Energy Policy 97 (2016) 354–364
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Energy Policy journal homepage: www.elsevier.com/locate/enpol
Financing alternative energy projects: An examination of challenges and opportunities for local government Grace Cheung a, Peter J. Davies a,n, Stefan Trück b a b
Department of Environmental Sciences, Macquarie University, NSW 2109, Australia Department of Applied Finance and Actuarial Studies, Centre for Financial Risk, Macquarie University, NSW 2109, Australia
H I G H L I G H T S
Australian local government sector can influence up to 50% of GHG emissions. Institutional capacity, finance, leadership and staff, influence GHG performance. Monitoring GHG emissions is limited by a lack of national guidelines or protocols. Environmental officers lack tools and support to assess GHG reduction projects. Reducing GHG emissions from street lighting is a contested legal and policy area.
art ic l e i nf o
a b s t r a c t
Article history: Received 3 September 2015 Received in revised form 8 May 2016 Accepted 26 July 2016
Local government in Australia has a strong collective capacity to reduce GHG emissions through policies, funding allocation to renewable energy projects and the delivery of programs and services. This study examines the institutional capacity of councils in Sydney and how this impacts on decisions to invest in alternative energy projects. We find greenhouse gas emission targets of councils are strongly aligned to national targets but do not reflect the local council's institutional capacity, political leadership or strategic priorities. Energy reduction projects are often identified and undertaken by environmental staff without support from financial staff or financial-evaluation tools. An absence of national guidelines to provide consistency in tracking and reporting limits cross-sector benchmarking. Street lighting contributes to a significant proportion of council's total electricity expenditure and GHG emission profile. Being highly regulated, existing contracts and the current practice of street lighting services limits the councils’ ability to reduce emissions. Based on our analysis we recommend a number of measures to overcome these constraints including the use of financial evaluation tools for small-scale renewable energy projects, a standardised national tracking and reporting platform to facilitate progress-reporting and meaningful comparative analysis between councils and policy reform to the regulation of street lighting. Crown Copyright & 2016 Published by Elsevier Ltd. All rights reserved.
Keywords: Renewable energy Local government Investment decision Climate mitigation policy
1. Introduction Local government can take on an active leadership role in transitioning to a renewable energy economy. In Australia, the local government sector is estimated to influence up to 50% of greenhouse gas (GHG) emissions through its role in urban planning, development approvals, the operation of community buildings and facilities, waste management, road infrastructure and street lighting (Lumb et al., 1994; Lumb et al., 1995; Commonwealth of Australia, 1995; Lindseth, 2004). Across 560 local n
Corresponding author. E-mail address:
[email protected] (P.J. Davies).
http://dx.doi.org/10.1016/j.enpol.2016.07.047 0301-4215/Crown Copyright & 2016 Published by Elsevier Ltd. All rights reserved.
councils in Australia, this represents an enormous collective capacity in setting policy, allocating funding and delivering programs and services to reduce GHG emissions (Storey et al., 2012). Evidence on mitigation of GHG emmissions by the local government sector has been mixed. The local government sector has, however, provided some of the most innovative and consistent leadership and action on climate change (Storey et al., 2012). This is in spite of three major barriers that have been mentioned in the literature: its subservient relationship to the state and federal government (Kelly, 2011; Brackertz, 2013); a perception that local government must continue to fulfil its traditional obligations as a priority, often described as roads, rates and rubbish (Mananauskas, 2013) while also meeting broader community expectation (ILGRP, 2013); and financial constraints, particularly in the state of New
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South Wales (NSW) that is subject to rate capping (Pricewaterhouse Coopers, 2006; Treasury Corporation, 2013). While a number of studies have investigated the relationship between energy policy, government regulation and the use of renewable energy resources in Australia (Sivaraman and Horne, 2011; Lilley et al., 2012; McConnell et al., 2013; Nelson et al., 2013; Martin and Rice, 2015), less focus has been given to the role of local government in generating renewable energy. In this paper, we conduct a survey to examine the challenges and barriers faced by five councils in metropolitan Sydney (Bankstown, City of Sydney, Ku-ring-gai, North Sydney and Willoughby) in financing alternative energy projects. In particular, we study the financial evaluation processes that guide and inform investment decisions as well as how councils identify cost-effective energy projects to meet their GHG abatement targets. Our study makes a number of contributions to the energy policy, governance, financial and environmental management literature. We identify major challenges and barriers faced by Australian local governments in financing and evaluating renewable energy projects. Our findings suggest that while GHG mitigation targets applied by local governments are consistent with national and state government renewal energy targets, progress towards these targets is slow and may reflect a lack of institutional capacity and varying political agendas to prioritise investment into renewable energy projects. We suggest that the administrative and political priority given to climate mitigation decisions is positively related to a council's underlying capacity-to-spend (budget position) and willingness-to-spend (political position). We also find a lack of national, state and local government standard procedures for tracking and reporting GHG emissions relevant to the local government sector. This is of high relevance as most councils fall below the national mandatory reporting threshold. The absence of standard measurement and reporting protocols limits effective management and evaluation of the performance of renewable energy investments. Our study also suggests that while local government environmental officers and managers have a high degree of knowledge in relation to the technical aspects and performance of alternative energy generation projects, they might not have equal expertise with regards to the financial evaluation of such projects. This suggests either a need for a financial tool for local government environmental staff to determine what may be the best use of the limited funding available for alternative energy projects or for financial staff within council to play a larger role in investment decisions. Finally, regulations around the ability of a council to influence the energy efficiency of street lighting provided in local government areas is a major barrier, impacting on recurrent operating budgets and the ability to reduce the overall GHG emission profile. We argue that street lighting is an area of policy reform that needs significant attention and could yield substantial GHG emission reduction and cost savings at a local to national scale. The remainder of the paper is organised as follows. Section 2 provides a review on the capacities and constraints of the local government sector with regards to climate change mitigation and the application of financial evaluation tools to assess renewable energy projects. Section 3 describes the mixed-method approach used to determine the administrative, financial evaluation and decision-making processes used by local government in determining project funding for alternative energy initiatives. Section 4 presents the results related to setting emission targets, the determining factors impacting on climate mitigation policy priorities, the capacities and challenges for implementing these policies and their implications for the local government sector. Section 5 provides a discussion on the barriers and challenges faced
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by local government. Finally, Section 6 identifies policy implications for the sector and concludes the paper.
