Written evidence submitted by the Association for the Conservation of Energy (HEE0042)

This response is from the Association for the Conservation of Energy (ACE). ACE works to reduce overall energy demand to ensure a secure and sustainable energy future. It does this by lobbying, campaigning and carrying out research to achieve sensible and consistent policy, legislation and targets; by raising a positive awareness of energy conservation and by encouraging increased investment in all appropriate energy saving measures. ACE’s work is funded by a combination of membership fees and project income.

Why have previous approaches to energy efficiency failed to deliver significant results?

This question implies that all previous approaches to energy efficiency have been unsuccessful. We would argue with this, since there is good evidence that some approaches have worked.

National statistics show that, despite increasing numbers of households and a proliferation of household appliances, domestic energy use is falling[1]. Between 2000 and 2014, primary energy consumption for households fell by 17%[2] and, as DECC note, this is in part due to ‘the impact of recent energy efficiency improvements in the housing stock’. This is consistent with findings from international work. The International Energy Agency (IEA) for example, reports that investments in energy efficiency make a bigger contribution to energy balances than any fuel (coal, oil, etc)[3] and that ‘energy efficiency improvements in IEA countries since 1990 have avoided a cumulative 10.2 billion tonnes of CO2 emissions’[4].

Previous programmes, such as past energy company obligations and Warm Front, have delivered significant numbers of energy efficiency measures to households, and these have undoubtedly contributed to falling energy use for heating homes[5]. A review of household energy efficiency programme evaluations by the UK Energy Research Centre concluded that, although the evidence is in places lacking, there is good reason to believe that well-established types of energy efficiency programmes (such as building regulations and energy company obligations) can save significant amounts of energy[6].

The issue with policies to date is that they have failed to support the development of a large-scale sustainable market for energy efficiency investments. The need for far higher levels of investment in energy efficiency, if we are to deliver on climate change, fuel poverty and productivity objectives, is recognised by professionals throughout the energy sector[7].

There has been a lack of a stable and long-term framework within which the energy efficiency supply chain can develop its market. Energy efficiency policies have proved susceptible to decisions driven by short-term political priorities. This is one of the main reasons for recent policy failures, and the resultant very low level of business confidence in UK markets and hence lower investment levels than there might otherwise have been. We therefore welcome the establishment of the National Infrastructure Commission and urge that this Commission considers energy efficiency, recognising that energy infrastructure does not stop at the meter.

What lessons can be learnt from current and previous schemes including Green Deal, Green Deal Home Improvement Fund, and ECO?

As mentioned above, previous schemes have led to the delivery of a large number of energy efficiency measures in homes. The ability of energy companies to deliver low cost measures at scale has been demonstrated. However, there remains a very significant potential for further efficiency improvements, and this needs to be accessed if policy aims are to be met.

The Green Deal and ECO were intended to drive the market and lead to a step change in the levels of investment seen. However, there are a number of significant shortcomings in the most recent policy programmes, leading to results far lower than the level of ambition set.

ECO has continued to deliver measures, but at a much lower level than its predecessor obligations, and it has failed to fill the gap left by the closure of the publicly funded Warm Front programme or to contribute to carbon emissions reductions in as significant a way as the previous obligations, CERT and CESP[8]. Based on lessons learned from implementation of supplier obligations to date, ACE has developed a working paper presenting our views on the key elements of any future obligation[9]. These include:

• Being set within the context of a long-term policy framework for low carbon housing, including finance, structural tax incentives and regulation;
• To increase policy certainty, being defined in lifetime carbon terms over a five year time horizon, with this horizon extended every 2.5 years;
• To ensure that delivery supports market development, being required to satisfy customers, not be designed around over-long and costly paper trails[10];
• Delivering and employing individual home retrofit roadmaps to make staged deep retrofit a reality;
• Being allowed to install any Green Deal approved measures rather than being constrained to particular measure classes; and
• Delivering an ambitious solid wall insulation programme, concentrating on houses and guided by quality of installation.

Experience with the Green Deal has demonstrated that a finance mechanism alone will not stimulate large-scale market demand for energy efficiency investments. Attractive finance is needed, but it must be put in place alongside incentives that stimulate demand.

The finance offering within Green Deal has proved attractive to some households; however, its rigidity with respect to the energy efficiency measures that can be financed (the Golden Rule) and long repayment terms (leading to high overall costs) have led to many potential customers deciding not to proceed with Green Deal Plans[11]. There is a need for a range of finance products, some of which should be provided by existing financial institutions, and these should enable householders to invest in whichever measures they choose, repaying the required loan over a time period that suits them. Greater flexibility in finance mechanisms will enable the supply chain to market measures on the basis of the wide range of benefits they provide (e.g. warmth, comfort, and a healthy home environment) rather than having to focus only on energy bill savings, and this should help to drive demand. There is experience from other countries (see below) that suggests that lower interest rates, facilitated by Government guarantees, can also increase uptake.

