Examination of Witnesses (Questions 40-59
MR NICK
EYRE AND
MR BRIAN
SAMUEL
1 FEBRUARY 2006
Q40 Dr Turner: Do you think that the
Treasury's strategy on fuel poverty is joining up with its strategy
on increasing energy efficiency?
Mr Samuel: I think it could actually
be a bit more joined up. I think there are opportunities to link
energy efficiency into the winter fuel payments, in particular,
for instance, you could incentivise investment in energy efficiency
by actually raising the level of the winter fuel payment, say
by £100, in return for, say, £200 or whatever being
spent on energy efficiency measures. That would have a long-term
benefit moving forward as well to those individuals who do invest.
Q41 Dr Turner: In 2003 the Energy White
Paper talked of a step-change for energy efficiency, but we do
not seem to be making that step-change. What do you think are
the barriers to progress?
Mr Samuel: I think some of the
barriers to progress which were identified in the Energy Efficiency
Innovation Review are around the perception gap. People do not
realise how much energy they are actually consuming and how much
that is actually costing them. Again, I mentioned some potential
measures, better billing information and feedback through smart
metering. Energy Watch have in the past raised the billing issue
and certainly that does not help in engaging with consumers. What
we are trying to do is to provide them with information and advice,
not just on household energy efficiency but linking that into
transport efficiency as well, the use of cars, and sort of sign-posting
to the most efficient appliances and to vehicles. Some of that
is working well. For instance, in the white goods market the level
of sales of A rated (the top rated) appliances have improved tremendously.
What we now need to do is to move forward into the next step and
actually create headroom at the top so that the efficiency can
continue to improve. Another good example is in condensing boilers.
Initially, working with the Energy Efficiency Commitment, consumers
were sign-posted to the most energy efficient boilers, the condensing
boilers. As a consequence of that, they became commonplace in
the market and therefore they were allowed to be regulated as
mandatory through the latest revisions of Building Regulations.
That is a good example of market transformation. That needs to
be done elsewhere as well.
Q42 Dr Turner: I never got my green boiler
discount when I fitted one and I am furious!
Mr Eyre: If I could just add to
that to make the general point that there has been a step-change
in some areas of energy efficiency policy. We should not be too
negative about this. What we have learned from that is that it
is generally an intelligent combination of policies, some regulation,
some incentives and some awareness-raising. There are real synergies
between those and we need to learn those lessons and apply them
in other market sectors.
Q43 Dr Turner: Why is it, do you think,
that it has taken so long to break down these barriers? Is it
because the problems are technically difficult, which I find hard
to believe, or is it a lack of coherent political will?
Mr Eyre: I think there is a misconception
in this barriers argument. It tends to come from neoclassical
economic theory and the assumption that everybody will behave
as a completely rational (in the economic sense) consumer, and
frankly that is completely unrealistic. I have never done a discounted
cashflow analysis when I have bought a refrigerator and I do not
expect members of this Committee or anybody else to do that! People
do not behave in that way. So we have to work with the reality
of real people and look at what actually influences them, and
that means looking at affecting their decisions in different ways.
We are increasingly applying, I think, a more sophisticated analysis
of the way in which consumers behave so that we do not treat the
British public as a homogenous mass. We know that some people
will be affected by environmental arguments and others will be
affected more by economic arguments. So it is working with the
reality of where people are rather than some hypothetical economic
construct which I think is what is important.
Q44 Dr Turner: You do not have too much
faith in the approach of trying to persuade people that if they
invest in energy efficiency they actually save money in the long-term?
Mr Eyre: We know it works with
some people, but we also know it does not work with some other
people and there is no point in banging our heads against the
wall and saying, "It should work with all people." We
have to take people as they are and convince them, and raising
the issue of climate change and getting a better understanding
of that will be an important part of it because that will influence
some people.
Q45 Dr Turner: It says in the Energy
Review published last week, the consultation document, that the
Energy Research Centre has commissioned research on the "Khazzoom-Brookes"
hypothesis that energy efficiency will not deliver overall reductions
in energy consumption. What do you think of this theory? If it
is true, if people are taking extra comfort instead of the energy
savings, does this not totally undermine a major plank of the
approach of the White Paper and Government's wishes to reduce
energy consumption by 40%?
Mr Eyre: It would do if it were
true, yes. This is a hoary old chestnut and it seems to re-emerge
periodically and often I think at times when major supply side
interests are pressing for a change in policy. So it is perhaps
not surprising to see it being raised at the moment. I should
say that I am very pleased that the UK Energy Research Centre
is doing work in this area. I think it is an area which needs
some proper independent academic scrutiny and I am sure that the
people involved in that will do that. I think, however, you do
not need to do a detailed economic analysis to draw some lessons.
