Select Committee on Environmental Audit Seventh Report

  SEVENTH REPORT

GOVERNMENT ACTIVITY

Institutional arrangements

63. The Green Alliance has proposed the establishment of a "sustainable development agency" to take responsibility for all aspects of energy efficiency and renewables promotion creating a more dynamic and visible regime.[85] We did not take a great deal of evidence on the promotion of renewables and so find it difficult to draw conclusions with regard to the potential for significant synergies between programmes to promote energy efficiency and those to promote energy efficiency. However we would point to the risk that putting all the 'green' programmes in one place may, as the Green Alliance's report does recognise, lead to marginalisation. One way to avoid this marginalisation would be to go further than The Green Alliance have suggested and to put the whole of energy policy within the ambit of the environmental protection as has been done in Denmark. This was described by DETR officials as representing a "significant statement of priorities" and a decision for the Prime Minister.

64. The Minister with specific responsibility for energy efficiency, Mr Alan Meale, emphatically denied that the Government's arrangements for promoting energy efficiency were incoherent. He told us: "We do not see the need for any agency, particularly because of the added costs and bureaucracy which, inevitably, such an organisation would bring. It is difficult to conceive of an agency which would be broad enough to cover absolutely every aspect of energy efficiency...we have a very good working system which enables us to develop energy efficiency policy and carry it forward. We do not believe an agency would add very much at all".[86] A number of witnesses identified political will as more important than administrative arrangements[87] and we would agree but recognise that at a practical level the priority afforded to energy efficiency seems to be so low that administrative arrangements need to be as efficient, simple and as high profile as possible to be effective. We recommend that the Government review its arrangements for developing and implementing sustainable energy policy and the potential for synergy between efforts to promote energy efficiency and efforts to promote the development of renewables. In particular it should consider carefully the concerns that have led to calls for innovation, for example, the establishment of an independent sustainable energy agency. It seems clear that while Government believes its arrangements can be made to work, this view is not shared by significant partners outside Whitehall.

65. What seems to us to be vital is that all the initiatives should be pulling in the same direction and that opportunities are sought out and taken to integrate energy efficiency concerns into other policy areas, such as planning and urban regeneration, and legislative proposals as and when these arise. In the absence of a specific institution this requires a comprehensive sustainable energy strategy covering both sources and use to provide clear principles for policy decisions with an energy dimension and clear goals. Mr Meale appeared to agree. He told us: "Our main objective is to have a good, sustainable energy policy" and agreed that there was a need for the Climate Change Programme to include a sustainable energy strategy with very clear targets.[88] We agree that a strategy with clear targets is vital but believe that such a strategy will need championing. We recommend that a new unit with a dedicated staff be given specific responsibility for driving and coordinating policy on energy efficiency; its integration into other policy areas; and for identifying barriers to effective action. The unit should report to the relevant Ministers in both the DETR and DTI and have a remit to advise Ministers on: particular barriers and opportunities in the promotion of energy efficiency throughout all Government policies and programmes; and on what action is needed when logjams have been identified.

Specific programmes

  66. The Government has inherited a number of programmes for promoting energy efficiency covering all sectors of the economy. The focus has been on the provision of advice and information, raising awareness and some incentive funding. The major exceptions are the HEES for fuel poverty (discussed above) and the Standards of Performance scheme which provide substantial funding. In line with IEA recommendations to supplement advice with appropriate incentives[89], the major innovation by this Government has been the announcement of a tax on business use of energy and an associated fund for promoting energy efficiency and renewables.

Industry

Programme	Objectives	Funds (£)	Targets	Performance
DTI's Environmental Technology Best Practice Programme (ETBPP)	Industry: advice and information to encourage business to adopt the optimum environmental technologies (including energy efficiency)	1999-02   8.1m	£320m of savings for industry by 2015.	By the end of 1998 £50m savings per year were being achieved
Energy efficiency Best Practice Programme (EEBPP)	Industry and business: advice and information to encourage energy efficiency improvements across the UK economy	1999-02   59.0m	Energy savings of at least 20 times the direct cost to government.	Per year: energy savings of £650m and 3.25 MtC
Climate Change Levy	Industry and business: a tax on energy for the promotion of energy efficiency. Rebates will be available for sectors that can offer emissions savings from negotiated agreements	200-02   to raise   1.7bn	1.5 MtC	—

67. The programmes for industry provide information and advice rather than grant funding or tax incentives and this is unchanged under proposals for the Climate Change Levy. There appears to be some overlap between the best practice programmes and there may be value in reviewing them to assess whether a single programme might be able to offer economies of scale and a higher critical mass of expertise (they currently share a telephone hotline). We note that the impact of the DETR's Energy Efficiency Best Practice Programme (EEBPP) is assessed annually with that assessment subject to independent audit in 1997-98. We commend this approach but believe that there is merit in looking at the Government's basket of initiatives in the round to complement programme-specific assessments.

