Big and dumb or small and smart? UK energy and climate policy at a crossroads once more

Energy efficiency is of central importance in meeting a raft of the UK’s infrastructure demands, as well as its climate targets. Ambitious energy efficiency implementation minimises the cost and maximises the benefits of decarbonisation. It addresses fuel poverty, enhances productivity and competitiveness, creates and supports quality jobs, improves energy security and boosts GDP, and can render potential ‘white elephant’ investments on the supply side unnecessary.

Energy efficiency’s track record speaks for itself. In homes, gas and electricity demand has fallen by 21% and 13% respectively since the peak of 2004. This despite there being over two million more households, higher indoor temperatures, and more lamps and appliances in each home. Thanks to insulation, efficient boilers and appliances, energy bills were £500 lower in 2017 than they would have been without energy efficiency improvements since 2004. With residential energy efficiency policy having slowed to a crawl in 2015, and the rate of insulation down 95% compared to 2012, there is now a real risk that these trends reverse. This risk must be overcome, and energy efficiency’s enormous remaining potential – which could slash household energy demand by 50% – realised.

Given energy efficiency’s central importance, the Government’s ambition for home energy renovation in its Clean Growth Strategy – for all homes to achieve an Energy Performance Certificate rating of C (on the A to G scale) by 2035 – is a good start. However, policy and investment to achieve it is severely lacking. The annual investment needed from public and private sources to 2035 is £5.2 billion. Public investment in 2017/18 was £0.7 billion. This draws in little to no private investment and there are no plans to change this amount or the way in which it is invested, leaving an annual gap of £4.5 billion.

Thought and practice on how to effectively drive greater demand for energy efficient renovation – including by harnessing the £27.6 billion market for housing repair and maintenance – is well established and needs to be acted on in the UK. In a new report out today, case studies of peer countries France, Germany and the Netherlands – and a case study of Scotland owing to its own advanced approach – demonstrate combinations of policies and public investment that are far more effective at raising renovation rates and unlocking more private investment.

Considering the UK has substantial energy efficiency policy capability and experience spanning decades, these case studies inspire the belief that the UK must be capable of doing better. But it will require a greater commitment of public capital investment and better-organised delivery to achieve.

Now is an important time to capitalise on momentum for greater ambition. Some incremental policy steps are being taken by Government following the Clean Growth Strategy’s publication last October. In March, the retail finance sector, through the Green Finance Taskforce, made strong recommendations to Government that would enable it to mainstream the financing of home energy improvements.

Crucially, the National Infrastructure Commission, having established energy efficiency as one of its priorities, has a unique opportunity to make big picture recommendations for greater energy efficiency investment as part of its first five-yearly National Infrastructure Assessment to be published on July 10th, 2018.

It must inspire Government to follow up with a more coherent and ambitious approach that treats energy efficiency as a national infrastructure priority and weaves in those steps the Government is already taking, including in response to the Green Finance Taskforce’s work. This encompasses:

1. Confirming energy efficiency as a national infrastructure priority, with clear governance arrangements, targets, a long-term action plan and funding, as in Scotland;
2. Additional public capital investment of £1 billion per year to 2035 – much of it supporting low income households – that can help unlock £3.5 billion of private investment, closing the £4.5 billion gap;
3. Adequate incentives for ‘able to pay’ homeowners and landlords, such as lower Stamp Duty for more energy efficient homes and 0% interest loans;
4. Robust regulation, strengthening over time towards an EPC rating of C, that requires some homeowners to take action and inspires others to plan and invest for the future;
5. A long-term approach to delivery in which local authorities play a core role in tackling fuel poverty, creating demand and growing local supply chains;
6. Strong advice provision and quality assurance and safety standards.

What is the prize, aside from meeting our climate targets in the most cost-effective way, of doing so? Everyone gets to live in a safer, more comfortable home that is cheaper to run: quintessentially ‘no regrets’.

Pedro Guertler is a Senior Policy Adviser at E3G, an independent climate change think tank. You can read the full report here.

The views expressed in the article are those of the author, not necessarily those of Bright Blue.

