Written evidence submitted by the Wwf – Uk (HEE0106)

1. WWF-UK is pleased to submit evidence to this inquiry, having worked closely with the Committee for many years.  We are a constructive, evidence-based organisation with extensive experience in a broad range of areas affecting people and their environment. Our work with governments, communities and businesses, and our unique global reach, mean we are in a strong position to take a lead on developing policies to tackle climate change.
2. We believe it is correct and timely for the Committee to hold Government to account over its past decisions in relation to energy efficiency and demand reduction policy and to ensure the Government urgently drives forward new, well thought-out policy measures that take into consideration past failures. 

Summary

3. A step change in energy efficiency is needed to meet our climate targets, to improve energy security and to keep bills down - particularly for those in fuel poverty. Energy efficiency will also drive wider benefits across the UK economy such as improved productivity and competitiveness, job creation and avoided healthcare costs.  This ambition should be brought about by making energy efficiency an infrastructure priority under the oversight of the newly announced National Infrastructure Commission (NIC), and protected from political risk through a long term, cross Government target for all homes. Energy efficiency policy must also be put on a level playing field with supply side measures in order to drive the most cost effective solutions to tackling the energy trilemma.

4. Regulation must be used to increase retrofit activity to the levels needed to meet climate and fuel poverty objectives. Past energy efficiency schemes have shown that information, finance mechanisms and incentives are not enough on their own to drive the mass-market adoption of energy efficiency. All three tools must be used together, and accompanied by proportionate and smart regulation to overcome the multiple barriers preventing investment. Given the cost effectiveness of these measures and the long term benefits they provide to people, their health and their fuel bills, they should be viewed as an investment not a cost: every £1 invested by energy efficiency by Government returns around £3.20 in bill savings and other benefits[1].

5. More needs to be done to galvanise both the public and political will by promoting energy efficiency as the best way to tackle rising energy bills, capitalising on growing interest in consumer-focused technologies such as smart heating controls. Government must open new markets by driving forward the introduction of time of use tariffs, alongside the smart meter roll-out.

6. Fabric efficiency and heat must be considered together: they are two sides of the same coin. Policy must be better integrated between the two, for example by allocating some of the Renewable Heat Incentive (RHI) to provide installations in off-gas grid fuel poor homes, or by providing funding for low carbon heat systems through the Energy Company Obligation (ECO). Similarly, energy storage has huge potential to improve the efficiency and reduce the costs of our heat and electricity systems - but is missing entirely from these policy areas. The best solutions for reducing a given building’s energy use and emissions will consider all these options, allowing for greater consumer choice.
7. WWF is concerned that the current policy framework has failed to deliver both the scale and types of energy efficiency retrofit required to meet UK climate targets[2]. This has put the cost-effective attainment of carbon budgets at risk by damaging supply chains, reducing investor confidence, failing to prepare the delivery of new measures like solid wall insulation and failing to address low consumer interest in energy efficiency. The UK will fall short of the fourth carbon budget (2023 – 2027) unless policies with increased ambition are implemented. If delivery is not put on track during this Parliament, there will be little time to do so, and the costs of meeting this carbon budget will increase.
8. Current policies have also failed to deliver a reduction in fuel poverty rates, which have stagnated or risen across the UK over the past few years[3]. Tackling fuel poverty is important from a climate change perspective because it will prevent the costs of low carbon policies falling disproportionately on the most vulnerable, and can help ensure continued public support for climate mitigation.

Question 1: Why have previous approaches to energy efficiency failed to deliver significant results?

9. Green Deal
   The failure of the Green Deal is responsible for a large part of the gap between current delivery and what is needed to meet carbon targets. With support for low cost measures limited to low income households under ECO, the Green Deal was intended to stimulate uptake of these measures, and more, in the 21 million UK homes that do not qualify for fuel poverty schemes.

10. It was initially hoped that around 1 million plans would have been taken out under the scheme by 2020. In this regard, the Green Deal finance offering has fallen well short of what was hoped for, with only 16,000 finance packages taken up between its launch in late 2012 and its closure in July this year.