68. With the announcement of the Climate Change Levy calls upon the resources of the best practice programmes may need to increase—indeed we regard the establishment of the Levy as an opportunity for the programmes to go on the offensive to promote themselves to a more receptive audience. We note that, while the DTI's Environmental Technology Best Practice Programme (ETBPP) has an increased annual allocation for 2000-02 of £1m over plans for 1999-00, this is still £0.4m shy of peak outturn in recent years (1997-98). The EEBPP's budget on the other hand is set to rise from £15m this year to £22.5m in 2001-02. In addition to assessing the benefits of combining the two programmes the Government should consider whether the resources available are sufficient to make the best out of the introduction of the Climate Change Levy.

Small and medium size enterprises and domestic sector

Programme	Objective	Funds (£)	Targets	Performance
Climate Change Levy Fund	SMEs: for the promotion of energy efficiency and use of renewables (to be developed)	2001-02   50m	—	—
Energy Saving Trust (EST)	Domestic and SMEs: information and incentive funding to develop new ways to promote the efficient use of energy (developing and maintaining the infrastructure of energy efficiency)	1999-02   72m   1997-98   19.7m	—	From projects implemented in 1997-98: —Savings of 15,000 GWh —Reduction of CO2 emissions of nearly 1 MtC.
Energy Efficiency Standards of Performance scheme (EESOPs) (Administered by EST for the Office of Electricity Regulation)	25% all sectors, 75% domestic sector (overall 50% for low income households): requirement on public electricity suppliers to carry out energy efficiency projects financed by a charge to the consumer (average £1 per customer)	1994-98   134m1	From projects implemented by end March 1998: Savings of 6.1 billion units of electricity	From projects implemented by end March 1998: —Savings of 6.8 billion units of electricity (1.5% of consumption) —Reduction in CO2 emissions of 6 MtC

1. £101.7m from all customers; £25m from beneficiaries; £7m from other sources

69. The Energy Saving Trust (EST) itself and the Standards of Performance initiative are aimed at both SMEs and the domestic sector where energy efficiency issues are largely similar. Programmes aimed specifically at the domestic sector such as HEES (discussed above) are set out below. There was no dissent in our evidence from the view that the work by the Trust was of a high quality and demonstrated an excellent use of resources. The Trust is responsible for a wide range of programmes aimed at developing the infrastructure of energy efficiency, raising awareness and creating incentive programmes to encourage taken- up of measures. The Trust operates a number of different kinds of funding including a revolving loan fund for Northern Ireland SMEs, competitive bid funding for local authorities implementing their HECA obligations and straight cash-back schemes. The Trust has recently been asked by the DTI to develop a verification system for "green" tariffs for the supply of electricity from renewable sources. A further new task has been the facilitation of a partnership between about 250 stakeholders in domestic home energy efficiency (now the Energy Efficiency Partnership for Homes). The Trust also administers the Standards of Performance scheme on behalf of OFFER.[90] Given this broad experience of partnerships and work with SMEs we believe there is merit in Ministers asking the Trust to administer the fund for sustainable energy being created out of revenue from the Climate Change Levy.

70. We do note the Trust is not currently set any targets by Ministers for energy savings or emissions reductions although it does publish information on outcomes as given in the table above. We believe that there are benefits to in target-setting and that Ministers should consider agreeing some with the Trust— perhaps on a programme by programme basis. Given the Trust's central role in advancing the Government's objectives we think there might also be an advantage in establishing a formal channel for independent and public advice to Ministers from the Trust on opportunities and obstacles presented by Government policies for advancing the objectives of energy conservation.

Domestic sector

Programme	Objective	Funds (£)	Targets	Performance
Revised Home Energy Efficiency Scheme (New HEES)	Domestic sector (low income): grant funding for energy efficiency improvements. New scheme will focus on private sector.	1999-02   375.3m	New target (1999): energy efficiency measures installed in one million homes by 2002.	Between 1991 and spring 1999: 3 million homes set to have received assistance (Between 1991 and 1996 estimates of fuel poor homes have dropped by 2.3 million)
Home Energy Conservation Act 1995 (HECA)	Domestic sector: requirement for each housing authority to identify measures to achieve significant improvements in the energy efficiency of dwellings in its area.	—	30 per cent. improvement from 1996 baseline by 2010.	At end March 1998: evidence pointed to a 2- 2.5% improvement on the 1996 baseline
Property improvement programmes1	Domestic sector: estimate of resources available and spent on energy efficiency dimension of housing improvement)	1998-99 to 2000-01 in excess of £760m	—	—

1. Elements of House Renovation Grants and Home Repair Assistance; Capital receipts initiative; LA social housing works; CSR allocation to housing; New deal for Communities; and Single Regeneration Budget. Ev p 234.