Heating up the energy efficiency market

Winter is the time of year when outdoor temperatures plunge and thermostats in homes get turned up. But the image of cosy homes, protecting people from the cold, is too rarely a reality in the UK. We have some of the most draughty and inefficient housing stock in Europe. The most recent government statistics show that 31% of homes with cavity walls have no wall insulation; 33% of homes with lofts have no loft insulation; and 92% of homes with solid walls have no wall insulation.

Yet, since the ending of public funding for the Green Deal and the scaling back of the Energy Company Obligation (ECO), there has been a policy vacuum for incentivising non-fuel poor households to invest in energy efficiency measures. The withdrawal of a supportive policy framework is starting to have an economic impact. Figures published by the Office for National Statistics (ONS) last month revealed that the number of people employed in the energy efficiency sector had fallen from 155,000 in 2014 to 143,000 in 2015.

In the past month, however, there have been some positive signs that the energy efficiency policy log-jam could be about to end.

EU 2030 energy strategy

In the EU’s 2030 energy strategy, published late last year, the EU Commission proposes a binding target of a 30% reduction in energy use relative to a business-as-usual scenario. They endorse the concept of ‘efficiency first’, which prioritises cheap efficiency upgrades over building expensive, new generation capacity. Jan Rosenow, a senior associate at the Regulatory Assistance Project (RAP), has described this principle in an essay for our Green conservatism project.

The strategy includes a set of policies to drive ‘eco-design’ (amending product regulations so that they are more energy efficient), retrofit of existing buildings with insulation, better energy performance labelling, and access to finance for energy efficiency measures. But, following the UK’s vote to leave the EU, it is unclear whether these measures will be transposed into UK law prior to our formal departure in 2019. While it seems likely that the UK will be able to miss this target with impunity if it wishes, it may begin implementing the EU legislation before Brexit is completed or choose voluntarily to continue with the target.

Bonfield review

After many months of delay, the government-commissioned Bonfield review was published last month. When Amber Rudd, the then Energy Secretary, announced the end of the Green Deal in 2015, she appointed Dr Peter Bonfield, CEO of the BRE group, to lead an industry review of consumer protection and standards in the energy efficiency industry. This followed reports that some Green Deal installations had been poor quality, undermining consumer trust in the industry. Our recent report on the Green Deal, Better homes, cited evidence that around 11% of Green Deal assessors and 14% of Green Deal installers were suspended from the scheme because of poor workmanship.

The Bonfield review makes a number of recommendations: a new information hub to explain the different measures to consumers and help them navigate the complexities of the supply chain, which was something we called for in our Better homes report; a new ‘quality mark’ so that companies installing energy efficiency and renewable measures conform to a framework of robust standards; and a new ‘data warehouse’ so that information about how individual properties consume energy can be better utilised by installers.

Emissions Reduction Plan

Detailed work is now underway on the government’s Emissions Reduction Plan, which is expected to be published in the first few months of 2017. This will set out the policies to enable the UK to meet the fourth and fifth carbon budgets. The fifth carbon budget was passed into law in July 2016, and requires a 57% reduction in greenhouse gas emissions by 2028-2032, from a 1990 baseline.

A recent report by the Association for the Conservation of Energy has assessed whether the current energy efficiency policies will be sufficient to achieve the emission reduction pathway recommended by the Committee on Climate Change (CCC) as being the most cost-effective. They find that there is a 12% gap between the reductions that current policies will deliver and the cost-effective CCC scenario.

The authors call for new policies in the forthcoming Emissions Reduction Plan to close this gap: in particular, they propose new regulation to ensure homes that are sold meet minimum energy performance standards, which we called for in our Better homes report last year. In a recent speech, Baroness Neville Rolfe, the former Energy Minister, hinted that the Government was considering such a policy: “We should ask whether we can do more to encourage home owners to improve their properties when they buy or when they move.”

Conclusion

Energy bills are likely to start rising again soon, as a result of higher wholesale costs. The Government’s response to this must not be to scale back energy efficiency programmes, as happened in 2014, but to scale up ambition. Energy efficiency measures will cut bills in the long-term, giving people permanently warmer and more comfortable homes for less money each month.

