Energy and Climate Change Committee
Oral evidence: Home energy efficiency and demand reduction, HC 552
Tuesday 8 December 2015
Ordered by the House of Commons to be published on 8 December 2015
Members present: Angus Brendan MacNeil (Chair), Rushanara Ali, Mr Alistair Carmichael, Dr Daniel Poulter, Antoinette Sandbach
Questions 127-184
Witnesses: Dr Nick Eyre, Director, UK Energy Research Centre, Dr Jan Rosenow, Senior Fellow, Centre on Innovation and Energy Demand, University of Sussex, Simon Roberts OBE, Chief Executive, Centre for Sustainable Energy, and Dave Sowden, Chief Executive, Sustainable Energy Association, gave evidence.
Q127 Chair: Could witnesses please state their name and organisation for the record? I will begin over on my right and to the witnesses’ left.
Dr Eyre: My name is Nick Eyre. I am a senior research fellow at the University of Oxford. I am here in my capacity as a co-director of the UK Energy Research Centre.
Simon Roberts: I am Simon Roberts. I am the chief executive at the Centre for Sustainability Energy.
Dr Rosenow: I am Jan Rosenow and I work for the Centre on Innovation and Energy Demand at Sussex University, where I am a Senior Research Fellow.
Q128 Chair: Thank you for taking the time to come along and help us with our inquiry here. We have heard that there are only three options to deliver energy efficiency in homes and there are subsidy programmes, obligations and regulation. Over previous years the UK has had all three; should this continue to be the case? Whichever one of you feels bold this morning.
Dr Eyre: I would dispute the “three” classification. I think there are four categories of policy for energy efficiency. One is regulation, the second is incentives in some form or another, the third is information and advice programmes and the fourth—and maybe this is the one that gets forgotten—is work with the supply chains who are the key actors in delivering home and energy efficiency. I would say that those are four areas and I don’t think there are alternatives to each of them. We probably need activity in all of those and most of the academic research in this area would now support that contention that these are not competitive approaches, that they offer different things and can deliver more in combination than they can individually.
Simon Roberts: I would add to that the importance of each used properly, so to just throw grants at a programme to try to stimulate a market without thinking about what the long-term consequences would be of creating a dependency on constant subsidy needs to be very carefully considered. We have seen an example with the Green Deal Home Improvement Fund. We have thrown large grants at a supply chain that was barely existent and, as a result, probably squandered rather a lot of public money, which could have been much better spent. We also created a situation where people are now waiting for grants before they will undertake work, which is not the kind of situation you want to encourage. But I would agree with Nick that the supply chain issues are particularly important, particularly as we move into these more complicated building works, such as solid wall insulation, where you need to be developing supply chains that already exist, but they are normal building work not low carbon building work. That requires a level of complexity and policy thinking and an approach to orchestration, rather than the monocultural approach that we have had so far, where we have thought, “We will throw grants at it and the supply chain will come forward” or, “We will regulate for this”. There is a much more complex picture of the way in which we have pieced different policies together and thought about what the ambitions are, what the current situation is that we are trying to address, and what we are trying to achieve. Simply thinking about another type of policy is a slightly naive approach that has been taken.
Dr Rosenow: Can I respond to that? The three points come out of the submission that we provided to the Committee, so it is partly my fault. The answer in the context of getting to scale—so when you want to achieve a high level of energy efficiency and how they get to scale in terms of the market—we suggested it could be subsidies provided by the Government for general taxation; it can be utility-funded, like the Energy Company Obligation type problems; and it can be regulation. I agree with Nick that information measures in other problems are supportive, but I don’t think they are sufficient in order to get to scale. There is no other option than large scale subsidies coming through the utilities or Government funds or a regulation. Ideally you would have a combination of all three.
Q129 Chair: You have these three or four that you seem to think should be maintained. Any other options for delivering energy efficiency?
Dr Rosenow: We had the Green Deal, so the pay-as-you-save schemes. I believe they can play a role. If they are not subsidised by any means, then they will be a niche product for a certain type of consumer, but they will not be able to get to scale, as we have seen with the Green Deal.
Q130 Chair: Everyone agree with that?
Dr Rosenow: There would be some people who are interested in that product, but I don’t think it will be more than 5% or 10%. You will never get to a mass market product with an interest rate of 5% or 10%.
Q131 Mr Alistair Carmichael: You are relying on people who are probably motivated to do it anyway then?
Dr Rosenow: Yes.
Simon Roberts: I am not sure I agree with my colleagues. I suspect we are going to get a little bit of this today. In terms of the need for large subsidies, we have a market in energy efficiency. The problem is we are thinking about it as an insulation market rather than a building improvement market, and if we start to think about how that market works, the supply chains there and how those can be stimulated, we might end up with a different picture. I do not see a world in which we should be necessarily throwing large subsidies at this stage at the solid wall insulation market beyond those needed to just bring enough extra work in to stimulate the supply chains to take more interest. That might be a “congratulations for doing the right thing” reward rather than something that transforms a cost-benefit analysis. If you start off by trying to transform the cost-benefit analysis with a level of subsidy, you are making the grant work very hard. It would be much better thinking about how to develop supply chains, how to build social norms around the fact that solid wall insulation is now becoming normal, the kind of work that is being done in Green Open Homes and so forth.
Q132 Mr Alistair Carmichael: But you start from a position where you have, as Dr Eyre said, virtually no supply chain. How do you develop that supply chain without subsidies?
Simon Roberts: We have done a couple of things. You need something in there for people who are interested in taking that sort of work forward, and there are enough people to start to develop the supply chain. There is a market already for solid wall insulation, if we are using that as an example. But the supply chain you need is not former cavity wall insulation contractors, it is building contractors. First, they are busy; secondly, they don’t work with subsidies, they work in a world where you do not have grants; and thirdly, they don’t like paperwork that much, or official scrutiny. So you have to work with that. Also, they don’t trust the fact that there is going to be a constant demand because what they see is grants coming and going, and all the rest of it, and being snapped up by companies they have never heard of doing building work of questionable quality.
You need to think about how you develop and orchestrate the supply chain development and the understanding there about the techniques and the materials that need to be used, which they are all familiar with but just do not bother with because they are harder than what they are doing at the moment, at the same time as stimulating demand. It is an orchestration problem. When the conductor’s baton goes down you need both the supply and the demand to be coming down. If you just push on demand you have to push very, very hard to get anybody paying some interest. But if you piece the two together, and can create confidence that there is going to be work on an ongoing basis, then you will find a supply chain coming forward and starting to offer it as a routine part of the building improvement work that they are offering their customers.
Q133 Chair: To go back to your answer a couple of questions ago, you mentioned building improvement rather than home insulation. Can you expand on exactly what you mean by “building improvement”?
Simon Roberts: With loft insulation and cavity wall insulation, you are basically adding an insulation product that is relatively low cost and simple to do; two or three jobs a day sort of work. But with solid wall insulation, you are suddenly moving into a task that needs scaffolding, might take two or three weeks, is complex with a range of building trades involved and is specific in detail. That is a different quality of work compared with rocking up in a van, drilling some holes in a certain pattern and squirting insulation into a cavity.
You are moving from a commodity mass delivery mechanism—in effect, most of the cavities that are ever going to be filled will probably be filled through those kind of market mechanisms by the end of ECO—to a place where the next most important measure is solid wall insulation. We have to think about it in a different way.
Dr Eyre: I can amplify that by saying that, if we look at where we need to be in the very long term—2030, 2050—every home will be a low carbon home, which means fairly exact insulation and air tightness standards. That means anybody who is a contractor in household building work needs to be aware so that they don’t go and drill a huge hole that damages the air tightness performance, for example. As Simon said, this is about moving to the very big supply chains for household repair and maintenance. From memory, it is over £20 billion a year, which is far bigger than the numbers we are talking about for efficiency investment, where that supply chain is delivering home energy efficiency consistently as part of what it does. That is a policy challenge. We would all accept that.
Dr Rosenow: I completely agree with the need to engage with the supply chain. My reasoning for putting those three options forward is based on looking at international evidence as well because one of the questions—I think it was the last question—was very much about what other countries have done in energy efficiency. All the good examples that are known, such as the KfW programme, the things they are doing in France with zero interest loans and tax rebates, and problems from across the world such as the US with the utility programmes, are all based on very strong demand drivers such as providing incentives for people to demand insulation.
Just dealing with the supply chain will not solve the issue of lack of demand. You have to do both. You have to engage with the supply chain, create demand and then enable people to finance what they desire to finance. If you just put in regulation but have no finance mechanism in place that is not going to be good enough. You need to offer people the opportunity to then finance those improvements in a way that works for them. It is about the combination of different instruments and doing that in a way that works for the supply chain, for the consumers who demand energy efficiency and also for the people who administer the whole programme.
Simon Roberts: And to do it at the same time, because one of the key problems we have had in the past is that we have had supply chain development programmes but no demand creation. We have had demand creation programmes with no supply chain development. This supply chain is a local supply chain.
Chair: Back to the orchestration you used before.
Simon Roberts: It is the idea of when the baton comes down. We can get people along to supply chain meetings to understand past the 2013 and the techniques in a scheme we are running with Bath and North East Somerset Council, but the only reason they come is that they know there is some work coming because grants and initiatives are being provided by the council to stimulate interest and build that up. It is not a perfect scheme, but it means there is enough interest to start working on both of those sides of the process.
Q134 Dr Poulter: One of the points just made about having a strategy that is attractive to the sector more broadly, rather than a more nuanced insulation strategy, strikes me as a fairly compelling case to reach some of the many properties that have not been reached by existing policies. I think we know that about 4 million properties that have not thus far been reached would benefit hugely from home insulation. I was just wondering in that context—this is to Simon Roberts first, perhaps—how you would see the best way of reaching landlords in the private rented sector, which we know is an area of particular challenge, both from a home energy efficiency perspective but also from a consumer energy price as well.
Simon Roberts: That is a huge challenge because it is a market that isn’t particularly interested in producing improvement in their property for the benefit of their tenants, which solid wall insulation and those kind of more intensive works are. You also have the issue of doing the work while the tenants are in the house; you have challenges like that.
There may be a challenge of thinking we have to solve that problem while we are also trying to develop a decent supply chain for solid wall insulation. I would suggest that, in order to do that, we do not get hung up on whether we are doing work in the private rented sector on solid wall. Let’s develop the supply chains for the private household market, because there are supply chains for the social housing market but they are doing mass work on blocks not individual properties. We need to develop that supply chain using a technology adoption curve: we have some of the pioneers; let’s get the early adopters interested, the early majority. That kind of model does not have a lot of private rented landlords in it to develop the solid wall supply chain for the private household market.