11. We believe there are a number of reasons for this:
1. High interest rates: the interest rate on Green Deal finance plans compared unfavourably with alternative sources of finance such as re-mortgaging and some personal loans. The finance mechanism will not have acted as an incentive to action for those with cheaper access to capital. A high interest rate also adds to costs, reducing the number of measures than can be financed under the scheme and further reducing the attractiveness of the offering.
2. Lack of supporting incentives: experience in other countries such as France and Germany has shown that low-interest rates (below 2%) are not enough in themselves to overcome the many barriers holding back household investment in efficiency. In these countries, low interest loans have been accompanied by incentives for efficient homes and efficiency investments.
3. Lack of marketing: for a scheme aimed at mass market adoption, the Green Deal was poorly marketed. The Government had hoped that large firms would market the scheme widely. This included energy suppliers, who it was hoped would push the Green Deal alongside meeting their obligations under ECO. In the event what little marketing was carried was done by the smaller installer supply chain, rather than large firms with a national reach.
12. Ultimately, the policy was not suited to being a tool of mass market adoption. International experience in France and Germany has shown that low interest rates alone are not enough to overcome the significant barriers that hold back household energy efficiency. In the absence of low interest rates and accompanying incentives, the policy would only have been attractive to landlords and households lacking access to capital, a much smaller proportion of the household market. To achieve the levels of uptake envisaged by Government, the scheme should have offered lower interest rates and been supported by smart regulations (for example, on minimum standards) and revenue neutral incentives such as council tax or stamp duty discounts.
13. Energy Company Obligation (ECO)
    ECO has failed in two key respects: addressing fuel poverty rates and stimulating the development of supply chains for more complex measures, notably solid wall insulation. There are three principle reasons for this:
     
1. Obligations were inadequate to tackle fuel poverty.
    
2. Lack of political will, leading to cuts to the policy in 2014.
    
3. Difficulties targeting the fuel poor.
    
14. A key reason behind ECO’s failure to reduce fuel poverty rates is that targets for the fuel poverty elements of the scheme (Affordable Warmth and Carbon Saving Communities Obligation) were not enough to drive significant improvements, especially in a context of low income growth and rising energy prices. It is generally accepted that bringing homes up to an Energy Performance Certificate (EPC) ‘C’ rating will protect against the risk of fuel poverty and the recently introduced fuel poverty target for England aims to bring as many fuel poor homes ‘as is reasonably practicable’ to this standard by 2030. However, the funding envelope for fuel poverty in England under ECO is less than the estimated £1.2 billion per year that it is estimated is needed to meet this target[4].

15. A key factor behind ECO’s disappointing performance was a lack of political will – the scale of the policy was substantially cut in 2014, to achieve a short term saving on household energy bills (around £50 per household). This followed public pressure over rising energy prices and pressure from energy suppliers who blamed the costs of policies for these rises. Suppliers were also struggling to meet their obligations, adjusting as they were to the greater administrative complexity of ECO. Although policy costs had increased, rising wholesale prices were responsible for the majority of energy bill increases seen between 2004 and 2013.
     
16. To reduce costs the Government granted suppliers two additional years to meet their obligations as well as allowing these to be achieved through the delivery of lower cost measures. This almost halved the amount of activity that would be delivered each year, taking delivery further away from the scale needed to meet carbon targets, and of course undermining the very policy which would have reduced bills on a permanent basis. Supplementary schemes (Green Deal Cashback and Green Deal Home Improvement Fund) were introduced to mitigate some of the lost carbon emissions reductions, although the original ambition of the policy framework remained insufficient.

17. Targets for the delivery of solid wall insulation were reduced with the result that annual installations fell in comparison to previous policies. This did significant damage to the emerging supply chain, which has yet to become established[5]. Despite revising costs upwards, analysis by the Committee on Climate Change finds that solid wall insulation remains a cost effective means of meeting carbon budgets during the 2020s[6].
     
18. Problems have also been experienced targeting the fuel poor. A more complex system to determine household eligibility was introduced with ECO, but has failed to improve the proportion of measures actually reaching fuel poor households. However, even if funding had been perfectly targeted at the fuel poor, the budget would still have been inadequate to make a big impact.
     
19. Electricity demand reduction
    Investment in more efficient lighting and appliances in the domestic sector has also slowed over the past five years. The principal reason has been a lack of policy. Whereas efficient lighting was included in previous supplier obligations, this support was removed from ECO altogether, leaving EU product policy (the Eco Design Directive) and a small pilot auction in the capacity mechanism (which is currently unsuited to aggregators of domestic demand reduction) as the only drivers of domestic electricity demand reduction in the UK.
     