2. Local government and climate change mitigation 2.1. National climate change policy and local government impact In the past few decades, Australia has experienced an inconsistent national policy framework that has polarised climate change governance and action (Talberg et al., 2013). National policy has been erratic and impacted pathways to support the implementation of renewable energy alternatives. Examples of drastic changes to national policy include disbanding climatechange governing bodies, creating new ones, then dismantling them again (Talberg et al., 2013). This is in addition to changing the priority and access to national and state government funding programs, which provide significant capital for climate mitigation projects undertaken by the local government sector. The initial catalyst for action on climate change by local government in Australia occurred in 1997 with an agreement to support the International Council for Local Environmental Initiatives (ICLEI)’s Cities for Climate Protection (CCP) program (Bulkeley, 2000). This commitment drew from Australia's international obligations as a signatory to the Kyoto Protocol. Australia set a national, unconditional, bipartisan-agreed Kyoto target of reducing 5% of the nation's year 2000 GHG emissions by the year 2020 (Dept. of Environment, 2007, 2012). The CCP program ran from 1997 to 2009 with an initial funding of A$13 million over five years from the federal government. Initial funding was further supported by additional grant schemes offered by both federal and state government towards climate change mitigation projects to meet emission reduction targets at the local government level (Bulkeley, 2010). At the conclusion of the program, ICLEI reported a total of 238 participating councils that contributed to an aggregated saving of 18 million tonnes of CO2-e (carbon dioxide equivalent) between the commencement of emission reporting in 1998/99 to 2007 (Pillora, 2011). Beyond the CCP program, in 2011 the Federal Government set up the Clean Energy Plan. This was designed to meet the national carbon reduction targets of 5–25% from 2000 levels by 2020, and subject to the scale of global actions, a longer-term target of 80% from 2000 levels by 2050 (Commonwealth of Australia, 2011a; 2011b). This was backed by a combined funding of A$13 billion over five years for the establishment of the Clean Energy Finance Corporation and the Australian Renewable Energy Agency to stimulate research and development, commercialise and induce private investment in clean energy technologies (CEFC, 2012; ARENA, 2012). A number of studies have examined the relationship between government regulation, energy policy and the use of renewable energy resources in Australia. Sivaraman and Horne (2011) investigated the potential to increase grid photovoltaic deployment through government response and regulation in Australia. They developed an energy generation based methodology to estimate the number of renewable energy certificates earned from small photovoltaic generation units. Lilley et al. (2012) examined the potential impact of distributed energy technologies such as collective demand management, energy efficiency and distributed generation on reducing greenhouse gas emissions in the Australian energy sector. Their modelling has relevance to local government as a generator of and planning authority to support the implementation of local generation and low voltage distribution networks. They suggest locally based generation and distribution networks would be better placed to cater for the evolving supplydemand imbalance, rather than traditional large scale centralised
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systems, and that these local systems have the potential to lower prices and volatility in Australian electricity wholesale markets. Similar results were found by McConnell et al. (2013) who suggested that photovoltaic generation has significant value and the potential to reduce electricity prices, particularly during summer peaks. McConnell's study further proposed that the depression of wholesale prices, as a consequence of the uptake of photovoltaic systems would be offset by the cost of support mechanisms for photovoltaic generation, while feed-in tariff policies could actually deliver savings to consumers, contrary to prevailing criticisms that they are a regressive form of taxation. A change in the federal government as a result of a general election in 2013 resulted in a shift in energy policy and funding. The Commonwealth's Clean Energy Plan was disbanded and replaced by the Direct Action Plan (Jotzo et al., 2014). The Direct Action Plan received a four-year funding allocation (2014/15 to 2017/18) of A$1.5 billion to support the Emissions Reduction Fund. This fund was designed to support public and private companies to reduce GHG emissions through a reverse-auction process (Dept. of Environment, 2013). Further funding was to be considered in future budgets to extend this program to 2020 bringing the total allocation to A$2.55 billion (Commonwealth of Australia, 2014). The initial focus of the fund was aimed at industrial, commercial and agricultural activities and for some time it was unclear whether local government could access this funding for their emission reduction projects. In 2014 the Federal Government identified an opportunity for local government to participate in this scheme through the aggregation of smaller scaled projects and street lighting. The caveat to funding these initiatives seems to be a requirement to scale-up the size of the project and thus requiring greater capital investment by the councils which typically they do not have. This remains a key barrier to reducing emissions, achieving policy targets and enabling local governments to show leadership through their own practice. The lack of certainty, and arguably access to, federal government funding for the local government sector to invest in their own projects is consistent with the findings by Nelson et al. (2013). Nelson's study found the uncertain nature of renewable policy development in Australia has resulted in investors withholding new capital and thus impacting on the capacity to meet agreed targets. Jotzo (2012) and Jotzo et al. (2012) further point out the profound policy uncertainty among Australian-based carbon-pricing experts and suggested that this uncertainty will result in large excess costs for the Australian energy sector and will delay and divert investments to other areas. Similar arguments with regards to the need for clear and consistent policy guidelines were given by Martin and Rice (2015) who provided an analysis of international and domestic stakeholder inputs to a government inquiry in Australia on renewable energy project policy and planning. Their study confirmed that renewable energy supply projects typically benefit from measures such as standardized approval processes and documentation as well as from a deep engagement with stakeholders in combination with supportive public policy and planning frameworks. 2.2. Financial constraints In Pillora's (2011) review of the CCP program, she noted that the lack of institutional capacity and financial resources were the limiting factors for many local councils to achieve their GHG emission reduction targets. The lack of ongoing and reliable access to financial assistance through grants and other means has been widely reported as an overarching and major constraint to the local government sector in Australia (Dollery et al., 2006; LGSA, 2006; ILGRP, 2013; Carter, 2013). For the majority of councils that participated in the CCP
