Energy companies deserve condemnation for missing efficiency targets, but why are they asked to fund energy-saving efforts in the first place?
Can you think of an industry, besides energy, where companies are actively forced to help their customers buy less of their product?
Even when you consider products that are commonly thought of as social ills, such as guns, alcohol and cigarettes, suppliers are not obliged to actively reduce demand for their offerings. They may be subject to strict controls and limits on advertising and sales, and they may choose to support progressive charities and promote responsible use of their products. But drinks companies are not legally obliged to fund Alcoholics Anonymous, just as cigarette firms are not forced to fund the free distribution of nicotine patches. It is only energy companies that are forced to fund efficiency schemes designed to ensure their customers use less of their product.
Equally, you do not see Tesco and Sainsbury's being forced to donate to food banks because food has become too expensive, yet energy companies are obliged to spend billions supporting (hugely admirable and sadly necessary) initiatives to tackle fuel poverty. Why is energy the only industry to face such obligations? And, more importantly, is it really the most effective way of tackling fuel poverty and delivering much-needed efficiency improvements and emission savings?
Even those who regard the energy industry as the devil incarnate have to admit that forcing a company to help reduce demand for its product is a bit bizarre, when you think about it. In the UK, energy companies have faced years of mandatory targets and obligations forcing them to invest billions helping customers improve domestic energy efficiency so as to require less of their energy. We've had the CERT and CESP schemes, which required energy companies to offer customers subsidised insulation and undertake improvements for fuel poor households, and now we have the ECO scheme, which will run alongside the government's new Green Deal financing initiative and will similarly fund efficiency makeovers for fuel-poor families. These schemes have undoubtedly enjoyed considerable successes, slashing greenhouse gas emissions, reducing energy bills, and resulting in warmer homes. And yet, no one can argue that they have delivered the nationwide improvement in building efficiency that is desperately needed for both environmental and economic reasons.
Understandably, there will not be much sympathy for any energy company that points out this policy oddity, particularly given news this week that several of them have failed to meet the energy efficiency targets they were set under the previous CERT and CESP scheme. But while these companies deserve all the condemnation that is coming their way for initially seeking to game the CERT system and then missing their targets that they had plenty of warning about, there are legitimate concerns about the way in which subsidised efficiency programmes struggle to get customers to sign up to improvement work and as such result in high costs per tonne of carbon saved. These concerns urgently need addressing, not least because they now threaten to undermine the newly launched ECO scheme.
None of this is to suggest Ofgem should go easy on those companies that have missed their energy efficiency targets. The rules are the rules, some of the energy giants managed to comply with them and others did not; the watchdog should throw the book at the laggards. Nor is it to suggest that the energy industry does not deserve its battered reputation. Time and again energy companies have been shown to be engaging in dodgy practices that make their current position as media punchbag largely justified. But that still does not mean energy companies are necessarily the best people to pick up the tab for energy efficiency programmes, particularly when they clearly lack the ability to deliver these programmes in a cost-effective manner.
To illustrate quite how weird this policy regime is, it is instructive to consider how the auto industry has driven efficiency gains. Requiring energy companies to improve the energy efficiency of their customers' properties is akin to forcing oil companies to improve the efficiency of cars. But in the auto industry there is a near universal recognition among policy makers that the primary responsibility for delivering efficiency gains lies with vehicle manufacturers and individual drivers. As a result, the drastic improvement in vehicle efficiency – new cars in the EU are nine per cent more efficient than they were just three years ago – are the direct result of mandatory standards for manufacturers, backed by price signals for drivers in the form of fuel duty and tax breaks for more efficient vehicles. Yes, the oil companies do face legal requirements to ensure their fuel is clean, safe and able to be used as efficiently as possible, but they are not required to fund the mechanical efficiency improvements of the vehicles.
It is easy to envisage how such an approach could be adapted to suit building energy efficiency, even when you take into consideration the differences between a fleet that is refreshed every few years and housing stock that is refreshed every few centuries. The government is introducing demanding new zero carbon home building standards, but these should be made tougher and extended so that you cannot sell, rent or upgrade homes without meeting mandatory energy efficiency standards. You cannot sell a car that is dirty, inefficient and unsafe because you need an MOT; the same should apply to property. Similarly, demanding standards should be imposed on the domestic appliances we all use, while price signals should also be introduced through more tax breaks for the most efficient products and materials. Like the oil companies, the main obligation on the energy suppliers should be to provide a safe and efficient product, which in this case means decarbonising the power they sell and ensuring it is delivered to people's homes in the most efficient manner possible.
