially true for the most vulnerable in our society, who are more likely to live in poorly-performing houses, and might not be able to afford to run heaters or coolers all the time.”

However, it’s not all bad news, Mr Menzel said, as he’s currently in discussions with German policymakers and industry leaders about the National Australian Built Environment Rating System (NABERS). NABERS is a “simple, reliable, and comparable sustainability measurement you can trust across building sectors like hotels, shopping centres, apartments, offices, data centres, and more”.

Mr Menzel said that Germany is keen to learn from Australia about how a system like NABERS can help drive energy efficiency improvements in commercial and public buildings – a space in which Australia is world-leading.

Weather-proofing residential buildings

Mr Menzel estimates that in Australia, there are probably around eight million homes that were built before the introduction of energy efficiency standards for houses in 2005. Meaning, that in a lot of cases, these buildings have fairly poor thermal performance (i.e. little to no insulation, draught proofing issues, highly-conductive windows, and inefficient appliances).

“As we pick up the pace to get to net zero emissions, we’re going to have to pay some serious attention to these residential buildings and make them net zero-ready,” Mr Menzel said.

“There’s a package of relatively straightforward upgrades – installing roof and wall insulation, simple draught proofing, installing reverse-cycle air conditioners for heating and cooling, and installing a heat pump hot water system, that could drastically reduce both energy usage and emissions, while reducing energy bills and improving health outcomes for occupants.

“But the residential market has been a hard nut to crack in terms of energy efficiency – and that’s doubly true for rental properties. “We think with the right policies, we could capitalise on a significant opportunity there.”

The “secret sauce” of industrial decarbonisation

While decarbonising the energy industry as a whole will take a long time, Mr Menzel said there are immediate opportunities to both upgrade energy performance and drastically slash emissions.

“We see the deployment of heat pumps as a key technology to reduce emissions from industry – particularly manufacturing and food and beverage – and the best part is we can start deploying them right now,” Mr Menzel said.

“Heat pumps are really the secret sauce of the energy transition – because they’re electric they can take advantage of renewable energy; they can be used flexibly and integrated with smart control systems; and they can be integrated with cheap thermal storage.

“And the best part is they’re available right now, and we understand them really well – they’ve been around for more than a century.”

But, as we upgrade technologies, Mr Menzel said it is important that businesses look at their energy usage systematically – preferably by using a framework like an Energy Management System. This would allow businesses to save on their energy usage without capital investment.

Capturing the full financial benefits

Mr Menzel said that it’s important to consider that investments in energy efficiency don’t always allow the investor to capture the full financial benefits of the investment.

In some cases, like commercial buildings, it’s straightforward to build a business case for energy efficiency improvements because the building owner will usually be able to recoup the cost of the investment. But in other cases, the value of the energy efficiency investment might accrue more broadly.

“For example, if you insulate your house, you will recoup some savings from that, as you’ll experience significantly lower energy bills,” Mr Menzel said.

“However, the wider energy system will also capture some of the value of your investment. Your insulation not only keeps your house warm, but it also reduces the amount of peak generation needed on really cold nights – so you’ve just reduced the need to create additional generation and network assets.

“While this is great, and this will reduce your energy bill a bit, it also reduces everyone else’s energy bill as well.

“So in some cases, there’s a misalignment between the person that invests in energy efficiency, and the people that realise the benefits. This is especially so in rental properties, where the landlord would have to be the investor, but the tenant would reap the benefits of investment (or feel the pain of lack of investment).”

This is where policies come into play – to realign these split incentives. Energy efficiency schemes in some states and territories are set up so that investment in energy efficiency benefits all consumers. In addition, Mr Menzel said that investing in energy efficiency also has a range of benefits that aren’t typically captured on anyone’s energy bill, including better health outcomes, improved climate resilience, better business productivity, and improved public finances.

Because of Australia’s historically cheap energy prices, many residential homes have poor thermal insulation, leading to energy inefficiency.

Where to from here?

For Mr Menzel, when it comes to improving energy efficiency and easing the transition to net zero, it all comes back to getting the regulatory frameworks right.

“A really important tool that we’re going to need to use is a package of interventions in the residential housing market to elevate awareness of the energy performance of homes,” Mr Menzel said.

This ‘tool’ will require three things:

1. A national system for rating the energy performance of new and existing buildings: this could be used by purchasers, householders, governments, and financial institutions to make good decisions about how to value and improve the energy efficiency of homes

2. Energy performance data disclosure: to be disclosed at the point of sale to build market penetration and familiarity with the tool

3. Minimum standards for rental properties: to ensure that the most vulnerable in our community aren’t exposed to unsafe living conditions through poorly performing housing

In addition, Mr Menzel said there are some other important actions to take from an energy efficiency perspective, including putting a clear policy in place to signal the need to decarbonise to industry. The new Federal Government has indicated that it will start that process by enhancing the Commonwealth’s Safeguard Mechanism to progressively reduce the allowable emissions from Australia’s largest emitters, and Mr Menzel said the EEC will be looking to work closely with the Government to make sure that’s well implemented.

The other critical action to take is to reform the national energy laws to elevate behind-the-meter actions to have the same importance in the minds of energy market regulators as supply-side actions, according to Mr Menzel.

“While we’ve made a start in that direction with the introduction of the Wholesale Demand Response Mechanism, we need some more fundamental change to make sure that regulators think of energy efficiency and energy management as the first fuel. “That’s the best way to reduce energy bills and accelerate the energy transition to a net zero-ready system,” Mr Menzel said.

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