You need to do other things in relation to the private rented sector. We have seen the regulations come in, but we need to make sure that they are policed properly, that the EPCs—energy performance certificates—being used are robust and that there are mechanisms, such as pay-as-you-save and others, which are available for private landlords to undertake, in a lot of cases, rather simple works that they have overlooked so far and not put forward.
If you are thinking about the solid wall insulation market, I would say let’s develop that and then see how we can tie the private rented sector in. It is still a very small market, but let’s focus on the easy measures that have not yet been done because landlords have been an obstacle to people taking up some of the measures that have been available under the existing obligations.
Dr Rosenow: If I could quickly add to that, on the private rented sector specifically. I think the main issue is that no financing mechanism for the private rented sector is available; the lease of the landlord energy savers allowance has been scrapped and the Green Deal is no longer supported by Government. We have already seen a huge drop in the number of Green Deal financing plans. It is now about 200 per month from more than 1,000 per month before the finance got scrapped. That poses a huge barrier because the minimum regulation for the private rented sector is based on no upfront cost to the landlords. I cannot see how landlords will be forced under the existing regulation to improve their properties because there is no financing mechanism in place. One of the conditions is that there has to be no upfront finance, and there will be.
Dr Eyre: The private rented sector is probably the paradigm case of where regulation will be needed, because the interests of landlords and tenants are always going to be different, but it needs to be sensible regulation. Therefore, it needs to be long-term regulation. It needs to give landlords a sense that the next time they do a major refurbishment they do it properly and well. I will give an analogy of disabled access to buildings; people were given 10 years to do that and, in the main, it happened because people knew it had to happen.
The more politically difficult question is whether that should be extended to the owner/occupier market. If we are going to have low carbon buildings everywhere, we probably need a policy signal that that is going to have to happen at some point but, clearly, that needs to be seen as more of an opportunity for households than a threat.
Q135 Mr Alistair Carmichael: I want to come back to this point about developing your supply chain in the construction industry. I represent two island groups, each has its own local construction industry as different from the other as is possible to imagine. I suspect it is probably different from the ones that Angus has got; none of them bear any relation to the construction industry in Glasgow and Edinburgh, which again is completely different from the construction industry in the south-east of England. You cannot treat that as a single homogenous industry. Is this part of the problem here? We are trying to create a national plan, whereas what we should be doing is something that is much more organic and starts with the community and grows up.
Simon Roberts: You can have a national plan to do exactly that. You could have a programme where, rather than giving large grants to householders, you gave modest grants to local organisations to develop supply chains locally. The advantage of doing that is that those local building trades tend to understand the local vernacular buildings, which is incredibly important in relation to solid wall insulation because of the building sensitivity to the materials and the change it creates in the performance.
Q136 Mr Alistair Carmichael: Why doesn’t it happen then?
Simon Roberts: Because we are trying to look for a single national lever to pull and it is rather simplistic. Also there is a bit of a blockage in policy thinking about supply chains. There is a rather simplistic view: you create demand and the supply chains will fall into place. But if your supply chain are building firms and they are busy doing normal building work, they are not going to fall into place and you tend to draw in a supply chain that may be here today, gone tomorrow, at one level, but also which becomes very subsidy dependent. It comes back to that orchestration, but I think that orchestration is local. How local is local? Certainly the west of England, for example, rather than the whole of the south-west.
Mr Alistair Carmichael: Regional.
Simon Roberts: Even then, cob houses down in Devon need something different from red brick terraces in Bristol, for example. The supply chains tend to be city regions or sub-regional scale.
Q137 Mr Alistair Carmichael: Whoever is going to understand this, it is unlikely to be a Whitehall civil servant sitting in DECC.
Simon Roberts: I would hope they would be able to understand the need for them to create a scheme that enabled local initiative to come forward, and that we supported that.
Mr Alistair Carmichael: Experience suggests otherwise.
Simon Roberts: As you see from our evidence, we had a few comments about the extent to which Whitehall understands the way in which the commercial interests that they are trying to shape the behaviour of through their policies actually respond to those policies. I think that is the key challenge for Whitehall.
Dr Eyre: I tend to have quite a lot of respect for Whitehall civil servants. I don’t think they are stupid. This problem is another aspect of trying to do too much through a supplier obligation. I don’t think Ofgem has any option but to try to run what is a market-based scheme on a national basis. If they tried to do it on a regional basis, there would be major complaints about them being unfair to different regions. It is a market-based approach for suppliers who operate across Great Britain and, therefore, the logical way to deal with supplier obligation is in the national way, but that means that it has these implications that Simon has talked about.
Q138 Chair: Mr Roberts, did you not point, maybe five or 10 minutes ago, to the problem that people in the supply chain may not like someone looking over their shoulder, and they don’t like the paperwork that goes with quite a lot of this type of work. Is there not a contradiction or tension of some form?
Simon Roberts: The point is you need to make it interesting enough for them to bother doing it. We did a small project a few years—before the Green Deal; it was a precursor to that—looking at how to stimulate supply chains for solid wall in rural markets. We had a small pot of grant money. Basically, we found that building companies would only go on a training course to use a particular set of materials if they had had three enquiries from the public asking them to come along and give a quote. They then needed to have gone and given three quotes to get a job, generally speaking, and then they needed to do three jobs before they felt able to think this was something that they might build a business in rather than just doing it as a side to keep them busy while they might otherwise have been quiet.
That is a very rule of thumb, almost anecdotal, tale, but it does point to the need to make them feel that there is going to be a business case for carrying on and doing that paperwork. What we see in schemes where you are orchestrating the demand and the supply at the same time is that people do come forward and they are interested in participating, as long as they can see the value being returned from that effort they put in. But, for example, with the Green Deal the amount of paperwork and requirements became very burdensome and also the focus was on the paperwork not on the quality of the installations and the specification of that work. I think we could change that as well.
Q139 Chair: Briefly, do you think energy efficiency should be recognised as a national infrastructure priority?
Dr Rosenow: It would certainly help. Would it solve the problem that we still do not have enough investment in that area? I do not know, but it is a step in the right direction.
Q140 Chair: Should there be some sort of road map then, because we heard from Energy Saving Trust that this could help homeowners and occupiers to understand the opportunities they have for their homes and communities? If there is to be such a road map what should it look like or could it look like? Any thoughts on that?
Dr Eyre: I should say I used to work for the Energy Saving Trust, so it is perhaps not surprising if I agree with them. The road map needs the four elements that we talked about at the beginning—a long-term regulatory structure, support for sensible advice programmes, support for the supply chain and targeted incentives. I also think it needs to ensure that in the owner/occupier market we work with the grain of what people want. This is where there is a misunderstanding about demand. Most people do want to live in an energy efficient home. That is hardly a surprise. What they don’t want is to have to do an energy efficiency refurbishment the day a Green Deal Home Improvement Fund is allocated. They want to do it in a way that fits in with their life, so they may want to refurbish their house when they have a new baby or when they retire or when they get left some money. That is the way that refurbishment works. This is not only common sense, it is supported by the research evidence that colleagues at the University of East Anglia have looked at.
There is demand, provided that the supply chain fits in with those trigger points for investment and works with the grain of people’s lives, rather than someone thinking, “We can do energy efficiency to somebody now because that is what Government wants to do”.
Simon Roberts: Can I add in one thing that often gets missed out of road maps? It is the kind of atmosphere that one is driving through, the social norms, the way in which people think about it and the culture around doing this sort of work. We have been running a scheme that was supported by the Department of Energy and Climate Change called Green Open Homes. It has provided grants to local community groups and local authorities in England to run weekends when homes are open that have had some efficiency work or refurbishment done. Typically, they are not the perfect home where they have had everything done, they are at various stages on it. There is a very good scheme in Bristol called Bristol Green Doors, and over the last few months there were 37 schemes supported across England and Wales. There were 10,000 visitors to over 500 homes and we found—from some anecdotes and a small sample we did—that the people surveyed went on to spend, on average, £4,500 on improving their home. What they are seeing are homes around the corner from where they live, occupied by people like them, which look a bit like their home, so they are able to go and see what it looks like when you do it. If you put those houses on a map, 30 properties around the city or a town, it looks like everyone’s doing it because we cannot process, “That is 30 out of 20,000 households”. We just look at it and think, “There is a lot of it going on”, so you change the expectation and what people think is normal. Going to see it, experiencing it, is a very, very powerful thing.
The total cost for each visitor was less than £15. Then it stimulated for the group, a small sample—albeit not representative necessarily—an average spend of £4,500. The average spend of people who went on to do work was £7,500, but it just gives people a chance to see what is normal, what is becoming normal, and to recalibrate their own view about what is possible and what it might involve. They get the real stories from real people who live near them about what they can do.
Q141 Mr Alistair Carmichael: Moving on to pay-as-you-save models and maybe to start off with a brief post-mortem of the Green Deal, we know the problems with the Green Deal. It was complex, it was expensive and there was a lack of demand. Was that because it was the Green Deal or is that just going to be a problem with pay-as-you-save models in general? I am getting a shake of the head there.
Dr Eyre: I will not repeat the evidence that I gave to the Committee in the last Parliament, but the key issue for me was that it was designed badly. I would particularly point to the Golden Rule, which essentially prevented people doing anything expensive. We know from loan schemes and pay-as-you-save schemes elsewhere in the world that they are better suited to the more expensive, deeper refurbishments that we have been talking about, where it is the benefits of the additional room or the additional comfort, not just the energy saving, that people do it for. The Golden Rule basically said, “If you do not have a very good cost-benefit analysis on the energy savings loan you are not allowed to do it under the Green Deal” and that is not what people want.
Q142 Mr Alistair Carmichael: So you are saying its failure was baked into it, essentially?
Dr Eyre: In my view, we got the Green Deal and ECO the wrong way round. We tried to get the Green Deal to do the expensive measures and ECO to do the expensive measures. It would be much more sensible to use supplier obligations to do relatively cheap measures, which is what everybody else in the world does, and use loan schemes to do the relatively expensive stuff, which is what everybody else in the world does.
Q143 Mr Alistair Carmichael: Talking about what happens elsewhere in the world, we have evidence about Energiesprong from the Netherlands. How does that differ from the Green Deal?
Simon Roberts: I do not have the programme in detail, but it serves a different market than the Green Deal has. So the types of technologies that Energiesprong supports are more expensive. It includes external wall insulation, for example, and solar thermal, whereas the Green Deal would not fund all of the cost of those measures. It would fund a small part of those measures but it would not fund all of the cost, whereas Energiesprong is targeted to more advanced markets. You cannot compare on a like-for-like basis.
