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Energy Policy 35 (2007) 2131–2140

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Demand reduction in the UK—with a focus on the non-domestic sector

David Tokea,�, Simon Taylorb

aDepartment of Sociology, University of Birmingham, Birmingham, West Midlands B15 2TT, UKbDe Montfort University, Leicester, LE1 9BH, UK

Available online 6 September 2006

Abstract

A demand reduction strategy is considered in the context of the UK and in the light of the UK Government’s 2006 Energy Review.

This paper discusses how a mechanism—a Demand Reduction Obligation (DRO)—can be established to achieve radical energy demand

reduction targets in electricity and gas use in the industrial, commercial and public administration sectors. A DRO would require energy

suppliers to invest in energy-saving measures so as to reduce energy demand in these sectors. The investment for this activity would be

funded by energy suppliers who would increase prices in order to cover the cost of achieving the carbon reductions. Public opinion

surveys suggest that a large proportion of the public would prefer to support demand reduction measures compared to other energy

options. It may be practical to deliver carbon emission reductions equivalent to around 30% of emissions from the UK electricity sector

over a 15-year period through a broad-based demand reduction strategy. Demand reduction is considered in the context of an assessment

of costs and resources available from other low carbon options including renewable energy and nuclear power.

r 2006 Elsevier Ltd. All rights reserved.

Keywords: Demand reduction; Investment gap; Prices

1. Introduction

This paper looks at how the Government can promotecost-effective measures to reduce demand for energy, with afocus on the non-domestic energy sector. This is done in thecontext of a comparison of resources and costs of differentlow carbon demand reduction and non-fossil energy supplyoptions. Energy efficiency is the provision of given levels ofservices using less energy. Although energy efficiencymeasures are used to achieve the demand reduction, wedistinguish between the terms energy efficiency and demandreduction. Demand reduction programmes discussed in thisarticle are in excess of what is likely to be achieved throughenergy efficiency programmes based on existing financialresources and knowledge.

We shall begin by setting out the context of the presentdiscussion. Then we shall discuss the potential and relativecosts of demand reduction and other low carbon options interms of their contribution to cutting carbon emissions. Weshall then consider the policy details and then the politics

e front matter r 2006 Elsevier Ltd. All rights reserved.

pol.2006.07.003

ing author. Tel.: +440 1214158616;

146061.

ess: d.toke@bham.ac.uk (D. Toke).

of establishing a demand reduction obligation (DRO) as acentral means of delivering demand reduction measures.

2. Context

This paper was written in the context of an EnergyReview which was widely acknowledged as being initiallyfocused on just one option—that of intervention in energymarkets to ensure the construction of new nuclear powerstations. It may well be that new nuclear power construc-tion would have to be funded by some sort of levy onelectricity prices. Yet there are also possibilities of fundingdemand reduction programmes in industry and servicesectors through increases in energy prices. Howeverpolicies favouring increased attention to demand tend tobe downgraded.In 2003, the UK Government published a White Paper

which promised a radical programme of cuts in carbondioxide emissions. Energy efficiency was to be at the heartof this programme. The 2003 White Paper declared:

3.2 The cheapest, cleanest and safest way of addressingour energy policy objectives is to use less energy.(Department of Trade and Industry (DTI), 2003, p. 32)

ARTICLE IN PRESSD. Toke, S. Taylor / Energy Policy 35 (2007) 2131–21402132

The Government had established an ‘Energy EfficiencyCommitment’ (EEC) to deliver energy efficiency in thedomestic sector. The EEC involves implementation ofenergy-saving measures such as cavity wall insulation(CWI) by the electricity and gas suppliers. The electricityand gas suppliers are set a kwh obligation and what theyspend to achieve it is up to them. There were debates abouthow this policy instrument could be extended. The WhitePaper said:

3.9 The energy efficiency commitment will have a majorrole to play in homes, and we will consider whether toextend it beyond the household sector. (DTI, 2003,p. 34)

Bodies such as the Association for the Conservationof Energy have issued calls for the domestic programmeto be expanded. There has been no move to extend theEEC outside the domestic sector. Yet, more energy isconsumed in the public, commercial and industrial sectorsthan in the domestic sector. Indeed for electricity, whichwas at the centre of the Energy Review’s focus, domesticconsumption is only a third of total final electricityconsumption in the UK. The initial Energy Reviewdocument stated:

The work undertaken in the current Climate ChangeProgramme Review shows that progress in achievingenergy efficiency savings has been slower than wasexpected in the 2003 White Paper. (Department ofTrade and Industry, 2006, p. 30)

Is this a self-fulfilling prophecy given the Government’sreluctance to extend existing energy efficiency pro-grammes? Certainly, the evidence suggests that there iscurrently a major imbalance between the terms upon whichinvestment is made in energy supply as opposed to energydemand reduction.