The Green Deal Home Improvement Fund was the main incentive used by the Government to try and increase the rate of uptake of Green Deal Plans following cuts in the carbon emissions reductions required from ECO. It suffered from the shortcomings of many Government incentive programmes: its introduction was not planned for, it was very limited and very short term, and was cancelled without warning. As a result, it led to the exaggerated peaks and troughs in demand that cause problems for the delivery chain. As each release of money under the fund was exhausted within a very short space of time, businesses offering measures to consumers were unable to offer a clear picture of the cost to the consumer of any package of work being agreed, which has led to confusion and disillusionment amongst householders.

Rather than using further incentives of this type, Government needs to put in place long-term structural incentives for energy efficiency, such as stamp duty and/or council tax differentials. These should be linked to a long-term target for the energy efficiency of the housing stock, and to regulations where appropriate.

Regulatory approaches have repeatedly been shown to work. Building regulations for new build do lead to increases in energy efficiency[12]; minimum efficiency standards for boilers, in combination with energy supplier obligation programmes, have led to the installation of significant numbers of efficient boilers and contributed to the fall in home heating energy demand; and appliance minimum efficiency standards and labelling programmes have transformed the market for home appliances in Europe and elsewhere, leading to significant savings in home energy use[13].

Another central element of the Green Deal is the provision of information in the form of the Green Deal Advice Report. These, along with Energy Performance Certificates, are a step in the right direction as they help to explain the steps that householders can take to manage their home energy demand. However, potentially more compelling alternatives, known as retrofit roadmaps, are being piloted in other countries[14].

One final point to note when considering the lessons that can be learned from past policies relates to the effect of a piecemeal approach to energy efficiency. The introduction of minimum efficiency standards for the Private Rented Sector was based on the assumption that the Green Deal would offer a finance mechanism for landlords thus ensuring that the required improvements could be delivered without upfront cost: the withdrawal of Government support for the Green Deal Finance Company has now put this mechanism at risk and hence also the effectiveness of the minimum efficiency standard itself (since landlords do not have to invest in improvements if these require upfront expenditure). Equally, the level of ambition for the Green Deal was in part based on the assumption that ‘consequential improvements’ regulations would help to drive demand; in the event these regulations were not introduced and the Green Deal was left without a key supporting element. Energy efficient buildings refurbishment is complex, and a more strategic policy and less political approach is needed to ensure that all elements of the required framework are introduced and maintained.

How does the UK’s performance on home energy efficiency compare with other countries? What lessons can be learned from these countries on energy efficiency?

It can be difficult to compare home energy efficiency performance across countries, since building types, incomes and climates can vary considerably. However, in 2013 ACE compared the UK’s performance against a range of indicators in up to 15 other countries with comparable levels of prosperity and heating need[15]. The UK ranked 6th out of 8 countries where thermal performance could be compared; and worst out of 13 Western European countries on fuel poverty.

Until recently, the UK had in some areas led the way in policy terms, being one of the first European countries to introduce energy efficiency obligations for energy companies and also setting the pace with its Zero Carbon Homes timetable. And, as mentioned previously, these policies have delivered significant efficiency improvements. This suggests that the relative performance of the UK and other countries may be largely due to the starting state of the building stock. However, the fact remains that we need to close the gap with other countries to ensure that our building stock is fit for purpose, we are no longer a leader in policy terms, and there are lessons that we can learn from other countries.

Other countries are recognising the strategic value of energy efficiency and setting themselves ambitious targets that demonstrate clearly their aims. These include: Germany’s target of increasing its buildings renovation rate from 1% per year to 2% as part of its ‘Energiewende’ strategy[16]; the inclusion of a target to double the energy efficiency of existing buildings by 2030 in California’s recent bill to combat climate change[17]; and the target to halve national energy use by 2050 contained in France’s energy transition law[18]. Setting an ambitious, long-term target for energy use reduction and, within this, for energy efficient buildings renovation, would send a strong signal to the market about policy intent and would also enable the overall effectiveness of policy approaches to be tracked.

The strategic value of energy efficiency to the energy system is perhaps better recognised in the US than it is in Europe, through decades of electricity system integrated resource planning. Learning from US experience demonstrates that there are significant benefits to all customers from utility investment on the demand side of the meter, and that these can be captured by appropriate energy system investment planning[19].

A range of options for incentivising take-up of finance offers have been used in a number of other countries, including the use of preferential interest rates in Germany[20], a combination of zero interest and tax credits in France[21], and tax rebates in Italy[22]. These demonstrate some of the potential for incentives, but are not directly applicable within the UK system. Work on defining appropriate incentives for use in the UK was completed by a UK Green Building Council task group, which looked in detail at stamp duty, council tax and an energy efficiency feed-in-tariff[23]. As this report recommended, it is now time for Government and industry to work together to introduce such an incentive.

An innovative idea that is being piloted in Germany and France is the use of building renovation roadmaps to engage householders in long-term staged energy efficiency retrofits[24]. These are intended to provide an accessible and detailed plan for householders, so that they can ensure that any home refurbishment work includes the appropriate energy efficiency measures and gradually work towards a deep retrofit of their home.

These are just two examples of policy approaches in other countries that can offer valuable learning for the UK. There are many other examples, and more concerted engagement from UK policy makers with the forums[25] in which these programmes are discussed could be beneficial.

October 2015