It would be much better to look at other pay-as-you-save schemes around the world. Kansas in the US, for example, is quite a successful scheme. It has quite low cost measures, but it works quite well. They had more demand than they planned for and it was deemed a success. Other schemes, in Oregon, for example, did not get the demand they wanted, and there are various reasons for that. There are examples of both good and bad pay-as-you-save schemes, and your original question on the paperwork and the complexity—I agree with Nick—is largely an outcome of the Golden Rule and the way it was designed in the UK. There are other examples from around the world of a very simple scheme, where the household does not have to fill in lots of paperwork, there is no complicated assessment and it is a very slick design. It does not predetermine the complexity; it is based on the Golden Rule.
Q144 Mr Alistair Carmichael: For peers you say we should be looking at Kansas and Oregon?
Dr Rosenow: I would certainly look at the lessons learned from Kansas. Oregon is probably an example of how not to do it, because they found the cost-effectiveness for kilowatt hours saved through pay-as-you-save was lower than for direct grant provided by the Government agency, which is surprising. You would expect exactly the opposite—that pay-as-you-save is more cost effective than a grant—but it was not. The reason again was the complexity involved in the way the scheme was set up. You cannot say generally that pay-as-you-save schemes are more cost-effective than typical grants or loan schemes. It depends on the design of the scheme.
Simon Roberts: I would just add to that, that it is very important that we don’t throw the baby out with the bath water with the Green Deal. The problem is that they have so many toys in the bath with the baby that it is quite difficult to work out where it is, because the Pay-As-You-Save mechanism was the key component that was missing as a tool in the market. Everything else was kind of there already, but the credit was not the thing we needed in the market; it was expensive credit with a whole load of paperwork associated with it that did not allow for what was needed. We have to find ways to lower the cost, make it more simple and let people borrow what they need. Collecting it through fuel bills is fine, but it seems like there are lots of different ways people can finance it. You do need a Pay-As-You-Save mechanism.
Q145 Mr Alistair Carmichael: This is interesting because Mark Bayley was telling us that the Green Deal Finance Company is funded for some years to come. His evidence is that it can be reactivated. Having identified the problems, would that be one way of proceeding?
Simon Roberts: I am interested in whatever finance you can get that can use that mechanism. You need to think about how you lower the cost of finance, and in a very private sector mechanism—a market—the Green Deal Finance Company has probably done about as well as you can, given the credit structure that has been put in place, the risks around the Green Deal provider and some of the other factors that have been built in to it. There are other ways in which you could underwrite some of that risk that would make it lower. Whether you give a monopoly to one individual private company and have access to that mechanism is a different question.
Q146 Mr Alistair Carmichael: We also had evidence of the KfW Bank in Germany—somebody is nodding—as a good example of successfully funding pay-as-you-save energy schemes. Is this something that could be replicated in the UK? Where do they succeed when the Green Deal failed? What was the difference?
Dr Eyre: I am sure that Jan can say quite a lot about it, but it links nicely to the last question, because the way that works is that KfW Bank essentially underwrites loans provided by normal retail banks who are lending to individual households and businesses. They have chosen to support it through the normal lending process rather than create a separate pot of money for energy efficiency.
Dr Rosenow: Can I add to that? One of the key features is they use local banks and the banking system in Germany is quite different. You don’t have lots of large national banks. You have lots of local banks and they are very much part of the community, so the access they have to people might be slightly different than the access of retail branches in the UK. That is just to bear in mind.
The interest rate of the KfW scheme, the last time I looked at it—it could have changed since so don’t quote me on this—was 0.75%. Compared to the Green Deal, which was 7.75%, some of them were 8%, so significantly lower. They also built in a system where, if you achieve a very high efficiency, you don’t have to pay back the entire loan. You get a reduction of the total loan size, so essentially it is a relief on the outstanding loan, which incentivises people to take out larger loans and retrofit their homes to a better standard.
The main thing with the KfW scheme is that it is based on a lot of public subsidy. It costs a lot of money, so more than €2 billion a year general taxation, which is a lot of money, but it works well. The demands of the programme have been consistent for the last 10 years. In the first few years, it was a struggle because it was a new scheme and the local banks did not quite market it in the way that was expected. But for the last few years it has been very successful in that there was more demand than there were funds in some years, and it has achieved significant amounts of retrofits. Is it enough? If you ask experts in Germany, they still say it is not enough. We still just get a 1%, maybe 1.5%, refurbishment rate every year. We need more. We need 4% to get to the climate change targets we have for 2050. But it is certainly a project that has been going strong and has achieved quite a bit. There is also lots of focus on the quality of the workmanship, and the way it is marketed is much more on quality of your property—you improve your property so the comfort level is increased. It is not so much on saving lots of money. You may not save any money at all because you take out a loan and pay it back over 25 years. The energy savings may be lower than the actual investment that you have to make, so it is marketed more as something people have to do in order to upgrade their property and increase their comfort levels.
Q147 Mr Alistair Carmichael: My impression has always been that Germany would probably start from a higher base in terms of the quality of housing stock. Is that a fair assumption?
Dr Rosenow: We had a discussion on the train as to whether there is any good data that would enable you to compare the building stock of different countries, because we have the climate and all those differences. I would argue that is the case. Just look at certain energy efficiency measures that have been installed, like triple glazing. You find a much higher share of the buildings in Germany fitted with those measures, but then Nick said, very correctly, that the climate in Germany gets cold in the winters, so that is why people install those measures. It is not a fair comparison necessarily.
Simon Roberts: It also means we have more we can do; we have bigger headroom to catch up, so it may be a benefit rather than a problem.
Q148 Mr Alistair Carmichael: You are saying that, for all the problems of the Green Deal, pay-as-you-save as a model is one that is still workable for that able-to-pay sector, in particular. If we were to go back to the drawing board in this country then, learning from past experiences, what would the sum of the Green Deal look like?
Dr Rosenow: Do you mean the redesign of the Green Deal?
Mr Alistair Carmichael: Yes. What are the components that you need?
Dr Rosenow: I could try. You say just the Green Deal; not any of the other products, just the Green Deal?
Mr Alistair Carmichael: No—
Simon Roberts: Don’t try to do it all in one programme. Do a pay-as-you-save scheme; do an accreditation and delivery scheme and do a supply chain development scheme; have a structure for getting small grants to reward people for doing the right thing in their homes and incentivise it; potentially use mechanisms like stamp duties to stimulate improvement around the purchase or sale of a house; and also think about how you develop a market, through initiatives like Green Open Homes where you show people what it can be like and develop a social norm around doing it. That is not one programme.
Mr Alistair Carmichael: No, point taken and a trip to Kansas.
Q149 Antoinette Sandbach: There seems to be a consensus that ECO in some form or another needs to carry on or, at least, Dr Eyre, your evidence was that it does need to carry on, but maybe not in its current form. What should be the key features of a new ECO scheme?
Dr Eyre: The difficulty I have in answering that question is that what we are hearing from the Government is the intent to fund a fuel poverty programme through ECO. For the reasons I have given about supplier obligations being better suited to deliver low-cost measures than some of the more expensive measures, we will need to take many people out of fuel poverty. I am not sure that is the right way forward, but it is better than no way forward at all on fuel poverty, for sure.
It would also be helpful to keep an obligation scheme on energy suppliers of some form—Simon and I probably disagree on the exact form—designed to deliver some of the low- cost measures that will still make energy services cheaper for people as a whole. The whole focus on the cost of an Energy Company Obligation seems to me to be very odd. The benefits are always going to be bigger than the costs provided if you design it properly, so the bigger it is, the better off people as a whole will be.
That means more of a focus on electricity-using products than there has been in the last five years. It perhaps means going beyond households. I know that is beyond the scope of this inquiry, but many small businesses look very like households in many ways with all the same sort of barriers to efficiency improvement. I think we are the only country in the world that restricts our Energy Company Obligation to households. These are things to learn from other countries.
Simon Roberts: I take a slightly different view. If you look at what ECO was trying to do, it was trying to do a fuel poverty programme. It was sort of trying to stimulate solid wall insulation and it was doing the remaining low-cost insulation measures, and more or less everything else was out of bounds. I think you need a fuel poverty programme. I am not quite sure the next ECO is the best way to do that because I am not sure that energy suppliers are the best people to run fuel poverty programmes. We will maybe come on to that. We have talked separately about what we need to do about the solid wall insulation market. I do not see suppliers as having a role there because I don’t think the local delivery we need to stimulate is in their mind.
What we need to oblige the suppliers to do is what we want them to do, which is to reduce average demand across their customer base. We have done some work, which DECC has been exploring, which we call the “average customer consumption reduction obligation”. They shortened it into “demand reduction obligation”, which is probably sensible. Basically, the idea is that you set an obligation on the suppliers to reduce their average customer demand in both electricity and gas by a certain amount per year. They are left to decide how they meet that obligation. But you would anticipate that what they would do is pick up all these low-cost measures—LED lighting, smarter heating controls. They would also do more behavioural work. They would make smart meters work for people. They would get involved and help people interpret the information and improve their energy management as a result because they would be interested in reducing demand. They would also be very interested in customers who have lower than average demand, because obviously if you acquire more of them you reduce your load.
It seems to me that is the outlook we want from them. Demand is already going down, so this is about getting their business models realigned with the way the world is going and the way we want it to go, which is through a much lower demand future. You could add in a peak demand reduction on top of that as well, and you basically just use data from the energy suppliers about their customer consumption as your monitoring of it. You fine them if they are under; you reward them potentially if they are over. You could even have a league table; benchmark them, where you just basically say, “Well, you did very well, so you the chief financial officer of that company have to pay money across to the chief financial officer of that company”. That could work quite interestingly. Basically, focus them on reducing demand for their customers. Do not tell them what they have to do in order to do that, what measures to follow. I think you would see a transformative effect and you would align their work much more strongly with the sorts of policies that we want in terms of efficient appliances, better lighting, smarter heating controls, using smart meters properly. All of those things would come forward. The complex building work and insulation work you would deal with separately, and likewise fuel poverty you need to think about separately, but that is what I would have an obligation on suppliers for.
Q150 Chair: Can I interrupt there and note that the panel has grown by 33%, and I invite Dave Sowden to introduce himself, first, to the Committee and then cover a little bit of what we have done.
Dave Sowden: My apologies for arriving so late, Mr Chairman. Out of my control I am afraid—diverted trains and weather-related incidents and all that.
I am Dave Sowden. I am from the Sustainable Energy Association. We are an industry member funded body that exists to advocate a range of energy measures in buildings as a means of providing a cost-effective range of solutions to the country’s energy policy challenges. Our members consist of manufacturers and installers of a wide range of insulation and conventional energy efficiency products, but also conventional heating, renewable heating products and integrated solar panels. We are quite a broad church. Energy efficiency is a big part of our agenda and that is why we are interested in whether we can help this Committee with its inquiry.