3. The energy investment gap

It is difficult to capture the bulk of energy efficiency orenergy demand reduction potential unless the inequalitiesof access to capital between energy suppliers and energyconsumers are reduced. Energy consumers may chooseto spend their money on items other than energyefficiency, for instance, holidays, new bathrooms, or newproduction equipment in the case of industry. Consumerswill usually only fund energy efficiency measures if thesimple payback is in the 1–2 year range (Enviros, 2006,p. 36). This corresponds to effective internal rates ofreturn of 40–50%. Meanwhile large power stations will befunded using project finance allowing internal rates ofreturn for the whole projects to be of the order of 5%, withsimple payback periods being around 10 years. This iscertainly the sort of basis upon which new nuclear powerstations would be funded (Oxera, 2005). Even this wouldonly be achieved on the basis of large subsidies coming

(almost certainly) from increases in consumer electricityprices.This ‘investment gap’ between the effectiveness of

institutional arrangements that exist to fund energyefficiency and power stations means that the optimumbalance between low carbon energy supply and demand-side investments is not being achieved. It is upon this basisthat much of the argument for the central funding ofdemand reduction measures rests.A final point about the context that should be considered

is public opinion. Although nuclear power is perhaps lessunpopular than formerly, it is still widely thought of as thelast resort. In a recent survey on public attitudes to nuclearpower and climate change (Poortinga et al, 2006), 76% ofthe respondents agreed with the statement that ‘Reducingenergy use through lifestyle changes and energy efficiency isa better way of tackling climate change than nuclearpower.’ We now look at the scope for demand reduction inthe commercial and industrial sector in the context of theopportunities for other carbon reduction options consid-ered using the same financial criteria.

4. Scope for demand reduction—assumptions upon which

carbon reductions are based

We evaluate the relative effectiveness of various deliver-able carbon reduction measures in the UK’s consumptionof gas and electricity using a model developed by Jacksonand Roberts (1989). This model was unique, at the time, indemonstrating the context in which energy measuresdeveloped over the next few years and the nascent influenceof environmental considerations for energy policy. It wasitself based partly on existing demand-side analysis modelsused by regulatory authorities in North America. We arenot aware of any updated version of the Jackson andRoberts study. However, the general approach is valid andthe energy policy arena would benefit from the approachbeing revisited using a contemporary context. UK energystructures have changed since then, so our model focuseson some different categories. Moreover, some types of datawere more accessible to Jackson and Roberts than us, andalso vice versa.We assess the amount of deliverable carbon savings from

different, selected, sources as well as the cost (per tonne ofcarbon saved) of delivering those sources to the energyconsumer. Note that (a) we have not had time to considermany cost-effective demand reduction methods, andsecondly that (b) we include only those measures that arefully deliverable though centrally organised fundingprogrammes or changes in regulatory policy. Assumptionsupon which the individual measures are based are set outlater in this paper.However, there are some important common yardsticks.

First, we assess all options on the same financial basis, thatis a 5% discount rate over a 15-year period on allinvestments. As explained earlier this is broadly the sameas that which will be applied to project-financed large

ARTICLE IN PRESSD. Toke, S. Taylor / Energy Policy 35 (2007) 2131–2140 2133

power stations such as nuclear power. Second, in order torelate our study to the costs of supplying energy services tothe consumer, we calculate the costs of supplying thecarbon savings relative to the costs which energy con-sumers would otherwise avoid using available alternativesources (the opportunity cost principle).

So, in the example of electricity production, we assumethat the alternative to providing renewable or nuclearelectricity is governed by the cost of electricity supply froma new combined cycle gas turbine (CCGT). UsingSeptember 1st 2005 wholesale industrial gas prices this willbe around £26.5/MWh (2.65 p/kWh). Hence, in Fig. 1, thecosts of renewables and nuclear appear as ‘positive’ costs,since their generation costs are higher than the cost ofelectricity from new CCGT plant. In the case of energy-saving measures, the cost of the different measures iscalculated relative to retail consumer energy costs for gasand electricity. In the measures we have chosen these costsare lower than the cost of supplying energy, by varyingamounts, after taking account of the annualised cost of thecapital investment in energy saving.

When we have calculated this cost of supplying (orsaving) energy we then divide the cost by the carbonsavings made to produce a cost of saving per tonne ofcarbon saved.

Hence, adapting Jackson and Robert’s description(1989, pp. 5–6), we have

Cost of Energy Savingðd=MWhÞ

Carbon savings madeðton=MWhÞ

¼ Cost of saving carbonðd=tonÞ.

We calculate the amount of savings that can be achievedover a 15-year period for a range of measures, as shown inFig. 1 (see earlier). We assume an end-of-2005 start. Ourcalculations concern measures that would not otherwisehave taken place through current policy.

We use Government data on energy in the Digest ofUnited Kingdom Energy Sources and also Energy Con-sumption in the UK (DTI, 2005). We assume Governmentprojections that UK electricity consumption will increasefrom 340TWh in 2004 to 381TWh in 2020. In the case ofnuclear power we make the ‘heroic’ assumption that thenuclear industry’s demand for a ‘fast track’ approval andconstruction of new nuclear plant is achieved by 2015. Weassume that this would replace the generation coming fromthe nuclear power stations that are due to retire by 2020.Hence we have five years’ worth of generation fromnuclear.

In the case of renewable energy the existing Governmenttarget is for 15% of UK electricity to be supplied byrenewable energy. We assume that this is increased by10% over 15 years in addition to the existing renewablesbuild-up.