Following the EU 2030 energy strategy and the Bonfield Review, Ministers should use the opportunity of their forthcoming Emissions Reduction Plan to drive a major uptake of domestic energy efficiency measures. The prize is warm, comfortable homes that actually keep people warm in winter.

Sam Hall is a researcher at Bright Blue

The case for targeted energy performance regulation

One of the key recommendations in our latest report, Better homes, was the introduction of new energy performance regulations for the owner-occupier sector. However, some are worried about the costs this policy would impose on households and the extent of government interference.  

Policymakers should use regulation cautiously, usually as a last resort. But the UK has some of the draughtiest housing stock in Europe. Progress in installing energy efficiency measures has slowed in recent years because of low uptake under the Green Deal and reduction in the scale of supplier obligations. With the current policy mix, the UK is forecast to miss its carbon budgets.

There is a particular policy vacuum for incentivising the non-fuel poor to install these energy improvements in their homes. Previous market-based schemes, such as the Green Deal, have failed to create sufficient demand. A combination of attractive consumer financing and targeted regulation is now required to achieve the scale of home energy improvements needed to achieve the 2050 target for reducing carbon emissions enshrined in the Climate Change Act.

Regulation has been effective before

Regulation has in the past been a good way of cost-effectively reducing carbon emissions. In 2005, the Government introduced new building regulations mandating that all replacement gas boilers installed in homes should be the more efficient condensing boilers. This has seen the share of condensing boilers rise from 2% of the market in 2001 to 53% in 2014. This significant amount of saved energy has come at minimal cost to the consumer, with boilers across the housing stock gradually upgraded as older models break down.

More recently, the Coalition Government introduced regulation to prevent private-sector landlords from renting out homes with the lowest two ratings on the Energy Performance Certificate (EPC), an official measure of how efficient and green a home’s energy consumption is. These regulations, due to come into force in 2018, demonstrate a willingness to intervene in order to protect property occupants from high energy bills.

Our proposals

Imposing minimum energy performance standards across the entire housing stock is not politically feasible, and would be an unacceptable level of government intrusion. But there are moments when individuals are more likely to consider home improvements, which are known as ‘trigger points’. By designing regulations that focus on these, costs and hassle to consumers can be minimised.

We propose two pieces of regulation that target such trigger points. First, prior to the sale of a property, a home must achieve a minimum rating on the EPC, the precise level of which should be decided by government. Second, whenever building work is carried out on a home, such as an extension, the home’s overall carbon emissions must be reduced.

Trends in the housing sector

 There is good evidence that bolting home energy improvements onto other types of renovation goes with the grain of consumer preferences. Focus groups run by the UK Energy Research Centre in 2013 found that just one in ten individuals would consider energy-only renovations, whereas they are three times as common when undertaken as part of general amenity renovations. Similarly, research by the Energy Saving Trust has found that 85% of homeowners were willing to stretch a renovation budget to include energy efficiency improvements.

There is also growing evidence that mortgage lenders are considering a property’s energy performance in their affordability calculations. Inefficient homes have higher bills, which means less money for individuals to make mortgage repayments. One US study from 2013 has found that mortgage default risks are 32% lower in energy efficient homes. The UK Green Building Council has argued that mortgage lenders should take greater account of efficiency, given the fact energy costs take up just over 7% of household income. Minimum energy efficiency regulations at the point of sale would reinforce this link.

The adverse effects can be mitigated

We propose some important exemptions to the regulations, such as listed buildings, fuel poor households, and homes with multiple occupants. It is essential that the government does not add costs to those who are not able, either legally or financially, to improve the energy performance of their property.

The government’s regulations for the private rented sector are conditional on a financing mechanism that removes the upfront cost. This is an important caveat, as it ensures improvements are affordable. This is why our proposed home energy improvement loans, guaranteed by government and therefore with lower interest rates than under the Green Deal, are an essential complement to the regulations.  

Conclusion 

This proposal would protect consumers from higher energy bills caused by volatile prices in wholesale energy markets. It would prevent homes being sold that will burden future occupants with permanently high bills. And it would prevent builders from installing extensions that cause a big increase in a home’s fuel bill.   