We have actually looked at this rebound effect (as it tends to
be called by energy efficiency professionals) and it is real.
We know that some of the benefit, for example, of insulation is
taken as comfort rather than cost-saving, but that is not necessarily
a bad thing; indeed from the point of view of the social and economic
objectives of energy policy that is what one would expect and
what one would hope would happen. It tends to be around 30% for
insulation projects. In other cases, I think common sense tells
you that the rebound effect will be small. Just because you get
a more energy efficiency fridge does not mean you are going to
leave the door of the fridge open or go and get another one, or
get one which is too big to fit into your kitchen. People's decisions
are not made in that way. So I think common sense will tell us
that yes, there is an effect here, but the idea that improving
energy efficiency is going to mean that you use more energy is
not only counter-intuitive but almost certainly wrong.
Q46 Mr Hurd: Just a complementary point
to this. I seem to remember from evidence you gave in a previous
session that the historical data of the last 25 years, I think
it was, suggested that there had been very real improvements in
energy efficiency but they had been offset by, if you like, trends
in terms of product development on new electrical appliances and
changes in consumer attitudes, the temperatures which people expected
to have in their homes, which is a point borne out to me when
canvassing in Ruislip on Saturday morning in freezing temperatures
when I was met universally by people wearing shorts and tee shirts,
and a nightie on more than one occasion. Is this not the problem,
that actually energy efficiency is running very hard to help us
stand still?
Mr Eyre: Indeed, people are getting
off and they want to have a better standard of living, and I do
not think we will get very far in advocating energy efficiency
if we suggest that that should not be the case; indeed actually
energy efficiency, as I have mentioned, has been part of what
has allowed people to have warmer homes. So yes, if we are getting
better of at 2 to 3% a year we would expect the demand for warmth,
light and for all the other things which we get from energy to
grow around about that, and that means we have to run at about
2% in terms of energy efficiency improvement for energy demand
to stand still. But that does not mean that energy efficiency
is failing, it only means that if we did not do it we would be
even worse off from the point of view of carbon emissions.
Mr Samuel: If I could just add
to that, people are going to demand new products and purchase
those new products. What we need to make sure is that they purchase
the most efficient ones, and that is what we are trying to do.
Q47 Chairman: Given, as you say and we
all know from our own experience, there is this sort of sharing
of the benefit, if we are hoping to achieve a reduction in energy
consumption in addition to concentrating, as we should, on achieving
the best improvements in efficiency, do you think we are now at
the point where we should look seriously at something like personal
carbon allowances, which would still incentivise people to obviously
use their energy as efficiently as possible but which would also,
even if it did not have an absolute cap, have a tax rate so that
you could tax people if they went over a certain level? It would
be a complementary measure for ones which we are now using to
encourage efficiency?
Mr Eyre: I think that is one of
the issues which has been raised by the Energy Efficiency Innovation
Review, whether we could go not so much to a personal cap but
to a cap which would operate through energy suppliers. In essence,
that is something which I think is worthy of serious scrutiny,
but it is not without its problems. I think we believe that in
the short term it makes sense to use the Energy Efficiency Commitment,
which in some ways is a similar mechanism; it is requiring energy
suppliers to deliver energy efficiency improvements for their
household customers. We think that perhaps could be made more
flexible, more open, more market-oriented and improved in that
way.
Q48 Joan Walley: Just moving further
along that track and moving away from energy supply to generally
improving energy services, I would be interested to know what
came out of the Treasury seminar which you attended on 18 January,
the long-awaited seminar.
Mr Samuel: Yes. When it did happen
it was quite interesting. We have already touched upon some of
the key outcomes of that. Basically, metering and data was identified
by all as a big issue. There was major support for fiscal incentives.
Q49 Joan Walley: Could you just say which
fiscal incentives?
Mr Samuel: It was general. There
was some discussion over council tax, but it was generally recognised
that some form of fiscal incentive was required as well as regulation,
for example, and better advice. There is a number of different
types which could be implemented. There was not detailed discussion
on each specific measure. Suppliers were very keen to have more
allowance for innovative energy efficiency measures. Under the
Energy Efficiency Commitment they do get an uplift at the moment
but only on a small percentage, a maximum of total allowable savings.
There was very little discussion around trading activities, such
as supplier caps or personal carbon allowances. Finally, unfortunately,
there were not that many potential new entrants there, it was
mainly parties interested in energy efficiency, energy saving,
and the suppliers. So there was not perhaps sufficient engagement
from other potential third parties. As Nick mentioned, we think
that is a missed opportunity. In order to provide energy services
there are potentially other parties who could come into the market,
but at the moment it is a supplier-dominated market.
