New Thinking Blog: Will the negawatt solution work in the domestic sector?

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New Thinking Blog: Will the negawatt solution work in the domestic sector?

Matthew-photo tinyWill the negawatt solution work in the domestic sector?

Matthew Lockwood, IGov Team, 14th May 2013

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The idea that the best way to provide energy is simply to avoid unnecessary use in the first place has been around for some time. Back in 1989, Amory Lovins coined the term “negawatts” (energy saved by cutting out waste) to emphasise the contrast with megawatts of power or heat that needs to be generated if that waste is not eradicated.

With the current Energy Bill potentially providing the biggest chance in a decade for rethinking institutions and markets, the negawatts idea has had a revival in the form of proposals for an (electrical) energy efficiency feed-in tariff or an energy saving FiT (ESFIT), whereby householders and businesses would be paid for avoiding the use of energy through energy efficiency measures, better energy management and so on.

We have recently seen briefings from Green Alliance and the UK Energy Research Council arguing that ESFITs are a promising way of transforming energy efficiency and saving in the UK. At the beginning of this month the Association for the Conservation of Energy wrote to DECC’s Ed Davey calling for the inclusion of an ESFIT in the Energy Bill. All of this follows favourable academic analysis from the likes of Oxford University’s Nick Eyre.

The case for an ESFIT seems quite strong: existing policy will not be enough to capture the technical potential; low-carbon supply (e.g. renewables and probably nuclear) will be getting support in the form of a feed-in-tariff, so a level playing field demands equal treatment for energy saving; and Perhaps most attractively, an ESFIT approach, unlike current policy, would not be restricted to the large energy supply companies and would allow multiple actors to enter the market.

However, the devil is often in the detail of policy, and what are to my mind two of the most important aspects of an ESFIT only become apparent in the small print.

The key issue is that, at least for electricity, the policy has to work for the domestic or household sector. According to a study by McKinsey for DECC, around two thirds of the total potential technically available savings in electricity use against business-as-usual to 2030 are in the domestic sector. Realising all these savings would halve household demand for electricity as against BAU. Yet so far, energy services contracts, and experiments with measures like the ESFIT – so-called “standard offer programmes” in the USA – have largely been in the industrial and commercial sectors. Achieving energy efficiency gains is bound to be harder when savings are spread across so many more customers, with each household saving far less than a large company could.

So, can an ESFIT succeed in the domestic sector, where so many other measures have fallen short of expectations? There is one reason for thinking that it might, and one that it might not. The first point is to do with how payment might be made. For homes, any ESFIT would probably have to be linked not to actual savings (hard to measure and attribute in millions of households), but rather to “deemed” savings, i.e. a certain fixed amount for a certain measure, such as switching from a D-rated fridge to an AAA-rated one. This is the approach that has been used in past schemes, like the CERT. If a fixed FIT is being offered for such measures, there is then no reason why it might not be offered as an up-front sum, equivalent to the discounted revenue stream over a certain number of years. This is crucial, since, as Nick Eyre points out, people tend to discount the future very heavily, and one of the most important barriers to investing in energy efficiency measures is capital costs.

In this case (which in my view should probably be the default case), the ESFIT would actually be a capital grant, or in ordinary language, a money-off deal. Indeed, I think that one potential trap with the ESFIT is that it will end up sounding and looking a lot more complicated than it needs to be (the Green Deal has gone this way). Basically this should be about money off when you trade in new-for-old. The effectiveness of such an approach in speeding up the turnover of appliances can be seen in the runaway success of DECC’s brief 2010 “cash for clunkers” scrappage scheme for boilers. We need that on a massive scale.

Which brings us to the second point, which is who pays and how. Nick Eyre also points out that an ESFIT is likely to cost a lot more than current schemes. If it is paid for out of energy bills, that cost will especially fall on those who do not benefit from the ESFIT, which is likely to include those hard to reach, including the elderly and disabled, and in any event is likely to be politically contentious. For Eyre, “the solution lies in finding routes to capitalise these benefits, for example in distribution company rate bases”. Another alternative approach, which I have argued for elsewhere, would be to use long-term public borrowing for what is essentially investment in a long-term public good.

Overall, then, an ESFIT looks like a good idea. Whether it will really work in an energy market otherwise designed to sell rather than save energy remains to be seen. In the meantime, let’s not forget good old-fashioned regulation. Building regulations have been effective in upgrading boilers when they are replaced. Around a third of McKinsey’s projected electrical energy savings will come from the replacement of incandescent lighting by CfLs (that figure may be more now with the development of even more efficient LED downlighters), which is already well on the way due to EU regulation driving a voluntary agreement with retailers. Regulation of the privately rented sector should see improvements in energy performance of the worst properties. Sometimes a little bit of stick along with the carrots is just what’s needed to keep things moving.

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