But as well as protecting consumers, these regulations would also provide a public good. Some homes in the UK disproportionately contribute to carbon emissions. These big-emitting homes carry an environmental cost. The least efficient homes must be upgraded if the UK is to cut its carbon emissions by 80% by 2050. Targeted regulation can achieve this without excessive government subsidy and in line with other household decisions around renovations. 

Sam Hall is a researcher at Bright Blue

Addressing the burning injustice of fuel poverty

With the right policies, tackling fuel poverty can deliver two vital government objectives. It can help to reduce carbon emissions by improving the energy efficiency of the housing stock, and it can improve the welfare of low-income households by reducing their energy costs. An effective, long-term fuel poverty strategy should therefore be a top priority for this Government, particularly given the new Prime Minister’s focus on tackling social injustice.

There are two elements to the government definition of fuel poverty. First, the required fuel costs of the household must be above average for the type of property. Second, paying the required fuel costs must take the household below the poverty line, which is currently defined as 60% of the median income.

The most recent figures show that there were 2.38 million fuel poor households in England in 2014, which is equivalent to around 10.6% of English households. This is a significant number of families in absolute terms, which has remained roughly flat across the last Parliament.

Policies for tackling fuel poverty

The government has had a legal obligation to monitor and provide a strategy to address fuel poverty since the passage of the Warm Homes and Energy Conservation Act 2000. The most recent strategy was published under the Coalition Government in 2015. This set out the target to have as many fuel poor homes as possible achieve by 2030 at least a C rating on the Energy Performance Certificate (EPC), one of the government’s measures for assessing a home’s overall energy consumption. The Conservative Party 2015 General Election manifesto promised to improve the energy efficiency of at least one million fuel poor homes over the life of this Parliament.

There are two types of policy for addressing fuel poverty: giving customers discounts on their fuel bills through cash transfers and installing energy efficiency measures that reduce a home’s energy consumption.

Cash transfers are important, as they ensure that vulnerable groups are able to stay warm in the short-term. There are three schemes with this purpose. First, the Winter Fuel Payment, with an annual budget of £2.1 billion, is paid to all pensioners. Second, the Cold Weather Payment is a discretionary benefit paid to individuals on income support. In 2014/15, just £11 million was spent under the scheme. Third, the Warm Homes Discount is paid to those in receipt of pension credit and is estimated to have an annual cost of £320 million.

But a long-term, sustainable approach to tackle fuel poverty by upgrading the housing stock and permanently reducing energy bills is also needed. The Government’s policy for this is the Energy Company Obligation (ECO), a mandate imposed on energy suppliers to find carbon savings in the customers’ homes. The government sets criteria about which homes are eligible for energy efficiency measures and what measures can be installed. The £640 million cost of the scheme is borne by energy suppliers, who in turn raise consumer prices.

Reforms to this scheme have recently been proposed in a government consultation. Previously, ECO had been focused jointly on reducing fuel poverty, improving energy efficiency of properties in deprived rural areas, and delivering more expensive energy efficiency measures across all households. The reforms will transition the policy towards an exclusive focus on alleviating fuel poverty while reducing the overall cost of the scheme.

Some regressive effects

Many believe that tackling fuel poverty using a supplier obligation is regressive. As described above, there are over two million fuel poor households in England. Yet the government has promised to improve just one million homes in this Parliament. That means that there are over one million fuel poor households that will have higher bills over the lifetime of this Parliament as a result of the costs of the supplier obligation, without receiving any subsidised measures to help them lower their bills. Moreover, as energy suppliers have discretion about how they pass on policy costs to customers, they often choose to increase the bills of those that do not switch providers. This group is disproportionately populated by those on low incomes. This increases the likelihood of a regressive effect of supplier obligations.

There is also concern about effective targeting of cash payments for the fuel poor. There were reports earlier in the year of a disagreement between the Treasury and the then Department for Energy and Climate Change over whether the Warm Homes Discount could be better targeted. The government’s response to the Warm Homes Discount consultation does promise to “explore ways for better targeting of those identified as living in fuel poverty.” But this vague formulation falls short of a concrete commitment to refocusing the scheme. In addition, there are long-standing criticisms of the non-means tested Winter Fuel Payment for pensioners.