Chair: Thanks very much. Just to let you know, we have covered some areas on market deficiencies and the future of pay-as-you-save schemes. We have just started discussing the future of supplier obligations. We will send you a transcript of this morning. If there is anything you want to pick up on that we may have raised you can respond in writing on that, just to save time and going over old ground. We return to Antoinette; you were questioning I think, Antoinette.
Q151 Antoinette Sandbach: Yes, Dr Rosenow, I was just about to—
Dr Rosenow: Just to add to what my colleague said to your question. The first one is that, going forward, you will see in the Spending Review the announcement that it is going to be £640 million per year spending. That is about equivalent to the amount of money spent before the carbon emissions reduction target was introduced; a little bit more, but it is about the same levels before 2008. We are back to 2007 levels in terms of the spend, if that happens. That would be equivalent to about 0.5% of primary energy saved in the domestic sector every year; asserted about 1%, about half of the spend, would deliver about 0.5%. It is nowhere near enough for what needs to be done in terms of achieving the targets that the Climate Change Committee set out. If we just had ECO as planned, going forward, and nothing else—whatever form ECO takes, whether it is a DRO or not—just in terms of the investment that has been stimulated by ECO, it is not sufficient to achieve the targets that are in the Climate Change Committee’s budget.
Q152 Antoinette Sandbach: In terms of the design, because we have had evidence to say that CERT and CESP were much better, in terms of delivery or outcomes, than ECO. Do you agree with that?
Simon Roberts: Up to a point, but they were also dealing with what became different markets. ECO got terribly wound up with the Green Deal and some of its complexities to associate with trying to be a support crutch for the Green Deal. We are at a point where things have changed very significantly and we need to think not how do we squeeze a little bit more out of the ECO as an insulation driven measure but how do we shift it. If the Government wants to use ECO to become a fuel poverty scheme—which is effectively what they are talking about in their scheme—they need to think much more carefully about the design of it to suit that purpose because at the moment it doesn’t, but it also doesn’t suit its current purpose.
In terms of what we need going forward, we need something that brings back in—as Nick is saying—these low-cost measures. It is very difficult. We cannot do them under ECO, but we don’t want to get back into the deemed savings, with people having to do assessments in advance. Just go for outcome-based stuff: what has this done to your customer’s demand? If it has reduced it, you are on the right curve. If you are not, then you haven’t. We are not worried about how many light bulbs are circulated. We are interested in what customer demand becomes.
Dave Sowden: Can I reinforce the point that the Chairman made, in particular, about the run rates? The Government has been quite clear in its manifesto commitment that it wishes to insulate 1 million homes during the course of this Parliament, and it has set out in the Spending Review that the £640 million a year should deliver 200,000 homes per year. That is consistent with the 1 million target. By contrast, the Committee on Climate Change, in its advice to Government on the fifth carbon budget published the day after the Spending Review, said that we needed a further 1.5 million solid walls done in the next decade—the decade that starts in 2020—plus a further 2 million cavity walls. If you take that run rate at 3.5 million across 10 years and you compare it with the 1 million across five years, it is not difficult to do the maths and conclude that the run rate in this Parliament is nowhere near adequate for what needs to be done, against the back cloth of the Climate Change Committee identifying 1.5 million solid wall and 2 million cavities as the most cost-effective way, or part of the blend of the most cost-effective way, to meet the fifth carbon budget.
In this Parliament, the next phase of design of ECO needs to segue into a much more ambitious programme, not necessarily supplier funded. There are other ways of doing this other than burdening fuel bill payers with the cost, but we need to have a much, much longer-term strategy and approach to this that is not just about the next round of ECO. That leads to stop/start and uncertainty in the industry, which has proven deeply unhelpful.
Q153 Antoinette Sandbach: Are there any international comparatives that you think are a good model for what should happen, going forward, that we can learn lessons from?
Dr Rosenow: There are plenty of them. We did two reviews recently where we looked at various countries around the world. It depends what your goal is, which sector, fuel poverty for example. New Zealand has a great programme—the Warm Up New Zealand programme They say do not save on energy, just increase people’s comfort levels and, therefore, create huge health benefits. They are not focused on carbon energy savings at all in that programme.
If you are interested in the able-to-pay sector, I think the KfW scheme in Germany is a very good one; it is the largest programme that I am aware of. Utility programmes: the US have run those programmes for decades, so that will be a good place to look at. But they are also very different markets. They are regulated and not fully liberalised, so they will be very different to the UK context. Able-to-pay schemes: there are some examples, but they have only existed for a few years. There is no long track record of them so it becomes a bit more difficult.
On regulation, just recently France introduced minimum requirements for all existing buildings—not just private rented but all existing buildings—going forward, because they set out a road map and some steps for where you have to be in 10, 20 years. If you are not there, you cannot sell your building, you cannot rent it out. It is a tough measure, but it is part of the French energy transition plan and it is something that you could look at as part of the solutions. Politically it is not very palatable, but they have all the supportive instruments as well. They have finance in place. Not just saying you have to be at this level. It is saying, “You can get finance and you should not be worse off by doing it”.
Antoinette Sandbach: So they have a carrot and a stick.
Dr Rosenow: Yes, exactly
Simon Roberts: And use a tambourine to let people know when to jump.
Dave Sowden: Just to reinforce that. I have some notes here on the German scheme across the period 2013 to 2020. The Federal Ministry of Transport, Building and Urban Development is due to supply €8.9 billion in annual loans—note that they are loans, not grants—through the energy efficiency refurbishment programme. Those can go up to €50,000 per house, so they are applicable to a wide range of measures. But they seem to have taken this idea that energy efficiency is something of a national infrastructure priority quite seriously. On which subject, we are very keen to see energy efficiency much more in the forefront of energy policy making and treated as a national infrastructure priority. When you look at the kind of numbers that are circulating around projects like HS2, Crossrail and so on, despite learned reports that indicate the economic indicators are more favourable for an energy efficiency programme than some of the infrastructure projects that we are already doing, it has been impossible to get a sensible conversation with the Treasury about thinking in those longer-term timescales, and scaling this up because it is the cheapest way to meet all of our energy policy goals.
Dr Eyre: One thing I would add is that some of the US states have been a little more creative in thinking about putting together different pots of money. For example, in Massachusetts there are very large energy efficiency programmes. They are partly funded through a mechanism that looks a bit like ECO, but they are partly funded through receipts from the Green House Gas Trading programme that operates there, their equivalent of the EU Emissions Trading Scheme. They are partly funded through capacity markets, through the analogue of the capacity auction. That has allowed more than one pot of money to come together and energy efficiency is delivering on all those objectives—greenhouse gas reduction, cost reduction for consumers and capacity reduction in the energy market.
Q154 Chair: You would almost be forgiven for thinking that maybe we should be devolving our energy efficiency to Germany. Is there anything that we do particularly well in the UK versus Germany?
Dr Eyre: We invented it. We invented the whole idea of energy efficiency obligations in competitive markets in 1994, and people learnt from us.
Chair: We invented the steam train as well, but we are sort of behind for rail infrastructure.
Dr Eyre: That is my point. We were ahead, but because we are so bad at looking overseas and learning from the way other people have learnt from us and then improving things, we are behind. I am not sure there is anything for which I would point to the UK as being the exemplar.
Dave Sowden: I can think of one, if I may, but it has been abandoned recently. That is, back in 2006 the then Government set out a 10-year pathway on new build houses to get to zero carbon homes by 2016. In fact, the first milestone along that pathway was to achieve, I think it was a 26% reduction in the CO2 emissions from a new build house with the building regulations update that were due to take place in 2010. To be fair, when the coalition Government came into power in 2010 it saw that through to its letter, which then inspired quite a lot of confidence in the new-build supply chain that the following stages would be followed through. Unfortunately, investor confidence then seemed to drain away when the consultation came out on the next update in 2013 because it was quite clear that there were moves afoot to water that down.
As recently as the Budget before the election, the Chancellor recommitted to zero carbon homes by 2016 and it was almost instantly scrapped as soon as this Government got into power. So we did have it right. We did have a world-leading policy. We implemented the first step of it. That inspired quite a lot of confidence. We had members who invested and built factories on the back of that first move and were then badly let down by the watering down of the subsequent stages. So a long-term strategy, a 10-year target, is a very, very good thing but it is incredibly important to stick to your guns and see it through.
Chair: I thought for a moment there was a contradiction there, but I assume you are back in there, Dr Eyre, Mr Sowden.
Q155 Dr Poulter: On the issue of a long-term strategy, which is something that we all talked about, the general theme I picked up across all the comments is that we should not be linking the agenda to one or two particular schemes or initiatives. That seems to be a theme that has been consistent across all four of you, even where you have differences of emphasis. In that context, from the panellists, the person who came forward with a longer-term strategy was Simon Roberts, and I want to ask Simon a couple of specific questions based on that, which is the issue of reducing average demand and the setting up of a supplier obligation. A couple of questions on that. First, what sort of timeframe would you be looking at in terms of that particular demand, and would you look at penalising suppliers or incentivising them to deliver in this and, if so, what sort of penalties would you want to put in place? Then I have one final question afterwards.
Simon Roberts: It is fair to say it is a developing area of policy because there are challenges that are emerging and answers one can produce to them. Interestingly, it is something you could do straightaway because we have the data about what the energy demand is per customer, per supplier. You could publish a league table now of what the change has been between end of 2014 and the end of 2015, for example. You could publish that probably in March and start to show what the differences are that are emerging as a benchmarking exercise. You could pilot the approach you are taking to collecting the data and reporting on it more or less straightaway. If you tried that for a couple of years and if you made a clear statement that this is a policy you wanted to introduce, then the companies would start to behave in the way that they were expecting to improve their performance relative to others.
You could then use that as a mechanism for deciding how to structure both the level of the obligation in terms of what the reduction should be, but also whether you move money between the worst performers and the better performers as a mechanism for incentivising them and penalising poor performance or good performance. All of those things are possible, but the first thing to do is collect the data, put it out there and start seeing what we can understand about the way in which different companies have been performing in this respect so far and give them a clear signal this is something that we are looking to do going forward.
There is still discussion to be had. Interestingly, all the suppliers seem rather anti the idea, in spite of the fact their demand is going down. The average demand per customer is going down at the moment, so you would have thought they would be interested in a change to their market model that they were expecting to work on and went with the grain of that. But I think they are hoping that that will change somehow as the economy picks up, rather than thinking about how they become viable commercial operations in a world with lower demand. That is where we want to get them, so this feels like a good technique for doing that.
Q156 Dr Poulter: Just quickly on that. One issue that I am sure we will be coming back to as a Committee later on is carbon budgets, and also how the future carbon budgets inter-relate with individual streams or different streams. Do you think having a longer-term strategy like that, which sets out a clear direction of travel and a clear obligation on the sector and can then build in clear expectations, would be fairly easy to integrate into a carbon budget as it is set?
