In September 2007, Cabinet agreed to amend the Energy Efficiency and Conservation Act 2000 (the Act). A regulatory impact statement (RIS) was prepared for 2 policy proposals in the paper. The content of that RIS is contained below.

It is proposed that provisions within the Act be extended to include the power to make regulations to rate the energy efficiency of buildings. This would provide the Energy Efficiency and Conservation Authority (EECA) with the ability to implement a regulatory regime for the rating of houses’ energy efficiency, to be provided to home buyers, owners, and occupants. Such a measure would reduce information barriers to investment in home energy efficiency and conservation and lead to the greater energy efficiency of New Zealand houses in general. It would also allow for the rating of other buildings if warranted at a later date.

Enforcement options for breaches of regulations under the Act are currently limited to prosecution through the District Court, with penalties of conviction and a fine up to $10,000. Due to the high costs of litigation and the relatively minor nature of identified breaches, enforcement agencies have declined to impose this sanction, despite numerous detected breaches. With increasing numbers of products subject to minimum energy performance standards and labelling requirements, breaches are expected to rise over time.

It is proposed that a less costly and administratively burdensome penalty for non-compliance that is more appropriate for the level of offence be introduced to complement the existing penalty. It is proposed that this be in the form of an infringement offence regime. This would help to encourage greater compliance with the regulations and to secure energy efficiency benefits from current minimum energy performance standards and labelling regulations.

The Ministry for the Environment (MfE) administered the Act before 1 July 2008, when the Ministry of Economic Development took over administration of the Act. MfE confirmed that the principles of the government approved Code of Good Regulatory Practice and the regulatory impact analysis (RIA) requirements, including the consultation RIA requirements, were complied with. An RIS was prepared and MfE considered it to be adequate. A draft RIS was circulated with the Cabinet paper for departmental consultation.

The residential sector in New Zealand consumes approximately 12% of the country’s energy usage or 34% of its electricity. Space heating and water heating consume 36% and 38% of household energy, respectively.

Despite this high proportion of energy usage, many houses in New Zealand are relatively energy inefficient in terms of water and space heating. The majority of the 1.5 million occupied houses in New Zealand do not have adequate insulation and are of low energy efficiency compared to what is achievable. The 2005 House Condition Survey found that less than 20% of the sample had underfloor insulation, and only 69% had the whole ceiling insulated¹. Only 63% of owner-occupied houses were reported to have adequate insulation in the ceiling, the most commonly insulated part of New Zealand houses, with an estimated 160 000 houses completely uninsulated. This has economic and health consequences, through households incurring additional costs to heat their houses and through houses being inadequately heated leading to occupant health problems.

Considerable economic benefits could accrue from better home energy efficiency. For example, owners of pre-1977 uninsulated houses will be able to identify cost-effective improvements such as draft stopping, hot water cylinder wraps, pipe lagging, water efficient shower heads, and energy-saving light bulbs. The estimated benefit of installing a full suite of such measures is $2.20 for every dollar spent on such improvements, including health and energy savings². A recent Wellington School of Medicine study has found that insulation positively affects people’s health. This research has found that families in insulated houses had fewer medical and hospital visits for respiratory conditions, and fewer days off work and school³.

Currently, there is little information available to people without some specialist knowledge, either at time of purchase or during occupation, that could help them to improve houses’ energy efficiency. If energy efficiency information is available, potential home owners may be willing to pay a premium for more energy-efficient houses to reflect the expected future energy savings and other benefits this provides. That would provide an incentive to home builders and vendors to make houses more energy efficient. Existing home owners would also be able to use the information to assess the profitability of investing in energy efficiency measures, the effectiveness of which would otherwise be uncertain.

The problem is that some of these potential benefits of information on houses’ energy efficiency cannot be realised because there is no consistent and reliable energy rating framework in place.

The policy objective is to enable the provision of consistent, reliable, and comparable information on houses’ relative energy efficiency. This would better allow people to make informed decisions relating to their house’s energy efficiency, and the energy efficiency of prospective houses.

An alternative is to establish a public education or marketing campaign that could inform householders and prospective buyers or tenants of home energy efficiency issues. While this may be effective in enabling a rise in public awareness of home energy efficiency in general, it would not enable the provision of details of the energy efficiency of particular houses or advice on potential improvements for particular houses. It also would not ensure that the information received is consistent, reliable, and comparable. This would prevent those who may wish to invest in improvements, or in a house purchase, from making informed decisions about the house’s energy efficiency.