program, the lack of financial resources had a profound impact on their ability to achieve their stated emission reduction targets. This in part reflects the relative decline in funding for the local government sector in Australia over the past 30 years (Dollery et al., 2006; LGSA, 2006). This is a consequence of many compounding factors including the devolution and cost shifting of responsibilities from higher tiers of government (federal and state), rising community expectations for more and higher quality services and the need to fund a backlog of infrastructure projects (Commonwealth of Australia, 2001, pp. 52–53; LGSA, 2006). The combined impact of these financial pressures has caused some to question the overall financial sustainability of many councils to strategically position themselves to manage 21st century issues, such as climate change risks (Dollery et al., 2006; Carter, 2013; Dollery, 2014). Such observations are significant as many councils are unable to retrospectively manage their current asset base let alone add new assets (ILGRP, 2013). These financial problems are even more acute for the local government sector in NSW due to the accumulative legacy of rate pegging exerted by the state government (IPART, 2009). This state-imposed revenue-raising cap has been a major contributor to the finding of the NSW Treasury Corporation (2013) that 52% of councils in NSW were likely to have recorded some minor to significant operating deficit. 2.3. Obstacles faced by local governments in street lighting Street lighting is the single largest source of GHG emissions by local governments, accounting for 30–60% of their emissions (Commonwealth of Australia, 2011c). The vast majority of Australia's 2.3 million street lights are old, often based on inefficient technologies and cost the sector more than A$400 million per year (IPWEA, 2014; Lynch, 2014). Switching to more efficient LED lighting is estimated to provide a collective benefit to the local government sector by halving their street lighting electricity consumption, reducing up to 720,000 t of CO2 emissions per year and saving up to A $87 million (IPWEA, 2014). However, to achieve these benefits existing regulatory frameworks and contractual arrangements within the Australian National Electricity Market (NEM) would require reform. Currently, the majority of street lighting assets are owned and maintained by electricity distributors or retailers, whereas the running costs for maintenance and electricity are paid by the councils. Therefore, with regard to street lighting, local governments are a so-called captive market with no opportunity to have these services supplied by an alternative provider for the majority of existing street lighting assets. Local governments are legally bound to provide and pay for what can be described as a monopoly service from the utility companies (Pricewaterhouse Coopers, 2011; Commonwealth of Australia, 2012; IPWEA, 2014). If a council wanted to undertake an upgrade of street lighting to a more efficient LED or other technology, it would be required to pay for often inflated residual ‘asset value’ of the existing fixture, which does not reflect the true age, condition and obsolescence of the assets (IPWEA, 2014), as well as navigate various contractual arrangements. Many councils are also locked-in to a ‘non-contestability’ contract with a single public lighting provider and operator which means they cannot set up a ‘rival’ and more efficient street lighting network (WALGA, 2011). Within Sydney, the Street Lighting Improvement Program initiated by the Southern Sydney Region of Councils (SSROC) demonstrates the lengthy and complex processes that have frustrated councils’ efforts to achieve significant cost-savings and GHG emission reductions (SSROC, 2011; 2014a; 2014b). 2.4. The challenges of economic and financial evaluation Given the obstacles faced by local governments to achieve reform to street lighting, the sector has turned its attention to
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investing in renewable energy generation and internal energy efficiency projects. Renewable energy projects and energy efficiency initiatives must, however, compete with other projects and services that councils are required and expected to undertake (Thomas, 2010) and these must also operate within a fiscally constrained environment. An evaluation tool to assess the cost-effectiveness and thus optimise return to the community and also the environment would improve decision-making processes. Such an approach requires specific expertise and understanding of financial concepts including the time-value of capital costs and cash-flows to determine discount rates, as well as criteria for measuring financial performance of a project post implementation. Commonly adopted measuring-criteria include net present value, the discounted payback period, the internal rate of return and the levelised cost of electricity (Stulz, 1990; Ross, 1995; Lefley, 1996; Vanhoucke et al., 2001; Kelleher and MacCormack, 2004; Magni, 2010; BREE, 2012). Two types of evaluation approaches are available to assist local government decision makers. The conventional approach is to undertake a financial analysis which examines a project from a narrow perspective of the investor, in the case of local government often the controller of the budget. This financially focused approach does not consider the wider benefits or costs to society nor does it reflect on committed policy positions. An alternative approach is to undertake an economic evaluation which considers both the costs and benefits associated with a project from the perspective of society (NSW Treasury, 2007). For renewable energy projects the economic evaluation approach is most often used as a cost-benefit analysis to facilitate critical investment decisionmaking, where both external costs and benefits are accounted from a broader environmental perspective (European Commission, 2008; US-EPA, 2010). Our literature review identifies a lack of research on the technical capacity and practice within the local government sector to use either financial or economic evaluation tools to assess alternative energy projects.