We assume that the non-nuclear measures are progres-sively introduced over the 15-year period so that the fullvalue of all the measures is in evidence at the end of the

period. We assume September 1st 2005 energy prices asappropriate for the sector under consideration.Fig. 1 shows the quantity and cost of carbon saving that

can be achieved in 15 years. Even if we assumeunrealistically rapid deployment of nuclear power, theamount of carbon saved through nuclear power over thenext 15 years will be around 28 million ton of carboncompared to 142 million ton of carbon saved by the(much cheaper) measures mentioned in this report. Fig. 2shows the annual savings in carbon emissions that areachieved after the full implementation of the measures.The non-nuclear measures constitute the equivalent of areduction in annual carbon dioxide emissions fromthe electricity sector of nearly 40% of present levels.This is well over three times the maximum annualcontribution of new nuclear build that would replacenuclear plant retiring by 2020. This is almost double thepresent contribution of nuclear power. This packageof measures is cheaper than the nuclear option. Ourmeasure of cheapness is the cost to the consumer assumingthat the measures were costed at the same cost of capital.Cost-effective demand reduction and combined heatand power measures on their own will reduce carbondioxide emissions from UK electricity by the equivalent ofapproaching 30%.We set out in Fig. 1 showing demand reduction

compared to energy supply opportunities assessed for theirrelative cost effectiveness in delivering carbon reductions.In Fig. 1 the various carbon-reducing measures areexamined in terms of their contribution to carbon emissionreduction by the year 2020. A comparison is made with thecarbon reduction resulting from the construction of nuclearpower stations sufficient to replace all those due to beretired by 2022. The ‘heroic’ assumption that the nuclearbuild can all start production within 10 years is made.Measures that fall below the line will actually savethe economy money. It can be seen that there is a largevolume of very cost-effective demand reduction resourcesavailable at much lower prices compared to nuclear power.The Government is considering giving some sort of a‘guarantee’ to companies who build new nuclear powerstations. Given that this is likely to be subsidised fromsome form of levy on electricity prices, it seems logical thatthe carbon reduction delivered by this method would bemuch more expensive than if a similar volume of carbonreductions could be mobilised using demand reductiontechniques. Fig. 2 sets out the measures according to theirannual impact on carbon emissions upon being fullyimplemented.If we calculate the annual impact of the measures when

fully implemented the demand reduction opportunities(including combined heat and power) would reduce carbonemissions from the electricity sector by the equivalent ofnearly 30%. Adding on the impact of extending theRenewables Obligation from 15% of electricity supply by2015 to 25% by 2020 would take this reduction in carbonemissions to nearly 40%.

ARTICLE IN PRESSD. Toke, S. Taylor / Energy Policy 35 (2007) 2131–21402134

5. Charts showing selected carbon reduction options that are

not included in current government policies plans or

programmes

See Figs. 1 and 2.

6. How realistic are our assessments of potential?

Our projections of resource estimates are broadlycomparable with conclusions reached by the Carbon Trust(2005a), even if our suggestions for policy instruments aredifferent (see later discussion). The Carbon Trust estimatedthat the cost-effective carbon reduction opportunities inindustry, commerce and the public sector amounted to7.9mton of carbon per year (Carbon Trust 2005a, p. 14).This is calculated on an internal rate of return of 15%, so a

Savings curve for CO2 abatement options

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Emissions reduction (m tonnes C over 15 years)

Co

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Domestic lighting

Reduction of stand by drain

Savaplugs

No new electric heating

Compressed air leaks

Non-domestic lighting

Motors

Domestic insulation

Bldg Energy M'nt Systems

CHP

Renewables

Nuclear / Revised Oxera

Nuclear / NEF

50

Fig. 1. Key gives measures starting from left (domestic lighting) to right.

Emissions savings aabatem

0.0 5.0

Non-nuclear

Nuclear

Million to

Nuclear RenewablesCHP BuildingEnergy MDomestic insulation No new electric hDomestic lighting Compressed air l

Fig. 2. Read key fro

figure assessed at 5% internal rate of return would berather larger than this. Indeed the Carbon Trust estimatethe total technical resource in industry and services to bearound 12.7 million ton of carbon per year. Our ownfigures indicate a total of 9.4 million ton including CHP. Asthe Carbon Trust study comments ‘Opportunity as stateddoes not allow for innovation and introduction of newtechnologies between now and 2020 (which would beexpected to significantly increase the figures shown)’(Carbon Trust, 2005a, p. 14).Government policy positions and reports commissioned

by Government agencies spend a lot of time discussing whyenergy efficiency opportunities are not taken up, but theyspend much less time discussing how they could actually bedelivered. Essentially, they are still expecting energyefficiency in the non-domestic energy sectors to bedelivered by the market, perhaps helped by making somelow-interest loans available. Yet, as has been mentionedalready, this still leaves energy efficiency to be financed onaverage payback periods that are much shorter comparedto large power stations using ‘project finance.’ Both theUK economy and its environmental welfare suffers as aresult since the carbon emission abatement will be lowerand rather more expensively achieved via much greaterreliance on energy supply measures. There is a solution tothis. It involves making investment for demand reductionavailable from energy suppliers that can correct theimbalance that exists between the returns on energyinvestments needed by energy consumers and energysuppliers.We do need non-fossil energy supply measures. How-

ever, renewable energy sources exist, and public opinionseems to prefer renewable energy as opposed to nuclearenergy (Poortinga et al, 2006). Hence a serious effort todevelop a national programme of financing of demandreduction using effective payback periods more like thosethat will be offered to nuclear power is likely to seriouslyreduce the need, and arguments, for new nuclear build.

