Utility Week

UTILITY Week 15th January 2015

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UTILITY WEEK | 15Th - 21sT JanUarY 2016 | 11 Policy & Regulation ment's new energy efficiency plans than just a scaled back obligation on suppliers. The Treasury has also set out plans for £295 million to be provided over five years to improve the energy efficiency of schools, hospitals and other public sector buildings. A further £300 million of funding will be offered to help develop 200 heat networks big enough to support more than 400,000 homes and leverage up to £2 billion of pri- vate capital investment. Energy secretary Amber Rudd reiter- ated in her policy reset statement at the end of last year that energy efficiency remains "important" and added that support under the new scheme would be targeted at those in fuel poverty. On top of this, she stated that the new scheme would be streamlined compared with the red-tape laden Eco, allowing it to be more cost efficient and less of a burden on energy bills. As SSE head of energy services Keith Arm- strong says, there is now "a golden oppor- tunity to build on previous programmes" and the details "on a simplified, extended scheme are needed to help the industry maintain momentum". All the sector needs to put this in place is for the government to provide that detail. Opinion Hard lessons The next energy efficiency drive must learn from recent failures or risk repeating them. E nergy efficiency policies have contributed to significant reduc- tions in UK household energy consumption. Total household energy use fell by 19 per cent between 2000 and 2014, despite a 12 per cent increase in the number of households and a 9.7 per cent increase in population. On average, individual households now use 37 per cent less energy than they did in 1970. However, the rate at which houses are insulated has stalled recently as a result of radical policy changes. The government decided in 2011/12 to overhaul the system for funding energy effi- ciency. Cert and Cesp came to an end, the Green Deal was launched and a substantially different supplier obligation – the Energy Com- pany Obligation (Eco) – was introduced. The Green Deal was intended to overcome the barriers of split incentives and high upfront costs by financing measures through loans that were tied to the building rather than the occupant and paid through instalments on electricity bills. The "golden rule" prescribed the savings from these measures must be larger than the repayments, so only investments with high rates of return were eligible for full funding. No set level of delivery was specified. With the Green Deal targeting high payback investments, Eco was largely directed towards more expensive measures with low rates of return, such as solid wall insulation. This represented a significant departure from UK and international experience, where supplier obligations have primarily been used to encourage relatively cost- effective measures. It is now clear the Green Deal failed to deliver any significant investment in energy efficiency. Since its launch in 2013 it set up 13,800 Green Deal finance plans worth about £50 million, or £17 mil- lion a year. The existence of the Green Deal also resulted in Eco being focused on areas in which it was less immediately effective, resulting in energy-saving targets being reduced. Together, the Green Deal and Eco have been a major setback for UK energy efficiency. The lessons from this experience should inform future policy design. It is evident that: Supplier obligations can be highly effective but should not be prescriptive about the type of measure and should allow the delivery of cost-effective energy efficiency improvements. High cost measures allocate the benefits to a limited number of customers and can place disproportional burdens on low income groups. The interest rate of the Green Deal was not attractive. A low-inter- est mortgage or loan with interest rates of around 2-3 per cent is an attractive proposition but is likely to require government support. The Green Deal's focus on low-cost measures (limited by the golden rule) did not allow for more comprehensive retrofits without additional finance. For low cost measures, commercial loans have very limited attractiveness for most consumers. Future on-bill financing schemes, as well as other types of loans, should therefore focus on medium and high cost measures. Jan Rosenow, knowledge leader for energy efficiency policy and a principal consultant at Ricardo Energy & Environment "One of the best ways to cut bills and cut carbon is to cut energy use itself. That's why energy efficiency is so important." Energy secretary Amber Rudd in her policy reset Key numbers £640m annual value of the government's new domestic energy efficiency suppler obligation £30 reduction on the average energy bill of the new supplier obligation 1m number of homes the government aims to help this parliament £295m earmarked to improve the energy efficiency of schools, hospitals and other public sector buildings £300m or funding up to 200 heat networks Jan Rosenow "It is now clear the Green Deal failed to deliver any significant investment in energy effi- ciency 2012 2014 2016 2018 green deal: 2012 to 2015 Soft launch October 2012; Official launch January 2013; 23 July 2015 Energy secretary Amber Rudd announced the Green Deal would be scrapped Eco1: 2013-15 Energy Company obligation: 2013 to 2017 Eco2: 2015-17

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