Assessing the economic costs and benefits of introducing regulation to promote the uptake of energy-efficient lighting in South Africa

MEPS for Lighting in SA 11 Oct 2019_final report with abstract

Purpose of the study

The Department of Energy (DoE) and NRCS, with support from the UNDP, commissioned Nova Economics to deliver a cost-benefit analysis (CBA) of the proposed regulation to set minimum energy performance standards (MEPS) for household lighting products. The technologies covered by the proposed MEPS include incandescent and halogen lamps (ICLs), compact fluorescent lamps (CFLs), high-intensity discharge, light-emitting diodes (LEDs), and any other household light sources. The intention is that the new regulation will replace the existing compulsory specifications (VCs) for CFLs and ICLs and extend the regulation to cover newer technologies such as LEDs.

The regulation is expected to result in energy savings, remove inferior quality products from the market, reduce peak electricity demand, and yield environmental benefits. The proposed regulation, however, will also be associated with some costs, which may be borne by the government, suppliers, and/or consumers, and these also must be assessed.

The purpose of the study was to provide an evaluation of the overall economic impact of the proposed regulation and make recommendations as to the most cost-effective form of MEPS.

Background and context

South African households purchase roughly 22 million electric lamps per year and the total installed stock in homes is approximately 170 million. While a single electric lamp does not consume a large quantity of electricity, the average household has about 15 lamps. We estimated that electric lamps collectively consume ~2 900 GWh of electricity per year which is ~1.5% of total national electricity sales.

Regulation in South Africa has not kept pace with global technological advancements in lighting. Light Emitting Diode (LED) lamps have emerged as the most energy and cost-efficient form of household lighting – outperforming both compact fluorescent lamps (CFLs) and halogen lamps. While older lighting technologies (CFLs, halogens and incandescent lamps) are regulated for safety, there are no safety or performance standards for LEDs in South Africa.

The need for regulation of lighting (from a safety and performance perspective) is justified on the basis that there is a market failure caused by ‘imperfect information’, which results in consumers making poor choices. The proliferation of lighting brands and technologies means that consumers cannot easily compare the quality, life-cycle costs, and performance of different lamps. A lamp is a relatively low-value purchase and consumers are unlikely to invest time and effort to compare options and make an informed choice.

The Department of Energy (DoE) has proposed introducing new regulations to set technology-neutral minimum energy performance standards (MEPS) for household lighting products.  The main objectives of introducing MEPS is to accelerate the adoption of energy-efficient lighting by households and to remove inferior and unsafe lamps from the market. The DoE and NRCS commissioned a study to calculate the economic cost benefit analysis (CBA) of the proposed regulation to set MEPS for household electric lamps

Approach

The potential economic impacts of MEPS for lighting were assessed within CBA framework which aims to quantify the net benefit of the proposed regulation in monetary terms. We also drew specifically on the guidelines provided by the United Nations Environment Programme (UNEP) in a guidance note on MEPS for lighting for policymakers and on a recent study by Australian and New Zealand Governments – “Decision: Regulation Impact Statement: Lighting”.  The cost-benefit analysis relied on four main inputs – market analysis, stakeholder consultation, economic modelling, and lamp testing.

We analysed the market for electric lamps in South Africa based on retail trade data sourced from AC Nielsen and augmented with technical lamp specifications and import statistics from the South African Revenue Service. We followed an extensive stakeholder consultation process with various groups to gauge the sentiment towards regulation, validate key assumptions and inputs to the model and to obtain qualitative insights on the likely economic impact of MEPS.

The economic cost-benefit model was then developed using data and input assumptions obtained during the market analysis and stakeholder consultation processes.

Key findings

The results of the CBA suggest that introducing MEPS for general lighting will yield significant, positive net economic benefits for the South African economy. Under the central assumptions, the net economic benefit of the project is expected to amount to R11.7 billion (USD811 million) over the 15-year period and the benefit-cost ratio is 27.4 to 1; i.e. the present value of the project benefits will exceed the present value of the costs more than 27-fold.

Once MEPS is introduced households will only be able to purchase energy-efficient forms of lighting and as a result, are estimated to save between 300GWh and 700GWh of electricity they would otherwise have consumed annually.  With the introduction of MEPS, South African households are expected to realise total electricity cost and lamp replacement cost savings of R12.1 billion (USD839 million)  over the next 15 years (in present value terms).

Based on stakeholder consultation, we identified that the key risks to the economic case for the introduction of MEPS are a potential delay in the implementation of the regulation and poor enforcement of the compulsory specifications. If the implementation of MEPS is delayed by three years, the total net benefit associated with MEPS is reduced to R1.9 billion (USD132 million) from R11.6 billion (USD804 million), under the central assumptions and the benefit-cost ratio decreases from 27.4 to 5.3. There is a strong case for implementing MEPS as soon as possible to maximise the potential economic benefit associated with more rapid switching to energy-efficient lighting. A very low enforcement scenario (33%) would also reduce the expected net economic benefit by more than two-thirds relative to the central scenario but various measures to improve monitoring verification and enforcement activities were recommended by stakeholders.

Impact of the study

The DTIC is set to introduce MEPS for household lighting in September 2022