Memorandum by Ofgem
INTRODUCTION
1. Ofgem welcomes the opportunity to provide
evidence to the Lords' Science and Technology Committee for its
energy efficiency inquiry. The Government has ambitious targets
for the improvement in energy efficiency across the economy and
it is important that such changes are used to stimulate economic
growth through the more efficient use of resources.
2. Ofgem considers that well functioning
markets will be the most efficient way to deliver the Government's
objectives of curbing and then reducing carbon emissions. Ofgem
therefore strongly supports the use of market-based instruments,
such as emissions trading, to reduce carbon emissions. However,
Ofgem recognises that there are energy efficiency measures at
the domestic level with very short pay-back periods which have
not been taken up and acknowledges that for this reason the Government
has set up schemes to encourage consumers to be more energy efficient.
It is important that both the Emissions Trading Scheme and the
downstream energy efficiency programmes operate within a coherent
regulatory framework so that investments that have already been
made to comply with one set environmental legislation are not
undermined or stranded by another.
3. Ofgem's work in the energy efficiency
field covers a number of aspects. Ofgem, through statute, is required
to administer the Government's Energy Efficiency Commitment (EEC)
programme that requires gas and electricity suppliers to improve
the energy efficiency of domestic consumers. Ofgem also, through
a licence obligation, requires the suppliers to provide an energy
efficiency helpline for all consumers, domestic and non-domestic.
This allows consumers to call their supplier for advice on how
to cut their energy consumption.
4. In other areas of Ofgem's work we are
mindful of the benefits reduced distribution losses on the networks
can bring. To this end, distribution companies in their price
controls have an incentive to improve the energy efficiency of
their networks. This allows the companies to earn increased revenue
for improving the efficiency of the distribution networks.
5. Ofgem has detailed knowledge of administering
and setting up domestic energy efficiency programmes having initiated
the first Energy Efficiency Standards of Performance which required
electricity suppliers to meet a domestic electricity saving target.
The responsibility for setting the overall target now rests with
the Government, but Ofgem continues to have the responsibility
for administering the current Energy Efficiency Commitment. This
programme requires gas and electricity suppliers, through a licence
obligation, to promote energy efficient products to consumers.
Ofgem's ultimate sanction for failure to comply with such an obligation
is to impose a financial penalty.
6. The current programme is expected to
lead to a 1 per cent reduction in carbon emissions from households
and cost nearly £500 million over the three years from 2002
to 2005. The second EEC will roughly double in size but is expected
to cost roughly £1,200 million. These are considerable investments
and have significant implications for gas and electricity consumers.
7. Provided below are our detailed comments
on each of the questions provided in the call for evidence.
THE MOST
APPROPRIATE MEASURE
OF ENERGY
EFFICIENCY, AND
THE RELATIONSHIP
BETWEEN IMPROVEMENTS
IN ENERGY
EFFICIENCY AND
OVERALL ENERGY
USE AND
CARBON EMISSIONS
8. There are two main policy drivers behind
the Government's push to improve the energy efficiency of the
domestic sector. The first is to reduce energy consumption, and
consequently abate carbon emissions, while the second is to alleviate
fuel poverty through making it cheaper to keep homes warm. Ofgem
considers that for the Government programmes to operate effectively
they need to send the correct signal to the market. It is therefore
important for the programmes to be measured in the units of their
objective: that is if the programme is being designed to reduce
carbon emissions the activity being promoted should be measured
in units of carbon abated and similarly if the programme is intended
to reduce the numbers of those in fuel poverty then the success
of the programme should be measured by the numbers taken out of
fuel poverty. Neither the Warm Front programme or the EEC are
measured in such a way and we consider, consequently, that their
effectiveness for helping the Government meet its targets would
be improved if this change were made.
9. With respect to the relationship between
carbon savings and energy savings, it is particularly important
to take consumer reaction into consideration. Defra have the lead
in monitoring the outcomes from energy efficiency programmes.
Evidence from the monitoring activity that has been carried out
under the energy efficiency programmes suggests that more than
half of the anticipated energy savings from insulation are not
being realised. The reasons behind this are still being investigated,
but it is expected that some will be a result of consumers using
the insulation to keep their homes warmer rather than save energy.
However, it is notable that for other products, like cold appliances,
there is no scope for the consumer to undermine the energy savings
that are realised. As a consequence measuring schemes on an actual
carbon saved basis as opposed to an anticipated energy saved basis
could lead to considerably different signal to markets about the
suitability of the measures to promote.
10. It is also important to note that measuring
energy efficiency programmes in terms of either carbon savings
or energy saving will reduce the carbon/energy intensity of the
economy. However, if the baseline is increasing, it might not
necessarily lead to an absolute reduction in carbon emissions.
This is an important distinction to make especially given the
scale of the carbon reduction target that has been proposed by
the Government.
THE BEHAVIOURAL
ASPECTS OF
ENERGY EFFICIENCY
SCHEMES—THE
QUANTITY AND
QUALITY OF
INFORMATION AVAILABLE
ON ENERGY
EFFICIENCY, AND
WHETHER THE
PUBLIC IS
SUFFICIENTLY KNOWLEDGEABLE
AND MOTIVATED
TO ACHIEVE
ENERGY SAVINGS
11. In the area of household energy use
there is evidence that less investment is made in improving household
energy efficiency than might be expected on the basis of reduced
energy costs following investment in energy efficiency. This suggests
that the consumer is neither sufficiently knowledgeable about
the energy savings that it is possible to make through investing
in energy efficiency measures nor motivated enough. However, it
is likely that, in effect, there are several barriers; whether
it is because the consumer has to make an investment at all, whether
low income consumers have little access to capital, although a
large number would be eligible for free measures, or whether there
other reasons such as the financial saving available for some
is too small to consider worthwhile. Breaking down these barriers
will be important if the Government is to meet its energy efficiency
targets.