Another alternative is to regulate through alternative legislative vehicles. Empowering legislation for a home energy rating scheme could come in the form of stand-alone legislation. This is not a preferred option because it causes a separation from, and possible inconsistency with, the existing regulatory framework for energy efficiency contained within the Act. Having multiple sources of energy efficiency regulations would likely lead to confusion. Including these provisions within another existing legislative instrument, such as the Building Act 2004, is not preferred for the same reasons.

The preferred option is for amendments to the Act to allow for regulations to be made to rate buildings for their energy efficiency and conservation. It should be noted that this option would only create a regulation-making power. The detail of any regulations proposed under such a provision would be subject to a cost-benefit and regulatory impact analysis, and will be accompanied by a separate regulatory impact statement when considered by Cabinet.

While the intention behind this option is currently only to develop policy about an energy rating scheme for houses, the definition of buildings is preferred, as this is a more certain legal term, and it provides the opportunity for a future energy rating scheme for commercial buildings should that become policy.⁴

The potential energy savings under a home energy rating scheme are large. Provision of information on houses’ energy efficiency at the point of sale would encourage investment in energy efficiency by home builders and vendors. Prospective buyers would be able to discriminate between houses based on their energy efficiency, and could incorporate expected future energy savings from more energy-efficient houses into their bid price, resulting in a premium being paid for more energy-efficient houses. House builders and vendors will then have an incentive to construct and sell houses that are more energy efficient.

With information on houses’ energy efficiency, existing home owners will be able to assess the economic case for investing in home energy efficiency measures. It will allow them to assess what improvements could be made and the likely energy savings from doing so, and empower them to implement those that are justified. Householders designing new houses will be able to use the rating scheme to optimise the energy efficiency of the building at the design stage, incorporating cost-effective features such as passive solar design and optimal levels of insulation.

Currently, regulations pursuant to section 36 of the Act prescribe minimum energy performance standards and labelling of the energy efficiency of products and vehicles. People who breach these regulatory requirements commit an offence and are liable on summary conviction to a fine of up to $10,000.

The number of products subject to minimum energy performance standards and labelling requirements is set to increase dramatically. Currently, 12 product classes are subject to minimum energy performance standards and 5 product classes are subject to mandatory energy performance labelling. It is planned that minimum energy performance standards or labelling interventions for an additional 17 product classes will be in place by 2012. This rise in volume includes a Vehicle Fuel Economy Labelling Scheme. This scheme will require registered motor vehicle traders to display a fuel economy label on all motor vehicles at the point of sale. This will apply to around 3 200 traders, and more than 200 000 vehicle sales per year.

Compared to the 5 complaints that EECA investigated when the regulations were first launched in 2002, last year EECA investigated 78 suspected breaches, of which 64 breaches were identified. Given the rise in the number of standards, labelling requirements, and products to be covered, it is anticipated by EECA officials that there could be a parallel growth in the level of breaches.

These identified breaches were over a range of at least 5 730 product models that are subject to labelling requirements, and they probably represent only a small portion of total breaches. The large majority of the breaches identified are minor, inadvertent, or technical in nature (such as failing to register a product, or minor and technical departures from labelling specifications) and as such do not warrant the pursuit of a conviction through the courts. Instead, some other mechanism that signals an appropriate level of sanction for minor counts of non-compliance is seen as necessary to add credibility to the regulatory regime, with continuing availability of prosecution for serious or repeat offences.

EECA monitors compliance with the regulations on behalf of the Minister of Energy. Enforcement in instances of non-compliance is currently ineffective. Despite numerous clear breaches since the introduction of the regulations in 2002, EECA has mounted only 1 prosecution to date. This is because EECA has determined that the expense of court action, often expected to run into some thousands of dollars, is not justified given the low level of offending identified. This process is also very time-consuming and can be subject to considerable delay. Instead, EECA informally sends warning letters to those suspected of being in breach. These letters do not provide any formal sanction and are often ignored. This is problematic as the very low level of offences does not justify conviction, but the offences ought to be met with some level of appropriate sanction.

The problem is that there is currently no effective sanction being imposed for non-compliance with the regulations. The high cost and time delays of the only available sanction for breach (prosecution) impede enforcement agencies from taking action. Without sanctions being imposed the regulations can lack credibility, may not be complied with, and are likely to be less effective. This will put the energy efficiency benefits of the regulations at risk, with the possibility of a reversal of the gains achieved so far, at a considerable cost to New Zealand. EECA has estimated that the Minimum Energy Performance Standards programmes have saved 1.65 petajoules of energy at a value of $60 million as at March 2006⁵. Energy savings from refrigeration appliances alone are estimated to have given benefits of $12 million.

