House of Commons - Trade and Industry

Select Committee on Trade and Industry First Report

Energy Efficiency

115. The energy regulators both share specific statutory duties with the Secretary of State to promote the efficient use of energy, particularly among domestic consumers.

The E-factor

116. OFGAS's primary tool to promote energy efficiency, known as the `E-factor', was instituted under the previous Director General, Sir James MacKinnon. Under the RPI-X revenue cap, British Gas is allowed more revenue for every extra therm of gas sold, therefore investment directed to increasing gas sales clearly has revenue benefit for British Gas. However, if an equivalent amount is invested in energy efficiency schemes, there is no increase in the cap. The E-factor, allowing British Gas to pass on to tariff customers the costs of investment in energy efficiency measures, was introduced, as the current DGGS told the Environment Committee in 1994, to "counteract this specific regulatory distortion" created by the RPI-X formula.[258] Thus the schemes which qualify for the E-factor are those where increased gas sales and energy efficiency are commercial alternatives. "There is no scope within the E-factor for spending money which would not be commercially viable if there were no regulatory distortion".[259] Schemes under the E-factor have to be approved by the regulator and are, in practice, managed by the Energy Saving Trust.

117. The E-factor has been used to provide some core funding to the Energy Saving Trust and also to fund condensing boiler and residential combined heat and power projects run by the Trust on behalf of British Gas. Under the gas condensing boiler subsidy scheme some 9,700 boilers were installed, representing a fourfold increase in sales over the previous year.[260] In the year ending 31st March 1995, the DGGS agreed that £2.3 million was eligible to be passed through as a charge to tariff customers under the E-factor.

118. However, widespread use of the E-factor has been suspended.[261] The current DGGS told us that the E-factor was in effect a levy on consumers and that "I do not see that it is the role for an independent regulator, who is not fully accountable to Parliament, to raise taxes on gas consumers ... that should be a decision for Parliament".[262] She also said that she would prefer a scheme to promote energy efficiency parallel to that introduced in the 1995 Gas Act to address social concerns, whereby a decision on any levy is taken jointly by the regulator and the Secretary of State. We have previously recommended that the Government, and not the regulator, should take responsibility for any imposition of a levy for energy efficiency.[263] We have seen no evidence to suggest that our original recommendation was misguided and therefore we broadly agree with the stance taken by the DGGS, as we have done before. As Mr Eggar told us "It should be a matter for Government to decide whether additional charges should be paid by consumers for environmental matters, rather than for the regulators".[264] We recommend that the Government accept responsibility for raising any levies on gas consumers to fund energy efficiency measures and that, it introduce appropriate legislation to achieve this.

Standards of Performance

119. OFFER created a scheme similar to the E-factor through PESs' Standards of Performance conditions. In 1991, the DGES set 16 Standards of Performance for PESs on important aspects of customer service. One of the conditions requires PESs to arrange energy saving projects for their customers, the costs of which can currently be passed on to tariff customers at a rate of £1 a year.[265] Energy saving projects under this scheme must be approved by the DGES and "to date over 280 projects have been approved involving a planned PES expenditure of almost £59 million".[266] Projects include insulating over 210,000 homes and distributing 4.75 million compact fluorescent light bulbs. OFFER estimate that Standards of Performance projects already approved will produce energy savings in the region of 4,300 gigawatt hours over their lifetime.[267] The Energy Saving Trust, who manage many of the Standards of Performance projects on behalf of PESs told us that, overall, such projects had already led to a 4.55 million tonne reduction in carbon dioxide emissions - equivalent to the emissions that might be expected from 900,000 households.[268] The Department of Environment told us that for every £1 spent, customers should receive a £5 energy benefit.[269] Most witnesses who commented on the Standards of Performance scheme, like the Royal Society for the Protection of Birds, believed that it had been successful.[270]

120. Some witnesses expressed concern over the future of the scheme after liberalisation.[271] The DGES has, to some degree, already addressed this concern. In January this year he published his revised proposals for price restraints in the post- liberalisation market which included proposals for the continuation of the Standards of Performance levy from 1998 for 2 years.[272] The scheme would then be reviewed again.

121. We have the same reservations over the constitutional position of the Standards of Performance scheme as those regarding the E-factor. Therefore, we recommend that the Government accept responsibility for raising any levies on electricity consumers to fund energy efficiency measures and that, it introduce legislation to achieve this.