Q50 Joan Walley: In respect of the way
in which the seminar was organised, who did you feel had ownership
in terms of following through and making sure that what was talked
about then became reality?
Mr Samuel: It was an HMT summit,
so really we expect actions from the Treasury to follow up with
the other participants there, including Defra.
Q51 Joan Walley: Was that made clear
by the Treasury, how they would be following it up?
Mr Samuel: I think we are waiting
to find out exactly how that will happen.
Q52 Joan Walley: We would be very interested
to know that. Could I just ask, because you just mentioned the
word "summit", should we read anything into the fact
that what was originally intended to be a summit became a seminar,
although I notice you referred to it as a summit? Has it been
downgraded?
Mr Samuel: I do not think it has.
I think the coverage of the participants who were there perhaps,
in our opinion, was not as wide as we would have actually hoped.
We would have liked to have seen potential new entrants there
as well, but that might be because they felt it was not a sufficient
high priority at the moment.
Q53 Joan Walley: So it might be worthwhile
us trying to find out from the Treasury who they intended to invite,
the remit of who they expected to be there? It may just be that
they invited the usual suspects, or they had not thought wider
than that.
Mr Samuel: Yes, it would be helpful
to make those enquiries.
Mr Eyre: I think it was a summit
in the level of people who were there; it was ministers from the
Government side and chief executives, all very senior people,
from the energy companies. So this was at that high level and
I think that probably indicates that energy companies are genuinely
interested in this as a concept. They probably feel they cannot
go on competing on price cuts for ever, and certainly they cannot
compete on price cuts at all at the moment, so they are looking
for other ways to differentiate their product. I think they are
still faced with the problem that actually consumers expect to
buy energy units from energy suppliers and they do not expect
to buy more complex packages. So there is a breakthrough point
which we have not reached yet.
Q54 Joan Walley: Could I just check,
was the main thrust of it in terms of domestic household energy
supply or did it cover business supply as well?
Mr Samuel: It covered business
as well as household.
Q55 Joan Walley: Was there any discussion
around the area whereby in terms of purchasing of energy businesses
are basically speculating on it, so in fact energy is being sold
not for use as energy but as a commodity?
Mr Samuel: Not to that great extent,
no.
Q56 Colin Challen: Just probing a bit
further your relationship with the Treasury, how do you feel they
follow up the idea which you have put forward and in what depth
did they explore those ideas? I could maybe cite one example.
I think you put forward a suggestion that VAT on fluorescent light
bulbs should be reduced to 5% and a charge also put on filament
light bulbs, two or three years ago. You gave that to the Treasury.
How do you think they actually dealt with it? Did they just glance
at it, or did you have an ongoing dialogue about it?
Mr Eyre: My feeling is that the
Treasury has got more open in that way over the time I have been
dealing with it, the last six or seven years, and we always make
an attempt when we are doing that sort of research work to engage
with the Treasury. We now find that officials there are happy
to engage. I think there is still, obviously, a period around
budgets where things disappear into a black hole and you just
have to wait for them to come out. So in a sense there is still
a lack of transparency about the ultimate decision-making process,
but I think the broad engagement with stakeholders is considerably
better than it was.
Q57 Colin Challen: Do you have the advantage,
perhaps, of structured regular meetings as opposed to summits
(or whatever they are) which may be held on an ad hoc basis?
Mr Eyre: We have some meetings
with other comparable agencies with Treasury officials on a regular
basis, but I think we find at least as productive meetings on
specific issues as and when they are required. For example, on
the energy services summit or seminar, whichever it was, they
asked us for advice on the agenda in advance of the session. So
I think we feel the engagement, even if it is ad hoc, is
often quite frequent.
Q58 Mr Hurd: A question on the Energy
Efficiency Commitment. Two years ago, I believe you argued that
the target for the second phase should have been set far higher.
Is that still your view?
Mr Samuel: Very much so, and I
think it is demonstrated by the fact that the first phase was
heavily over-achieved and currently some of the suppliers are
not as active in the able to pay cavity wall insulation market
as they have been, mainly because they have carried over so much.
Therefore, we feel there is still very much real scope to increase
the level of the Energy Efficiency Commitment moving forward in
the next period 2008 to 2011.
Q59 Mr Hurd: Could you quantify it in
terms of how much stretch you feel could be practical?
Mr Eyre: We have argued for a
long time that we should be aiming to go towards three times EEC
one, in other words that the target for the period after the current
commitment in 2008 should be three times what it was previously,
or about one and a half times what it is now. I think it is sensible
to ramp it up in that way in order that capacity and quality problems
do not arise within the supply chain. There are some real issues
there, but as Brian indicated, because within the period 2002
to 2005 the suppliers did far more than they were required to
they have less to do in the next couple of years than was perhaps
envisaged.
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