Select Committee on Trade and Industry Minutes of Evidence


Memorandum by The Energy Saving Trust

QUESTION 1: GIVEN THE IMMINENT DEPENDENCE OF THE UK ON ENERGY IMPORTS, HOW CAN THE UK MAINTAIN A SECURE ENERGY SUPPLY? WHAT MIX OF FUELS WOULD MAXIMISE SECURITY?

  The UK can most effectively maintain a secure energy supply by conserving its existing energy resources; this is achieved through energy efficiency. If demand for energy is reduced, indigenous resources of gas and oil will be maintained for longer, thus delaying the day when importing these resources will be necessary. In addition, existing nuclear or coal capacity will represent a higher proportion of demand, which will help maintain supply diversity. By reducing demand there will also be spare capacity in energy supply which is good for security, and also encourages competition between suppliers. Losses from electricity transmission and gas storage are also reduced if demand is reduced, particularly at peak times.

QUESTION 2: IS THERE A CONFLICT BETWEEN ACHIEVING SECURITY OF SUPPLY AND ENVIRONMENTAL POLICY? WHAT IS THE ROLE FOR RENEWABLES, AND COMBINED HEAT AND POWER SCHEMES?

  On occasion, there can be a conflict between security of supply and environmental objectives. Utilising our considerable indigenous coal reserves would be a good example of this. However, almost uniquely, energy efficiency satisfies the key policy objectives of conserving indigenous supplies of low and non-carbon resources and of meeting environmental policy objectives. Energy efficiency is the cornerstone of the UK climate change and sustainable development policies because it:

    —  reduces carbon dioxide emissions from energy use;

    —  prolonges the life of indigenous fossil fuels and enhances security of supply;

    —  is in consumer's interests as it lowers fuel bills;

    —  is the only sustainable solution to fuel poverty, by enabling householders to stay warm while they are protected from future energy price rises;

    —  creates jobs throughout the UK;

    —  saves carbon dioxide at a net benefit to the UK economy of £150/tC.

  We don't believe that the current market factors in social, environmental or security of energy supply issues to the extent desirable. Our view is that it should be possible to take all these factors into account, and place a value on them, rather than focussing on any particular aspect.

The role of Renewables

  Renewables provide an indigenous source of carbon-free energy to complement fossil fuels, and should be utilised in a way that reflects this value. Renewables currently contribute only 3GW to UK electricity supply (3 per cent), and the 2010 target for renewables is 10 per cent of electricity supply. While some proposed renewables developments have failed to gain local acceptance in the past, we see a future for renewables in small community based schemes where local communities will feel ownership, and the benefits of, a renewables development. It is clear that the trend in electricity supply over the past decade has been towards smaller more flexible sources (smaller Combined Cycle Gas Turbines rather than previous large scale coal and nuclear powered stations). These are clearly more acceptable to local communities than large scale developments). We see smaller-scale generation as the most secure and diverse source of energy in the future.

  We believe there are important regulatory and institutional barriers to be overcome if such new sources are to contribute to their maximum potential. It would also be important for energy suppliers and/or distributors to be offered incentives for encouraging embedded generation in the electricity network. It is likely that this will entail a completely different approach to the regulation of distribution networks, allowing them to invest in smarter networks, capable of coping with large numbers of very small distributed generators.

  There are a number of renewables suitable for small-scale production at community and household level. The renewable technologies considered most economically viable in this context are:

    —  Small scale wind power projects, if planning arrangements are sensitively handled with local communities.

    —  Energy crops. Production of energy from biomass can be a local community-based scheme.

    —  Photovoltaics (PV) are deployed in domestic houses in Germany and Japan. The DTI PV project will help raise awareness of PV technologies, but much greater effort is needed for these to become cheaper (from mass production). Subsidies are needed for this technology to become market competitive, and this will include a favourable buy out rate for the electricity generated. In commercial buildings, PV panels are already cost-effective when compared with prestige cladding materials. In this sense, there is already potential for 250MW PV (a small power station) by 2010.

    —  Solar thermal technologies provide water heating for the home. This is a relatively inexpensive technology. Denmark and Austria have extensive capital and tax support mechanisms for this technology.

