Session 2010-12
Energy Bill
Memorandum submitted by Charlie Morri s-Marsham (EN 36)
Postgraduate Student at the London Loughborough Centre for Doctoral Research into Energy Demand
Introduction
I am a postgraduate research student at the London Loughborough Centre for Doctoral Research into Energy Demand. I am currently engaged in research on domestic energy service companies in the UK. For a full biography visit: http://www.lolo.ac.uk/profilepreview/view/id/108
Headline Points
1. The Green Deal in its current format does not address the barriers to domestic energy efficiency associated with risk and consumer inertia.
2. Research into energy service companies suggests that the upfront cost, risk and inertia barriers could be overcome by regulation to encourage long term energy contracts.
3. Various assumptions used in the Green Deal Impact Assessment, e.g. the impact of the Green Deal on property value and the level of consumer take-up, do not stand up to detailed scrutiny.
Submission
4. My research into domestic sector energy service companies explores the barriers to domestic energy efficiency and analyses the UK government interventions designed to mitigate them. It finds that the interventions like the Green Deal focus on removing the upfront cost, split incentive and information barriers to energy efficiency.
5. However other barriers to domestic energy efficiency exist including risk, hidden costs and consumer inertia. Theory and empirical studies suggest that, when households do not install energy efficiency measures, it is often due to interacting and reinforcing dynamics linked to the characteristics of the measure and the household, plus the wider social context (Bruel & Hoekstra 2005; Energy Research Partnership 2009; Jensen 2005; Sorrell 2004; Vadodaria et al. 2010; National Energy Services 2009).
6. As Table 1 outlines, the Green Deal does not address the risk, hidden costs and consumer inertia barriers. Therefore, due to the interacting nature of the barriers to energy efficiency, the removal of upfront cost and split incentive barriers may not lead to a dramatic increase in uptake of energy efficiency due the continued presence of risk, hidden costs and consumer inertia barriers.
7. The Green Deal Impact Assessment references consumer inertia, hidden costs and high private discount rates (associated with high risk) as important barriers to energy efficiency. However the measures suggested to counteract these appear piecemeal; consumer inertia to be addressed by an "information campaign" and "momentum" and hidden costs to be addressed by "simplified processes" . No measures are proposed to address consumer exposure to risk.
Table 1 : B arriers addressed by the Green Deal
|
Risk |
Information |
Capital |
Hidden costs |
Split incentives |
Bounded rationality |
Consumer inertia |
|
|
Green Deal |
Unaddressed |
Free tailored advice |
No upfront cost |
Unaddressed |
Loan tied to property |
Unaddressed |
Unaddressed [1] |
8. The risks to the consumer from partaking in the Green Deal are:
a. The risk that the cost of installation, including hidden costs, will be more than anticipated
b. The risk that the savings from the installation will be less than anticipated
c. The risk that the Green Deal might reduce the price or saleability of the property
d. The risk of default by subsequent owners and liability returning to the consumer due to lack of proper disclosure
9. Regarding (c), the Green Deal Impact Assessment mentions the effect of the Green Deal on property value but suggests that energy efficiency could increase the value of properties, though evidence for this assumption is lacking (Department of Energy and Climate Change 2011b, pp.16-17). Anecdotal evidence suggests that UK estate agents have concerns that schemes like the Green Deal could put off potential buyers (Morris-Marsham 2010). Indeed evidence presented elsewhere in the assessment has shown that similar schemes (e.g. the PACE scheme) have had a negative impact on the availability of mortgages in the U.S. In this context, the statement that the Green Deal "would not interfere with the mortgage market" appears to be unsubstantiated.
10. Modelling the Green Deal accreditation scheme on the EPC framework may be inadvisable due to early indications that EPCs have low levels of consumer trust (Home Sale Network 2009; Energy Saving Trust 2008; National Energy Services 2009)
11. The Impact Assessment assumes that under the ‘Low’ take-up scenario 50% of maximum feasible potential of insulation is installed and under the ‘High’ take-up scenario 75% of the maximum feasible potential is installed. These rates appear implausibly high, especially given research that indicates that 30%, or more, of households would not install energy efficiency measures even if they were free of charge (Committee on Climate Change in Holmes 2011; E.ON 2010).
