The good news is that we don’t have to go and live in caves after all. In fact, we can stop catastrophic climate change and maintain our standard of living by transforming how we do things, not just by changing what
we do. This is what the respected
McKinsey Report on the cost of greenhouse reductions for Australia tells us.

For Australia to reduce its greenhouse emissions by 30% by 2020 compared to 1990 it would only cost $290 per household annually and the growth of GDP would slow by a mere 0.02% each year. More striking, however, is that one quarter of the emissions reductions are cost-negative. That is, they create substantial savings while reducing emissions, and the technologies to achieve them are available today. This is the beauty of energy efficiency.

It’s the kind of sliver bullet that’s needed in the face of the latest climate science. Professor Garnaut’s recent interim report for the Climate Change Review quite properly raises the bar for Australia’s greenhouse target, with a nod to the UN’s Intergovernmental Panel on Climate Change, which recommends 80-90% reductions by 2050.

Energy efficiency technologies make a 35% reduction in emissions by 2030 cost neutral for Australia. This is because the savings compensate for the more expensive supply-side reductions such as solar, wind and geothermal
power. Moreover, it’s the quickest fix available, a critical advantage as Australia’s emissions will need to peak by around 2012 in
order to reach far more significant cuts later on.

Energy efficiency involves a vast array of technologies including improved motor systems, smart lighting, better refrigerators, more efficient heating and cooling, better insulation and smarter appliances. Its close relative,
demand management, broadens out the scope to include co-generation (using the heat that would otherwise be wasted in power generation), stand-by generation, fuel switching to gas or solar, interruptible customer contracts and smart meters. The trick for policy makers is
how to drive energy efficiency into an industry that earns revenue from selling more electricity, not less.

Energy efficiency has been a dim blip on the radar of policy makers for some time, which has made Australia one of the least energy efficient countries in the developed world. There are many barriers: energy is currently a small proportion of total household and business expenditure; electricity companies have the wrong incentives; customers are shielded from proper price
signals; and politicians’ sensitivity about the shadowy risk of the ‘lights going out’  gives the energy supply industry disproportionate power.

Some argue that an emissions trading scheme will drive energy efficiency by itself because energy prices will go up, but this is too simplistic an argument. It fails to take into account the peculiar nature of Australia’s National Electricity Market and the ability of most households to absorb increased electricity prices because current prices are so low. While a price on carbon will gradually shift
investment in new power away from coal, it will not necessarily drive the market to capture cost-negative energy efficiency without additional, targeted incentives and regulations.

The primary aim of the National Electricity Market (NEM) was to reduce unreliability and over-investment in the states’ power systems by linking up the Eastern Seaboard in one grid. The other goal was to deliver better efficiency
through competition and privatisation. The
jury is still out on whether the NEM will achieve even these limited goals. The bigger question is: to what extent do the NEM’s basic flaws exacerbate the greenhouse problem, and how can we transform it so that it promotes rather than blocks energy efficiency?

The NEM is essentially a market place where
electricity generators bid to sell their power. Prices are so volatile that 80% of the market exists outside this auction process, and electricity retailers instead hedge their risk with long term contracts for power at fixed prices. Then there are the networks (the ‘poles and wires’) that, as natural monopolies, are supposed to be regulated for efficiency. The problem for energy efficiency is that by
the time the electrons come out of the wall in our living rooms, the competition has evaporated. Mostly, we just swallow our quarterly bill and plug in the latest energy guzzling gizmo.

Michael Keating rightly argues that governments can use managed markets to effectively achieve policy objectives. NSW’s Greenhouse Gas Abatement Scheme, despite its flaws, is a good example. It
triggered the proliferation of energy saving light globes and promoted gas over coal fired generation. The NEM, however, is not managed by policy makers with social goals but by the fossil fuel industry that wrote its first rule book and the treasury and energy bureaucrats tasked with maintaining the status quo. As a
result, although the NEM has found itself at the very centre of the climate crisis, it has been strongly resistant to responding to it.

There are several points of entry for new policy. One is to transform energy retailers into energy service providers by requiring them to meet energy efficiency targets. This would also help retailers to manage the significant risks they face in such a volatile market. Another is to require the networks to implement
energy efficiency (Demand Management, or DM) before building more expensive infrastructure.

A package of rule changes to the NEM has been proposed by the Total Environment Centre to facilitate this important reform. The proposed changes are:

• that when planning, network operators consider
  DM solutions before network augmentation alternatives so that DM is
  implemented when it is a more cost effective option than augmentation;
• requiring transmission network owners to publish robust data
  on upcoming network constraints that are relevant and useful to DM
  service providers;
• requiring the Australian Energy Regulator to design a demand management incentive scheme;
• including a clear specification of the circumstances in which
  transmission network owners can recover expenditure on demand side
  activities;
• requiring that DM activities are prioritised and properly integrated into revenue determinations;
• in the context of DM expenditure, that there is recognition of
  the potential use and value of small scale demand side activities in
  providing long term benefits;
• including prudency reviews to assess the extent to which
  transmission network operators have implemented an adequate level of
  demand management;
• including specification, within the Regulatory Test, that DM options must be investigated before augmentation options; and
• including a mechanism for setting the price of demand side response activities within the market pool.

A number of businesses, including Fuji Xerox and Investa Property Group, have already written submissions in support of this proposal, noting that the business sector is under pressure from rising electricity costs.

The problem is not a shortage of ways to improve the NEM; it’s a shortage of political courage. Energy efficiency can make reducing our greenhouse emissions affordable, and is the best risk management strategy we have.