71. HEES and the property improvement programmes are discussed above in relation to fuel poverty. The Home Energy Conservation Act is a requirement on local authorities who are housing authorities to report on energy conservation in their area with a view to establishing a strategy for making 30 per cent. improvements over the next 10 to fifteen years. We heard in Nottingham that no identifiable resources had come with the duty and ultimately all local authorities are required to do is report.[91] Mr Meale pointed to the resources that various initiatives had channelled to local government for housing improvements, a significant proportion of which was available for spending on energy efficiency improvements to local authority housing stock.[92] As we have mentioned the EST runs a competitive programme to fund a small number of 'HECAction' projects which are successful in a bidding process. We regard the HECA legislation as providing a useful framework under which local authorities can organise their efforts on energy efficiency as well as serving as something of a spur to action. However, it seems clear from the first HECA report that responses to this spur have varied and overall performance has a long way to go before a rate of improvement is achieved that will meet the 30 per cent target by 2010.

Overall

  72. There are clearly a plethora of programmes and sources of funding for energy efficiency such that it is difficult to assess the extent or the adequacy of the whole package in terms of either the social or environmental objectives. However, we fully expect that this is a task for the DETR in developing the Climate Change Programme. The point made to us by a number of witnesses, notably in Nottingham, was that an enormous amount of time and effort went into achieving coherence between funding sources, including those in Europe, for any particular project. In addition a focus on competitive bids often resulted in efforts being wasted as the majority of bids were unsuccessful.[93] We conclude that the Government needs to reassess its many different programmes for promoting energy efficiency to achieve a simpler, streamlined and more efficient approach.

73. One further point that is clear from the available information is that there is a need for a consistent methodology for expressing energy savings, emissions reductions and policy costs (in terms of £/MtC) across the range of programmes. We welcomed Mr Meale's sympathy on this point and his assurance that simpler ways of presenting such information were being developed as part of the Climate Change Programme. In addition estimates of performance need to avoid double-counting especially in the present situation where funding from different programmes and sources is co-mingled in single projects and framework initiatives like HECA will be reporting improvements individually attributable to a range of programmes across the board. We recommend that the Government's work on the draft Climate Change Programme address the development of a clear, accurate and consistent way of expressing the targets and performance of its energy efficiency programmes.

Taxes, levies and obligations

The Climate Change Levy

  74. We welcome in principle the announcement by the Chancellor of the introduction of the Climate Change Levy. We were not able to discuss the levy with witnesses in any detail[94] but we would raise a number of points in response to the Chancellor's announcement, the consultation document issued by HM Customs and Excise and Lord Marshall's report.

• Customs ask whether the Levy should be identified on consumers bills. It seems to us perverse to do otherwise given that the tax is designed to change behaviour and put energy efficiency more firmly on the agendas of businesses in the UK. In addition we believe that the impact of the CCL on changing commercial behaviour change would be assisted by the simultaneous requirement for energy consumption and greenhouse gas emissions, to be included as part of companies' statutory reporting obligations. We recommend that the Climate Change Levy be identified clearly on consumers' bills.

• We note concerns raised by the energyn- intensive sector in relation to its competitiveness. While we detect an element of special-pleading in this against a background of falling industrial energy prices in the UK and the potential identified for efficiency improvements by Lord Marshall this issue must be addressed in determining the detail of the tax. We believe the Government, in partnership with industry, should look at this issue on the basis of whole business costs. This issue might also be pursued in the context of discussions on tax harmonisation at a European Union level. The Government should address the impact that the Levy will have on the competitiveness of heavy users of energy in a proportionate way.

• The Levy is based on energy consumption rather than 'broadly' reflecting the carbon content of fuels as recommended by Lord Marshall. While we note the argument that renewable electricity may not be disadvantaged by the Levy in relation to other sources of power generation, we believe that it is in line with the Government's objectives for renewable energy to receive special treatment. Consideration should be given to granting exemptions from the Climate Change Levy for electricity bought under verifiable "green" contracts which utilise electricity generated from renewable sources. In evidence to us in another inquiry the Financial Secretary told us that the sticking point was distinguishing 'green' electricity from any other sort. We regard the initiative for verification of green tariffs and contracts by the EST to be an obvious answer to that difficulty. We recommend that electricity bought under verified green tariffs be exempted from the Climate Change Levy.

• We could not determine an exact rationale for the proportion of Levy revenue going into a fund for the direct promotion of renewable sources and energy efficiency. £50 million is 2-3 per cent of expected revenue, comparing poorly with levels for similar initiatives elsewhere in Europe. The Financial Secretary told us it was determined in relation to existing spending on similar initiatives. We do not regard existing spending as necessarily an appropriate indicator of sufficiency. Mr Meale told us that it was much as could be 'squeezed out' of the Levy but that "there is no exact definite direct reasoning for that calculation." We would like to have seen work done to estimate the effect on expected energy savings from a range of funding levels and the most cost-effective level selected. Due regard would have to be given to the capacity of the energy efficiency infrastructure to use the resources. Without definite reasoning ourselves, we believe that such work may indicate a substantial increase in the fund, perhaps a doubling. We recommend that the amount of direct funding for energy efficiency under the Climate Change Levy be doubled and reviewed over time as to cost-effectiveness in securing savings.