THE SCOPE
AND INCENTIVES
FOR IMPROVING
ENERGY EFFICIENCY,
AND REDUCING
WASTE, ACROSS
THE ECONOMY,
IN BOTH
PRIVATE AND
PUBLIC SECTORS
12. Suppliers have been effective in meeting
their energy efficiency targets and demonstrated that they are
in a good position to market energy efficiency measures to the
domestic sector. Since 1994 the suppliers have met and exceeded
their energy efficiency targets, and the experience from the current
programme suggests that all the solvent suppliers will meet their
targets. Suppliers meet their EEC targets by setting up schemes.
These schemes tend to take the form of promoting energy efficient
products and these are available for consumers in owner-occupier,
private rented and social housing sectors. The table below provides
our estimates of the measures likely to be installed by the suppliers
in the current EEC programme.
|
| Measure | Total number of measures
expected to be installed
during the EEC (Priority
Group)
| Total number of measures
expected to be installed
during the EEC (non-
Priority Group)
|
|
| Loft insulation (empty loft) | 34,200
| 18,300 |
| Loft insulation (top up) | 277,000
| 185,000 |
| DIY loft insulation | 53,400
| 402,000 |
| Cavity wall insulation | 411,000
| 333,000 |
| Other insulation | 318,000
| 447,000 |
| Replacement boilers | 79,200
| 126,000 |
| Replacement boilers with heating controls |
34,700 | 125,000
|
| Heating controls upgrade only | 18,200
| 122,000 |
| Fuel switching | 12,600
| 7,000 |
| Other heating | 1,800
| 2,900 |
| CFLs (direct) | 17,500,000
| 9,170,000 |
| CFLs (retail) | 285,000
| 4,140,000 |
| Cold & wet appliances | 916,000
| 4,240,000 |
|
THE POTENTIAL
FOR TECHNOLOGICAL
IMPROVEMENTS TO
THE ENERGY
EFFICIENCY OF
NEW AND
EXISTING BUILDINGS,
AND HOW
THESE SHOULD
BE IMPLEMENTED
13. The majority of the measures that the suppliers use
to meet their current EEC targets are mature and have been available
for some time, although some suppliers have brought forward innovative
technologies. These have varied from improving the efficiency
of appliances that draw low levels of power to new heating measures.
14. It was suggested in Defra's EEC consultation document
that DCHP should be supported through an incentive. Ofgem is against
the use of incentives in the EEC as they distort the energy savings
that suppliers are accredited with and prevent the market from
finding the most efficient outcome. In addition, Ofgem does not
consider it appropriate that consumers' money, through the EEC,
should be used to subsidise the R&D of innovative technologies,
particularly those that have still to be proven to save energy,
while some consumers remain in fuel poverty. If R&D is to
be supported by the Government, Ofgem considers that this is better
funded through general taxation.
THE DEVELOPMENT
AND PROMOTION
OF ENERGY-EFFICIENT
CONSUMER GOODS
15. Under the current EEC programme supplier activity
has led to a considerable transformation of the cold and wet appliance
markets: now most products sold are A-rated, the most efficient
until a recent change in the classification. With respect to new
consumer goods coming onto the market, such as brown goods and
set-top boxes, there appears to be little attention to their energy
consuming performance. The risk of this is that manufacturers,
looking to minimise their costs, give little regard to the efficiency
of each product. While each product in itself might only use a
small amount of energy, the large volume sold could undermine
the progress that has been made by the energy efficiency schemes
to date. It is therefore Ofgem's opinion that where the design
can be made more efficient for little or no cost the Government
should be working with the manufacturers and trying to set up
voluntary agreements to ensure that these products do not lead
to large amounts of energy being wasted.
INNOVATIVE SCHEMES
TO USE
DISTRICT HEATING
OR COMBINED
HEAT AND
POWER IN
ORDER TO
REDUCE OVERALL
ENERGY DEMAND
16. All measures that the suppliers can demonstrate save
energy are eligible for accreditation under the EEC programme.
Some suppliers have promoted district heating or combined heat
and power to reduce overall energy demand. However, the cost of
these schemes tends to be relatively high and consequently suppliers
do not favour them over other forms of activity.
17. It should also be noted that district heating schemes
(not those that produce electricity) are not always the most efficient
system for households. The minimum efficiency for most boilers
to be installed post April 2005 is expected to be higher than
86 per cent, an efficiency most district heating systems, from
the evidence we have from supplier activity, would struggle to
match. Where carbon savings could be made are in the systems which
are run on biomass, although some concern has been expressed about
these systems and the amount of non-renewable energy that is used
in the collection and transportation of the fuel.
ENERGY SERVICES
18. Energy Services are often described as the provision
of the services households demand through the supply of gas and
electricity and are often seen as one way to overcome consumers'
apathy to invest in energy efficient products. To a limited extent
there is already a market for energy services in the non-domestic
market. By contrast energy services have, so far, been little
developed in the domestic market. Ofgem has established a trial
to test whether, without the 28-day rule on customer switching,
there will be greater demand for household energy services.
|