    —  Ground source heat pumps are widely used in the US and Scandinavia. This technology could be particularly efficient for providing energy to households in rural regions off the gas supply.

  Support measures are necessary to overcome local resistance to renewables development at the planning stage (providing help for developers to gain community approval for schemes). Favourable buy-out tariffs will be essential, as they will help in overcoming the problems engendered by the New Electricity Trading Arrangements (NETA) for non-firm energy sources such as some renewables and CHP.

Combined heat and power

  Community CHP provides the maximum efficiency in fuel use associated with electricity generation, with efficiency reaching 90 per cent. With this valuable energy efficiency and environmental benefit CHP should be encouraged, so it can make an important contribution to UK energy supply, and to conserving other fuel resources.

  The current UK CHP capacity of 4,700 MWe is estimated to save around 4MtC/a compared with coal-fired power stations. The Climate Change Programme has set a target of 10,000MW of CHP capacity by 2010. CHP is currently in crisis due to:

    —  the high gas price (relative to electricity prices) which are a disincentive to CHP;

    —  the fact that electricity exports from good quality CHP are not exempt from the Climate Change Levy; and

    —  NETA has created difficult trading conditions for CHP.

  The UK CHP target will not be met unless these difficulties are alleviated. As an additional initiative, an energy supplier obligation for good quality CHP could be set, expressed in TWh/a, so the environmental benefits of this technology are fully achieved.

Domestic CHP (dCHP)

  dCHP has been in the process of development over a number of years and now looks set to become more available on the market. This will provide 90 per cent efficient technology in the home, generating electricity while providing heat. It will cover up to 75 per cent of the needs of the household. Excess electricity can be fed back into the network. dCHP can save between 0.3 and 0.6tC/a per unit, installed, dependent on the boiler it replaces. These units are likely to be marketed as "replace your old boiler, save on heating bill and generate most of your own electricity". However to calculate the additional savings over the Building Regulations minimum standards from 2002, the comparison has to be made with a 78 per cent efficient boiler.

  The EST believes that a realistic expectation is that around 700,000 units could be in place by 2010, saving around 0.3MtC on average. However uptake of these units could grow rapidly to around eight million units by 2020 and with expected increase of electricity output from the dCHP units (especially if fuel cell units are used) carbon dioxide savings will rise. Condensing boilers have struggled to gain their nine per cent share of the boiler market, but some of the installer difficulties are unlikely to occur because the manufacturers will train a dedicated installation team. The technology is also attractive to energy suppliers because suppliers have to buy electricity when it is expensive, to cover for the peak demand hours in the evening. dCHP will shave off some of the demand at peak times (and will be predictable in doing so), thus reducing suppliers' electricity purchasing costs. The long term potential for this technology is likely to be even greater.

  If dCHP becomes widely installed in houses potential technical and regulatory difficulties in the electricity distribution system will have to be overcome. Government and regulator activity to overcome these barriers will also be needed to encourage householders to take up the new technologies.

Ofgem

  Ofgem has a critical role in the success or failure of Government policies on energy efficiency, CHP and renewables. The operation of NETA is just one example where policy has adversely affected the renewable energy and CHP suppliers, particularly for new generators. The potential impacts of NETA were clear even before the arrangement came into effect, and Ofgem's attempt to pass responsibility back to the government is a discouraging interpretation of its environmental responsibilities.

  Ofgem's role as regulator has a clear impact on embedded generation issues, which will be important if domestic and community scale renewables and CHP are to succeed. In addition, technologies such as smart meters should be encouraged so consumers, electricity distributors and suppliers see the benefits of energy efficiency and power generation in the household.

QUESTION 3: WHAT SCOPE IS THERE FOR FURTHER ENERGY CONSERVATION?

  We know there is large untapped potential for cost effective savings, and that this reduction can be achieved without any net costs, and indeed with benefits to the rest of the economy. The Energy Saving Trust is very confident about this because the data on the costs and benefits of energy efficiency are not based on forecasts for the future but stem from concrete historical information on energy efficiency measures over a period of years. Evidence of the cost effectiveness of energy efficiency to the UK as a whole is underlined in the report by the National Audit Office on the Energy Efficiency Standards of Performance schemes in 1998.