fter full implementation ofent measures

10.0 15.0 20.0

nnes C per year

Motors'nt Systems Non-domestic lightingeating Reduction of stand by draineaks Savaplugs

m left to right.

ARTICLE IN PRESSD. Toke, S. Taylor / Energy Policy 35 (2007) 2131–2140 2135

7. Description of the measures

7.1. Building energy managements systems (BEMS)

BEMS control energy usage in buildings, for example,ensuring that boilers do not operate longer than necessaryfor a particular ambient temperature. They are also used tocontrol lighting, ventilation and other energy usingservices. Here, we calculate only heat savings from retro-fitting BEMS in existing buildings, which makes ourresource estimate a very conservative figure. We assumean economic resource of 15% savings of heat use covering70% of services and industrial heating and we assume a 4-year payback period. Data on capital costs of BEMS andenergy savings are derived from actual experience from ascheme in North Lanarkshire District Council under aenergy efficiency programme funded by the ScottishExecutive (Hill, 2005b). Carbon reduction resource:17.5mton. Marginal Cost: �£73.9/ton C. The installationof BEMS systems will be achieved by a DRO on supplierswho will fund the installation of BEMS through a levy onconsumer bills.

7.2. Motors

Motors are ubiquitous in industry and services. Ex-ploitation of the demand reduction resource in motorsinvolves (a) programmes to retrofit existing motors drivingitems such as ventilation units with variable speed drives,high-efficiency motors and replacing existing pumps, fansand compressors with units that use less energy and (b)regulatory changes to make new buildings and machineryuse high-efficiency motors and systems. The marginal costof the retrofit programme is �£104 per tonne of C. Theresource is 23.8 million ton of carbon. Source: de Barrin(2003). Motor efficiency improvements can be achievedthrough the DRO.

0

0.5

1

1.5

2

2.5

2000 2001 2002 2003 2004 2005 2006

Fig. 3. Consented onshore wind as % of UK electricity.

7.3. No new electric heating in domestic and services sector

Use of electric heating in new buildings is increasing andshould be restricted at least in areas covered by gas mains.Electricity produces more than twice the carbon dioxideemissions than gas heating due to inefficiencies in powerstations. We make allowances for some increases ininstallation costs and also for the extra maintenance andsafety check costs of gas heating compared with electricheating. The cost of gas heating is much lower for theconsumer than electric heating. Community heating, viacombined heat and power (CHP), can provide high-qualityheating in apartment blocks where individual gas heatersare inadvisable on safety grounds. Cost of carbon saving:�£313 per tonne; new buildings resource: 8.1 million ton ofC. The Government needs to pass a law ensuring thatelectric heating is not used in areas connected to mains gasexcept in the case of use of heat pumps. Heat pumps

generate 3–4 times the quantity of heat energy compared toelectric input.

7.4. Reduction of stand-by drain

Stand-by usage in appliances such as TVs and stereosystems soaks up around 6% of UK domestic electricityconsumption. We assume that effective regulatory actionwill reduce stand-by consumption by 80% producing atotal carbon saving of 5.46mton C at a price of �£395.7per tonne.

7.5. Renewables

We assume continuation of current rates of onshorewindfarm planning acceptances, sufficient now for over 2%of UK electricity (BWEA 2005)—see Figs. 3 and 4 fordetails. If the amount consented in 2005 is repeated everyyear until 2020 the total will come to 10% of current levelsof UK electricity supply. Taking into account schemes inthe pipeline and allowing for some increase resulting fromexpected relaxation of MOD radar objections to wind-farms and from increasing plans for offshore windfarms,we assume 20% of UK electricity is supplied by windpower by 2020, half onshore, half offshore. At least afurther 5% will come from other renewable sourcesincluding biofuels, small hydro, wave power, tidal streampower and solar power. Using wind power costs as thebasis at an average of £1050 per kW (Enviros Consulting,2005), costs declining at 1% per year over the next 15 years(following earlier patterns) and average capacity factors of31% we can expect carbon savings to cost £76.40 a tonneand 37.8 million ton of carbon to be saved. The means ofdelivering this 25% target would be by extending the targetfor the Renewables Obligation to 25% by 2020. Currently,it is only 15% by 2015.

7.6. Home insulation

There will still be at least 1.5 million homes suitable forCWI that have not had this treatment by the end of thecurrently projected rounds of the EEC (2011). In addition,there will still be a great unfulfilled need to refurbishexisting loft insulations. We assume that 7.5 million homeswill be fitted with home insulation in addition to existing

ARTICLE IN PRESS

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2000 2005 2010 2015 2020 2025

Per

cen

t

Fig. 4. Projected consented wind as proportion of UK electricity (based

on current trends).