The policy objective is to ensure compliance with minimum energy performance standards and labelling requirements. Sanctions need to be in place to deter non-compliance that can credibly be expected to be enforced and that are appropriate to the level of offending.

An alternative is to educate those for whom the regulations apply to encourage them to comply voluntarily. While this may have some limited effects on non-compliance, awareness of the regulations is already high, and it is considered unlikely that much current non-compliance would be deterred without compulsion. Another alternative to the status quo is to prosecute all instances of alleged breach. This would be likely to deter breaches. However, with expected litigation costs to both the enforcement agency and the alleged offender of approximately $10,000 each, the cost to all parties for the 64 alleged breaches of 2006 (which is likely to represent only a fraction of total breaches) would run to well over $1 million per annum. This is expected to rise significantly following introduction of new products into the specification and labelling framework.

It is proposed that a new sanction for non-compliance with the regulations be imposed in the form of an infringement offence regime incorporating infringement notices that come with an instant fine. These notices will be issued by enforcement officers appointed by EECA, and fines are expected to be set at between $500 and $1,000 per offence. Enforcement officers will have specifically prescribed powers of entry, search, and seizure to enable them to detect instances of non-compliance and gather evidence. There will also be penalties for obstructing enforcement officers from performing their duties. In all instances those issued with infringement notices will have the ability to appeal to the District Court.

Under this proposal there is unlikely to be any change in the time and expense taken to inspect products for compliance over and above what already takes place, and the proposed powers of entry, search, and seizure will enable more efficient investigation of suspected breaches. Although enforcement will be considerably more cost-effective than previously, a slight increase in enforcement costs will occur, as some administrative costs in issuing infringement notices will be necessary. This is still considerably cheaper, however, than the alternative of prosecuting the offenders who would be issued infringement notices under this proposal.

This proposal will promote compliance with the regulations by presenting a more credible threat of sanction for non-compliance than currently, with enhanced means of detection. Increased compliance will result in greater effectiveness of the regulations made under the Act. Therefore, the major benefit of this proposal will be energy efficiency savings associated with the energy efficiency regulations being followed.

These benefits will outweigh the relatively low costs of administering an infringement offence regime. There is large potential in New Zealand for improved energy efficiency to benefit society, and the energy efficiency regulations are one way to help realise this potential. Ensuring compliance is, therefore, likely to be of considerable benefit. Compliance with these already well-established regulations is already required and it will remain an offence to be in breach of them. Establishing an infringement offence regime will act to improve compliance as part of a suite of enforcement measures.

The reasons for not providing an RIS for the remaining 2 policy proposals are as follows:

• Provisions for updating New Zealand Standards that are incorporated by reference are intended to rectify an error in section 37 of the Act and, though more detailed than the original section 37, are essentially of a minor mechanical nature. This fits within an exemption to the requirements for an RIS.

• Access to New Zealand Customs Service data is an arrangement between two arms of government and ought not to impact on the public. This fits within an exemption to the requirements for an RIS.

The proposed changes will be implemented through the Energy Efficiency and Conservation Amendment Bill 2008. If implemented, proposed legislative amendments for the future creation of regulations under the Act are expected to be reviewed periodically as appropriate, but it is not considered necessary to have a review of the regulation-making powers proposed (except as part of a full review of the Act at some future date). There will be widespread notification of the infringement offence regime. Changes will be gazetted and advertised in newspapers and in EECA publications, and importers will be contacted directly to inform them of the changes.

It is anticipated that in the first year after implementation, EECA will review its monitoring and compliance activities relating to energy efficiency standards and labelling, and will consider what changes, if any, are needed as a result of this amendment.

The following government departments and agencies have been consulted on, or informed of, the various policies contained in the Energy Efficiency and Conservation Amendment Bill 2008: the Department of the Prime Minister and Cabinet, Ministry of Economic Development, Ministry of Justice, Ministry of Consumer Affairs, New Zealand Customs Service, Department of Building and Housing, Energy Efficiency and Conservation Authority, Commerce Commission, and Office of the Privacy Commissioner.

Public consultation on any regulations that result from proposed regulation-making powers will be required. However, no public consultation is required on the enabling legislative amendment itself before it is introduced to Parliament.

There was widespread industry consultation for the development of the energy efficiency standards and energy efficiency labelling requirements that are currently in place. While no consultation has been undertaken for the proposed change in penalty for non-compliance, affected industry participants will be contacted directly to ensure full understanding of the change if the amendment is passed.