Simon Roberts: I think it could. I think it is easier to focus on kilowatt hours at this stage rather than carbon, simply because that is what we measure. Also there are other policies to try to reduce the carbon content of the kilowatt hours you are selling to people. In terms of anticipating the demand reductions required to meet carbon budgets, you could factor those in to the long-term trajectory you would be setting for that sort of obligation.
Q157 Rushanara Ali: Can I turn to fuel poverty? You touched on a number of issues that I am going to come on to so there may be some overlap. Campaigners say it would need about €2 billion to eliminate poverty. There is a range of numbers between €1.2 billion and €2 billion. Given the changes in the recent statements by the Government that spending will go down by about €300 million, how far off the poverty target do you think the Government will be? Some estimate 80 years. Is that a credible figure and what are your views on that?
Dr Rosenow: I can’t give you a precise figure from the top of my head and I think it depends on the assumptions you are making, but there is a big gap. I would confirm that.
Q158 Rushanara Ali: Can you say in terms of numbers of years that they are far off?
Dr Rosenow: I can’t give you a precise figure at this stage, but when you look at ECO and the reduced spending, and also the targeting of efficiencies—how many people are deemed as being fuel poor under the obligation are actually in fuel poverty—you quickly find out that it is a smaller proportion than you think it is. Of the people deemed fuel poor under the current Energy Company Obligation, only a small proportion are in fuel poverty because the criteria—are people on certain benefits or on a certain income?—are not very good proxies for establishing whether someone is in fuel poverty. You have to look at the energy performance of the property as well as other factors. That is not currently being included in the assessment of fuel poverty.
Q159 Rushanara Ali: What would you do? How would it be defined more accurately to reflect those who are—
Dr Rosenow: The John Hills definition, I guess, would be the official definition that people have been using. It is much more complex than the previous one. For fuel poverty, there is a general question of whether ECO is the right tool to deliver. My view is that ideally, for various reasons, you would use a scheme funded by general taxation and not the Energy Company Obligation to address fuel poverty. The Energy Company Obligation has regressive effects and energy suppliers usually target those properties where they can achieve the highest amount of savings for the smallest amount of money. That is not the fuel poverty sector. So I don’t think energy companies are the best actors to deliver on fuel poverty.
Q160 Rushanara Ali: Can you say a bit more about general taxation? How much would it cost out of general taxation?
Dr Rosenow: I think it would be in the billions but, again, I can’t give you a precise figure—it depends how fast you want to bring down fuel poverty—but it is certainly more than £1 billion a year.
Q161 Rushanara Ali: To reach the target?
Dr Rosenow: I would say so. Yes.
Simon Roberts: My understanding is that the next round of ECO that was announced in the spending review will be almost entirely focused on what effectively the current HHCRO is doing—to throw some acronyms around. In that sense, it can be presented as an increase relative to that, but what it shows is the weakness of thinking of energy supplier obligations as the mechanism for funding a fuel poverty programme. It may be a way of contributing to it, but it feels like it could benefit from other sources of funding going into a pot.
What we have proposed previously is that you take those various sources, you put them into a pot and you have, in effect, a competitive approach to letting contracts for delivering the measures to address fuel poverty so that a range of different parties can be involved. That could include energy suppliers, but at the moment you are creating an obligation for energy suppliers to, in some cases, use their own heating engineering teams; a nice little monopoly for them to install heating equipment in certain homes. It would be a very interesting question for the Department of Energy and Climate Change: how many more people are put into fuel poverty by recovering the cost of the future ECO for fuel-poor households from bills?
As we get to more and more expensive measures, fewer and fewer people get the benefits; they get a big lump of benefits and everyone else pays the cost. In our estimation, that puts the number of people in fuel poverty up, not down, because you are not running through enough people giving enough benefit to enough people. In a way you are almost running at a standstill if you use fuel bills as your main mechanism for funding fuel poverty works. It does not mean it should not contribute, and I would not have a problem with fuel suppliers being involved in the local schemes if they felt they had something to offer, but we have to think about creating a pot of money for fuel poverty to which there are various different contributions—as Nick was saying earlier of models from other places—and also reflect on the eligibility criteria.
We deliver schemes at a local level. We give energy advice to households—100,000 over the last 25 years or so—of energy-vulnerable people. You do not need to do an assessment along the Hills line to work out whether they need some help making a home more affordable to heat. But we can’t go into a home and know what they can get out of a scheme, because you have to work out whether the computer will say “Yes” or “No” when you feed in their eligibility criteria. That seems mad, not only because that person may well qualify as fuel poor anyway—so if we collected the data they would have done—but they may have qualified as fuel poor under the data, but not on the eligibility criteria. Also, in five years’ time we would need to find them anyway because they will need the upgrade in their home. It feels like we need a programme that is much more about doing what is needed when you find the property, win the confidence of the householder in it, and move it forward. Some of the work we have been doing with the health sector and others is a really good way of opening that market up and opening up that approach to targeting, but you do need the scheme to go with the grain of that; shake hands with it.
Q162 Rushanara Ali: You talked quite a bit about data. What else needs to happen to make the data more accurate, in terms of reflecting those who fall into the specific category of fuel poor according to the Government’s definition and the more complex, more accurate ones by Hills? What specific measures do you think would be helpful in getting to the right data, looking forward?
Simon Roberts: You need about 30 points of data for a property to work out whether someone is in fuel poverty. That is not a mechanism you should be using for driving a scheme. If we worked on something that was much more obviously needs based, so you may have someone like Ofgem E-Serve assessing programmes for the quality of the work they are doing to assess the eligibility of people; not eligible by some ticking of boxes for what benefits they are on or what data has been collected, but in terms of the assessed need by expert people working on the ground with these vulnerable people. If you use that as a mechanism for getting people into the scheme, I think that would transform it compared with this very data-focused approach that, in effect, creates a world where you have “computer says yes”, “computer says no” houses and a whole load of people stuck between the two who need support and who can’t access it because we do not have the data, or the analysis available does not come up with the answer that the householder needs.
Dr Rosenow: I agree entirely with Simon. The whole approach of identifying someone at the doorstep and having to fill in some paperwork is wrong. It would be better to have something like an area-based scheme, where your local authorities can play a much larger role and just say, “This area has a high degree of fuel poverty” and everybody who lives in that area can benefit from a programme. You avoid that whole stigma of going round people’s houses and asking them, “Are you on benefits? Are you poor? Are you deserving?” That is the wrong approach, and there is lots of evidence that suggest that is not the most effective way of identifying people in fuel poverty. The whole idea that you can use better data to identify individuals more precisely as being in fuel poverty is the wrong direction. It has to be more on certain areas rather than specific properties.
Q163 Rushanara Ali: There is kind of a consensus that the supplier obligation helps, but it is not going to achieve the fuel poverty target. What would be your suggestions of the policy mix? You have alluded to some of them. Along with investment—you mentioned tax revenue, which is unlikely to be forthcoming—if you could think about some numbers but also what are the examples from elsewhere that would help to achieve the target? I would press you once again on years. This 80 years seems pretty dramatic and shocking. In your view, is there a timeline you can indicate in your assessment of how far off we are going to be in meeting the fuel targets?
Dr Eyre: We have to accept that energy efficiency programmes are only ever going to be part of the solution because, under the new definition, income inequality is an important driver and that is not within the scope of what we are talking about. In my view, energy efficiency programmes should be targeted on energy inefficient homes rather than on a particular category of people living in them. We will have to make every home energy-efficient in the coming decades. The 80 has to be wrong—that is clear—because we should have upgraded every home in 80 years.
Simon Roberts: We should have done, but whether we will have done is another matter. I would not quibble with that. It is a lot longer than it needs to be, in terms of meeting the fuel poverty strategy target of bringing every home up to the level by a certain date. It is not enough to do that. I think the danger is where we say, “It is not enough” and either give up on it or don’t put the work in to design properly what is there and create something that extra money could be added to. That is where you need to get suppliers out of the way a bit, because if they have got it, there is no way that Treasury is going to throw a whole lot of money at suppliers and say, “Can you do some extra?” If you throw it at local authorities, but the suppliers have part of the pot, that creates a kind of bizarre bidding and partnership-development war between the suppliers and the local authorities, and then you have contractors in the mix as well. We need something that creates a mechanism that further funding could be added to. We start to build a system that can deliver it and the eligibility criteria and mechanism of finding people, so that you can add to it as you go forward. At the moment, it is clearly not enough. It may be slightly more than we have at the moment, but that is not the point. There needs to be far more spent. We should create a system that could do that.
Q164 Antoinette Sandbach: I am interested in the area approach. I think that has been tried in Wales, but without the survey of housing stocks, so I query how effective that is at hitting the homes that really need it. One of the groups that seem to miss out is the rural fuel poor. They always seem to miss out. How do you tackle that particular problem? If you go for the area-based approach, you end up going to the areas where you have high densities of people and older housing, pre-1940s, in rural areas just seems to be passed by.
Dave Sowden: Perhaps I can answer both of the points in the same go. I completely agree with Nick’s point that if we started looking more at the properties themselves, and not worrying too much about who is occupying them, if we are investing in those buildings, with an infrastructure-type concept, then we are permanently insulating ourselves against pricing shocks in the future, irrespective of who the occupant of the building might be at any given time.
According to DECC’s fuel poverty statistics—the latest figures are from 2013 so they are a little bit out of date—there is an incredibly good proxy simply on the energy rating of the properties. We have an increasingly rich database of energy ratings of properties because every time a property is leased or sold it has an EPC done. Whether you agree with the methodology for EPCs or not is a different matter, but that is something that we should fix rather than say it is the wrong thing to do. In 2013, 31% of households living in G-rated properties were in fuel poverty, with the average fuel-poverty gap being £1,274 per annum. That is quite a lot of money for a family on a low income. By comparison, just 2% of those living in properties that had EPC ratings A to C were fuel poor and there was an average fuel-poverty gap of £370. When you look at where the centre of gravity of the focus from the Treasury and No. 10 is on energy policy, the Spending Review was very proud to point out that they are going to save people £35 a year by the end of the decade, primarily by cutting an energy efficiency programme when, if we were treating this expenditure as capital rather than revenue, we could be lowering those gaps from £1,270-odd a year to £370-odd a year; still not enough but, boy, would that improve the quality of life of some of those families.
The final point you mentioned was the possibility of using tax revenue, which is the concept of infrastructure spend. At the moment, £100 billion of infrastructure investment—let’s remember it is investment because it has a return; it is not spend, it is investment—is earmarked for infrastructure spending, and the Government has just set up the National Infrastructure Commission. There are certain projects that have the go-ahead to a greater or lesser degree—HS2 is very much in vogue politically; Crossrail is already under way. I repeat the point I made earlier that energy efficiency outscores both of those substantially. It is not just me saying that. It is learned consultancies that do this sort of work for the Treasury: Verco, Cambridge, Econometrics, and Frontier Economics. They are all saying the same thing: this is a good deal for the country to invest in. It improves quality of life; it re-circulates money back into the economy and it lifts people out of fuel poverty. I think we could be looking at a more area-based approach.