  Because there are large benefits to the economy from energy efficiency, there remains huge scope for further energy conservation in the UK. The benefits of energy efficiency stem from the fact that the initial costs are far outweighed by the benefits of reducing demand for fuel. The average rate of return is over 30 per cent on the energy efficiency measures needed to achieve our proposed 2010 target. In summary:

    —  The cost of reducing demand is less than the cost of increasing supplies.

    —  The cost to the economy and the UK of reducing demand is negative. In other words, the initial costs of energy measures are outweighed by the benefit of lower fuel requirements.

    —  The cost of reducing carbon emissions to 2010 is negative at-£150 per tonne because carbon emissions can be reduced without costs, and with benefits to the rest of the economy.

    —  The cost to the Exchequer, of reducing carbon emissions, is small because consumers contribute some of the initial costs, given that there are significant benefits and because there are measures available to increase energy efficiency without cost to the Exchequer.

    —  Energy efficiency policies are unique in that they contribute to all the UK's key energy and environment objectives. Energy efficiency reduces carbon dioxide emissions, is the sustainable solution for fuel poverty, reduces consumers' fuel bills, helps conserve indigenous energy supplies, and creates employment.

  We have recently made an in-depth assessment of where further energy efficiency measures can be made in the UK household sector. In our publication Towards an Energy Efficiency Strategy for Households to 2020 (electronic copy attached, and paper version to be circulated to Committee members) we recommend that the Government should set an energy efficiency target for 2010, and should commit itself to introduce the measures necessary to achieve the target. It should also set an indicative target for 2020. We believe that the value of energy efficiency must be reflected in Government policy priorities. A UK Energy Efficiency Strategy is needed to create a policy framework.

  With respect to the household sector, we believe a target should be set of a 12.5 per cent reduction in energy consumption by 2010 (from 2000 levels), and for 2010-2020 an indicative target of a further 12.5 per cent reduction should be set.

  These targets can be met through a range of policy instruments (as currently):

    —  Public/private incentives as in EEC.

    We envisage that half of the 12.5 per cent could be met by increasing the Energy Efficiency Commitment by 2.5 times to 2010.

    Energy services would contribute to meeting this target.

    —  Fiscal incentives: this could include:

    A widening of 5 per cent VAT to include all energy efficiency products (condensing boilers, compact fluorescent lights, and high performance windows) and to include DIY products. By reducing the purchase price of these products they will be more attractive to the customer.

    Tax credits for householders who take measures to improve the energy efficiency of their homes.

    Stamp duty rebates for householders who improve the energy efficiency of the home they purchase.

    —  Regulation: the Government should

    Require new build to be near zero emission from 2012. A clear and early signal that the Building Regulations will require this standard by 2012, is necessary so the building industry can develop techniques and technologies to meet the requirement.

    Agree minimum standards with industry so appliances in general, and standby mode in particular, consume minimal energy.

    Ensure Ofgem makes policy decisions consistent with UK environmental objectives.

    —  Changing Consumer Attitudes to energy efficiency

    Through a co-ordinated public awareness raising campaign, with government, energy suppliers, the energy efficiency industry, retailers, local authorities and housing landlords to alert householders to the environmental benefits, and the savings they will make themselves on their fuel bills.

  We have identified a range of cost-effective measures that could be taken (full details in the Strategy attached).

  Our assessment shows that if the full range of energy efficiency measures are taken, energy consumption in households will fall by 12.5 per cent or 100TWh of energy per year by 2010 (equivalent to the output of 5 CCGT power stations each year). Without these measures energy use in households is set to rise to 2010, and will make it even more difficult to reach the Climate Change Target. These policies will also save 7MtC/a, allowing the Government comfortably to achieve its Climate Change Target. The electricity component of this reduction alone would be sufficient to meet the shortfall in existing generating plant for the domestic sector (20TWh) in 2010, forecast by the DTI in their Energy Paper 68.