12. Preliminary results from a domestic energy service contract (DESCO) model, using input parameters from the Green Deal Impact Assessment, show that energy contracts of 2-4 years would enable providers to finance low cost energy efficiency measures at zero cost and zero risk to consumers. The ‘guaranteed saving’ contract model could offer consumers guaranteed fixed-price, fixed term contracts of ≥0% less than existing bills. Research suggests that many consumers in the UK would welcome fixed-price fixed-term contracts which could potentially reduce consumer inertia towards energy efficiency.
13. Validated results from the DESCO model will be available later in 2011 but these preliminary results suggest that energy service contracts might be able to address the risk and inertia barriers to domestic energy efficiency as well as removing the need for consumers to provide upfront capital for measures. However preliminary research for the project suggests that regulation might be needed to encourage provision of these sorts of contracts due to lack of commercial incentive for existing suppliers and barriers to entry for new providers.
14. This submission recommends that the bill make provision to encourage or mandate energy suppliers to offer energy contracts of 2 years or more and/or to enable other organisations to offer these contracts by removing barriers to entry to domestic energy service companies.
June 2011
References
Department of Energy and Climate Change, 2011a. Consumer protection in the Green Deal. Available at: http://www.decc.gov.uk/assets/decc/what%20we%20do/supporting%20consumers/green_deal/1733-consumer-protection-in-the-green-deal.pdf [Accessed May 13, 2011].
Department of Energy and Climate Change, 2011b. Green Deal Impact Assessment. Available at: http://www.decc.gov.uk/assets/decc/legislation/energybill/1002-energy-bill-2011-ia-green-deal.pdf.
E.ON, 2010. Challenge100, Tackling fuel poverty for 100 families, in 100 homes, in 100 daysFinal Report. Available at: http://www.eon-uk.com/downloads/Challenge_100_Full_Report_-_October_2010.pdf.
Energy Research Partnership, 2009. Report of the ERP – ETI – RAEng Heat workshop.
Energy Saving Trust, 2008. Energy Performance Certificates: Home Truths. Available at: http://www.energysavingtrust.org.uk/About-us/Media-centre/Library/Green-Barometer/Green-Barometer-6-Energy-Performance-Certificates-Home-Truths [Accessed June 16, 2011].
Holmes, I., 2011. Financing the Green Deal. Available at: http://www.e3g.org/images/uploads/E3G_Financing_the_Green_Deal_May_2011.pdf.
Home Sale Network, 2009. Energy performance certificates make little impact on buyers according to new survey. Available at: http://www.home-sale.co.uk/about-us/press-releases.aspx?id=144 [Accessed June 16, 2011].
Jensen, O.M., 2005. Consumer inertia to energy saving. ECEEE 2005 Summer Study Proceedings. Energy savings. What works & who delivers., Vol. 3, pp.1327-1334.
Littlechild, S., 2006. Residential energy contracts and the 28 day rule. Utilities Policy, 14(1), pp.44-62. Available at: http://www.sciencedirect.com/science/article/B6VFT-4G4N5PW-1/2/6b0478c4df673bd6590b8c873bef24a4.
Morris-Marsham, C., 2010. Do solar pv and solar thermal installations affect the price andsaleability of domestic properties in Oxford, Full report.
National Energy Services, 2009. Energy Performance Certificates. Seizing the opportunity. Available at: http://www.nher.co.uk/sites/default/files/documents/news/Seizing_The_Opportunity_Marketed_Sales_Dec09.pdf [Accessed April 12, 2011].
Sorrell, S., 2004. The economics of energy efficiency : barriers to cost-effective investment, Cheltenham: Edward Elgar.
Vadodaria, K. et al., 2010. UK solid-wall dwellings-thermal comfort, energy efficiency refurbishment and the user perspective-some preliminary analysis from the CALEBRE project.
[1] Except where ‘high status’ measures are included, such as renewable energy