A final point—your concern about off-gas-grid properties. Of course in Scotland the propensity of off-gas-grid properties is higher and also in Scotland—same stats based on the same year—39% of people are in fuel poverty. Mr Chairman, I checked the stats in your constituency. I think you have one of the worst in the country. Some reports have it as high as 71%. Those parts of the country are characterised by a lot of solid-wall, off-gas-grid, hard-to-heat properties. The problem with those is that per unit they cost a lot more to tackle so you then don’t get efficient carbon returns. There are all sorts of complex things in the mix here for any Government to deal with but, at a macro level, it does seem to outperform almost all the other things we are investing in as a country.
Chair: Before I return to Rushanara Ali, there is the point that Simon was making earlier: the gains are sometimes so great in these rural areas in front of the carbon gain, but the amount of paperwork to justify it is almost putting off the next person in the supply chain, because they spend more time justifying the gains, which seem so big to a bureaucracy that they are not interested in carrying out that work very often. Rushanara Ali?
Q165 Rushanara Ali: What is your view of the Government’s £30-a year reduction when the investment is being reduced substantially? Would you say that is pretty irresponsible because, ultimately, many people will remain in fuel poverty and this seems like a symbolic gesture compared with the amount that could be saved through investment?
Dave Sowden: It has to be a correct objective to get the costs of people’s fuel bills down.
Q166 Rushanara Ali: But that is not what is going to happen according to your own numbers.
Dave Sowden: Indeed we are missing an opportunity. We need to separate out here whether levying the investment in energy efficiency on bills is the right thing to do in the long term anyway. Our members would certainly want to see, in the long term, that this comes off fuel bills and is funded through other mechanisms, recognising that there is a political difficulty with that in the short to medium term. But, for the moment, let’s lift ourselves out of the detail of who funds it or how it is funded, whether it is done through suppliers, whether it is done through general taxation. UK Plc or the general public eventually pays for it one way or another and, at that macro level, it is a very, very good investment.
If the country was run like a company we would be throwing every ounce of investment we had at this because the economic returns are so good, let alone the social returns, and we have not even started to factor in the fact that, when you lift people out of fuel poverty, you give them a warmer home that is usually less damp and you get significant benefits in reduced visits to the GP, better educational performance from children and so on. None of that is costed into DECC’s models in justifying any of this.
Simon Roberts: The nature of those calculations needs a bit of unearthing, but I don’t think there is time to do it or that we have the data available to do it. The original argument for an energy supplier obligation—not necessarily one focused on fuel poverty—is that energy saving is cheaper than energy supply. You need to intervene in a market that is only providing you with energy supply so that it starts picking up all those measures that are cheaper. That does not apply in the fuel poverty case because we are not in that sort of world. It needs unpicking, but basically we should be constructing a market for energy suppliers where it is in their interest to invest as much as possible of their customers’ money, which is ultimately the money they have, into those cheaper-than-energy-supply energy saving measures, which is where the demand reduction obligation focuses. Then overall bills will come down. They might have to recover more per unit price, which is something we all need to get used to—we should focus on bills, not individual prices—because obviously they have fixed costs to recover over a smaller number of units. We must get to a point where the market that we have created here, the liberalised market, is correcting that market failure. If we do that, then we should not be in this situation where we are arguing about how much the energy saving obligation should be. The bigger it is, the more it will reduce bills, is basically the way we need to think about it, but that is not how it is being constructed at the moment. Because we are focused on fuel poverty, it conflates a number of different issues, which is not helpful.
Dr Eyre: Simon has explained the general point very well. I would just say, with respect to the £30, my understanding of it is that it is not a cost-benefit analysis, it is the costs. I think it is bordering on the dishonest to present it as a cost-benefit analysis.
Dr Rosenow: Also on the £30, if you do the calculations, it can’t be per year because the current spend on ECO is about £800 million per year and the new ECO we just heard is £640 million per year. That is £160 million per year off consumers’ bills and there are 25 million households. If you do the maths you end up with a figure much, much lower than £30 per year. The result is more like £6.40 is the result if you calculate it that way, so over five years it is £30, but not per year. That might be something worth looking at in more detail, but I don’t have the figures from the Treasury at hand.
Q167 Chair: Some interesting things. We must make sure that we use the language correctly—“spend” and “investment”—and your argument about getting energy efficiency investment out of bills. Would the panel agree with Mr Sowden’s point about getting this out of bills in the long term—maybe through more general taxation?
Simon Roberts: It depends which measures you are talking about trying to stimulate. These low-cost measures that are cheaper than energy supply—there is no problem with them being on bills except that we have not constructed a market and placed obligations on suppliers, or a market model on suppliers. It means they are chasing after those low-cost energy-saving measures so they do not have to buy supply.
Q168 Chair: You have no problem with funding coming through the bills.
Simon Roberts: I would be looking at a much more progressive approach to funding fuel poverty programmes, which would be through general taxation, simply because if you put the cost of those programmes on bills it is a regressive measure. You end up with more people fuel poor as a result, not fewer.
Q169 Chair: Is that shared round the panel?
Dr Eyre: Yes. We should be trying to construct an energy market that delivers energy services as cheaply as possible—not energy kilowatt hours, energy services—and obligating some level of energy efficiency or demand reduction is clearly part of it. I don’t think there is any evidence to show the contrary. When you add to that the environmental benefits, it simply strengthens the case. The only place I think people see there are issues—fuel poverty is a classic example, trying to fund a social programme from energy bills—is that it is being done as a matter of convenience rather than a matter of principle.
Q170 Chair: Mr Sowden, you said there were further benefits, such as the health benefits, fewer visits to the GP, better educational attendance—that were not calculated in DECC’s model. Would you be able to provide the Committee with evidence and numbers on that later? I think it would be quite useful. We often hear about this, but we live in a bean-counter society, and have for quite a number of years, so if you can align some beans in such a way that points to a certain argument you might be making to the Committee, that might be useful.
Dave Sowden: I am happy to write to the Committee afterwards and provide that. We have done some work on that and we do have some data on it.
As a brief aside, in the coalition Government this was something that the previous Secretary of State had started to explore. I think perhaps it was seen politically as something of a land grab for NHS funding by the Department of Energy and Climate Change and so got tied up in Cabinet politics. Nevertheless, Ed Davey did manage to get a boilers-on-prescription scheme up and running, where doctors were able to specify in a pilot scheme that a household could have a boiler installed on prescription and that kind of thing. Trialling that sort of mechanism, looking at the benefits to the NHS, could unlock a lot of cost saving to the NHS and justify, again, what should be regarded as an investment for the country, not a cost.
Chair: Thank you. We will leave that there for the moment.
Q171 Dr Poulter: Much as I would like to explore that previous point further, I will not digress and look forward to your evidence.
Turning now to the issue of local authorities and the potential of local authorities as a delivery mechanism, would you say that energy efficiency programmes should be decentralised, and what are the potential challenges and benefits of that sort of approach? An open, broad question.
Dr Rosenow: The problem in the current landscape is that the local authorities do not have the capacity and the staff to manage those problems. That could be rectified. If you speak to local authorities, they often say they don’t have the people who can deal with all those issues because of the cuts to their funding. The people who were responsible for energy and climate change and carbon reduction are often the ones who have been made redundant, so there are some issues around the capacity building that would be required. But there are some very good examples, like Kirklees for example, where they have run successful local energy efficiency schemes.
I think there is a big role for local authorities. Will it solve the main issue of funding and demand? I don’t think so, necessarily, but they would be part of the delivery mechanism. I think there is a role for more localised delivery of those national programmes. Simon, I think you said before that there needs to be a national framework, but within this framework there would be a local delivery mechanism. I think that is very much the case. You would not just say it is the responsibility of local authorities; you would still need some national mechanism to provide the funding and the incentives. But I think local authorities could be the ones who were much more involved in identifying who benefits, working with local tradesmen and so on and successfully promoting the programmes.
Simon Roberts: To add to that, I would see local authorities as crucial partners. It is not necessarily something where in every case they have the capability or understanding to be the lead partner. What we have seen in a number of cases is, in effect, the sort of monoculture that you get from central Government delivery happening at a more local level. Because the level of understanding is not there and, also, sometimes because the programmes of funding that come their way end up with lots of strings attached—how they have to do it, when they have to spend it by and it has to mimic the Green Deal Home Improvement fund or whatever—it ends up by just reproducing at a local level some of the faults of nationally delivered programmes.
I would not be purist about whether it was local authorities as opposed to local partnerships and local initiatives that can deliver on this. One of the challenges in the last Government, or even in this Government, is that when there has been funding available for local initiative it has all been funnelled through local authorities. I think that that crowds out the initiative that other agencies—I declare my own interest as a local charity working in this field—can bring forward in partnership with local authorities, but where that capacity may reside in other organisations. From the conversation we had earlier, we have to have that local dimension and that has to be a key driver of it. If you just devolved, I think you would end up with even more of a patchwork of provision across the country than you have at the moment.
Dr Eyre: I broadly agree with Simon. I would have the opposite bias, as a former local councillor, but I agree with the conclusion. In essence, some local authorities would do a very good job, particularly some of the bigger city authorities who are already working in this area and have the capacity. Some smaller district councils would be very challenged if they were to be given complete responsibility for this.
Dave Sowden: From the supply chains’ point of view, local authorities can be excellent or very poor partners in the delivery of energy efficiency schemes, but the most important thing is to get the national framework right so that local authorities can play their role as a partner. One example close to where we are based in Birmingham is that under the first round of ECO, something called Birmingham Energy Savers was launched with great fanfare. It is all but over, following the cuts that were announced to ECO in 2013. If the national policy framework gets tinkered with, then local delivery gets affected. There are some fantastic schemes out there, far too many for us to keep a handle on. Many of our members are involved in them. The market is very good at innovating and bringing in public-sector partners if it has certainty over national policy and where that is going.
One final thing that I think is worth saying about local authorities is that, under the Planning and Energy Act 2008, which was a Private Member’s Bill sponsored by Michael Fallon, local authorities still have the legal capability to specify in their local plans that, as a condition of planning permission, higher standards of energy efficiency should apply to new build developments and/or minimum energy contributions to be made from on-site renewables. Something like 200 local authorities around the country have exercised those powers and they have been exemplars in driving forward energy efficiency standards faster than the building regulations. There is a move to repeal that Act. I think that would be a very regressive step.