  Beyond 2010 there will clearly be further technical advances and new technology, such as domestic combined heat and power (dCHP), could take off more rapidly. Energy efficiency is likely to remain an exceptionally cost effective way of reducing carbon emissions, and it is thus likely to be possible and well worthwhile to secure a further 12.5 per cent reduction in domestic energy demand below 2010 levels by 2020. For this target to be met more R,D&D will be needed to support the development of low carbon technologies for households.

QUESTION 4: WHAT IMPACT WOULD ANY CHANGES HAVE ON INDUSTRIAL COMPETITIVENESS AND ON EFFORTS TO TACKLE FUEL POVERTY?

  As outlined in our answer to question three we do not see any adverse effects on industrial competitiveness, indeed energy efficiency will bring benefits to industry. Energy efficiency creates jobs in the heating and insulation industries. Jobs in these industries are scattered throughout the country, with demand in both rural and city areas.

  In households, energy efficiency measures include insulation (cavity wall, loft, pipes and tanks), draught-proofing, double-glazing, efficient central heating systems (condensing boilers) with advanced thermostatic controls, compact fluorescent bulbs (CFLs), and efficient household appliances. With its operational efficiencies combined heat and power at community scale, or in individual households with the new domestic CHP boilers (dCHP), offer the same advantages. Most of these measures require trained installers. In the heating industry there is constant demand for boiler repair and replacement, and indeed there are acute personnel shortages in some parts of the country.

  New technologies such as domestic-scale CHP (dCHP) and household renewables (eg. photovoltaics, active solar water heaters, and ground-source heat pumps) will provide new employment opportunities as well as the potential for being "ahead of the game" in industrial development worldwide[20].

  In addition, energy efficiency provides the only sustainable solution to fuel poverty. By improving the fabric of a home, through insulation, draught-proofing and an efficient heating system, the household is awarded greater comfort, and at the same time will be able to maintain these improved interior conditions even if fuel prices rise. Furthermore there are un-quantified benefits such as overall improvements to the UK housing stock, and health benefits for households previously suffering cold and damp homes. It is in recognition of this that the Home Energy Efficiency Scheme (and equivalent devolved administration schemes) fund such measures in fuel poor households, to the sum of around £200M/a. Under the Energy Efficiency Commitment (EEC) (from April 2002) half the energy supplier measures to encourage energy efficiency will be targeted at the fuel poor, to ensure a comprehensive effort to overcome fuel poverty.

QUESTION 5: IS ANY CHANGE OF GOVERNMENT POLICY NECESSARY? HOW COULD/SHOULD GOVERNMENT INFLUENCE COMMERCIAL DECISIONS IN ORDER TO ACHIEVE A SECURE AND DIVERSE SUPPLY OF ENERGY?

  Historical evidence has shown that individuals are generally reluctant to invest in energy efficiency measures for various reasons, and Government or energy supplier incentives are needed to encourage uptake. We propose (in Towards an Energy Efficiency Strategy for Households to 2020) that Government needs to initiate an expanded effort on energy efficiency. There is no single solution, and we recommend that the existing four methods of encouraging energy efficiency are fully exploited.

  Government, through the Utilities Act 2000, now requires energy suppliers to offer energy efficiency to their customers (the EEC) and we envisage an EEC expanded 2½times to 2010 to make a major contribution. The EEC is structured to allow energy suppliers to gain carbon credits for the energy efficiency measures they undertake. With the right incentives in place, the energy suppliers will respond to government policy drivers.

  However the EEC will not be successful on its own unless it is supported by a comprehensive information programme to help householder's recognise the link between energy use and environmental impacts. We would also need fiscal incentives, such as reduced VAT on all energy efficiency products (including condensing boilers, and compact fluorescent lights), stamp duty rebates for energy efficient homes, and tax credits for energy measures taken in the home. Another important Government policy that has a sustained impact on the energy efficiency of housing, is the Building Regulations. Government could declare its intent to move to near-zero emission new build by 2012. If this is announced at an early date the construction industry could develop technologies and techniques to meet this requirement at the end of the decade.




20   Energy Efficiency and jobs: UK issues and case studies EST September 2000. Back


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 3 May 2002