3. Methods To gain an insight into the challenges faced and the processes undertaken by local government in financing GHG abatement initiatives, a preliminary desk-top research was conducted on councils within the metropolitan area of Sydney, Australia. The initial analysis was based on information available on the councils’ websites to identify those that were previous members of the ICLEI's CCP program, had achieved the five milestones within the CCP program, and demonstrated an ongoing commitment to climate change mitigation planning and alternative energy programs. From this analysis, eight councils were invited to participate in this study. The invitation to participants outlined the commitments anticipated as well as an indication of the data that would be required for the study. Five councils accepted this invitation: Bankstown City, City of Sydney, Ku-ring-gai, North Sydney and Willoughby councils. A mixed-method strategy with a combination of quantitative and qualitative methods and modes of analysis was used to investigate four key research themes: 1. What greenhouse gas emission mitigation targets were set, and how are they accounted for and monitored? 2. What is the priority of the climate mitigation policy in the councils’ operation, and how does the financial sustainability of a council impact on the decision-making processes? 3. What are the challenges and barriers in mitigating the local greenhouse gas emissions from an institutional capacity and
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National Electricity Market (NEM) regulation perspective? 4. What financial evaluation processes are adopted in ensuring the economic viability of alternative energy projects, and has performance been tracked and aggregated from an accounting perspective? Note that we define institutional capacity as the ability of an organisation to fulfil their goals in an effective manner (De Vita and Fleming, 2001, Chaskin, 2001). An organisation's ability is the aggregate of its leadership, financial resources, skills and competencies of the people participating in taking courses of action that can overcome obstacles to achieve a chosen goal or vision for the organisation. 3.1. Data collection and analysis The data collection process of the study was based on an ‘exploratory sequential design’ (Guest, 2013) and ‘grounded theory approach’ (Glaser and Strauss, 1967). Results from this survey informed the interview questions and then the desktop research data collection (Fig. 1). The data analysis process used a ‘convergent concurrent design’. Three data sets were analysed separately, then together, and then mixed in the interpretation stage (Creswell and Plano Clark, 2011). The grounded theory approach is particularly relevant to understanding complex organisational settings and decision making processes (Sousa and Hendriks, 2008). This method was used as the basis for focusing on a smaller number of councils while controlling for the scope of the study (environmental and financial operatives) and seeking a more indepth analysis of decision-making processes that may improve the quality of the research findings. There were three sequential stages of data collection. A copy of the survey questionnaire, questions used in the semi structured interview and the mini-questionnaire for the focus group are provided as supplementary material to this paper. The survey questionnaire was designed for two different participants within the council: the environment manager / officer; and the finance manager / officer. Both participants were expected to have knowledge of the decision-making processes for the implementation of climate change mitigation / renewable energy projects. The aim was to enable a comparison in response based on their technological, policy and financial backgrounds of staff within different departments of the councils. The spreadsheet component was aimed to obtain factual data on completed and planned energy projects undertaken by the respective councils. The questionnaire and the survey were then sent out to the environmental and financial officer / manager to complete and return. The semi-structured interview with environmental and financial managers / officers was designed to clarify data, discuss emerging themes or solicit additional information / documents. Each semi-structured interview session lasted around 60 min and was focused on verifying data collected from completed surveys and obtaining additional information and documents on alternative energy projects. The desktop website analysis reviewed annual financial reports, community strategic plans and various documents related to climate change mitigation targets, roadmaps, master plans and progress reports. An independent financial sustainability evaluation rating from financial consultants and the NSW State Treasury evaluation report were also reviewed to verify, confirm and support the validity of the financial data across each council. The data collection was followed by two successive stages of data analysis. The first involved a preliminary analysis with initial findings being then presented to participants at a focus group for feedback. Second, all feedback was integrated for further analysis and incorporated into the final research results.
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Fig. 1. Data collection and analysis processes design.
4. Results 4.1. Emission targets and progresses tracking 4.1.1. Emission targets The majority of the councils adopted a 20% GHG emission reduction target by 2020. The 20% by 2020 is consistent with national renewable energy targets (RET) set in the Clean Energy Act 2011 (Cth) and the NSW State Renewable Energy Action Plan (NSW Government, 2013). The major difference between the councils’ target was the year selected as their baseline. This varied from 1996 to 2012 (Table 1). The variability in the baseline year can be explained by four factors: the timing of the councils’ entry to and progress within the CCP program; the date of the council's initial GHG reduction policy commitment; the initial data collection processes to quantify GHG emissions; and more recently the use of more sophisticated and accurate energy and GHG monitoring systems which has meant earlier data was not able to be meaningfully compared, thus resulting in a shift to a more recent baseline date. Shifting of the baseline from the initial policy commitment has presented a number of difficulties with respect to comparing between councils and accounting for actions which have impacted on GHG emissions. For example, Willoughby Council has recently shifted its baseline year to 2012 and as a consequence, projects completed prior to 2012 are now not to be included in the council's overall emission reduction reporting. Thus, the reporting does not represent the full extent of the council's investments and achievements with regards to emission reductions. 4.1.2. Strategies for meeting the targets When councils first committed to the ICLEI's CCP program, they typically set ambitious GHG reduction targets. While these targets were broadly consistent with that of the federal and state government, the councils undertook little analysis of how they were to achieve the reductions. For example, North Sydney Council had a target of 50% reduction from 1996 by 2020, Willoughby Council's target was to reduce 50% of emissions from 1999 levels by 20101 1 Carbon Reduction Strategy 2008: http://www.willoughby.nsw.gov.au/Down loadDocument.ashx? DocumentID¼ 2665