Q172 Dr Poulter: Very quickly, Kirklees was mentioned. Clearly there have been some developments in Kirklees in terms of delivery of energy programmes. I want you to pick out what has enabled that to happen and how easy that would be to replicate in other local authorities, because that is quite pertinent to this discussion?
Dr Rosenow: My understanding is that in Kirklees they bundled up a whole range of funding streams. So I think when they started they had funding from CERT, from the supply obligation. They had their own funding and they had third party funding, and they bundled all that up and offered anyone who lived within the area free insulation. That was their sell, I think, and that was a very clever way of approaching it. But I guess the issues cannot be replicated in the current landscape, where you have reduced funding for supply obligations and there may be less funding available to local authorities in general. It is probably difficult to replicate it, like for like, but I think the idea as such could be replicated.
Simon Roberts: Can I just add to that? We did some work back in 2005 for DEFRA and DTI, which covered the energy space at the time in the role of local action in delivering carbon emission reductions. We looked around for a lot of different examples and what we found was that, behind every single one, there was what we described as a wilful individual who was pushing the initiative. Interestingly, that led to the National Indicator 186, which was about measuring low carbon reductions in local authority areas. That moved it from wilful individuals into the less wilful, and that is what we need to do. If you are relying on cloning wilful individuals, you are going to have a problem.
You need to create a framework where local authorities have not only the powers but also the responsibilities and are measured against what they are doing in this field. If you simply devolve and say, “It is up to you. Whatever you want to do, do it”, as I say, we will end up with a huge patchwork, and you will be back to a small group of very well-motivated people putting in the extra time to get the councillors on board or, in some cases, becoming councillors and seeing it through. You will not end up with a national programme that you could call anything like that built out of the individual local components. It would be a complete patchwork and very threadbare in some areas.
Dave Sowden: There was something called the Home Energy Conservation Act, which has now been repealed, which required local authorities to report annually on progress towards meeting household energy efficiency targets. That is no longer there. One of our members, a company called Kenaf Insulation, a big insulation manufacturer, has launched their own local authority index. That is a scoring method that basically produces a league table of local authorities for how well they are performing on a number of environmental measures. It is quite interesting that, when those sorts of things are published, you get an element of competition between local authorities, particularly neighbouring local authorities, all trying to outdo each other. I think there are things that can come not necessarily from the policy framework. Industrial initiatives such as that can help as well, and there is one example of somebody in the industry trying to play their part to tease that discussion along, perhaps acting as a catalyst for Government putting a more structured framework in place.
Q173 Chair: Thank you. To give some thought to the type of incentives to encourage UK households to install energy efficiency mechanisms, we have heard that adjusting household stamp duty or Council Tax according to energy efficiency could be used as a possible incentive. What is your view on that and are there any drawbacks to doing that?
Dr Rosenow: I don’t think there would be any drawbacks. It has not been tested. I am not aware of anywhere internationally that this has been tried, so I think you just do not know what the response will be and it depends on the scale of the incentive, obviously. If you reduced Council Tax significantly or stamp duty for more energy efficient properties, you would get some sort of response, but I don’t think there is any evidence, or at least I have not seen any evidence that suggests what that response would be. I believe those mechanisms can be supportive. I don’t think they can, by themselves, deliver a large scale energy efficiency programme.
Q174 Chair: Over and above Council Tax and stamp duty, are there any other mechanisms you would recommend to stimulate the initiative?
Dr Eyre: There is some limited evidence on Council Tax. British Gas ran a scheme, essentially as part of an energy company obligation, with some local authorities where they gave the rebate to consumers via the local authority. Essentially a reduction in Council Tax would be the best way of describing it, I think. They found it was more influential to get the money through the local authority than directly from the energy company, so there is some understanding of that through behaviour economics. People respond to different incentives from different people in different ways, and I think there is the logic in most people’s minds of a tax break for a property-related tax rather than a non-property-related tax. I think there is some evidence.
If you do it through Council Tax properly, then obviously there are serious problems about how that is done at a national level. Whether Government or the devolved Governments could and should force different local authorities to do the same thing is obviously an interesting question. Stamp duty can work, but clearly there are a lot of properties, particularly some of the properties that might need this work most, which are now outside stamp duty.
Q175 Mr Alistair Carmichael: I am fascinated by this. I think it is an important area. Obviously, it is going to be one of the levers. It is never going to be the big bang, is it? I would have thought stamp duty was the obvious place to do it, apart from the fact that, as we say, a lot of the properties that need improvement are below the threshold. Psychologically, it comes at the time when there is a pressure on people’s budget: you have the conveyancing fees; you have the moving costs and you have all the rest of it. You are moving into a new property. This is the time to do improvements, and I think it is a point also where people will notice the benefit. The danger is that if it is £10 a month or £20 a month it tends to get lost and banked quite easily without really being appreciated. Given that you are at the margins here, I would have thought stamp duty was the place to be doing it, but you are the expert.
Simon Roberts: I think the most important thing is you calibrate it so that people who are in less efficient properties, who do not improve, also pay more. Then it can be revenue-neutral. The other thing, in terms of driving demand, is where I think bringing in an obligation on suppliers to reduce demand would make them very interested in changing the nature of their relationship with their customers. With the Energy Company Obligation, at the moment they are not interested in whether it is their customer or anyone else. They just do the measures. A demand reduction obligation would mean they became very interested in their own customers’ energy using behaviour and the adoption by their customers of low-cost energy saving measures, better behaviour and so forth.
Coming back to the discussion we were having earlier about solid wall insulation, I also think the social norm activities, like the Green Open Homes programme, is a very cost-effective way of making people who were the next in line to do this sort of work realise it can be done, understand how it can be done, talk to people who have had it done and get the stories from them. That creates new social norms about what is expected of people and homes in the 21st century. I think if we can get those things going and a shift in the business model of suppliers, you would see a kind of push as well as a pull coming through.
Dave Sowden: I think the point that you make about stamp duty is a valid one, but I think it is an illustration of a wider opportunity that exists in energy efficiency to catch interventions. Moving house is one intervention, and you are absolutely right that people tend to want to change things, want to do things then, so there is a fantastic intervention opportunity there.
The other intervention opportunity that exists around 1.5 million times a year in this country is when people’s boilers get changed, and so you have what is notionally an energy expert crossing 1.5 million thresholds a year in this country. But that conversation is never about energy. It is about a white box on the wall that is not working. It should be a wider conversation about energy and what happens today is that, broadly, a like-for-like replacement gets fitted. It might be a more efficient model, but is the heating system calibrated correctly to allow it to work in the most efficient way? Normally not, and certainly there is no conversation taking place with the customer about very, very cost-effective other things they could be doing to their property at the point they have an expert or what could be a notional expert there.
If you were in a position where we start to tighten regulation at these intervention points, over time, with plenty of notice, then you could start to make progress by, for example, at some point requiring radiators to be balanced correctly, requiring modulating heating controls, requiring thermostatic radiator valves to be put in place. All these significantly enhance the performance of heating systems and maybe three years on, five years on, you tighten the regulations even further to say, “If you have unfilled cavities then you have to have them filled within a period after you change a boiler”. You certainly have to have it done if you put a renewable heating system in place, because it is a requirement to receive renewable heat incentive payments.
Paradoxically we have regulations in place that require you to have a more energy- efficient building if you put a renewable heating system in, but not if you put a fossil fuel heating system in and that takes us the wrong way rather quickly. There are these intervention points and moving house is one of them, changing boilers is another. If we can catch some of those natural discontinuities in consumers’ lives, and intervene effectively and in a thoughtful way, then I think we start to make much more rapid progress and possibly even reduce the need for subsidy, which certainly in the current environment is something of a dirty word.
Q176 Mr Alistair Carmichael: Before you arrived we had an interesting discussion about educating the supply chain. Every year I have a man come to service the boiler of my house and every year he tells me what a waste of time condensing boilers are. I know that come the day that our boiler is beyond service there could be a nasty, difficult conversation to be had, but it illustrates the point, I think.
Dave Sowden: There are more enlightened installers out there, is all I could say.
Simon Roberts: Are you saying you do not have a condensing boiler?
Mr Alistair Carmichael: I do not have a condensing boiler.
Simon Roberts: Then you are missing out on some major energy savings.
Mr Alistair Carmichael: Yes, I know. He is a neighbour. It is a small community. It is a difficult story.
Chair: I never saw this Committee as being one of those famous intervention opportunities. Clearly it is, and we are intervening in the Carmichael household perhaps a little bit too much.
Q177 Dr Poulter: Looking briefly at sending the right message and engaging consumers and, more generally, the public about energy efficiency measures and some of the schemes that are available, what do you believe is the right message? Should we be talking about the carbon agenda that is something perhaps difficult for many consumers to immediately buy into or—and I am perhaps leading you in my question here—should we be prioritising comfort and home energy bills as an immediate target?
Dr Rosenow: I would like to respond to that because there is some interesting evidence coming out of, I think, New Zealand, where they tested different messages. One message was, “You can save money on your bill if you install energy efficiency”. One was, “You can increase your comfort levels”, and one was, “You can improve the property you are living in so its value will go up”. They found that by far the most effective message was the comfort one, so if they said to people, “You can increase your comfort”, that was when they had the highest response rate. I think there is a lot to be said for that sort of evidence. When you look at the KfW programme, again, it is marketed very much around comfort and the quality of the living environment you are in. I think the focus that we had especially with the Green Deal on the financial proposition, “You can save lots of money” is limited. You are limiting yourself to a very small segment of consumers, so I believe refocusing the engagement process more towards comfort, quality of life and the value of your property would be much more effective than just focusing on the financial gains. When you go into deep retrofits, the financial gains become much smaller, and even negative at some point, and you do not recover your costs, so I think for the long-term perspective we need to refocus the way we sell those programmes to consumers.
Dr Eyre: I would just add a caveat by saying that any question about consumers as a generality is very difficult to answer, because there is no generality of consumers. Some will be influenced by all those different messages you mentioned. Marketers understand this very well. They segment markets and they work out what messages are required for different people. That has been done. Various segmentations have been done by DEFRA, by the Energy Saving Trust.
We understand reasonably well what messages might be effective for different people, but what is critical is getting the right message at the right time. There is no point in knowing what sort of fridge you want to buy until you are buying the fridge. You need the right message at the point of sale. You need the right message at the key point of intervention and you need more than just messages. You need practical, pragmatic advice.
Simon talked about open homes programmes. That is where people really learn what installers will do this, how did they do it, what are the problems. That level of granularity of advice on what is appropriate to you in your particular circumstances rather than a general marketing message is probably more important for this sort of intervention where you are talking about real hardware interventions in people’s homes.
