Will the negawatt solution work in the domestic sector?

LED light bulbThis post originally appeared on the IGov blog at the University of Exeter

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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6 Comments

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6 responses to “Will the negawatt solution work in the domestic sector?

  1. Ned Harrison

    I agree about the primacy of energy reduction, and the arguments for subsidising efficiency measures. But I’m not sure the approach you suggest will result in a net carbon reduction; saving energy through one measure, without any overall budgeting can just displace the energy use (rebound effect). Similarly encouraging people to replace working products may not bring a net carbon reduction. This is why I think Tradable Energy Quotas (http://www.teqs.net/) are needed to guarantee reductions, something that it’s hard to see happening with the current piecemeal and contradictory [policy framework. But the impetus (both from government and campaigners) behind comprehensive schemes such as TEQs seems to have fallen away.

    In the meantime, the priority among more realistic actions should be urgent work to bring our housing standards at least in line with other parts of Northern Europe. We have higher rates of home ownership, and settle for much lower standards of building. Why is that?

  2. Hi Ned
    thanks for the comments. I kind of knew the rebound effect would come up, although I left it out of the original post because of space. The UKERC review on the rebound effect puts domestic energy rebound effects somewhere in the region of 10-30%. This is significant, but doesn;t mean that all domestic energy efficiency efforts are doomed to failure – in fact the contrary. On replcaement of new for old, studies on embodied energy vs energy use as a proportion of lfecycle total show that for appliances, embodied energy is a much lower proportion, so it makes sense to turn them over more quickly. The opposite is true for electronics, like laptops, which ironically of course we do replace more quickly.
    Matthew

    • Ned Harrison

      Hi Matt,
      Thanks for the reply, and apologies for moving off topic so rapidly (& predictably). I agree that the rebound effect does not invalidate energy efficiency, but I still think it needs consideration. As I remember the UKERC review, the 10-30% figure is for the direct effect (e.g. heating to a higher temperature because it’s cheaper). Indirect and wider economic impacts are not well understood but could be significantly higher (over half – though still probably net positive). I might have the details wrong, but the issue is that efficiency typically drives growth and growth drives emissions.

      I don’t at all want to imply that this invalidates energy efficiency as a mitigation strategy. It should be our primary focus. But measures such as the proposed ESFIT will have limited carbon impact unless coupled with a holistic, top-down approach.

  3. Matt, I agree that it is vital that any ‘negawatts’ policy should directly benefit as many people as possible. I don’t see why efficient appliances couldn’t be made as cheap or cheaper than less efficient models. Indeed as we mentioned in our report, creating a market for electricity saving, there are a number of international examples of electricity saving programmes that have directly helped householders, particularly those that most need it. In Oregon there is a rebate programme for Energy Star appliances that targets low income homes.

    I would however question the assumption that supporting electricity saving programmes doesn’t indirectly help all consumers. The typical cost of the international electricity saving programmes we looked at (which included domestic as well as commercial and industrial schemes), came out at around £30/MWh which is much lower than typical generation costs. Buying negawatts should therefore lower everyone’s bills, not just those that have been directly affected by the scheme.

  4. Hi Rachel

    thanks for the comment. I agree with a lot of what you say, but I still think there are some issues about the timing of inverstments and cost burdens.

    In some cases (e.g. LEDs at the moment), while lifetime use costs are lower, equipment costs are higher, although with scale that shoudl come down. In other cases, as you say, efficient appliances may cost the same or less than less efficient ones. But that is not the whole issue. First, there are policy costs (and reaching low income homes often has the highest policy cost), and second there is the point about accelerated equipment turnover, which has a cost. This latter point is one about timing and spreading cost. A more efficent fridge may cost no more than the low efficiency one I have now, but replacing it before I otherwise would do so still means I incur a capital cost, and if that is scaled up and passed on within a single year to other energy consumers there will be a political problem. That, as I understand it, is Nick Eyre’s point about the need to spread out the burden of capital costs over time.

    This is relevant for your figure of £30/MWh. This presumably is the net lifetime cost of the programme, not the capital cost of the measure. This is cheap compared with new generating capacity, but we pay for that as costs levelised out over the lifetime of the investment (or some notional lifetime), whereas at the moment we pay the negawatt cost in one year.

    All of this suggests that on current arrangements, we would all indeed benefit from a negawatt solution at some point in the future, but there may be a big hump of cost burden to wade through first…

    Cheers
    Matthew

  5. Ian Christie

    Thanks Matthew.
    ESFITs are well worth trying, and as you say need to be packaged in a way that motivates people and is simple to grasp, unlike the way the Green Deal has gone so far. Rebound issues are not trivial but also not a reason for pessimism re energy efficiency; work by my colleagues at Surrey Univ. and Steve Sorrell at Sussex confirms that the range of 10-30% is about right, but there are many more complexities to tease out and some rebounds seem likely to go well above 30%. How to minimise or eliminate rebound effects is a very complicated issue, and in the case of low-income households our policy goal in many cases should be to enable some rebounds, so that wellbeing can be improved through higher energy-based comfort-taking. How we do ‘income capture and storage’ to prevent EE savings rebounding or even backfiring (100%+ rebound) remains to be worked out.

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