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Energy Efficiency (and Conservation) and Climate Policy Cost

Dr John Constable: GWPF Energy Editor

The long expected but now manifest failure of the UK government’s Green Deal and Energy Company Obligation (ECO) energy efficiency schemes, which were predicted to offset the impact of climate policies, combines with low fossil fuel costs to make it essential that the UK government resumes publication of its analysis of the policy impacts on UK electricity and gas prices and bills. The decision to discontinue publication was never, in our view, justifiable. Continued concealment in the present circumstances is nothing short of scandalous.

A key element in worldwide climate policies is the belief that improvements in the efficiency with which energy is converted into goods and services will tend to offset the costs of climate policies. In the UK these claims have been particularly extreme, with some ministers even claiming that their policy driven efficiency measures would more than offset other policy costs, such as renewables subsidies, and have the net effect of actually reducing bills (Hansard, 23 November 2011, Columns 300–30).

However, experienced observers noted that the unit price effects of policies, in other words the pence per kWh effects, were very large, and that in their modeling of bill impacts the government relied on the striking assumption that efficiency measures would both work extremely well, and also lead to energy conservation. In point of fact, real world experience suggested that the measures would underperform, and that even if they did work the energy savings would, either in that service or elsewhere in the economy, cause a rebound in consumption that reduced the net saving, and could even cause a backfire that wiped it out completely and actually increased energy consumption.

At the heart of this cluster of governmental assumptions lies the curious and deeply questionable premise that individuals, households and commercial entities were irrationally ignoring opportunities to obtain more benefit from the energy resources available to them. This conviction, which is not limited to the civil service (within which the folly of the general public is an implicit if never stated article of belief) seems to arise from resentment of the aims and the manner of consumption of others, as if to say that I consume what I must, with occasional errors and lapses, but the desires of others are mistaken and their actions in any case consistently and carelessly wasteful.

A colder, less self-centred, assessment, might, on the other hand, conclude that all consumers know their own affairs well, and are continually seeking optimal use of resources available to meet their ends, ends that are more or less universal. Of course, no one has perfect information or understanding so errors are frequent, but in aggregate a communicating population learns from these mistakes, and overall and over time the most practically efficient behaviours will prevail.

In other words, people know what they want, have similar desires, and are continually making the best use of the available resources to satisfy those desires. No one, outliers aside, is particularly wicked or egregiously stupid in their consumption of energy.

Viewed from such a naturalistic and humane position it would appear that government efforts to coerce the population into adopting certain behaviours and technologies in order to improve energy efficiency and reduce consumption are very unlikely improve matters. Firstly, government is unlikely to understand the micro-pattern of human desires over time as well as the individuals themselves. Secondly, a large population can quickly learn from empirical experience and so become much better informed about the feasibility and promise of energy efficiency devices and methods than a small number of civil servants who rely on desktop reviews, laboratory studies, and the promises of technologists and other businesses who stand to gain by the proposed energy efficiency legislation.

So much for theory. What does real world experience of government energy efficiency programmes tell us? During the 1939-1945 war and just after it the British government had extensive campaigns to conserve electricity, particularly in private households. These were briefly successful, but from 1943 consumption returned to the upward trend and between that year and 1948 domestic electricity sales doubled. None of the subsequent campaigns, from the “Save It” (1974-9) or “Monergy” in 1986 did anything more than create short term reductions in the upward trend of consumption, and even these short term deviations, in the decade 1978 to 1988 for example, and after 2008 are probably explained by general economic difficulties rather than the success of the campaigns.

And now we have firm evidence from the National Audit Office, that the latest version of these campaigns, the Green Deal and the Energy Company Obligation (ECO) have been extremely expensive failures.

The statement of Sir Amyas Morse, Comptroller and Auditor General, who leads the National Audit Office, is unequivocal:

The Department of Energy and Climate Change’s ambitious aim to encourage households to pay for measures looked good on paper, as it would have reduced the financial burden of improvements on all energy consumers. But in practice, its Green Deal design not only failed to deliver any meaningful benefit, it increased suppliers’ costs – and therefore energy bills – in meeting their obligations through the ECO [Energy Company Obligation] scheme. The Department now needs to be more realistic about consumers’ and suppliers’ motivations when designing schemes in future to ensure it achieves its aims.

Uptake of the measures has been low, the additional savings achieved are disappointing, and the cost of emissions savings has proved to be very high (about £90 per tonne), and, critically, the NAO concludes that the Green Deal “did not persuade people that energy efficiency measures are worth paying for”. In defense, some will say that the fault is not with energy efficiency, but with badly designed policies. However, if the offering was fundamentally attractive poor policies would have little detrimental effect, and the inference that offers itself most plausibly and powerfully is that the public are a great deal better informed than the government about energy efficiency, and quickly came to see that the proposed measures are, in truth, and all things considered, not worth paying for.

The evidence of this important study underlines the urgent need for government to return to publication of Estimated impacts of energy and climate change policies on energy prices and bills, the concealment of which cannot be justified and is now plainly harmful to the public interest. Specifically, government must confront the fact that reduced expectations for energy efficiency will combine with low fossil fuel prices, which magnify policy impacts relative to other economies, intensifying the severity of the overall impact.