This approach would inevitably impose new costs on construction firms and appliance manufacturers, which would in turn lead to higher prices for householders. But these costs would be quickly offset for customers by efficiency gains, while tough new standards would inevitably drive innovation in these sectors. More important still, the new Green Deal scheme would allow landlords, people buying and selling homes, and those carrying out extensions to undertake improvements at no upfront cost and then pay for them through the energy savings that result. Everyone would benefit.
A model based on more demanding standards would deliver far more rapid improvements in energy efficiency than the current system of relying on energy industry funded efficiency programmes and hoping people will voluntarily embrace Green Deal improvements. It would allow the upfront cost of efficiency improvements to fall on the appropriate sectors, it would result in lower energy prices as a considerable cost is removed from the energy industry, and it should free up energy companies to focus on what they should be doing as a matter of urgency, namely decarbonising their power supplies.
The one flaw in this approach is that it would remove programmes that are urgently required to help households tackling fuel poverty. But where households are struggling to tackle rising energy bills there is a strong case for saying it is the government, rather than energy companies, that should be leading the way. Government is far better positioned to orchestrate local authorities, social housing projects and the third sector to undertake street-by-street improvements. At the purely bureaucratic level it is government, through the Department of Work and Pensions that knows which households are most likely to be facing fuel poverty – information that ministers are currently refusing to share with energy companies, meaning that late last year some energy firms were spending double the amount trying to identify fuel poor households to offer CESP scheme improvements to than they were spending on the resulting energy efficiency upgrades. If government needs to raise funding to deliver such a programme, ministers could start by either raiding the tax revenues provided by the energy industry through the carbon floor price and emissions trading scheme, or removing the Winter Fuel Allowance from rich pensioners who are in no danger of experiencing fuel poverty.
Will any of this happen? Of course not. The "my home is my castle" mantra makes a policy regime focused on property standards political kryptonite, as proved by the controversy caused by the modest "conservatory tax proposals". A tax-and-spend, tighter regulation approach to enhancing energy efficiency is anathema to the current government, meaning that it has no choice but to stick with the perverse policy of forcing energy companies to spend money so that they can make less money in the future.
We're stuck with the current system and given their woeful standing with the public at the moment, the energy companies would be wise to step up efforts to deliver on their next round of energy efficiency targets. The ECO looks to be a significantly better scheme than CERT and CESP, with the combination of a brokerage system for efficiency projects and plans to get utilities, charities and local authorities working much closer together on projects set to result in more cost-effective improvements for fuel-poor households.
But with the next wave of efficiency improvements requiring far more work than simply laying down some insulation in the loft, policymakers need to ask if obliging energy companies to fund improvements will ever be able to deliver the large-scale energy efficiency revolution that is required. The Green Deal has always been designed to address this problem by breaking the link between efficiency improvements and grant programmes, and it seems to have made an encouraging start. But it is clear that the Green Deal does not go far enough, while the ECO still places responsibility on energy companies who, barring a remarkable transformation, will never regard energy saving as part of their core business.
I am no apologist for the energy giants' recent behaviour – I firmly believe they should face a more demanding obligation to deliver clean energy as a matter of urgency and should be taxed appropriately as they do so. I also think they have made a grave error in failing to play a fuller role in the fast evolving market for onsite and community scale renewables that promises to destroy their current centralised business model as renewable energy costs fall and storage technologies emerge. But while there is a huge responsibility for energy companies to support the revolution in energy generation, the responsibility for delivering an efficiency revolution should surely lie with the individuals who will benefit, the companies that sell energy using products and properties, and a government that has a duty to cut emissions and tackle fuel poverty. Forcing energy companies to spend money that is made selling energy on schemes designed to ensure they sell less energy – which in turn results in them putting up the price of energy – is a vicious circle that barely moves us closer to the seismic energy efficiency gains we all need.
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