and the City of Sydney's target was a 100% reduction and offset of emissions from Council operations and services by 2008. The initial strategy by most councils to achieve these targets relied on the substitution of coal-based electricity for GreenPower2 and carbon offsets (Newman, 2010). This broadly relied on councils purchasing more expensive electricity or the outlay of capital for offsets thus having a direct financial impact on the budget position. GreenPower and carbon offsets were progressively replaced with initiatives to improve the energy efficiency of buildings and other assets to lessen operating costs and installing renewable energy systems (City of Sydney, 2013). This change was enabled through internal financial mechanisms in the councils, such as the establishment of revolving energy funds. Revolving energy funds were often initiated through direct savings of money previously allocated to GreenPower or carbon offsets and continued to be funded via ongoing savings achieved from energy efficiency initiatives and alternative energy generation projects. For example, since 2008 the City of Sydney no longer purchased GreenPower resulting in an annual saving of $2 million that was directed to their ‘Precinct Scale Solar PV Program’. This initiative also maintained the council's carbon-neutral status by a more cost-effective certified National Carbon Offset Standard.3 The emission reduction results for the councils is shown in Table 1. For most councils the GHG emission reduction trajectory is falling well behind adopted targets, the notable exception being the City of Sydney that had achieved a 17% net emission reduction through its mitigation effort. To-date the primary focus of investment by councils in GHG emission reduction strategies has been directed to improving the energy efficiency of buildings and other community assets, such as swimming pools, with investment having relatively short payback periods. This has been supported by the installation of rooftop photovoltaic systems to generate power, particularly when linked to day time demand such as administrative buildings. Increasingly, greater attention is turning to the more difficult regulatory and 2
A special 777 State Supply Contract organised by the NSW State government. The aim of the certified carbon offsets is to ensure the offset projects in the developing world are genuine and not being double counted. Emission Inventory and Offset reporting is available at http://www.cityofsydney.nsw.gov.au/vision/sustainable-sydney-2030/strategicdirections/a-leading-environmental-performer/carbon-reduction/carbon-neutral 3
Willoughby’s baseline figures include street lighting (which are otherwise not counted by the other councils) Therefore, the emission reduction figure is not comparable and needs to be considered with care. Ku-ring-gai has increased emissions by 4% instead of a reduction. Percentage for North Sydney’s street lighting is in kWh as to total electricity kWh used. The rest are all in terms of cost in $ value. c
b
a
Envisi Planet Footprint STVeV and CCAP Envisi (GreenTrack)
Envisi
$358,931 (25%) 35% (2013/14)c $756,000 (47%) $1,919,334 (32%) $4,030,000 (59%)
179MWh (2%) Green Power $1,438,788 (2013) 1894 (22%) Green Power $1,171,700 (2013) þ 173 (4% increase)b No $1,621,495 (2013) 1764 (10%) No $6,830,000 (2014)
Emission reduction Green Power / Offsets Total Cost of Electricity Street lighting cost (% to total) Tracking tools
9,121MWh (2012) 8942MWh (2013)a 8465 (1996) 6571 (2012/13) 4484 (2000) 4657 (2011/12)
52,972 (2006) 43,945 (2013 offset for carbon neutrality) 9027 (17%) Offset - carbon neutral since 2011 $5,992,971 (2014) 16,972 (2009) 15,208 (2013) Total baseline (tonnes CO2-e)
20% renewable electricity for buildings based on 2012 level by 2020 26% emission reduction and 5% renewable 20% emission reduction from 2000 electricity (ex- 50% emission reduction electricity of 2006 level by 2016 clude street lighting) and fuel use by 2020 and 90% from 1996 levels by 2020 70% emission reduction and 30% reby 2050. newable electricity of 2006 level by 2030 100% local energy generation and no reliance on coal-fired electricity by 2030 20% emission reduction of 2009 level by 2020 Targets
Bankstown
Table 1 Emission mitigation targets and progress tracking.
City of Sydney
Ku-ring-Gai
North Sydney
Willoughby
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contractual initiatives that could yield substantial gains in energy efficiency and GHG reductions. These include linking alternative energy generation systems via a private wire networks (supporting decentralised generation to local demand) and finding pathways to reform the provision and efficiency of street lighting. Progress in these areas is slow, although each of the local governments in this study are part of a consortium of 35 councils participating in the SSROC Street Lighting Improvement (SSROC SLI) Program (SSROC, 2011, 2014a, 2014b). These councils account for 95% of all the street lights in distribution network of Ausgrid, a state owned corporation which supplies energy to the most densely populated suburbs in NSW and about half of all electricity customers in the state (Ausgrid, 2015). Therefore, reform has significant potential for energy and GHG savings. 4.1.3. Progress tracking Most councils in Australia and all councils in this study emit less than 50 kilo-tonnes of GHG per year, the threshold for national mandatory reporting of GHG emissions (Commonwealth of Australia, 2013). There is no national standardised reporting format or obligation to report for GHG below this threshold, nor is there any specifically developed method for reporting for the local government sector. This lack of standard reporting limits any meaningful comparison and analysis of the mitigation progress and aggregated emission-reduction contribution by the local government sector, an observation also made by Storey et al. (2012), when analysing climate change mitigation actions by local government under the ICLIE CCP program. 4.2. Climate mitigation policy priority The importance of climate change mitigation policy, relative to all other obligations and initiatives of a council, will impact on investment and progress on stated emission reduction targets. The allocation of funding and other resources reflects a council's capacity-to-spend (financial resource) and willingness-to-spend (political and executive leadership commitment). The capacity to track and report on the progress to provide evidence that funding has been successful in achieving policy outcomes remains critical. The council's financial capacity, as measured by their operating surplus and percentage of income from rates, was identified as a major differentiating factor when comparing the councils in this study. Financial capacity had a direct bearing on the council's ability to prioritise and allocate funding for alternative energy projects. The analysis also examined the financial sustainability rating (FSR) by the Fiscal Star (2009) and the FSR / financial outlook provided by the NSW Treasury Corporation (2013) as outlined in Table 2. The greater the financial independence, the less the council had to rely on external grants or special levies to fund mitigation projects such as energy efficiency or alternative energy generation. A capacity-to-spend does not necessarily translate into a prioritised spending for GHG mitigation projects. Councils have many competing priorities for their revenue base. We found that where a strong and consistent political leadership was present, investment in alternative energy projects tended to follow. Council and executive decision-makers were also more supportive of the ‘low hanging fruit’ projects, which are those with the greatest return and often shortest payback periods. Most councils identified climate change as an important policy area in their 10-year Community Strategic Plan. This did not reflect proportional financial allocations in their annual budget. Table 2 offers a summary of key indicators for the relative financial strength of each participating council which has implication on its capacity-to-spend on climate mitigation projects.
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Table 2 Councils’ financial capacity and operating result 2012/13.