D. Toke, S. Taylor / Energy Policy 35 (2007) 2131–21402136

plans. Loft insulation will be cheaper than CWI, but saveless energy. We assume that 30% of energy savings aretaken as comfort leaving an average of 2.1MWh annualsaving per home insulated in our mix at an average cost of£280 per house (DEFRA 2005). This produces savings of9.6mton of carbon at a cost of �£90 per tonne C. Thesefigures are an underestimate of the resource since we do notinclude savings can be achieved through measures such assolid wall insulation.

7.7. Non-domestic lighting efficiency

State-of-the-art lighting efficiency techniques can beretro-fitted in old buildings in the industrial and servicessectors which are still using inefficient types of fluorescentstrip lighting or even incandescent bulbs. High-efficiencylamps or bulbs, efficient reflector and diffuser designs andup to date control gear can be installed. The Carbon Trustcase study (Carbon Trust, 2005b) on lighting efficiencysuggests a payback period of 3.6 years for the investment.We assume a payback period of 5 years and assume thatbuildings consuming 70% of the lighting energy in theindustrial and services sector can be retro-fitted. Themeasure will produce savings of 11.8mton C at a cost of�£138.2 per tonne. Its delivery will be achieved through theestablishment of a DRO.

7.8. Domestic lighting

Compact fluorescent lamps now give high-quality lightfor very cheap prices (£2 per lamp) and ought to be takingover the domestic light market if only they were promotedproperly. Their payback periods are a couple of months inthe most used light fittings. We estimate up to 75%provision of light through CFLs by 2020 providedassuming effective promotional activity. The measure willprovide savings of 4.64mton of carbon and cost �£435 pertonne.

7.9. Savaplugs

These can be retro-fitted to existing fridges and savearound 20% of electricity. The large majority of fridges inuse and also a high percentage of those still being sold do

not have this function—and so can be retrofitted as anadditional measure to home insulation fitted under theEEC. By the end of the 15-year period minimum efficiencystandards could be raised by the EU to incorporate thisdevice. A total of 2.3mton of carbon is saved at a cost of�£322/ton of carbon. Much greater savings could beachieved than this if electronically commutated permanentmagnet (ECPM) motors were made a regulated standardfor electrical appliances.

7.10. Combined heat and power

CHP produces power and heat simultaneously andcurrently generates around 7% of UK electricity, mainlyfrom industrially based plant. The Government’s target of10% of electricity from CHP by 2010 is not on courseto be met. We assume that new incentives for CHP areintroduced which gives payments to CHP electricityproduction based on the extent to which the CHP plantreduces carbon emissions compared to the average forCCGT plant. This can lead to new CHP capacity that willgive around 20% of carbon reductions compared toCCGTs, similar to that which is being achieved inDenmark. We assume: (a) 5000 h use a year, (b) industrialpower exchange electricity and gas export and importprices and (c) a cost of £500 per kW based on a quote for ahospital project supplied by Clark Energy Ltd using aJenbacher gas engine (Hill, 2005a, b). We assume thataround 10GWe of CHP will be installed mostly in theindustrial and services sectors for a cost of �£9.85 per tonof carbon saving a total of 19.5 million ton of carbon. It ishoped that domestic gas CHP (microgeneration) units canbe developed that will cut carbon emissions by around 20%and these machines could add to this capacity.

7.11. Compressed air

Health and safety regulations demand tough control onreleases of noxious gases, but there are no controls on theextensive leakages of compressed air used in industry. Thisleakage could be very cheaply reduced (Carbon Trust,2001). We assume that eventually up to 90% of compressedair leaks could be eliminated through more frequentreplacement of air nozzles and other actions. Such actionswould be necessitated by the inclusion of checks incompressed air leakages in Health and Safety Inspections.Total savings will be 2.3mton of carbon at a cost of �£261per ton of carbon.

7.12. Nuclear power

Currently, nuclear power supplies around 21% of UKelectricity. However, if nuclear power stations are retiredaccording to current plans, then the equivalent of 14% ofcurrent electricity generation would have to be replaced by2020 to maintain current levels of nuclear generation. Asmentioned earlier, we assume that this quantity of new

ARTICLE IN PRESSD. Toke, S. Taylor / Energy Policy 35 (2007) 2131–2140 2137

nuclear comes on line in 10 years’ time. According toGovernment advisers Oxera, the first nuclear station willcost £1.6 billion per GW and operate at over 90% capacity(Oxera, 2005). This capital cost is well under half the costof the last nuclear power station (Sizewell B) that was builtin the UK (MacKerron, 1991 using 2005 prices), but itapplies to a design that has never been built. Moreover, thehigh capacity factor attributed to this design comes fromoperating data for (very expensive) Sizewell-B type PWRsfor which there is great experience.