Dave Sowden: I agree with the point about comfort being important, but there is a hierarchy of needs here. Comfort is important if your existing state is that you are uncomfortable and I can imagine there are plenty of people out there with quite expensive heating systems who are not in discomfort. Their property is heated adequately. It is just heated relatively inefficiently. How do we learn through membership of Select Committees? How do we communicate with that marketplace?
If we can learn any lesson from failed policies, let us learn the lessons of the Green Deal, because the Green Deal was supposed to be something that was for the able-to-pay sector and, therefore, by definition a financial equation came into it. We have run some post-mortem models on the Green Deal since the event. Cavity wall insulation, for example, is one of the prime measures the Green Deal was supposed to encourage the take-up of. Typically in an on-gas-grid property it yields a return of just over 5% per annum on the investment cost. We were expecting people to pay 7.5% interest on something that was only going to earn them 5% and we wonder why it was not taken up.
Simon Roberts: You mean solid wall insulation, not cavity walls.
Dave Sowden: No, cavity. These are DECC’s figures on cavity. On a gas system with an efficient boiler, cavity wall insulation yields a payback of about 11 years, 11.3 years according to DECC’s stats. I am happy to share these, put them into the public domain and have them peer-reviewed. The only one that gives you a compelling return is draught-proofing. But that able-to-pay sector needs policy propositions where the financial equation makes sense and it simply did not for enough people with the Green Deal.
One of the things we have talked about is fuel poverty here. We have not talked enough about the able-to-pay sector because that sector has demonstrated, if we look at the relative success of household solar panels, that, when an adequate financial incentive exists, at times it was over-attractive. We recognise that but when it is an adequate financial incentive, then people tend to take it up in their tens of thousands and it is unlocking that able-to-pay market that will help certainly make progress towards the carbon targets in particular.
Simon Roberts: Can I just add a brief comment about the messages? I agree with Nick. You have to suit the message to the person in front of you, not assume you can do a kind of broadcast. I think it would be helpful if we did not keep talking about supply gaps but talked about demand overreach in terms of winter pressures on the grid, because a lot of the problem is caused by the level of demand we create, not by the lack of supply, though obviously that is a delicate balance. The message is there. You also need to think about the messenger, and that is where we come back to local supply chains. Your boiler engineer is a messenger who has a certain message that is inaccurate, out of date, not in keeping with his trade association, and he probably ought to be struck off the Gas Safe Register for misinformation.
Mr Alistair Carmichael: Not the gas.
Simon Roberts: Sorry, yes, I fell into that one. But even so, he is probably on the Gas Safe Register. I think you need to think about the messenger as well. For example, in areas like fuel poverty, health professionals, social care professionals, people who are encountering people in need, are routinely much better than trying to somehow create a signal above all the noise in people’s daily lives to say, “There is something else here that you ought to be interested in that you have shown no interest in for 20, 30, 40, 50 years”.
The only campaign that ever had any resonance with the public was the Save It campaign back in the 1970s, when lights were going out because of the power cuts at that time. We will not go into the reasons why there were power cuts, but they were kind of key. In Japan after Fukushima there was a massive programme, a very needs-driven programme, and they had a 15% reduction in their electricity demand because they said to people, “Stop wearing suits in the office. Come in casual clothes”.
There is a lot of evidence that where there is some sort of crisis you can do it and you can get very big take-up like that. There is also evidence from the water industry. I think Thames Water had a very successful campaign around leakage by pointing out the costs associated with it to their customers. Energy efficiency is invisible to most people. We know it does not resonate for anyone. While we are trying to make it sexy and visible, we should be getting it into the work of people who are turning up on your doorstep to do work—people who you are encountering anyway who have an energy-related interest in how you are living your life, in the case of health professionals, or the people going into your home fixing your boiler, the builders you want to do improvements on your home. Those are the people who can carry that message and reinforce it rather than assume you can create some unifying, simple top-down banner for everyone to work under nationally.
Q178 Dr Poulter: On the able-to-pay sector, the point that was just raised, obviously you have that broadly for homeowners and then you have private landlords, a group that we will come back to. There are a clear number of changes that are going through in the buy-to-let rules in terms of, I suppose, turnover now being taxable rather than income. The EPC certificates are coming in—which we are going to come to in a moment in the questioning—for private landlords. That would strike me, given these changes, as a particularly challenging route now to incentivise to invest in some of these measures, and I wonder what your thoughts are on that.
Dave Sowden: That is precisely why the Government has chosen to go down the regulated route with the private rented sector. So it is not a case of incentivising that market, it is a case of requiring it to do something. Beyond a certain point—I cannot recall the precise details—it will be illegal to let a property that is below a certain energy rating. It is as simple as that, so the landlords have no choice. That gets over the so-called landlord/tenant problem, where it is the landlord who would provide the capital and do the upfront investment but it is the tenant who takes the benefit.
I lived in a flat some years ago. I could not even persuade the landlord to pay for a hot water cylinder jacket, £35, because he said, “Your tenancy is only six months and I cannot put your rent up enough to cover the costs of doing it within that period”. So you have that disconnect. It doesn’t exist just in the household sector. It exists in the non-residential sector, in commercial buildings as well to a large degree.
We don’t think the Government is going fast enough on the PRS regulations. They could be more ambitious, but having said that, it is a helpful step forward. It is much harder to introduce that into the private sector, and I guess policies like the zero carbon home regulations, as they were, even the rule to bring in mandatory condensing boilers back in 2005, tend to work when there is a buffer between the policy maker, the politician, and the voter. In the case of condensing boilers, that buffer was the installer. “Well, it’s not my fault, Guv; I’ve got to do this. I can’t buy a non-condensing boiler down at the plumbers’ merchants any longer”.
With zero carbon homes, the buffer was the builder sitting between the Government and the punter. In the case of the private rented sector, it is the landlord. It is not directly voter-facing. As soon as you get into introducing regulatory requirements directly on people who own their own homes, they are immediately being impacted by a policy decision that they might not like and you get unhelpful labels like “conservatory tax”, for example, to describe things like the consequential improvements proposals we had in the last Parliament. It is not an easy political sell, but, unless we do make steps to regulate some of these measures into existence, we are simply not going to grasp the economic savings that are available. We are certainly not going to meet the carbon targets. It becomes a choice between subsidies on the one hand to change people’s behaviour or regulation on the other, and somewhere something has to give and we need an intelligent blend of those two for that able-to-pay sector.
Q179 Mr Alistair Carmichael: We had the example earlier of the Disability Discrimination Act, where there was a 10-year lead-in, so everybody knew it was coming. The replacements and the refurbishments were done over that period and the pain was spread.
Dave Sowden: Industries are very good at responding to enough notice to invest, to innovate and to deliver against what Government expects. It is when things chop and change that it is very unsettling for investors and very unsettling for the market, so a 10-year plan is fine, but you rapidly lose investor confidence if you start to deviate from that.
Dr Rosenow: Could we go back to the PRS question? I gave evidence a few weeks ago at the All-Party Parliamentary Group for the Private Rented Sector and they are very worried about the scrapping of LESA, which I mentioned before, and also the uncertainty about the Green Deal, because I think one of the conditions in the PRS regulation is there is no upfront cost to the landlord. Now with no financing mechanism left there is a worry that landlords will just say, “Look, there are upfront costs and we are not liable. We don’t have to implement the minimum standards”. So there is a big question mark over whether the PRS regulation will bite, given the recent policy developments. It is just something to add on. But I think your reasoning why they introduced this is exactly spot on because it is so difficult to reach out to the private rented sector, for the reasons they have stated.
Q180 Chair: You are indicating that regulations do not go far enough in the private rented sector?
Dr Rosenow: Precisely, yes.
Simon Roberts: My concern would be policing and enforcement. You can have whatever regulation you want, but if no one at a local level is checking what is going on, and we are relying on tenants to report problems, in what is effectively a rather fragile situation in terms of their relationship with the landlord, I think we have to think about how that enforcement and policing works and whether it is consistently applied around the country. We know that it is a sector where if people can find a way round the rules they will and we need that enforcement working very effectively.
Q181 Chair: A very good point, thank you. We have a final question here as time is pressing, of course, as it always does on these occasions. Do you think the zero carbon homes target should be reinstated?
Simon Roberts: Yes.
Dr Rosenow: Yes.
Dave Sowden: Yes.
Dr Eyre: Yes, with the caveats about the way it was designed, that they were not all zero carbon homes because you cannot get zero carbon in very dense urban development.
Q182 Chair: What sort of timeline, 2016 or when?
Simon Roberts: As Dave has been saying, you have an industry that was expecting that, so it is not like suddenly you might have to get back on a horse that was tied up and left outside for a while but it is—sorry?
Dave Sowden: And starved.
Simon Roberts: And starved, but it should not be that we need to suddenly set out a much longer timescale.
Q183 Chair: But the horse is still there, essentially, to sustain the metaphor. The saddle is still on the horse. It is just that it is still tied.
Dave Sowden: I am not convinced it is. I think we will see a return to this becoming more of a focus next year. The simple reason for that is because the second European Energy Performance in Buildings directive requires near zero carbon buildings by the first year of the next decade, so this is not something the UK Government can ignore for ever. If we are to help with a sensible pathway for the construction industry, which is staged and managed, then they need to be thinking this through and consulting next year on what that pathway looks like.
Simon Roberts: The extra cost has been the argument for getting rid of the target. That is because we are thinking about it as a cost rather than as an investment. If we see it as a long-term return of making houses more energy efficient, in terms of its stimulus for the economy, it would be far more positive than the small saving we will get on house builder costs now.
Q184 Chair: You have framed my final, final question. Was this a spend or was it an investment? I think the indication we are getting from the panel is that zero carbon homes would be an investment as opposed to a spend. Do you agree with that?
Dave Sowden: Absolutely on two counts. The first is the way the Government analysed the numbers; when they put through the 2013 change we pulled apart the impact assessment and the justification for watering that down was that it would cost house builders—I forget the precise figures; happy to supply them afterwards—something in the order of £350 million across the three years between 2013 and 2016. What was not considered relevant in that equation was the net present value of the lower bills that the occupants of those new houses would enjoy for ever. That was not taken into account in the decision-making. That is contrary to the way the Treasury’s own Green Book says you are supposed to inform policy decision.
So, first, let us have an honest discussion based on the real numbers and a proper analysis. Secondly, of course, every home we build without maximising the opportunity to lock down the energy bills creates a future retrofit need to lock down the carbon footprint of that building because we will have to do the work eventually and it is far easier to do these things at the construction stage when you have the diggers on site, when you have the architects and the designers involved.
Chair: Thank you very much. Thank you all. Thank you, gentlemen, for your time this morning and the very interesting discussion in the last couple of hours. I will bring this to an end.
Oral evidence: Home energy efficiency and demand reduction, HC 552 33