Residential Rate Income ($m) Business Rate Income ($m) Rental Income from Asset ($m) Total Income ($m) Operating Surplus or (Deficit) ($m) Environmental Levy ($m) Debts ($m) Net Assets ($m) Fiscal Star FSR (2009) NSW Treasury Corporation FSR / Outlook (2012) Population (2013 ABS 3218.0) Average household taxable incomes (NSW OLG 2012/13)
Bankstown
City of Sydney
Ku-ring-Gai
North Sydney
Willoughby
53.73 25.16 2.79 147.51 0.608 0 7.47 2100 Sustainable Moderate / Negative 196,974 $39,083
51.28 188.84 54.87 599.25 113.85 0 0 7280 Sustainable Strong / Positive 191,918 $56,470
23.96 3.70 4.30 111.55 15.81 2.49 31.68 984 Unsustainable Sound / Neutral 119,027 $81,612
17.01 11.10 5.09 104.75 18.42 1.82 0 729 Sustainable Moderate / Neutral 69,248 $84,686
22.30 17.43 8.30 110.45 15.07 5.08 51.85 2770 Vulnerable Moderate / Neutral 73,115 $77,896
Table 3 Comparing priority of climate change mitigation policy in councils.
Capacity-tospend Willingness-tospend Effective tracking & reporting Mitigation policy priority score
Bankstown City of Sydney
KuringGai
North Sydney
Willoughby
3
5
3
4
3.4
3
5
2.2
2.6
3.4
2.7
5
2.7
3.3
2.7
2.9
5
2.6
3.3
3.2
Table A1 Relevant variables and scores for assessment of the Capacity-to-spend in councils.
Operating result Revenue raising capacity Asset base Debt level Treasury Corp & Fiscal Star FSR Capacity-tospend
Bankstown City of Sydney
KuringGai
North Sydney
Willoughby
3 2
5 5
4 3
4 4
4 4
4 3 3
5 5 5
3 2 3
3 5 4
4 2 3
3
5
3
4
3.4
Table A2 Relevant variables and scores for assessment of the Willingness-to-spend in councils.
Leadership support Mitigation highlight in community strategic plan Low-hanging fruit Completed energy projects Progress reported Willingness-tospend
Bankstown City of Sydney
KuringGai
North Sydney
Willoughby
3 2
5 5
3 2
3 2
3 4
3 3
5 5
2 2
2 2
3 4
4 3
5 5
2 2.2
4 2.6
3 3.4
4.2.1. Priority of climate change mitigation policy in councils The priority of climate mitigation policy in a council's operation is influenced by the factors of three institutional-capacity
elements: capacity-to-spend; willingness-to-spend: and staff capacity (including tracking and reporting) (Table 3). These three elements are used to reflect the financial strength, executive leadership support and knowledge and skills of staff. To gauge a relative climate mitigation priority of the participating councils, an evaluation scale from 1 to 5 (1 ¼ very low, 2¼ low, 3 ¼ medium, 4¼ high, 5¼ very high) was used to assess the relative score of these three institutional-capacity elements among the councils. To minimise the subjectivity of analysis, the score for each of these three elements was further derived from the assessment of their contributing variables adopting the same relative scale. We refer to Appendix A for more details on how the score for each variable was derived. The score ratings from Table 3 are indicative of the relative priority of climate mitigation policy in the operation of each council. For City of Sydney, the council occupied the highest scale position in all aspects of this analysis. It can be concluded that climate mitigation policy has a relatively high priority in its operation, representing a confluence of their institutional capacity. The results also demonstrate that decision-making involved in the setting of GHG emission reduction targets and progress towards meeting the targets is not subject to nor will be achieved by strength in just one of the institutional capacity elements, but rather relies on a convergence of all elements (as demonstrated in Appendix A). 4.3. Challenges and barriers in mitigating the local emissions A range of internal and external challenges and barriers in mitigating GHG emissions were identified in the survey and validated through interviews and workshops. A lack of funding and the cost of technology were the most significant internal barriers for local government investment into alternative energy or GHG emission reduction projects. This is consistent with other reviews on the financial sustainability of local government in fulfilling its environmental obligation (e.g., Dollery, 2005; Dollery et al., 2006). The impact of energy market policy and regulation was identified as the most significant external barrier that confirms results found by other reviews (e.g. WALGA, 2011; Commonwealth of Australia, 2011c; Ironbark, 2012). In this study, the external barrier related to the operation of and reform to street lighting exemplifies the complexity, inertia and consequent drag on achieving a reduction in GHG emissions at the metropolitan scale. 4.4. Financial evaluation processes and project performance tracking No financial staff volunteered to participate in the survey and interviews of this study. This can be interpreted as either the project was seen more as an environmental one, or a lack of close
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Table A3 Relevant variables and scores for assessment of tracking and reporting in councils.
Enabling software tool Integrated and easy access of data Tracking and reporting clarity Effective tracking and reporting
Bankstown
City of Sydney
Ku-ring-Gai
North Sydney
Willoughby
4 2 2 2.7
5 5 5 5
4 2 2 2.7
4 3 3 3.3
4 2 2 2.7
engagement between the financial and environmental staff in the evaluation and decision-making processes of their alternative energy projects. The rigour and process for a financial evaluation of renewable energy projects varied across the councils. Most alternative energy generation projects undertaken by the councils were less than $100,000. Therefore, many projects fall below the financial threshold, requiring a more rigorous procurement review. Internal processes across councils also varied with respect to which section of the council was responsible for the financial assessment. Officers from the environmental department generally undertook the initial financial review for low capital-value alternative energy projects (which varied from o$60,000 to o $150,000 among the councils) without being subsequently reviewed by the financial or capital-works department. Typically, the environmental staff did not have an economic or financial qualification or in depth experience in this discipline. Further, few used financial evaluation tools as part of their project assessment. The threshold required for a more thorough financial analysis varied across the councils considered in this study, ranging from $100,000 to $400,000. When a project exceeded this threshold it would trigger the need for a more detailed internal or an additional external financial review. The detailed financial review most frequently relied on an analysis of payback periods as a mechanism to determine whether a project would be funded or not. However, there were no predetermined benchmarks for what payback period was acceptable. When an external consultant was required to assist in the financial evaluation, the consultant report was generally based on a cost-benefit analysis focused on the net present value, internal rate of return and a simple payback period that did not consider the time-value of money. The study also found a limited use of ex-post performance tracking of alternative energy projects to validate either the system or the financial evaluation. The recent introduction of energy tracking software by a number of councils is likely to facilitate the review process. It was not clear, though, whether current or previously installed projects will be subject to post-evaluation scrutiny which could assist future investment decisions.