Other environmental regulation initiatives

122. Both regulators have also attempted to discharge their environmental duties through the operation of price controls and through other licence conditions. All suppliers of gas and electricity to the domestic market are required by licence to provide energy efficiency advice to customers upon request.[273] The proposed new price controls for British Gas Supply are more cost-reflective and, consequently, will reduce any artificial incentive to sell more gas. Similarly, the proposed controls for TransCo, with a 50:50 split between fixed revenue and per therm revenue will, according to the DGGS, remove artificial incentives to transport more gas and increase incentives towards the efficient use of gas.[274] For its part, OFFER told us that recent revisions of price controls for transmission, distribution and supply companies have reduced the extent to which revenue is linked to volume or, in the case of the NGC, linked to maximum demand on the system, thereby removing artificial incentives, which existed in the original controls, to sell more electricity.[275] OFFER also pointed out that price controls promote energy efficiency by increasing the incentives to reduce electricity losses in transmission and distribution.[276] The Environment Agency has welcomed these new price controls.[277]

123. Despite these measures, some witnesses questioned whether the regulators were doing enough to promote energy efficiency and discharge their wider environmental duties. The Energy Saving Trust told us that there was "very little evidence that much importance is attached to ... energy efficiency and the environmental duties"[278] and the Association for the Conservation of Energy said that "there is scope for, and feasibility of, more positive action".[279] As we have already stated primary responsibility in this area should lie with the Environment Agency. We recommend that the regulators do their utmost, within their respective remits, to promote energy efficiency.

The impact of competitive supply markets on energy efficiency and energy conservation

124. There has been much public debate on the likely impact of liberalisation in supply markets on progress towards energy efficiency and energy conservation. It has been argued that, if energy prices fall as suppliers compete for market share as, for instance, they have in the gas trials in the South West, there will be less incentive for domestic users to conserve energy or invest in energy saving equipment and that the pay-back period for such investment would be longer. Concern focuses on the fact that, initially at least, competition is likely to centre on price. This is certainly the message from the gas trials in the South West where prices have fallen by some 20%.[280] The DTI estimate that for every 10% drop in energy prices demand is stimulated by 2%.[281]

125. The Department of Environment told us that there "is not necessarily a conflict between the desire of companies to increase their market share and the need to promote energy efficiency, provided the overall market does not increase in size".[282] Moreover, the UK Round Table on Sustainable Development added that "market forces can assist a move towards sustainable development" provided that they operate within a regulatory regime which addresses environmental concerns.[283] OFFER believe that competition in supply "should strengthen the incentive on suppliers to offer more efficient solutions to customer needs"[284] and British Gas, amongst others, supported this argument, stating that "supply companies can gain market share by ... offering better and additional services".[285] These "better and additional" services are commonly referred to as energy services.

Energy Services

126. If the development of energy services is to compensate for the negative impact on energy conservation that lower prices is likely to have, it is important that such services develop quickly. The Association for the Conservation of Energy told us "the free market alone is not likely, in the short to medium term at least, to result in an energy sector which meets society's needs in an optimal way".[286] The World Wildlife Fund estimated that energy services will not emerge for several years.[287] The UK Round Table on Sustainable Development, in their Report on The Domestic Energy Market: 1998 and Beyond, expressed similar concerns.[288] We support the recommendation of the UK Round Table on Sustainable Development that the government "should consider promoting the development of energy services if these do not emerge quickly on their own accord".[289]

127. Even if energy services do emerge, there are a number of reasons, other than falling prices reducing incentives, why consumers may choose not to take advantage of them, as British Gas pointed out.[290] Consumers may lack the necessary information to be able to assess the impact of particular efficiency measures; they may not be in a position to be able to receive the benefits of such measures - for instance landlords or tenants; or they may not have the funds required for the initial investment. The Government has a number of initiatives designed to promote energy efficiency to domestic consumers. For instance the Energy Efficiency Best Practice Programme seeks to raise awareness of the considerable scope for energy savings and the financial and environmental benefits that can be gained; and the Home Energy Efficiency Scheme provides grants to allow qualifying low income consumers to carry out energy savings measures.[291] Nevertheless, with the liberalisation of domestic energy supplies, there is a need, and potential, for further initiatives. We recommend that the Government consider further ways, for instance through consumer education, building regulations, appliance standards, labelling schemes and, where appropriate, financial incentives, to encourage all consumers to invest in cost-effective energy efficiency measures.

The Energy Saving Trust

128. Significant parts of the Government's energy savings initiatives are implemented through the Energy Saving Trust, for which it provides core funding. However, the Government have not guaranteed long-term funding for the Trust, stating that "the funding will be tapered to reflect the Trust's role as a catalyst, stimulating investment in energy efficiency and the development of self-sustaining markets for energy efficient goods and services".[292] At present the commitment to funding only covers the first few years of a competitive market. Both the Trust itself and the UK Round Table on Sustainable Development argue that the Government should, to ensure the development of energy services and to counteract the effects of liberalisation, make a commitment to the long-term funding of the Trust.[293] We agree. We recommend that the Government should make a commitment to the long-term funding of the Energy Savings Trust.

258 Energy Efficiency: The Role of OFGAS, Minutes of Evidence taken before the Environment Committee, HC 328, Session 1993-94, p.2. Back

259 Energy Efficiency: The Role of OFGAS, p.2. Back

260 Mem. p.6. Back

261 Mem. p.59. Back

262 Q. 893. Back

263 First Report from the Trade and Industry Committee, Session 1994-95, on The Domestic Gas Market, HC 23-I, para 45. Back

264 Q. 301. Back

265 Q. 1039. Back

266 Ev. p.279. Back

267 Ibid. Back

268 Mem. p.59. Back

269 Mem. p.6. Back