In March 2011, a small group of advisers including Steven Fawkes of the Energy Managers Association (EMA) and Graham Meeks of the Combined Heat and Power Association were asked by Greg Barker, Minister of State at DECC, to propose five priority actions to promote energy efficiency. Two years later, Steven Fawkes looks at how far we have come in implementing these actions.

After nearly two years of discussions about Electricity Market Reform (EMR), the publication of the Energy Bill on 29th November, the formation of the Energy Efficiency Deployment Office (EEDO), the agreement of the EU Energy Efficiency Directive, and OFGEM’s warning on the supply margin dipping to a scary 4%, it seems a good time for a status update on where the UK has got to on the five recommendations we offered, as well as taking a look at energy efficiency policy more generally.

Let’s review the five recommendations and how far we have got.

The first recommendation was to set a target for energy intensity. Several countries have set a national target for reducing energy intensity, with China aiming for a 16% reduction between 2011 and 2015, following a reduction of c.20% in the previous five year plan. We all know that energy intensity is a high level indicator that is driven by economic structure as well the deployment of energy efficiency on the ground and that it is sometimes difficult to disentangle the effect of these inputs. However, it is certainly possible, using a balanced scorecard of energy efficiency and energy efficiency investment in each sector and of course the structure of the economy.

Yet, we have seen little or no discussion of setting a national target for energy intensity and we need to look towards a target that is about accelerating the underlying rate of change of energy intensity.  This is in line with recommendations in the most recent IEA World Energy Outlook.

When I was asked for advice, the glaring hole in the government’s approach to energy efficiency was that DECC had offices for Renewable Delivery (ORED), Carbon Capture and Storage, Electric Vehicles and so on but no similar office for energy efficiency. It is hard to stand up and say energy efficiency is important if you don’t have an equivalent part of your organisation dedicated to efficiency.  It was a classic piece of dissonance between what was being said and the organisation and resources in place. This point has been quickly addressed by the government with the formation of the EEDO.  The publication of EEDO’s strategy in November was a good first step in ramping up energy efficiency activity, but now the strategy has to be delivered.

An energy efficiency FIT?

The third proposal was for an energy efficiency feed in tariff, the so called E-FIT. Personally the E-FIT presents me with a conundrum because the energy efficiency industry has spent thirty years arguing that energy efficiency is economic and doesn’t need subsidies. We do know from lots of evidence from around the world that energy efficiency is the cheapest energy resource but the potential is far from fully exploited and the barriers to energy efficiency are also well documented.

Some kind of financial support, particularly if we are going to subsidise renewables (and gas and oil!), is needed to help overcome the barriers and address those opportunities that may not be economic to the individual host or investor, but are certainly economic to society compared to investment in new supply capacity. We need to address the imbalance between energy supply and demand. Subsidising renewables (or fossil fuels and nuclear) without a similar regime for energy efficiency, which is proven to be cheaper per kWh, makes no sense.

The problems of measurement and verification as well as avoiding using tax payers’ money to support projects that should have, or would have, happened anyway, are serious but can be addressed. Internationally accepted protocols such as IPMVP are well known and understood and should be an absolute requirement of any government financial support mechanism. Perhaps the main advantage of an E-FIT would be that many new players would take energy efficiency more seriously and it would create a market in the same way that solar FITs did.

EEDO’s consultation of an incentive mechanism for energy efficiency seems to signal recognition that some form of incentive is a good idea.  Now we have to address the detail of what it is and how it will work without over-complication.

Targets hit

The fourth proposal was to set a target for energy efficiency in the government estate of reducing consumption by 25% over five years. This followed the very successful programme to reduce consumption by 10% in one year, a target that was planned before the election and then was successfully implemented with savings of 13.8% in the first year of the government. The government has gone on to set a target of 25% saving in the wider government estate by 2015.

The big issue with this target is that it will clearly require capital expenditure at a time when government spending is under severe pressure. The second aspect of this proposal to the government was to set aside a large part of the government estate for an Energy Savings Performance Contract (ESPC) on a large scale. The US General Services Administration (GSA) has established an ambitious programme to drive Energy Services Companies (ESCos) to produce deeper retrofits, the Net Zero Renovation Challenge, which is a great model.[3]

In the UK the use of ESCos and EPSCs at scale seems bogged down in government accounting rules, lack of confidence in the concept, small scale projects and timid conventional solutions offered by conventional ESCOs.  The issues of government accounting, on or off the balance sheet, are very real but even if an ESPC was financed by government money it would serve as an important demonstration of the approach at scale and produce net savings and a good financial return to the tax payer – surely a good idea at times of reduced government spending.  A big issue with utilising third party finance for energy efficiency is lack of scale, if private investors are to be induced into the market we need scale and the government estate has super scale.  Government leadership would also help drive the market in the rest of the public sector.

“Sleeping giant”

The fifth recommendation, and one that if fully implemented could have a bigger impact than anything else, was to ensure that the Electricity Market Reform (EMR) fully supported the growth of D3 (Demand Management, Demand Response and Distributed Generation) activities.  Specifically we said:

It is essential that the EMR legislation explicitly includes:

• the principle that demand side resources are equivalent to supply side resources
• comparable value is given for comparable service
• the proposed market mechanisms do not work against expanding D3
• the flexibility to introduce specific market mechanisms that encourage the growth of D3 services.

Throughout the process of drafting the Energy Bill the demand-side lobby has been on a roller coaster ride with moments of optimism, and a lot more moments of pessimism.  The most significant thing in the Bill from a demand side point of view seems to be the recognition of equivalence between supply and demand side in the Capacity Mechanism clauses, namely: “providing capacity” means providing electricity or reducing demand for electricity”. 

As with almost everything else in the Bill the devil is in the detail, most of which is yet to be worked out but, assuming the final rules do not discriminate against demand side measures in any capacity auction we would expect the demand side to come in cheaper than supply.  This could finally incentivise power suppliers to identify, aggregate and secure potential demand side measures.  On the other hand some of the market mechanisms such as the contracts for difference (CfD) could still work against some important D3 technologies such as Combined Heat and Power.

Looking at the five recommendations, we have achieved the establishment of EEDO and set a target for energy reduction in the government estate (albeit with no clarity on where the capital is to come from). In addition, the government is now seriously considering an E-FIT or other financial incentive and the Energy Bill and the current consultation holds the promise that efficiency will be incorporated into Capacity Mechanism of the EMR.

Against those gains we have no overall target for energy intensity, no visible means of financing the required investment in the government estate, and including demand side in EMR could still be derailed in the details.  So to summarise, in the last two years the UK has made some very significant steps towards recognizing the power of energy efficiency and the wider D3 resource.  Potential foundations have been laid but now we need to ensure that they are effectively built upon in order to wake the sleeping giant of energy efficiency.

The author is Steven Fawkes, an energy efficiency, energy services and financing specialist.