5. Discussion This study has uncovered both internal and external challenges and barriers confronting the local government sector in NSW to finance alternative energy projects. Internal challenges are subject to the dynamics (strength or weakness) of institutional capacity elements such as financial resources, leadership at the political (elected councillors) and executive levels and the knowledge and skills of their staff. The capacity-to-spend on climate change mitigation energy projects is a function of the council's financial resources, whereas the willingness-to-spend is a reflection of the strength or the lack of leadership / management support. The knowledge and skills of the staff are critical for an effective assessment of the financial viability of an alternative energy project, project implementation and management, and to track and report on progress.
The priority of climate change mitigation policies and actions across the councils are strongly shaped by the dynamics of these institutional capacity elements. Each council's capacity profile is different (as shown in Table 3 and Appendix A), as are the internal challenges they experience in allocating and prioritising funds to meet climate change related policies and GHG emission reduction targets. The City of Sydney Council is both an exemplar and an exception, when compared to other councils, with respect to its capacity, capability and action to invest in alternative energy generation projects. Within the City of Sydney Council there is a confluence of strength across each of the three institutional capacity elements. Financially, it is ranked in the top 1% of councils in NSW (Treasury Corporation, 2013). Institutional support (both political and administrative) and technical capability are extremely strong across both environmental and financial areas. Comparison with metropolitan councils therefore is limited and it would be best to benchmark the City Council as a sub-set at a national or international level. We do believe that the four other councils provide a representative sample similar to the majority of councils in the state of NSW (Treasury Corporation, 2013). The capacity-to-spend for these councils is a question of whether the ratepayers are able to support investment in alternative energy projects. Our study highlights that three of the councils, namely Ku-ring-gai, North Sydney and Willoughby, have a socio-economic advantage, since average household taxable income in these councils is almost double that of Bankstown Council (Australian Bureau of Statistics, 2013a; 2013b; 2013c). The significance of using a measure of affluence to ascertain a willingness-to-spend is also evidenced by the ability of these three councils to successfully negotiate with the state government a separate and additional rate or tax commonly referred to as environmental levy (Table 2). Part of an application by a council to the state government to impose an additional rate (such as an environmental levy) must address the capacity of residents to pay as well as their willingness to support the initiatives that will be funded. However, despite its less advantageous revenue raising capacity, Bankstown's overall ‘Mitigation policy priority score’ lies roughly in the same range as the score of the other councils with the exception of City of Sydney (Table 3). These results suggest that the revenue-raising capability is not the only key factor that shapes the priority of investment in alternative energy projects. Overall, the climate policy priority assessment framework provided in Appendix A offers a basic set of key factors determining a council's capacity to prioritise mitigation policies. The asset base of a council would affect the number and type of energy efficiency and generation projects that may fall into the ‘low hanging fruit’ basket. This was limited for councils such as Kuring-gai and North Sydney. The debt level of a council might impact on its willingness-to-spend or borrowing capacity for mitigation projects, as in the case of Ku-ring-gai council. Therefore, the factors shown in Appendix A are to a various degree likely to be common factors that influence the prioritisation process also for other local governments in NSW. We also find that ‘energy market policy regulation’ that impacts
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on street lighting is the most significant external barrier to achieving reform and progress against GHG emission targets. Street lighting is a highly regulated and controlled service provided by a few utility companies. The annual cost of street lighting as a percentage of the total electricity expenditure for the five councils ranges from 25% to 59%, with a contribution to total GHG emissions between 31% and 52%. Currently, the local government sector in Sydney has very limited capacity to influence this part of their GHG emission profile, irrespective of their institutional and financial capacity. Street lighting in effect remains a fixed cost for local government and GHG emission source they are unable to influence. Methodologically, the exploratory sequential design and grounded theory approach revealed important insights into the internal decision-making processes that are otherwise not accessible through documents publicly available and would be limited through structured survey instruments. The applied approach provided a deeper understanding of the capacity and procedures implemented by councils and specifically staff within the environmental department to promote carbon reduction policies and recommend investment on specific projects. The low interest by the financial staff to participate in the study and also to provide advice to environmental ‘technicians’ in the decision-making process might also indicate one of the challenges and barriers to energy policy reform for the local government sector. Further, despite the relatively small sample size of five councils, the qualitative nature of this study does offer deep insights into the relationship between the climate policy priority in the council and its various challenges posted by its unique institutional capacity dynamics. The findings of this study have also provided empirical evidence supporting findings of other studies in the field on the financial sustainability of local government as well as their challenges and barriers in mitigating their GHG emission (Dollery, 2005, 2014; Dollery et al., 2006; Pillora, 2011; WALGA, 2011; Commonwealth of Australia, 2011c; Ironbark, 2012; Carter, 2013; ILGRP, 2013).