• Apart from the £50 million fund, the revenue from the Levy is to be recycled to business and industry through a cut in the rate of National Insurance Contributions (NICs). We welcome the shift of taxation onto 'bads' (like pollution and consumption of natural resources) and away from 'goods' (like labour) that this represents as heralded in the Treasury's Statement of Intent on Environmental Taxation. However, in the case of the Levy it might have been expected that some of the revenue would be recycled in a way that more directly addressed the base on which it was levied—energy consumption—in line with the definition of a 'levy' given to us by DETR officials.[95] We believe the Government should assess the effects of using a proportion of the Climate Change Levy revenue to provide continuing incentives and assistance for investments in energy efficiency in the form of tax breaks or rebates.

• We note Lord Marshall's emphasis on the importance of stepping up the pace on efforts towards establishing a national emissions trading scheme. The implementation of the Integrated Pollution Prevention and Control (IPPC) Directive and discussions of voluntary agreements (related to Climate Change Levy rebates) with intensive energy- using sectors seem to provide the ingredients for progress. Compatibility and synergy between the Levy and any emissions trading system is vital. For the Government and interested parties not to consider options for emissions trading schemes alongside the development of the details of the Levy may prove a lost opportunity.

Value-Added Tax (VAT)

  75. In previous reports we have considered the perverse differential between VAT on energy saving measures (ESMs) at 17.5 per cent and the rate on domestic fuel and power at 5 per cent. The Government has reduced the rate for ESMs installed under certain Government schemes aimed at low income groups. The Government has been emphatic that is as far as European VAT law will permit them to go. We heard from ACE that the European Commission did not necessarily agree with this interpretation.[96] At least, as DETR officials put it, the Commission's advice on the matter was 'delphic' and capable of interpretation either way.[97] As this report was being prepared we received advice from Customs and Excise stating that the Commission had confirmed the limitations imposed by the 6th VAT Directive in that reduced rates of VAT may only be applied in relation to 'social policy'.[98] We urge the Government to secure the earliest possible opportunity for reviewing the VAT Directive, in concert with its European partners, under the banner of the Community's responsibility to develop "common and coordinated measures" to assist the achievement of the Kyoto targets. We note that, as things stand, there is little likelihood of the Commission coming forward with proposals for revision this year.

76. Given this situation we note the possibility for an alternative approach to this conundrum. There is a Commission proposal for a Directive that would allow Member States to apply reduced rates of VAT (for a limited period) for certain services that are labour-intensive; provided direct to final consumers; are predominantly local; and will not distort competition nor prejudice the smooth functioning of the single market.[99] This proposal is framed with the intention of addressing unemployment by stimulating local services. It appears to us that the home insulation industry satisfies these criteria admirably. We received evidence that this industry offered significant employment opportunities for the sort of jobs that were most needed.[100] We believe that support for this proposal may constitute an integrated response to both social and environmental issues in encouraging employment and allowing the UK to apply a reduced rate of VAT to all installations of energy saving materials. We recommend that the UK supports the proposal for a Directive allowing temporary VAT reductions for local services and applies the reduction, once available, to all installations of energy saving materials as a priority.

Energy Efficiency Standards of Performance

  77. While the Government is set against any further taxes on domestic fuel and power it does intend to use the regulatory regime to secure energy savings which will be paid for by all energy consumers. Currently the Office of Electricity Regulation runs a scheme under existing statutory powers, Energy Efficiency Standards of Performance EESOPs), under which public electricity suppliers are obliged to achieve set levels of energy savings for their customers and are allowed to pass through costs of, on average, £1 per customer per year. The scheme is overseen by the Energy Saving Trust. This has levered in funds in total of £134 million since 1994, £25 million in 1998-99 and has achieved reductions estimated to be 6 MtC. Although of remarkably low profile the scheme has been judged a success, including by the National Audit Office.[101] Under the Government's proposals for regulatory reform it seems likely that this scheme will be extended to all electricity and gas suppliers and the level of required savings will be increased. This initiative appears to be the main plank of the Government's effort to unlock the potential for energy efficiency improvements within the domestic sector.

78. The financial implications of this new programme for customers and companies are expected take it beyond the discretionary powers of the regulator and new legislation is required. Ministers were not forthcoming about the implications for consumers' bills stressing that government would not be setting prices. However, Mr Battle said that estimates in the Climate Change consultation document of the cost of delivering the best five domestic energy conservation measures would mean an average increase of about £17 per customer per year.[102] The Energy Saving Trust said that it would be looking for a 'gentle' rise over a number of years to an average of about £6 per customer per year for both electricity and for gas customers (ie £12 on average per year).[103] While it is true that Ministers will not determine customers' prices, Ministers will be responsible for determining the levels of energy savings that energy companies will be required to achieve and this will to a large extent determine the effect on prices of the scheme. Indeed it is precisely these sorts of increases that led the Government to conclude that it needed to make specific statutory provision for such schemes as set in A Fair Deal for the Consumer. Mr Callum McCarthy, the Director-General of Electricity and Gas Supply, was clear that the current level of an average £1 per customer per year was as far as he felt he could go in implementing his secondary duty to promote energy efficiency amongst consumers.[104]

