CIED gives evidence to the ECC on Home Energy Efficiency and demand reduction

I recently gave oral evidence, on behalf of the Centre on Innovation and Energy Demand, to the House of Commons’ Energy and Climate Change Committee responding to the inquiry into home energy efficiency and demand reduction. This was based on an earlier written submission drawing on a range of academic work done by myself and Dr Nick Eyre (Oxford). For those who can’t spare the time to watch the full hearing you might find this summary more manageable.

Energy efficiency policies have contributed to significant reductions in UK household energy consumption. Total household energy use decreased by 19% between 2000 and 2014, despite a 12% increase in the number of households and a 9.7% increase in population. On average, individual households now use 37% less energy than they did in 1970, with the bulk of this decrease occurring since 2004. Between 2004 and 2011, total household gas consumption decreased by 5% per year on average, or approximately 3.6% per year after temperature correction

illustration 2However, the rate at which houses are insulated has stalled recently as a result of a number of radical policy changes. The UK government decided to radically overhaul the existing system in 2011/2012. CERT and CESP came to an end, the Green Deal was launched and a substantially different supplier obligation – the Energy Company Obligation (ECO) was introduced.

The Green Deal was intended to overcome the barriers of split incentives and high upfront costs by financing energy efficiency measures through loans that were tied to the building rather than the occupant and paid through instalments on electricity bills. Since the Golden Rule prescribed that the cost savings from these measures must be larger than the repayments, only investments with high rates of return were eligible for full funding. These measures (e.g. cavity wall insulation) were previously targeted by the supplier obligations – whose targets gave some confidence that particular levels of energy savings would be achieved. In contrast, the Green Deal did not require a specific level of delivery, with the result that the outcome was highly uncertain.

With the Green Deal targeting high payback investments, ECO was largely directed towards more expensive measures with low rates of return, such as solid wall insulation (SWI). This represented a significant departure from UK and international experience, where supplier obligations have primarily been used to encourage relatively cost-effective measures. Part of the rationale was that the potential for cost-effective measures was declining, requiring a mechanism to support more expensive retrofits in the longer term. From 2013, most support for cost-effective measures was supposed to come through the Green Deal.

It is now clear that the Green Deal has failed to deliver any significant investment in energy efficiency. Its existence also resulted in ECO being focussed in areas in which it was less immediately effective, with the result that the energy-saving targets have now been reduced. Together, the Green Deal and ECO have been a major setback for UK energy efficiency policy.

Early assessments by myself (CIED) and Dr Nick Eyre (Oxford University) forecast that the introduction of the Green Deal and the restructuring of the energy efficiency obligations would lead to a decline in energy savings of around 80%. Whilst such forecasts are always uncertain, recent figures confirm that they were if anything an overestimate of the energy savings, with the rate of energy efficiency improvements dramatically slowing down.

The lessons learned from this experience should inform future policy design. It is evident that:

Supplier Obligations can be highly effective but should not be prescriptive about the type of measure and should allow the delivery of cost-effective energy efficiency improvements. Internationally, the vast majority of energy efficiency obligations target such measures thereby ensuring that a high proportion of customers benefit from the obligation. In contrast, high-cost measures allocate the benefits to a limited number of customers and can place disproportional burdens upon low income groups.

Previous Supplier Obligations included also many non-insulation and heating system measures such as energy efficient appliances, lighting and behavioural change. There is currently a lack of support for innovative technologies such as LED lighting and future obligations should be refocused with a view of including such technologies.

Reliance upon deemed saving estimates is recommended to avoid excessive administrative costs.

Unexpected policy changes such as the reduction of the ECO target in 2014 need to be avoided to create long-term policy stability and investor confidence.

The interest rate of the Green Deal was not attractive and significantly above current mortgage rates and high street loans which is a benchmark used by consumers when assessing the interest rate of such programmes. A low-interest mortgage or loan with interest rates of around 2-3% is an attractive proposition for investment in energy efficiency. Such a measure is likely to require government guarantee of the loans and/or subsidies to a financial organisation offering the loans.

The Green Deal’s focus on low-cost measures (limited through the Golden Rule) did not allow for more comprehensive retrofits without additional finance. For low-cost measures market research undertaken for the government showed that commercial loans have very limited attractiveness for most consumers. Future on-bill financing schemes as well as other types of loans should therefore focus on medium- and high-cost measures.

The Green Deal was primarily marketed as a financial proposition saving households money on their bills. Instead of a universal, top-down, marketing approach, we should learn from DECC’s own survey evidence that a multitude of factors beyond purely financial considerations motivate people to improve the energy efficiency of their home. A more effective marketing strategy needs to draw on those insights and speak a language that addresses consumers’ desires and requirements.

At CIED we look forward to reading the final report of the Energy and Climate Change Select Committee on this important policy area and of course to the response that will be  given by the Department of Energy and Climate Change.