6. Conclusions and policy implications The aim of this study was to identify the challenges and barriers confronting Australian local governments in evaluating and financing renewable energy projects. As the level of government closest to the people and with an estimated capacity to influence up to 50% of greenhouse gas emissions it can play a significant leadership role in transitioning to a sustainable low-carbon economy. However, while there is a body of literature examining the relationship between government regulation, energy policy and the use of renewable energy resources (Sivaraman and Horne, 2011; Lilley et al., 2012; McConnell et al., 2013; Nelson et al., 2013; Martin and Rice, 2015), less focus has been given to the key factors impacting on local governments’ capacity to implement and monitor renewable energy projects. This research provides several new and significant contributions to the energy governance, energy policy and the environmental management literature. Our key results and policy implications can be summarised with regards to four main areas. First, GHG mitigation targets applied by local governments are consistent with national and state government renewable energy targets, although baseline years varied across the councils considered in this study. Overall, progress against the targets remains slow and is well short of the trajectory required. This may reflect insufficient institutional capacity such as financial capability and leadership support to prioritise investment towards adopted policy initiatives. We also find that the priority given to climate mitigation policy and efforts directed to achieving targets by local
government are positively related to their underlying capacity-tospend and willingness-to-spend dynamics. A convergence of capacity and willingness at both the political and administrative spheres is needed to maximise success. Second, there is no national, state or local government standard format or procedure for tracking and reporting GHG emissions relevant to the local government sector, as most councils fall below the national mandatory reporting threshold. This limits meaningful comparative analysis between councils and reporting on aggregated contributions of GHG reductions from the local government sector as a whole. Furthermore, the absence of standard measurement and reporting protocols limits effective monitoring and review within the councils as to the impact and performance on their investment decisions. Third, the environmental officers and managers are most often the ones making recommendations to council on financial expenditure for cost effective alternative energy projects. This study acknowledges that this group of staff have a high degree of knowledge in relation to the technical aspects and performance of alternative energy generation projects. However, their technical skill often is not equal to their financial literacy. The findings point to a need for a financial tool that can be used by environmental technicians to determine what may be the best use of the limited funding available for alternative energy projects. Such a tool could then support financial staff to more easily and willingly undertake a peer review of the output as part of additional financial due diligence. Forth, the ability of a council to influence the energy efficiency of street lighting provided across their local government areas is a major barrier impacting on recurrent operating budgets and the overall GHG emission profile for this tier of government. The complexity of the regulatory market affecting street lighting is an area of policy reform that needs significant review and is one that could yield substantial greenhouse gas emission reduction and cost savings to the sector.
Acknowledgements We would like to acknowledge the help and contribution of the managers and officers of the five councils (Bankstown, City of Sydney, Ku-ring-gai, North Sydney and Willoughby) for their interest in participating in this study and their great efforts in returning the survey questionnaire, and time commitment to interviews and Focus Group workshops.
Appendix A. : Assessing the climate change mitigation policy priority in councils The 5 point scale (1 ¼ very low, 2¼ low, 3 ¼ medium, 4¼ high, 5¼ very high) for each of the variables summarised in Table 2 were based on an analysis and ranking of the financial data. The score measures the council's relative position to the others but also acknowledges some similarity in the data that precluded the use of a strict rank (i.e. the councils may have been allocated the same score). Assessment of the capacity-to-spend in councils The capacity-to-spend of local government depends on its ongoing financial strength and sustainability. This is shaped by factors such as a council's annual operating result, its revenue raising capacity, asset base and the level of debt. Councils receive a financial rating from institutes such as the NSW Treasure
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Corporation and Fiscal Star. Ratings are used to track and confirm the historical performance of councils in terms of their financial sustainability. The scores for the ‘Operating result’ for each of the participating councils (in order as per Table 2 and Table A1) are: $0.608 m, $113.85 m, $15.81 m, $18.42 m and $15.07 m. This resulted in the following ranking: City of Sydney (5), Ku-ring-gai, North Sydney and Willoughby councils (4), Bankstown (3). The results in Table A1 are based on the information from Table 2. To obtain an average score for the relative criterion, each of the variables considered was weighted equally. The final score for the capacity-to-spend for each council is then calculated as the average of the scores for all contributing variables. 7.1. Assessment of the willingness-to-spend in councils The ‘willingness-to-spend’ of the council is depending on the leadership support, commitment of its management team through its 10-years Community Strategic Plan, the availability of ‘lowhanging-fruit’ from its asset base, and is finally reflected in the progress made through completed energy projects and results on emission reductions. Councils considered solar PV projects on the office building blocks that consume on-site generated electricity during daytime to be a low-hanging-fruit. These projects are easily justified, because they usually have favourable payback and IRR. Councils with a high number of community and administrative buildings tend to have a greater number of small PV systems in their portfolio as a way to both reduce energy costs and help meet GHG emission targets, thus rated well in the ‘low-hanging-fruit’ projects. The relative position for the variable ‘leadership support’ for the councils is obtained based on data collected through survey questionnaires and interviews. Statements relating to energy conservation and alternative energy generation in the council's Community Strategic Plan were the strongest for City of Sydney (5), followed by Willoughby (4). The remaining councils had notably less emphasis on this as a corporate and community priority (Tables). The ‘low-hanging-fruit’ variable is scaled according to the relative asset base values for each council (refer to Table 2). The score for completed energy projects is based on data collected through the conducted survey and various council reporting documents posted on their website. The score for the variable ‘progress reported’ is based on results from Table 1. 7.2. Assessment of effective tracking and reporting in councils The clarity of tracking and reporting, the integration of data for effective access and the applied enabling data-management software tools are factors shaping the score of the ‘effective tracking & reporting’ criterion. The ‘effective tracking and reporting’ assessment is based on the current status of the councils, even though three councils (Bankstown, Ku-ring-gai and Willoughby) had only recently acquired the software tool that may help with tracking and reporting in future periods. The highest score for City of Sydney (5) for all factors is due to its application of two sophisticated enabling software tools which can provide integrated and easily accessible data for tracking and reporting with high clarity. This is also evident in the comprehensive tracking and reporting on renewable energy on their website. The scaling of the other councils is based on the reports they provided and the fact how easy or difficult it was for them to provide the required data for this study. Lastly, we also evaluate how confident they feel about the reliability of their data.
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Appendix B. Supplementary material Supplementary data associated with this article can be found in the online version at http://dx.doi.org/10.1016/j.enpol.2016.07.047.
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