79. There is a debate within government and elsewhere about where to place the obligations and what to do in the interim period before the much heralded Utilities Reform Bill sees the light of day. With the advent of full competition electricity suppliers will no longer have a fixed geographical customer base and administering a Standards of Performance Scheme will become more complicated. The regional distribution function, separated from supply, will remain monopolistic and therefore subject to price control. The main advantage of the scheme seems to us to be that, while not a tax or a levy, it is a way of securing resources from customers that are hypothecated for energy efficiency improvements. From our evidence we see two main advantages to putting the obligation on suppliers:

• Without price control the incentive will be stronger for suppliers to secure the most costn- effective response to achieving set levels of savings. However, guidance will be necessary if the current policy of directing a proportion of the scheme to the benefit of those on low income is to continue.

   —  Energy suppliers are closer to consumers and consequently have more tools to employ in wielding influence over consumer behaviour. In addition there is the lack of development of energy services companies (ESCOs) in the domestic sector. Requiring suppliers to devote at least some of their energies to delivering, or purchasing, energy savings may assist the development of commercial energy services.

The new scheme has been the subject of informal consultation between Government departments, industry and other players in the energy and energy efficiency policy field such as the EST and ACE. We were surprised that, given the implications for consumers' bills, there has not been wider and more formal consultation especially in the light of the low level of awareness of the existing scheme. We believe that the more significant amounts of money under consideration necessitate an effort to engage consumers in discussions of the proposals. This may yield the double benefit of maximising the impact of the 'stick' represented by the cost implications and increasing taken- up of the 'carrots' that the scheme will be able to deliver.

In the interim

  80. We heard from the Energy Saving Trust that there were two problems in advance of the new legislation coming into force - unlikely before 2001. The first was that the current Standards of Performance scheme was set to finish in March 2000. It applied only to franchise customers of the existing 14 public electricity suppliers (PES) and therefore was set to diminish as customers moved between existing companies or to new companies. If a hiatus occurred between the old scheme and the new arrangements the EST saw the potential for the expertise built up by the companies to dissipate. The second problem was that, although the legislative powers existed, no equivalent scheme was in operation in respect of gas supply—the 'Spottiswode legacy'—a difficulty since 80 per cent. of homes are heated by gas and OFFER has only allowed insulation under the scheme to be offered to customers with electrically-heated homes.[105]

81. The EST and other witnesses urged Ministers and the new Director General of Electricity and Gas Supply, Mr Callum McCarthy, to address this issue. In evidence to us Mr McCarthy said that he would have difficulty going beyond the current scope of his activities without a greater degree of clarity from Ministers. He said that "It seems to me that if the Government say they are clear that when the legislation comes in it will do A, B and C and that, once there, they intend to give the following instructions and to take the following powers under whatever the legislative process might be, giving statutory underpinning where there is a significant financial impact, all that would be very helpful in giving me a reference point, which clearly I would take into account."[106] In turn Ministers told us that they could not direct the regulator but they had written to him setting out the Government's intentions. Mr Meale told us that with respect to extending the existing scheme and expanding it to cover gas supply he had been clear saying "Read my lips: we expect that to happen".[107] Mr McCarthy told us that in terms of producing a helpful degree of clarity "the Government still has quite a long way to go."[108] We were concerned by the apparent lack of communication between Ministers and the Director-General of Electricity and Gas Supply over the immediate and longer term future of Standards of Performance scheme. We urge Ministers to respond to the request for clarity over their intentions set out by Mr McCarthy in evidence to us.

82. We recommend that all necessary steps be taken to extend the existing Standards of Performance scheme for electricity supply until the advent of the new utilities legislation including, if necessary, securing the voluntary participation of suppliers outside the ambit of the existing legislation. We urge the Director-General to establish a Standards of Performance scheme for gas suppliers as soon as possible using the successful electricity scheme as a model (and we recommend that his statutory powers to do so are not allowed to lapse by the Secretary of State for Trade and Industry).

83. The necessary authority for an expanded Standards of Performance Scheme and for statutory guidance on social and environmental matters between Ministers and the regulator will be contained within a forthcoming Bill to reform the utilities. The DTI described this Bill as a priority for them but said that provision of a legislative slot was a matter for the Prime Minister.[109] We asked whether the Bill was ready for publication in draft form as has been undertaken with a number of other Bills this session. The DTI wrote that the Bill would be published in draft "if it were possible".[110] Given the contradictory position that exists between the current legislative provision and actual developments in the energy market we see the reform of utilities regulation as a priority from the environmental perspective. The conclusions of the Government's consultation on A Fair Deal for the Consumer need to be put into practice as a matter of urgency to integrate environmental concerns into the regulatory regime. We regard the elaboration and implementation of utilities reform as a matter of utmost urgency. We recommend that the DTI publish the relevant Bill in draft for consultation, and perhaps pren- legislative scrutiny, as soon as possible.

