The next energy efficiency drive must learn from recent failures or risk repeating them.

Energy efficiency policies have contributed to significant reductions in UK household energy consumption. Total household energy use fell by 19 per cent between 2000 and 2014, despite a 12 per cent increase in the number of households and a 9.7 per cent increase in population. On average, individual households now use 37 per cent less energy than they did in 1970.

However, the rate at which houses are insulated has stalled recently as a result of radical policy changes. The government decided in 2011/12 to overhaul the system for funding energy efficiency. Cert and Cesp came to an end, the Green Deal was launched and a substantially different supplier obligation – the Energy Company Obligation (Eco) – was introduced.

The Green Deal was intended to overcome the barriers of split incentives and high upfront costs by financing measures through loans that were tied to the building rather than the occupant and paid through instalments on electricity bills. The “golden rule” prescribed the savings from these measures must be larger than the repayments, so only investments with high rates of return were eligible for full funding. No set level of delivery was specified.

With the Green Deal targeting high payback investments, Eco was largely directed towards more expensive measures with low rates of return, such as solid wall insulation. This represented a significant departure from UK and international experience, where supplier obligations have primarily been used to encourage relatively cost-effective measures.

It is now clear the Green Deal failed to deliver any significant investment in energy efficiency. Since its launch in 2013 it set up 13,800 Green Deal finance plans worth about £50 million, or £17 million a year. The existence of the Green Deal also resulted in Eco being focused on areas in which it was less immediately effective, resulting in energy-saving targets being reduced. Together, the Green Deal and Eco have been a major setback for UK energy efficiency.

The lessons from this experience should inform future policy design. It is evident that:

Supplier obligations can be highly effective but should not be prescriptive about the type of measure and should allow the delivery of cost-effective energy efficiency improvements. High cost measures allocate the benefits to a limited number of customers and can place disproportional burdens on low income groups.

The interest rate of the Green Deal was not attractive. A low-interest mortgage or loan with interest rates of around 2-3 per cent is an attractive proposition but is likely to require government support.

The Green Deal’s focus on low-cost measures (limited by the golden rule) did not allow for more comprehensive retrofits without additional finance. For low cost measures, commercial loans have very limited attractiveness for most consumers. Future on-bill financing schemes, as well as other types of loans, should therefore focus on medium and high cost measures.

 

Jan Rosenow, senior research fellow, Centre on Innovation and Energy Demand, SPRU, University of Sussex.

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