Select Committee on Environmental Audit Seventh Report



  47. The potential for energy-savings is usually described in at least two categories: cost- effective (having a pay-back period of some recognised length under current assumptions about prices etc.) and technically possible (meaning simply that the technology is there). We came across no fundamental dissent between witnesses about the existence of significant potential for energy savings across all sectors. Estimates vary (probably due to differing interpretations of "cost-effective" and the boundary between it and "technically possible") but the potential is plainly significant. The sectors substantially within our sights were business and the domestic sector.

Business and industry

  48. The report of Lord Marshall's Government taskforce on the business use of energy contained the latest summation of the potential for energy efficiency improvements in UK manufacturing industry.[68] The work was undertaken by the Energy Technology Support Unit (ETSU) and reveals "considerable scope for cost-effective energy saving measures in all sectors, including those identified as energy intensive" up to 2010. Overall the cost-effective potential for savings was estimated to be 11 per cent of business as usual consumption (with a sectoral range of 8 to 28 per cent.). This potential was estimated to be doubled by the employment of 'all technically possible' measures (with a sectoral range of 14 to 40 per cent).[69]

Full implementation of all cost-effective measures was calculated to result in a saving of 6.6 MtC by 2010—more than enough to meet the likely Kyoto shortfall and some 23% of the improvement necessary to meet the domestic target. The DETR gave a range of between 3 to 10 MtC savings by 2010 from all business, with the upper figure representing the total cost- effective potential.

Domestic sector

  49. We received a variety of estimates of the potential for cost-effective energy-savings in the domestic sector from the DETR and from the Energy Saving Trust.

Table 7  Estimated energy-saving potential by 2010—domestic sector





total 3-7 MtC

of which 2-4 MtC from ESMs


£150-400m p.a


max. 7.5 MtC, of which

5.5 MtC realistic potential

£9.8 bn

£7 bn (pro rata)

Evidence from ACE stated "it is easy to identify investments totalling some £11 billion which would pay for themselves through the energy savings they would generate".[70] The DETR's report on HECA observes that local authorities identify the potential for a fraction under the 30 per cent improvement required under the Act between 1996 and 2010. However, we note that the POST briefing for this inquiry indicates that while there is significant technical and economic potential for energy savings in the housing sector the "market" potential ('achievable in practice'[71]) is virtually nil.[72]

50. We conclude that there is clear evidence of a substantial potential for cost-effective energy efficiency measures across the economy that are simply not being implemented. This is most starkly the case in the domestic sector. The question arises as to what is preventing their take-up?

Barriers to energy efficiency improvements

  51. The POST briefing identifies a great number of barriers across the whole spectrum of energy efficiency from innovation and basic research and development to installation. While we were primarily concerned with the barriers to the take-up of tried and tested measures with identifiable pay-back periods we were concerned to note that in 1997 only 4 per cent of the Government's energy research and development spending was devoted to energy conservation. Half the spend was on nuclear energy (of which almost all was spent on research in nuclear fusion—47 per cent of the total energy R&D budget); 18 per cent on fossil fuel research; 14 per cent on renewables; and another 14 per cent on power and storage and other 'cross-cutting' matters.[73]

Low and falling energy prices

  52. Our witnesses agreed that the chief barrier to promoting energy efficiency was the perception of falling energy prices. The process of market liberalisation has exerted a massive downward pressure on prices in line with the policy's objectives.[74] Competition was introduced in the industrial sector first. Lord Marshall's report on energy use in business describes the outcome. In 1996 UK industrial gas prices were the lowest in the EU and the second lowest in G7. Between 1990 and 1997 UK industrial gas prices fell by 46 per cent in real terms—the largest fall in the EU or G7. Over the same period UK industrial electricity prices fell by about 22 per cent. In 1996 they were the fourth lowest in the G7 and fifth lowest in the EU. The Government's proposed Climate Change Levy on the business use of energy, discussed below, has been announced as a countervailing force. With full competition now in place it is expected that prices for domestic consumers will start to fall with expectations of a 10 per cent reduction over time.

53. It is difficult to complain about lower prices especially to the extent that they reflect increased efficiency of electricity supply. However, price falls do seem likely to overwhelm current efforts to promote energy efficiency of use in two ways. Firstly, by simply making the economics less favourable in extending the pay-back period for any particular investment; and secondly, by reducing the imperative to seek out information or opportunities to make savings in the first place, whether at home or at work. Even in business, more equipped than the householder to address the bottom line, our evidence was that, when faced with investment choices between core business activity and energy efficiency, investment in core activity was likely to win out even if the pay-back was less certain and longer than with energy efficiency.[75] We discussed this in Copenhagen with Mr Svend Auken, the Environment and Energy Minister, and heard that the basic strategy in Denmark was not only to pass the benefits of liberalisation and competition on to the consumer in the form of lower prices but, through the use of taxes and levies, also in the form of the promotion of renewable energy and energy efficiency. This is in line with the principles of the strategies developed by the International Energy Agency (IEA) and the European Commission which, in summary, suggest that competition will secure efficiency gains in energy supply while taxes will secure efficiency gains in energy use.[76]

54. While the environment is claimed to be increasingly driving policy within Whitehal[77]l, research by the Energy Saving Trust indicates that people are not being motivated by environmental messages—hence their current 'Einstein' campaign which focuses entirely on cash-savings to be gained from energy saving.[78] However, we perceive that the more powerful message from the market is that competition will deliver cash-savings with no effort. To counter the general lack of priority given to environmental considerations, as identified by the Trust, Mr Meale told us that the Government had put £7 million into the 'Are you doing your bit' campaign.[79] We have enjoyed the campaign material so far but doubt whether it can really compete with market signals.