84. We support the establishment of an enhanced Standards of Performance scheme for energy efficiency and we strongly recommend that obligations, for both electricity and gas, be imposed on the supply function rather than the distribution function in order to encourage the development of energy services provision.

Other contributions from the regulatory regime

    85. At the moment the duty of the regulator to encourage energy efficiency is a secondary one. Mr McCarthy was clearly and commendably keen on staying within his existing powers while aware of the tension between the pursuit of competition, a downward pressure on prices and the Government's environmental policies.[111] He believed that the Government's proposals for new framework (the provision of statutory guidance and separate statutory provision for initiatives with significant financial implications) were right.[112] We agree and welcome the establishment of a formal channel between Ministers and regulator that would address the current impasse caused by a reluctance to trespass on each others responsibilities. However we would urge the regulator in the difficult interregnum he described to have regard to the possibility that success in one area of his responsibilities—albeit a primary one such as reducing prices—might be reasonably argued to shift the balance he has to strike in favour of another area— such as promoting energy efficiency.

86. One particular issue that interested us was the current licence requirement for suppliers to offer energy efficiency advice. It seemed clear that the performance of this duty was monitored by OFFER and Ofgas in terms of the number of inquiries to which energy suppliers responded.[113] We would suggest that this does not constitute a sufficient demonstration of the effectiveness of the measure but that the outcomes in terms of take-up of advice and savings gained should be assessed. We note that the EST has made such efforts with regard to the outcomes of advice given by the Local Energy Advice Centres and might be willing to share its methodology or even act as an agent in this matter. We believe that to assess the implementation of his duty to promote the efficient use of energy the Director-General of Electricity and Gas Supply, or a suitable agent, should examine the impact of the provision of advice on energy efficiency by energy suppliers in terms of outcomes achieved.

87. We heard in Nottingham that a significant barrier to developing an energy efficiency strategy was the lack of data on actual energy consumption. We were told 'what you can't measure you can't manage'. Examples were given of European countries where aggregated data was available by e- mail from central databases.[114] The DETR told us that they were keen to encourage suppliers and local authorities to reach mutually acceptable solutions but they had yet to be persuaded that compulsion was necessary. The Department pointed to the commercial confidentiality of such information and potential problems in different classifications of user employed by suppliers.[115] We do not regard these objections to be insurmountable and the forthcoming legislation provides an obvious opportunity for movement on the issue. The provision of consumption data could be made part of the licence condition for suppliers and the regulator, or a suitable agent acting under his authority, could be charged with preserving its confidentiality and producing it in a suitably aggregated, and thus anonymised, manner. We recommend that a national database for energy consumption by geographical area be established, under the auspices of the regulator, to assist local authorities and others to fulfill their responsibilities and desire to promote energy efficiency. We believe this should form part of forthcoming legislation on utilities reform.

Other regulation

    88. In addition to the provision of advice, funds and tax changes we believe there is a role for more use of regulation across the board to increase the priority given to energy efficiency.

The Building Regulations

    89. Outside transport 60 per cent of energy in the UK is used to provide heating and hot water in buildings (industrial processes account for about 30 per cent and lighting and appliances for 10 per cent). There is a very low turnover of housing and only a slightly higher rate in respect of other buildings. We regard mechanisms to reach back into the existing building stock and create incentives or requirements to improve its energy efficiency as a priority. To this end we welcome the DETR's on-going review of the contribution that the building regulations could make to the reduction of CO₂ emissions. We understand that this includes examination of how higher energy efficiency standards might be built into regulations governing the renovation and refit of existing buildings. Possibilities under consideration included:

• fiscal measures, including increased stamp duty, related to energy-efficiency improvements;
• bringing extensions and conservatories within the ambit of the regulations linked to the overall performance of the building;
• requiring energy efficiency improvements during major repair or refurbishment (concentrating on system improvements such as boiler replacements);
• trigger points, such as change of ownership or tenant, for encouraging or requiring improvements;
• bringing energy efficiency into the consideration of planning applications;
• higher technical standards for construction performance (thermal properties of walls and windows but also airtightness, natural ventilation and standards for the provision of daylight);
• performance requirements for air conditioning and mechanical ventilation (the growing demand for which was highlighted by the Energy Minister);
• methods of demonstrating compliance in an understandable way such as the Standard Assessment Procedure (SAP); and
• codes of practice on energy efficiency of buildings, building 'MoTs' and energy/CO₂ reporting.[116]