We use two bases for evaluating the costs of new nuclearbuild, both of which accept considerable cost reductionssince Sizewell B. The first is the median estimate made bySimms (2005). The second is a revised version of the Oxeraestimate. We revise this Oxera estimate by (a) using theaverage recent UK performance of British nuclear powerstations (capacity factor 76%) and (b) like Oxera assumingthat decommissioning will cost £500 million but unlikethem assuming that this is an upfront payment made to theGovernment to defray its existing nuclear decommissioningprogramme. Oxera effectively write off the current cost ofdecommissioning to close to zero by saying it will be paidthrough a sinking fund. Windfarm developers are requiredto make upfront decommissioning payments to guardagainst the possibility that the developer will not be aroundin only 15–20 years. Hence it is logical to insist on fullupfront payment of decommissioning costs for nuclearinstallations since the companies that operate them (andthe sinking funds notionally dedicated for decommission-ing) are likely to have been absorbed in reorganisationsover the 100 or more years until decommissioning actuallytakes place. Judgements about decommissioning costs are,of course, highly controversial in political terms, but wefeel that the assumptions made here are as plausible as anyother value basis for considering this issue.

We estimate that the new nuclear power will reducecarbon emissions by 28.4mton of carbon by the end of2020 at a cost of £115.80 per ton according to the NEF costestimate and £88.60 per ton according to the Revised Oxeraestimate.

However, the central purpose of this report is tohighlight how the very large energy efficiency resourcecan be captured by diverting investment from energysupply to demand reduction in the industrial, commercialand public administration sectors. There are a range ofregulatory measures available to deliver the measuresmentioned in Figs. 1 and 2. We focus in this paper onmechanisms that can deliver demand reduction in theindustrial, commercial and public administration sectors.In the case of electric heating, which is associated withnearly three times as much carbon emissions as gas heating,the emissions savings are derived from restrictions onuse of electricity for heating in new buildings where thereis access to mains gas. This is excepting cases wherelow carbon sources such as heat pumps can be used.Compressed air losses in factories could be reduced bywidening Health and Safety Officers’ responsibilities to

include checking that work to control such leakage isbroadly similar to that of noxious gases.However, a simple means of delivering demand reduc-

tion is to give energy suppliers an obligation to achieve pre-determined reductions in carbon emissions. This is ourpreferred means for delivering the bulk of the measuresdescribed in this report in the industrial, commercial andpublic administration. Let us look at the existing obligationon energy suppliers concerning the domestic sector. This iscalled the EEC.

7.13. Energy efficiency commitment

This has been operating since 2002 and requires theelectricity and gas suppliers to invest in energy saving in thedomestic sector sufficient to achieve targets for savings incarbon emissions. The system is regulated by Ofgem whohave powers to fine electricity suppliers for up to 10% oftheir revenue if they fail to achieve energy-saving targets.The suppliers’ carbon abatement targets are set inproportion to energy that they supply and, as discussedearlier, the suppliers are allowed to take the costs of doingso out of revenues paid by consumers. It has beenestimated that the first, 2002–2005 period this extra cost(for the demand reduction measures) amounted to around1% of consumer bills and the energy suppliers were able toovershoot their savings targets by considerable amounts(Ofgem/Treasury 2005). The savings were predominantlyin gas, but the total savings are equivalent of around 1% ofemissions from the electricity sector. The targets have beendoubled for the 2005–2008 period. The Association for theConservation of Energy has called for the targets to betripled in the 2008–2011 tranche of the EEC.The energy suppliers calculate emission abatement levels

on the basis of installing a defined set of measures whichare estimated for their carbon-saving potential. CWI hasbeen the most common measure used, while other measuresincluding loft insulation, energy-efficient fridges andfluorescent light bulbs. Fifty per cent of the measures aredirected towards a priority group including low incomeand elderly and disabled households. This means thatmuch of the savings are taken in increased ‘comfort’ ratherthan energy savings, but even so the investment looksextremely cost effective as a carbon abatement measure.A reduction of 0.4 million ton of carbon was achievedthrough an expenditure of around £500 million through theEEC in 2002–2005 (Regulatory Assistance Programme,2005). The measures used to induce consumers to buy theenergy efficiency products range from paying most, or all,of the costs in the case of the fuel poor (50% of theprogramme) to paying part of the cost in the case of themore affluent consumers.The demand reduction measures that we highlight in this

report are primarily focused on the commercial, publicadministration and industrial sectors, and would be able todeliver the savings without any dilution for anti-fuelpoverty purposes, making them especially attractive as a

ARTICLE IN PRESSD. Toke, S. Taylor / Energy Policy 35 (2007) 2131–21402138

carbon abatement measure. Let us move on to examinehow a DRO might work and what it might achieve.

8. DRO—design and targets

The simplest mode of operation for a DRO in thecommercial, public administration and industrial sectorswould be follow the practice established under the EEC forthe domestic sector. The distinction between the domesticsector and other consumers would be made according tothe size of annual energy consumption. As in the EEC, theDRO would involve giving the gas and electricity supplierstargets for carbon emission abatement, except that theimplementation would be in the non-domestic energysectors. It may be preferable to divide the targets into,for example, a section for small and medium enterprises,another for public administration, and another for largeindustry. This could help ensure that investment in demandreduction was spread more evenly around the differentsectors. The costs of implementing the measures would bereclaimed through higher consumer prices levied by theenergy suppliers.

