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Energy Efficiency: Lessons from the Green Deal and Energy Company Obligation

Dr John Constable: GWPF Energy Editor

New data on the uptake and application of domestic energy efficiency measures under the Green Deal and the Energy Company Obligation provides a useful indication of the likely efficacy of such measures. Where the public is permitted choice, and has to pay for the measures, they are not widely adopted; where they are coerced and the costs are socialised over all consumers, the rate of application is much higher. This does not bode well for the general success of the efficiency measures.

The belief that energy efficiency measures will result in energy conservation is pervasive in discussions of climate policy. The International Energy Agency (IEA), for example, has for some time now been publishing charts that show some 40% of the required reduction in emissions by 2040 (for example see Dr Birol’s recent talk in London). There does not appear to be any reasoned basis for assuming that demand for the energy services will remain steady, so that improved efficiency will result in a falling demand for energy itself, and the ghost of Jevons stands over such claims shaking his head and reminding us that the identification of efficiency and conservation is “wholly a confusion of ideas” (Coal Question, 1865, p. 103).

Indeed, viewed with a cold eye, claims such as those of the IEA seem only to invoke efficiency (conservation) as a way of taking up any slack left after all plausible levels of decarbonisation have been fed into the model. Of course, the picture that results is very attractive to policy makers, since it suggests a relatively painless and cost free path to a low carbon system.

Putting Jevons’ doubts about the intellectual rigour of this view aside for the moment, we can see that those who believe energy efficiency will deliver conservation must also believe that many consumers, of all kinds, are acting irrationally in failing to adopt the measures. For example, these are measures that would increase disposable household income by reducing the need for energy consumption, but uptake is much more modest than those modelling the benefits seem to think it ought to be. Various causes can be assigned, poor information, lack of available capital, hassle factor, and so on, all conveniently bundled up into the general label of ‘market failure’.

The UK government’s Green Deal and Energy Company Obligation (ECO) were supposed to address this market failure. In the case of the Green Deal consumers were to be informed and reassured by expert assessments and offered the opportunity to borrow the cost of the measures and repay the loan from the energy savings produced. The ECO scheme, on the other hand, is an obligation on energy suppliers to assist low income and vulnerable consumers by applying energy efficiency measures, the cost being funded from the bills of other consumers. The government’s target expressed the aspiration of insulating 1 million homes (there are 27.7 million homes in the UK, so this was not a wildly ambitious target).

The Department of Business, Energy and Industrial Strategy (BEIS) has recently updated its datasets reporting on both the Green Deal and the ECO schemes, and now that over two years has passed it is time to take stock.

BEIS tells us that a total of 399,000 homes have had at least one insulation “measure” applied. The government is currently a long way short of its insulation target.

A rather more impressive total of 1.8 million properties have benefited from efficiency measures, of all kinds, under the Green Deal and ECO. However, it is the ECO which accounts for the vast bulk, over 99%, of these properties.

By comparison the Green Deal has been spectacularly unsuccessful. There have been 695,635 Green Deal assessments to the end of August 2017. Of these only 13,910 have actually proceeded to a Green Deal Plan. That is, to say only 2% of those going to the trouble of obtaining a Green Deal assessment have proceeded to take out the loans and fit the efficiency measures. By any standards this a very low rate of uptake.

Interest in Green Deal assessments peaked at over 37,000 in one month, July 2014, and have now fallen to 335 in August 2017, the second lowest month on record (the lowest was the first month of the scheme). The end is nigh.

One cannot rule out the possibility that a better sort of Green Deal might have been more attractive, but even the government’s sternest critics would struggle to put all the blame on poor policy design. It is much more likely that the Market Failure that government imagined its policy would address is simply not there. When householders informed themselves, and weighed up the pros and cons, they decided that it didn’t make sense even with government taking the risk of lending them capital to apply the efficiency measures.

By comparison, with the ECO, where the householders had to take no risk at all, and suppliers and the consumer base in general were coerced to apply and pay for the measures, there has been broad application.

Some will doubtless interpret the success of ECO and the failure of the Green Deal as showing that private individuals are incapable of making rational decisions about energy efficiency, even when helped by government, and that they therefore should be given no choice in the matter. In other words, that consumers should be forced to apply efficiency measures through an ECO-like system.

On the other hand, perhaps it is government that has made the mistake. Perhaps the private households were right in turning up their noses at efficiency measures, and it is government that has blundered by compelling the application of energy efficiency measures that would not pass the test of site specific due diligence that only a locally informed and interested party can provide.

Before spending more consumer cross-subsidy on energy efficiency the government should undertake a rigorous and unsentimental assessment of the effectiveness of the measures installed under the Energy Companies Obligation. If these are anything other than resoundingly successful government should think again.