55. Falling energy prices appear to send stronger signals than awareness campaigns and seem likely to overwhelm current efforts to promote energy efficiency. The actual economics of energy efficiency investments will become less attractive but, more importantly, the already low priority afforded to the concept overall will be further weakened.

Energy services

  56. The problem posed by the price signal is exacerbated by the apparent determination of energy suppliers to compete solely on this point, at least in the domestic market. The provision of energy services (energy supply in terms of, for example, light and heat rather than units of electricity or gas) has not developed. Indeed we heard in evidence that some suppliers were choosing to differentiate their utterly fungible products with tariffs and schemes rewarding higher levels of consumption such as the provision, by energy suppliers, of Air Miles (which have their own sustainability issues in relation to the consumption of aviation fuel).[80] Mr Callum McCarthy, the new Director-General of both Electricity and Gas Supply told us that cost-reflective pricing was part of the promotion of efficiency throughout the energy supply system as a whole to which we refer above.[81] We regard incentives to consume higher levels of energy as flying in the face of current Government objectives—and the provision of Air Mile,s in this context, as rubbing salt in the wound. We recommend that Ministers, the Director-General of Electricity and Gas Supply and the energy companies together consider what measures are currently feasible and/or desirable to address this issue. An assessment should be made of the balance between the benefits of cost-reflective pricing compared to the poor environmental signals being given.

57. DETR told us that work was needed on why energy services, "a very basic and straightforward proposition" was having so much difficulty making a place in the market[82] and we welcome the proposed seminars on the matter. The Electricity Association told us that the requirement for customers to be able to switch supplier at a month's notice reduced the practicability and attraction of providing energy efficiency services on which a return would need to be made over the longer term.[83] Neither Mr Battle, the Energy Minister nor the EST saw this as an insurmountable problem as energy efficiency debt could be separated from supply debt with the former being transferred with the customer to the new supplier.[84] We recognise that the liberalised market is in its infancy and there are more changes to come—most significantly utilities reform legislation and the separation of the functions of distribution (the regional pipes and wires) from those of supply (the bills). It is inevitable that suppliers will be looking for strategies that do not impose rigid or long term obligations as things may change. However, we regard the development of energy services provision as fundamentally important to the achievement of the UK's environmental objectives and their promotion should be integral to the Government's stewardship of the completion of market liberalisation and not left for bolting on afterwards. Our recommendations below, with regard to the future for the energy efficiency programme, Standards of Performance, are relevant.

Lack of information

  58. The lack of priority given to energy efficiency at home and at work is partly a cause, and partly a result, of difficulties in securing appropriate information on the available measures and means of implementing them. Without information the benefits will not be understood and nor will attention be devoted to securing them. Without inducements to pursue potential benefits the information will not be sought. This lack-of-information barrier applies as much to the lack of information about actual energy costs, due to billing arrangements (whether the virtual invisibility of direct debit arrangements or the actual invisibility of a notional service charge), as to possible means of reducing consumption.

59. The Government's current programmes are very much focussed on the provision of information and the promotion of awareness in all sectors. We regard the efforts of the best practice programmes for industry and of the Trust for SMEs and households to be worthwhile. However, advice and information need to be first sought out, then provided, and finally acted upon.

Lack of resources

  60. To invest to save energy capital is needed up front. In addition, as described above, even where resources are available priority needs to be assigned to energy efficiency for the matter to be allocated funds. Clearly in the case of fuel poverty, a lack of funds, or access to them, is likely to be a problem by definition. The issue of split incentives seems also to be a significant issue here. For example in the case of rented accommodation or premises where the tenant may be reluctant to sink funds into property improvement and the landlord may be equally reluctant so in the light of fact that the benefits will accrue to the tenant (and the low status of energy efficiency may make such investment a low priority in terms of property improvement to attract future tenants). Furthermore tenants may be reluctant to pursue such improvements if rent increases might then ensue.

61. We regard the over-arching barrier to be as Mr Andrew Warren of ACE described: that energy efficiency is "exceptionally boring" smacking of frugality and doing without. Combined with perceptions of low and falling prices the information available from various sources is either not sought out or not acted on as competing priorities win out. We believe that the "Are you doing your bit?" campaign theme is unlikely to redress this balance. This message seems redolent of wartime exhortations on rationing or 'digging for victory' and runs counter to the "gain not pain" message with which the Deputy Prime Minister launched the Climate Change consultation and which expresses the potential for economic, environmental and social benefits arising from improvements in energy efficiency.

68  Op.cit., pp54n- 56. ETSU has not published figures for the potential for energy savings in the energy supply industries and the Building Research Energy Conservation Unit (BRESCU) are working on estimates for the commercial sectors. Back

69  "Cost- effective" and "technically possible" are defined in the Marshall Report, pp54-5. Back

70  Ev p 34 Back

71  Technically possible, financially attractive and simply implemented. Back

72  Ev p 22 Back

73  Energy Policies of IEA Countries, The UK 1998 Review, International Energy Agency/OECD, 1998 Back

74  QQ178 and 139 Back

75  Q617 Back

76  Energy Efficiency in the EC - towards a strategy for the rational use of energy, COM(1998)246 and Energy Efficiency Initiative, IEA, 1997. Back

77  Q214 Back

78  Consumers' Association, Warm homes, low bills, cool planet, 1997. Back

79  Q679 Back

80  Q208 Back

81  Q527 Back

82  Q218 Back

83  Ev p 307 Back

84  QQ116 and 454 Back

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