90. Clearly there is a need to avoid today's new building becoming tomorrow's insuperable retro-fit problem and a number of witnesses called for energy efficiency standards of new buildings to be raised. The latest changes to the regulations were made in 1995 and required compliance with Part L of the Building Regulations "The Conservation of Fuel and Power". It is estimated that the new regulation will achieve improvements in energy performance of 25-30 per cent compared with the old regulations. Experimental projects we discussed in Denmark and developments we discussed in Nottingham have demonstrated that substantial thermal efficiency gains can be achieved in new construction at little or no extra capital costs.[117] We welcome the DETR's evidence that the on-going review of Part L of the Regulations is aimed at maximising their impact on CO₂ emissions from both new and existing buildings and that practice and standards in other European countries was being examined.[118]

Standard Assessment Procedure

    91. The principal rating system for energy efficiency is the Standard Assessment Procedure now mandatory for new buildings and required information for the vendor of a new dwelling. This rating is an indicator of the cost of maintaining a standard heating regime of a building from 1 (poor) to 100 (ideal). We heard from witnesses that the cost basis of this rating did not necessarily reflect the CO₂ emissions from a particularly building but that the CO2 dimension to the rating was optional. SAP ratings appear to us to have a low profile to the man or woman on the street engaged in house purchase. One problem identified by ACE is that the terminology nor the acronym conveys little meaningful about the procedure.[119] We believe that an effort to raise the profile of energy labelling of houses could include a re-naming of the rating, for example, we suggest the Home Energy Audit Test (HEAT).

Energy surveys

    92. Whatever the nomenclature of energy efficiency ratings for buildings they need to be applied to more of the housing stock. We note the failure of the Energy Efficiency Bill [Bill No. 32 of Session 1998-99] to make headway as a Private Member's Bill. The Bill was to require a energy survey of residential properties at the point of sale. Many of our witnesses regarded this as an excellent idea and we note that the Government was in support though not to the extent of adopting the Bill. "Energy labelling for housing" was recorded as a 'key action and commitment' under the revised Sustainable Development Strategy but it was unclear what the Government was going to do to implement this objective. The Government's preferred option appears to be a logbook to be kept by householders which would, inter alia, demonstrate energy efficiency improvements made to the property to purchasers. We do not see how such an initiative could work without a verifiable basis such as a mandatory professional energy survey. Once this has taken place a logbook could record the implementation of improvements recommended in an energy survey. While the owner-occupier sector is a priority we believe that mandatory energy surveys could be linked to other events such as the change of energy supplier or a change of tenant and could be applicable in the commercial as well as the residential sector. Clearly there would be a cost. This might be addressed in a number of ways:

—  changing properties also involves changing energy suppliers who might offer a survey to keep or gain customers;

—   a combined pot of money might be put aside from Standards of Performance schemes;

—   many lenders offer house surveys as part of the mortgage package and this might be extended to include an energy survey;

—  encouraging such surveys might be a task for public expenditure as the spread of such surveys might reduce the pressure on the advisory functions of Government programmes so resulting in savings.

We believe that the Government should adopt the proposal for there to be mandatory energy surveys of houses at the point of sale or introduce a requirement for energy suppliers to offer one to new customers (in which case the utilities reform bill offers a timely opportunity to secure introduction.)

Appliances

  93. While consuming only 10 per cent of total energy consumption, according to the DTI, the Sustainable Development Strategy states that home appliances consume 25 per cent of UK electricity and that it is a fast growing sector with consumption doubling since 1990.[120] The Consumers' Association describe a generational change in attitudes to the use of home appliances, the growth of home computer use and the trend for smaller households as contributing to the growth of energy consumption in this sector (constrained so far by the improving efficiency of appliances).[121]

94. To improve the energy efficiency of consumer products the Government supports the development of specific EU common and co-ordinated measures given the Community's responsibilities to preserve and develop the single market. These initiatives include product labelling, standards, industry agreements and procurement. Potential savings of 2 MtC by 2010 have been identified dependent on the introduction of improved products. A large part of the EU effort is aimed at driving up the energy efficiency standards of products. EU energy labels are currently mandatory for fridges and the various combinations of washing and tumble drying machines. Labels for dishwashers, light bulbs, boilers and other major products to follow. Regulations already set minimum standards for central heating boilers and these will be extended to fridges and freezers in 1999. The Government supports the Commission in negotiating agreements with EU industry bodies to improve the performance of various products with targets in place for TVs, video recorders and washing machines.[122] Mr Meale described efforts at an EU level to secure voluntary agreement with appliance manufacturers to reduce the power consumption of appliances on standby.[123]

95. The Government's strategy is termed market transformation and is based around regulation to get rid of the worst performers; negotiated agreements to drive up the standards of new products; and labelling to educate the market to seek more efficient products and send the right signals back to the manufacturers. We commend this approach but the Government needs to ensure in particular that labelling is clear, consistent and compliance is independently audited.