Conclusion

The Government is right to want to reduce fuel poverty. It can make a significant contribution to the Prime Minister’s social reform agenda, and enable the UK to cost-effectively meet its climate change commitments. However, the current suite of policies must be reviewed to mitigate regressive effects. Government support must be focused on the most vulnerable.

Sam Hall is researcher at Bright Blue

Story-telling: making the case for climate action

For two months this year, electricity generation from UK solar eclipsed that from coal. Granted, it was in the summer, but it is nevertheless significant to see the future overtaking the past. To energy policy experts this isn’t surprising: July was sunny, and coal is viewed as a poor investment. But when I mentioned this to a friend over the weekend, her response was one of perfect confusion: “So, why don’t we ever hear the good news about renewables?

Faced with austerity, policy experts and commentators focussed on proving the business case for investment and intervention in the low carbon economy. This should not have been difficult: the sector continued to grow rapidly even after the 2008 crash, turning over £121.7 billion in 2013 and employing 460,600 people. Energy efficiency is a particularly impressive performer in productivity terms – responsible for around 94,200 jobs and a disproportionately high £7.3 billion of Gross Value Added to the wider economy.

We have the hard economic modelling to back this up, showing that ambitious decarbonisation can outperform business as usual in terms of future economic growth (an increase of UK GDP by 1.1% in net terms, with average householders financially better off against business as usual scenarios where little is done to reduce emissions).  With around 45% of all new energy capacity worldwide now renewable, we thought we had spotted an opportunity for the UK to lead the next global industrial revolution – and we thought the numbers more than justified supportive policy and government investment.

In reality, a positive economic narrative alone has failed to get the job done. The Committee on Climate Change recently warned government that there is a growing gap between our commitments on climate change and what government policy will deliver.  Instead, we need to reach people emotionally about what decarbonisation looks like, speaking to their values as well as their wallets – as a more detailed look at energy efficiency policy should tell us.

Investments in energy efficiency offer big returns. Consumers benefit from bill reductions and there are wider social gains, such as a reduction in NHS admissions for respiratory illnesses following the retrofit of the homes of vulnerable people. A mass-retrofit of UK buildings would offer better value for money as an infrastructure commitment than High Speed 2. Yet, shortly after the last general election, subsidies for products and regulatory standards for new homes were scrapped. The indignation of industry, policy experts, and campaigners focussed on the economic short-termism of the cuts. The numbers added up. What more could have been done?  

Well, it’s possible that we were all having the wrong argument – or at least the right argument in the wrong way. Climate change communications tend to be negative, with the solutions often presented as a “loss” rather than a “gain”. For energy efficiency, for example, consumers have been concerned about lost loft space, the cost of installation, or changing ‘the feel’ of their homes. Psychological research has shown that negative or reactive messages can undermine trust in the long-term; not only do negative stereotypes prevent immediate action but they also stick, and undermine the wider case for change.

People with centre-right values are more likely both to believe negative misconceptions about low carbon solutions and to reject overall climate change messaging which they view as “doom-mongering”. The absence of a distinctively centre-right vision for climate change action might go some way to explain why greater doubt exists among Conservative MPs about climate science than for parliamentarians in other parties.

All of this suggests that we need to reach a broader audience, with a language and set of values that work for all voters. Without this, relying on numbers will not be enough to win the argument for rapid decarbonisation. Fortunately, the messages already exist – they have just gone unnoticed, as returning finally to energy efficiency again can illustrate.

As I write this I am sitting in WWF’s headquarters, the Living Planet Centre, in Woking. It is built using the cutting edge of low carbon, energy efficient technology. When we show guests around it, we focus on the business case for the building – we talk about the operational savings that come from switching to a ground source heat pump, or how much energy our solar panels generate on a given day. We talk, too, about some of the building’s secondary impacts, as part of the urban regeneration of Woking, or the improved wellbeing and productivity of our staff.

But what we often forget to do is point out that The Living Planet Centre is just a better building than most new buildings. It is also beautiful, an upturned ship of glass and wood which sits back into the green landscape of canal and heritage Surrey woodland. We should be able to make a case to the British public to say: “The changes we need to make to decarbonise our lives are also changes that will improve our lives - they will be more socially positive, economically beneficial, and (on occasion) more beautiful than sticking with the way we do things now.” We need story-tellers now, as well as economists.