The electricity and gas regulators (Ofgem) would issuecertificates of carbon abatement to the suppliers based onthe number and type of energy efficiency measures thatwere taken. Of course the measures would be ratherdifferent from those which apply to the domestic sector.

For example, certificates would be issued in respect ofretro-fitting Building Energy Management Systems ofcertain specifications according to the size of building orsize of current energy consumption. Various formulaewould be developed to certificate other retro-fit measuressuch as lighting retrofits, various types of motor andancillary efficiency measures, high-efficiency kilns and soon. The carbon reduction value of the certificates would beadjusted to take account of the installation rates thatwould have occurred in the absence of the DRO. Energysuppliers could only derive certificates for retro-fit mea-sures on existing buildings. If the retro-fits are occurring inthe context of general refurbishments (where buildingregulations specify minimum levels of energy efficiency)then the certificates for carbon abatement would have arelatively lower value. Such rules would, in fact, berelatively straightforward compared to the labyrinthinecomplexity of the balancing and settlements codes used toregulate the UK electricity supply system!

If we are to approach the fulfilment of just the cheapestenergy savings measures in the services and industrialsectors over the next 15 years then we would require annualcarbon abatement targets of around 0.5 million ton ofcarbon a year in these sectors alone. This would deliver 7.5million ton of carbon reduction. This is a relatively modesttarget since it is less than the 7.9 million ton accepted asbeing economic by the Carbon Trust using their 15%discount rate rule, and does not include technical develop-ments in the coming years that will lower costs and

improve productivity of investment in demand reductiontechniques.This target would be divided appropriately between the

gas and electricity suppliers. This would represent areduction in carbon emissions equivalent to around 16%of 2004 levels of emissions from the electricity sector. Thissort of target would produce the carbon emission savingsthat would be equivalent to more than the full annualproduction of replacements for nuclear power stationscurrently due to retire over the next 15 years. Thedifference would be that while new nuclear power stationswill increase both electricity prices and consumer bills,demand reduction measures will increase prices but reduceconsumer bills, albeit only those who actually getsubsidised energy efficiency measures through it. If theother energy demand reduction measures modelled in thispaper are added to this programme, then there would be areduction equivalent to around 30% of 2004 levels ofcarbon emissions from the electricity sector.It might well be possible to design a system that allowed

the suppliers to have more flexibility in what methods theychoose to achieve their targets. A recent joint DEFRA/Treasury report recommended that, in the case of the EEC:

Defra considers the scope to move EEC towards asupplier cap and trade scheme after 2011. Such a schemewould move the objective away from the installation ofphysical measures (which do not always correspond wellwith absolute energy or carbon savings) towards directdelivery of carbon or energy targets. This would supportan energy services approach to delivery of carbon andenergy savings. And suppliers could choose from a widerrange of measures including those which addressbehavioural change as well as the more traditionaltechnological solutions (DEFRA/Treasury, 2005, p. 9).

There is a case for introducing this type of ‘supplier capand trade’ system into a DRO. On the other hand, giventhe uncertainties surrounding the effects of particulardesigns it would seem prudent to limit such experimenta-tion to pilot schemes for the moment or areas in which suchan approach had obvious benefits. Delivery of the bulk ofthe DRO measures may best be achieved by adapting themechanisms used by the existing EEC.However, there is a case for using a ‘performance’-based

incentive in the case of promoting new investment incombined heat and power plant. Indeed, we could achievetarget reductions of much greater than 0.5 million ton ofcarbon a year (mentioned above) if we also include anobligation on suppliers to invest in combined heat andpower. Energy suppliers could derive contributions to theircarbon saving in proportion to the operational energyefficiency of the CHP plant. In Denmark, CHP reducescarbon emissions by 20% compared to CCGTs. MakingCHP incentives proportional to their measured, opera-tional, emission reductions per MWh is likely to increasethe environmental value of new investment in CHP.

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8.1. DRO—barriers and opportunities

The existence of political barriers to a DRO must be theexplanation for its absence. This is because the argumentsfrom the Government and its agencies against such aproposition are either absent or contradictory. The CarbonTrust’s recent statements on energy efficiency testify to thisirrationality (Carbon Trust, 2005a). The Carbon Trustdoes not even mention the option of paying for energyefficiency measures through increases in gas and electricityprices when it considers the cases of the public adminis-tration sector and also large private sector companies.Rather it urges greater, more focused public spending onenergy efficiency in the public sector and, in the case oflarge companies, voluntary carbon trading schemes. This,of course, side-steps the arguments that investment incarbon abatement needs to be shifted from energy supplyto energy saving if the most cost-effective approach for theeconomy is to be adopted.

Energy consumers, be they large or small, need to be thefocus of demand reduction investment since they need muchmore rapid paybacks than do developers of large powerstations. Public sector institutions are no more flush withmoney for energy-efficiency projects than the private sector,and the Government is itself very reluctant to provide morethan token funds for energy efficiency in the public sector.Carbon trading schemes have a role. However, it is ofparamount importance to ensure that extra investment fromoutside the institutions in question, preferably organised byenergy suppliers, is directed into energy-efficiency invest-ment in the private sector as well as the public sector. Thiscan be guaranteed if energy suppliers are obliged to achieveambitious targets for demand reduction.