20. This gap in policy may have left cost-effective opportunities to decarbonise the power sector untapped. There should be a more balanced approach to supporting alternative, low carbon demand side solutions as current funding models favour low-carbon generation. In many cases demand reduction can abate emissions more cheaply than supply-side technologies[7], and the current imbalance between incentives for electricity supply and demand risks consumers paying over the odds for power sector decarbonisation.
     

Question 2: What lessons can be learnt from current and previous schemes including Green Deal, Green Deal Home Improvement Fund, and ECO?
 

21. The delivery of long term climate and fuel poverty objectives has been harmed by exposure to short term political risks. The ambition of policies put in place in the last Parliament did not match what was needed to meet climate and fuel poverty objectives, and schemes were cut for short term reasons in 2014.

22. The delivery of climate and fuel poverty ambitions through domestic efficiency should be protected from political risk through long term, cross-Government targets. Continued roll-out of energy efficiency for all homes remains the cost-effective way to meet legislated carbon budgets, and the Government must therefore acknowledge this by setting an efficiency target for all homes. The new EPC-based fuel poverty target for England is a good start, and a similar target for all homes should be considered. As well as reducing risks, this would provide clarity of direction to industry, which has suffered from the stop-start nature of policies over the past four years, and show consumers the direction of travel required for all homes.
     
23. Such a target should also be cross-departmental in nature – for example, by setting domestic efficiency as an infrastructure priority under the oversight of the new National Infrastructure Commission. Investing in domestic energy efficiency provides benefits beyond climate and fuel poverty mitigation (such as health and economic productivity), and compares favourably with other infrastructure projects such as road building or high speed rail[8]. Designating efficiency in this way has the potential to free up capital funding from alternative sources and ensure that the delivery of these benefits does not rest solely with DECC.

24. The Green Deal was well suited to some, but not all, situations. A pay-as-you-save mechanism attached to a property rather than the homeowner is the most appropriate policy tool to address rented accommodation, as well as those without access to capital. An appropriate ambition for the scheme would have been to treat these sectors, rather than the entire housing market.

25. Sticks and carrots are needed to drive uptake in able-to-pay households. The most important lesson to be drawn from the last few years is that policy must tackle all of the barriers holding back household investment in energy efficiency. The Green Deal failed as a scheme to drive mass-market adoption because it addressed some (mainly financial) barriers, but not all of them; information, finance, hassle factor and landlord/tenant split being among the most important. This was a lesson learned under previous schemes: even when loft insulation was given out almost free under CERT, many households were reluctant to carry out installations. As a minimum, the Green Deal needed to be accompanied by incentives such as zero or low interest loans alongside stamp and council tax exemptions.
     
26. WWF believes that ultimately, only regulations will drive the scale of retrofit activity needed to meet climate and fuel poverty targets. Many of the measures that households would be required to install are cost-effective, and there is significant evidence that these investments would yield substantial direct and indirect benefits to the economy. The mandating of condensing boilers (through regulation) in 2005 remains the single most successful policy at driving down domestic energy consumption in the UK.
     
27. Electricity demand reduction does not compete on an even playing field. The uptake of efficient electric appliances, in particular efficient lighting, has slowed over the past four years since the removal of support for these measures in ECO. Supporting electricity demand reduction can often be cheaper than supporting low carbon supply, and there is significant scope to reduce domestic electricity demand through efficiency.
     
28. Although electricity demand reduction can, in theory, compete for subsidies in the capacity market, reductions are only rewarded for their services at periods of peak demand, leaving their year-round benefits unrewarded. Funding for low carbon supply is an order of magnitude greater than for the demand side; to level the playing field this funding should be opened up to electricity demand reduction, to ensure cost effective opportunities are not missed. This could be done through an energy efficiency feed-in tariff[9], or through the supplier obligation.
     
29. The experience of ECO has demonstrated that there is still much to do to improve the targeting of schemes at the fuel poor. Area-based schemes, by tackling both fuel poor and low income homes, have been shown to be a successful way to address this problem, and should be incorporated into any new policies. A significant amount of funding is used for the Winter Fuel Payment, which is particularly poorly targeted at the fuel poor[10]. This could be made opt-in, to free up funds for more effective schemes.
     

October 2015