Emma Pinchbeck is Head of Energy and Climate policy at WWF UK

The views expressed in this article are those of the author, not necessarily those of Bright Blue.

We need a new Green Deal

One of the first achievements of Theresa May's new government was to secure the passage through Parliament of the fifth carbon budget. This committed the UK to reducing emissions by 53 per cent between 2028 and 2032 relative to 1990 levels. It was an important demonstration that our cross-party consensus on tackling climate change will continue. But how is the government going to make good on this now legally binding ambition?

Twenty-two percent of the UK's carbon emissions currently comes from heat and power used in homes. The Committee on Climate Change does not think that there is a cost-effective path to decarbonisation without eradicating these emissions. Owner-occupiers are the biggest sector in the housing stock. They also have the worst energy performance. Yet since the scrapping of the Green Deal in 2015, there has been no scheme to incentivise home energy improvements. That's why today Bright Blue is today publishing a new report proposing fresh policies to cost-effectively stimulate this market.

The first set of improvements that should be prioritised are energy efficiency measures, which reduce the amount of energy homes consume. Good progress has been made on installing cheaper measures, like cavity wall insulation, but for more expensive measures, like solid wall insulation, there is still much further to go. The Committee on Climate Change believe that around 10 per cent of the UK's carbon emissions could be mitigated cost-effectively through improving the energy efficiency of residential buildings.

The second set of improvements that should be prioritised are decentralised renewables, which decarbonise the remaining electricity and heating supply. For electricity, there is now about as much small-scale solar power in the UK as a large power station generates. Much of this uptake has been driven by falls in price. Renewable heat has seen slower progress, with just 2.5 per cent of our heating demand met by low-carbon sources. The Committee on Climate Change believes this heating figure needs to be at least eight per cent by 2020 if we are to achieve a cost-effective route to decarbonisation in 2050.

The government's previous scheme to incentivise these measures in the able to pay market, the Green Deal, is widely regarded to have failed. When the Green Deal launched in 2013, ministers predicted 14 million homes would be improved by 2020. Yet the reality was no way near that. Just 15,000 Green Deal plans had been signed by the time the scheme ended last year.

The Green Deal allowed households to fund improvements by a loan that was repaid through energy bills. This attractive off-balance sheet financing was made unappealing as a result of high interest rates and the long average payback period. In addition, the 'Golden Rule' limited the size of the loan such that repayments could not exceed the amount that was being saved on bills from the measures. As a result, the average Green Deal loan was just £3,500 - insufficient to finance expensive measures like solid wall insulation or heat pumps.

Bright Blue is making a number of recommendations for how these deficiencies with the Green Deal can be overcome.

First, the government should introduce new 'Help to Improve' loans and ISAs. The government should underwrite loans to households to finance an exciting package of home energy improvements including energy efficiency measures, decentralised renewables, battery storage, and smart appliances. The interest rates would be considerably lower than under the Green Deal, because the government has much cheaper borrowing costs than private lenders. In Germany, where there is a similar scheme to the one we are proposing, every €1 of public money spent on the programme earns the Treasury €4 in additional taxes and reduced welfare spending. A new Help to Improve ISA should also accompany this policy, to encourage households to save for improvements.

Second, the government should introduce new regulation to ensure there is consumer demand for home energy improvements and to give the supply chain confidence to invest. Homes should be prevented from being sold if they do not meet minimum energy performance ratings. Building regulations should also be amended to ensure that any general renovations, such as constructing a new conservatory or an extension, do not increase the home's overall carbon emissions.

The new government is currently drawing together its emission reduction plan for the end of the year. This will set out how it intends to meet the legally-binding fourth and fifth carbon budgets, in a way that is cost-effective and guarantees energy security. Incentivising more home energy improvements in this sector should be a top priority.

Sam Hall is a researcher at Bright Blue and co-author of 'Better homes'

This article originally appeared on BusinessGreen and can be viewed behind the paywall here.