The Carbon Trust only tackles the issue of a DRO-typestrategy in the non-domestic sector when it discussesmeasures for the small and medium-sized enterprise(SME) sector. Here, it dismisses the proposal, saying:

suppliers do not always hold deep relationships withtheir small business customers, and business customerswith low energy bills often receive a comparable serviceto domestic customers. Allowing for this and for thediversity and sheer number of SMEs, it would seemreasonable that the EEC for SME obligation forsuppliers could only be ramped up to 25% of the fullavailable cost-effective opportunity by 2020 (CarbonTrust, 2005a, p. 42)

The comparison with the domestic sector is strange, forthe EEC operates here, and there are over 20 milliondomestic consumers whose relationships with their suppli-ers are no stronger than in the SME sector. Indeed theauthors (who may be more knowledgeable energy con-sumers than most) can barely remember the names of theirsuppliers! So how is it that an EEC (or DRO as we call ithere) could not work effectively in the SME sector thatactually consists of a rather smaller number of consumers?

Instead the Carbon Trust advocates a system of offeringlow-interest loans in the context of such loans beingpromoted by equipment suppliers. However, this does notovercome the problem that the SMEs will not have thebenefit of outside investment and they will still have to payback the loans within fairly short timescales. In additionenergy suppliers have no incentive to ensure that energy-saving opportunities are taken up. The Carbon Trust reportsthat pilot schemes show that the involvement of equipmentsuppliers is important in promoting take-up of energyefficient equipment (Carbon Trust, 2005a, p. 42). Surely,then, it would make sense for energy suppliers who are drivenby an obligation to meet carbon abatement targets to workwith equipment suppliers to produce an even more successfuloutcome for energy saving take-up. Otherwise ambitioustargets for energy saving will simply not be achieved.Doubts concerning the logic of the Carbon Trust’s

arguments become even more apparent when we rememberwhat has been said (by a DEFRA/Treasury report) aboutthe effectiveness of the supplier obligation mechanism inthe domestic sector compared to grant support, never mindloans:

2.6 A supplier obligation such as the EEC is an effectiveroute to drive energy efficiency take-up, particularly forhousing fabric measures. The analysis undertaken byEEIR consultants Oxera shows that EEC is much moreeffective than a simple grant scheme or discount oninsulation measures. Access to the consumer is a keyfactor in delivering carbon savings, so an energysupplier-led programme remains key to driving furtherenergy efficiency improvements in the home (DEFRA/Treasury 2005, p. 8).

We need to discuss some political history in order toexplain the unpopularity (in Government circles) of aDRO-style arrangement. In the 1970s and early 1980s agrant-aid scheme for promoting domestic loft insulationwas actually successful in that around 90% of homes wereindeed fitted with loft insulation. However, the inception ofthe fossil fuel levy in the early 1990s and its accompanyingfledgling energy efficiency programme (through ‘standardsof performance’) shifted the funding stream from Govern-ment departments to electricity and gas revenues. Thisproved to be politically convenient since expansion of thisfacility did not impinge on departmental budgets. In the1990s and after the turn of the century the lobby fordomestic energy efficiency gained increasing strength, andalso sympathy from a New Labour Government. Thepolitical convenience of using levies on energy prices as anenergy-efficiency funding stream, allied with the fact that itwas already the institutionalised way of doing this activityhas led to its use to fund domestic energy efficiency.Another possible reason why a DRO in the non-

domestic sector has not been implemented is that withouta mechanism for containing the costs to non-domesticcustomers (difficult given the current absence of pricecontrols) the effect would be to increase energy prices for

ARTICLE IN PRESSD. Toke, S. Taylor / Energy Policy 35 (2007) 2131–21402140

households as well as businesses. However, this objectionhas not stopped implementation of the EEC, and it ispossible to counterbalance such effects by increasing helpfor low income and other priority domestic consumers.

In the case of the industrial and services sector thepressure for an energy-efficiency programme has not beenanywhere near as strong as in the domestic sector, wherethe energy-efficiency lobby has made successful commoncause with the anti-fuel poverty lobby. The Governmenttherefore finds it convenient to placate energy supplyopposition to obligations to invest in demand reduction.

9. Conclusion

It follows from the aforementioned argument that if thereasons why we do not have a Demand ReductionObligation (DRO) or similar mechanism are political, thenthe only way of obtaining one is for interest groups tomount an effective lobby for them. Such a lobby mayinclude environmental groups and also a number ofcommercial groups who would gain by selling theirenergy-efficient products.

It is clear from the modelling of demand reductionmeasures discussed in this paper that a DRO in the non-domestic sector could achieve radical reductions in carbonemissions. Altogether, an economically profitable demandreduction strategy could, in practical terms, deliver theequivalent of around 30% cuts in carbon emissions fromthe electricity sector within 15 years. Over half of thiswould come from the non-domestic sector.

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