The commencement of the VEET scheme on 1 January 2009 follows the successful passage in December last year of the Victorian Energy Efficiency Target Act 2007, which requires large electricity and gas retailers in the state to acquire and surrender energy efficiency certificates representing more than eight million tonnes of carbon dioxide equivalent (CO2-e) over the first three years of the scheme.

This new legislation is intended to reduce greenhouse gas (GHG) emissions, encourage efficient use of electricity and gas, and foster investment, employment and technological development in energy reduction industries.

The VEET model is essentially a ‘white certificate’ scheme – that is, it leads to the creation of tradeable instruments, issued by an authorised body, that guarantee a specified level of energy saving has been achieved.

The new law requires that for each of the first three years of the scheme (2009 - 11) a minimum of 2.7 million certificates, each representing a tonne of GHG, shall be created – equivalent to 675,000 Victorian households becoming carbon-neutral for a year.

In Victoria these energy savings will be achieved by rewarding consumers prepared to undertake one or more of an anticipated 25 ‘prescribed activities’ ranging from the installation of high efficiency hot water systems, air heater/coolers, lighting, draught proofing and window treatments through to the purchase of high efficiency appliances like refrigerators.

The Essential Services Commission (ESC), which the government has made responsible for building and then administering the VEET scheme, will maintain a public register of approved products included in the various categories of activities.

These activities will be defined in some detail in regulations being drafted by the Department of Primary Industries (DPI), which is also responsible for setting the shortfall penalty rate for electricity and gas retailers that fail to achieve their stipulated share of the scheme target.

How the scheme will work

The operation of the VEET scheme is best explained by describing a typical transaction.

For instance, Energy Appliance RetailerX encourages Householder Y to purchase a high efficiency product by offering a cash discount. Y purchases the product and assigns to X the right to create energy efficiency certificates equivalent to emissions saved by installing the product.

The certificates are then purchased by Energy Retailer Z to surrender towards its obligation under the scheme. So X effectively sets a discount based on the price it can get for the certificates from Z, plus administration costs. Y benefits from discounted product prices and lower energy bills resulting from reduced energy use.

Of course, a relatively simple scenario like this belies the complex underlying administrative challenges for the ESC inherent in such a scheme. In addition to its existing responsibilities for utilities regulation in Victoria, the ESC has been given new powers under the VEET legislation to administer the scheme efficiently and effectively in order to meet the government’s objectives.

At the end of August the ESC released a set of draft guidelines that it will use to operate the scheme, covering matters like accreditation, the creation, registration, transfer and surrender of certificates, energy acquisition statements, record keeping requirements and a range of compliance and enforcement measures.

Along with DPI’s regulations, these draft guidelines are being subjected to extensive and detailed public scrutiny. At the conclusion of the public consultation period, the ESC also plans to hold at least one feedback forum to ensure that interested parties are kept informed.

Three discrete categories of individuals and corporate entities will participate in the VEET scheme: consumers; so-called ‘accredited persons’ (that is, permitted to create energy efficiency certificates); and ‘relevant entities’ (electricity and gas retailers with a minimum of 5,000 Victorian customers).

At least for the first three-year phase – which both the government and ESC regard as a proving-up period – this demand-side scheme will focus on the 2.9 million residential energy customers in Victoria (the scheme may be subsequently expanded to include the commercial sector).

As indicated, persons – usually corporate entities or sole traders – wishing to create certificates must first be accredited by the ESC, and pay a once-only fee that will not be so high as to constitute a barrier to entry but sufficient to discourage frivolous applications.

In order to meet scheme commitments the relevant entities, currently about 13 of the 22 energy retailers operating in Victoria, will focus on acquiring certificates in a competitive market after they have been created by accredited persons.

Trading VEET certificates

There is an expectation that some energy retailers may also become accredited persons – that is, engage in certificate creation activities as well as purchasing and surrendering certificates in order to satisfy liabilities.

The ESC also understands that a number of persons intend to participate in the scheme as certificate traders, or arbitrageurs.

In this respect, the Australian Securities and Investments Commission (ASIC) has advised that like credits created under the Australian Government’s proposed Carbon Pollution Reduction Scheme, energy efficiency certificates created under the VEET scheme may be regarded as derivatives and therefore caught by the ‘financial product’ provisions of the Corporations Law.

It is not yet clear whether this means accredited persons (and traders) will need to be ASIC-registered as financial services providers and meet relevant disclosure and reporting requirements of the Corporations Act 2001.

However, the ESC is aware that under the Commonwealth’s existing Mandatory Renewable Energy Target scheme a number of energy retailers have taken the precaution of becoming registered.

The ESC will not provide a trading floor for the market in certificates, merely facilitate access to information about current owners of certificates and record details of change of title resulting from transfers.

The value of VEET certificates traded in a competitive market will obviously vary but an upper limit will be indicated by the shortfall penalty rate, prescribed from time to time (most likely annually) by DPI in the scheme regulations.

According to an exposure draft of the regulations released in August, the shortfall penalty rate for at least the first operating year of the scheme will be $40, so the effective capped value of a certificate will be $40 plus GST.

The assumption is that this rate is sufficiently high to discourage any relevant entity from declining to purchase certificates and instead electing to risk the civil financial penalty.

While GST will apply to this penalty, it should be added that the Australian Government has exempted a range of compulsory VEET registration, transfer and lodgement fees from the provisions of the Goods and Services Tax legislation.

Similar GST exemptions apply to fees levied under the sister Victorian Renewable Energy Target (VRET) scheme already administered by the ESC.

Administering VEET – ensuring simplicity and accountability

In building the VEET scheme the ESC has tried to tread a fine line between ensuring administrative simplicity and accountability – in other words, to balance ease of participation against the necessity to safeguard public interest.

At the heart of the scheme’s administration will be an internet-based registry system that will provide public access (within privacy legislation constraints) to registers of accredited persons and energy efficiency certificates. The system will also provide a portal to the VRET scheme.

Apart from facilitating administration, this information and communications technology approach will help reduce the likely administrative burden of the scheme and thus keep participation costs to a minimum.

Further, while the ESC understands the potential for gaming in such a scheme, it is confident that appropriate risk-based compliance and enforcement controls being put in place will moderate such behaviour, and the VEET Act provides for penalties for improper and/or illegal conduct.

The ESC’s current focus, however, is on the positive – ensuring that the VEET scheme operates optimally as a key initiative in confronting the nation’s climate change challenge.

Further information VEET regulations exposure draft: www.dpi.vic.gov.au/veet

VEET draft guidelines: www.esc.vic.gov.au/public/VEETConsultations/