The role of local government

    96. Local authorities are clearly crucial partners in the effort to promote energy efficiency particularly with regard to their residents, for which the Home Energy Conservation Act is the spur, but also their local businesses and industry. We benefited from formal evidence and informal discussions in Nottingham with the Nottinghamshire and Derbyshire Local Authorities Energy Partnership (LAEP). The LAEP involves partnership between authorities but also between local government and other bodies including industry and the voluntary sector. We were extremely impressed with the plans and achievements of the Nottingham and Derbyshire Local Authorities Energy Partnership. We recognise that such efforts have not been made everywhere but the initiative demonstrates what is possible. We have also noted however the conclusions of the first report by the Secretary of State for the Environment, Transport and the Regions under HECA. The report reveals that local authorities have not seized the energy efficiency agenda across the board but that there are pockets of excellence of which the LAEP is one. However, we conclude that where intensive efforts have been made barriers have been encountered fairly quickly. As noted above a major complaint was over the time and effort it took to achieve coherence between the various sources of funding available. There were also significant procedural barriers and we heard of a number of examples where Government rules and regulations had to be outwitted to achieve Government objectives.

97. A main difficulty has been encountered with the legal propriety of local authorities forming or participating in energy service companies. The importance of local government involvement was stressed because of the likelihood that competitive energy suppliers would cherry-pick higher income customers and the benefits of market liberalisation would not accrue to those on low incomes. The role of local government would be to see equitable distribution of benefits. We recommend that the Government take steps to address the apparent lack of clarity in Clause 14 of the Local Government Bill regarding the legal capacity of local authorities to establish or run energy services companies.

98. The Government intends to introduce legislation to place a new duty on councils "to promote the economic, social and environmental well-being of their area" providing an over-arching framework for local government.[124] Our witnesses believed that implementing this commitment would assist local authorities to pursue integrated policies on sustainable development including the promotion of energy efficiency.[125] We agree and look forward to this duty being given legislative force in the near future.

99. We welcome the initiative by the DETR to assess the experience of the LAEP as an example of an excellent striver in this field. We welcome the Government's plans to assess formally the lessons to be learned from the Partnership's experience in terms of disseminating best practice. As well as demonstrating best practice we regard the Partnership initiative as demonstrating what is not possible. We recommend that as well as extracting lessons for best practice, the Government's review process also focuses upon the barriers encountered by the Partnership and that Ministers take steps to address these. This would be an example of the sort of task we envisage for the new unit we recommend above.

The need for action

    100. The integration of efficiency and conservation into energy policy has not been impressive. The timetable necessary for action is now being dictated by the UK's international obligations with results needed under the Kyoto Protocol in 2005 and 2010. Besides the precise legal requirements of the Kyoto Protocol, there is a need to demonstrate that the UK continues to take the matter of climate change seriously and is looking to the longer term so that we can continue to exercise leadership upon the international stage in this important matter. The liberalisation of the energy markets and the introduction of competition was undertaken without due regard for energy efficiency and what provision was made was hampered by the attitude of the previous Director-General of Gas Supply. The present Government has understandably been concerned with policy reviews and consultations on an enormous range of issues and this has taken its toll on progress in any one area. However, in the proposals for utilities reform there exists the potential for a better integration of energy efficiency considerations with those of supply. But these are as yet still proposals not even having sufficient weight and clarity to guide the current regulator. The legislation is awaited and is needed as is firm proposals for the UK's climate change programme as a whole. We believe that the Government needs to step up the pace with these initiatives if it is going to convince onlookers that it is committed to the project and if it is going to have mechanisms in place to deliver the 'demonstrable progress' required by 2005 under international obligations.

---

85  The Case for a Sustainable Energy Agency, The Green Alliance, 1999. Back

86  Q625 Back

87  See Q132 Back

88  Ibid and Q626 Back

89  UK Energy Policy Review, 1998, p 47 Back

90  Ev pp 14ff Back

91  Q587 Back

92  Q648 Back

93  Q604 Back

94  The Trade and Industry Committee has recently concluded taking evidence in its inquiry into the Climate Change Levy and is expected to report shortly. Back

95  Q263 Back

96  Q190 Back

97  Q246 Back

98  Ev p 366 Back

99  IP/99/117: proposal to amend Dir77/388/EC on a common VAT system to allow the application of a reduced rate of VAT on labour-intensive services for an experimental period, February 1998, European Commission. Back

100  Q136 Back

101  HC1006, 1997-98 Back

102  Q439 Back

103  Q63 Back

104  Q492 Back

105  Ev p 14 Back

106  Q518 Back

107  Q671 Back

108  Q518 Back

109  Q431 Back

110  Ev p 173 Back

111  Q464 Back

112  Q468 Back

113  Q485-6 Back

114  Q582 Back

115  Ev p 228 Back

116  DETR, Building Regulations Divsion, review of energy efficiency requirements in the building regulations - response to consultation, July 1999. Back

117  Q618 Back

118  Ev p 228 Back

119  Q141 Back

120  Op Cit, p 45 Back

121  Warm homes, low bills, cool planet, p 13 Back

122  Ev p 60 Back

123  Q626 Back

124  Modern local government - in touch with the people, Cm 4012, DETR, July 1998 Back

125  Q544 Back

---

Prepared 22 July 1999