New policies for energy efficiency

new policies for energy efficiency

Business

forCouncil

SustainableEnergy UK

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new policies for energy efficiencyby Russell Marsh

Published by Green Alliance, March 2005, £15

Artwork and printing by Seacourt

Printed on Revive matt - 75 per cent post-consumer waste.

ISBN 0-9549757-1-5

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Green Alliance

Green Alliance is one of the UK’s foremost environmental groups. An

independent charity, its mission is to promote sustainable development by ensuring

that the environment is at the heart of decision-making. It works with senior people

in government, parliament, business and the environmental movement to encourage

new ideas, dialogue and constructive solutions.

www.green-alliance.org.uk

UK Business Council for Sustainable Energy

The UK Business Council for Sustainable Energy (UKBCSE) brings together the

key players in the energy sector in order to develop an effective dialogue with

government that can help strengthen the UK’s strategic agenda for sustainable

energy.

www.bcse.org.uk

acknowledgements

Our thanks go to our funding partners, the Pilkington Energy Efficiency Trust,

British Gas, E.ON UK, RWE npower,The Micropower Council, BG Microgen, B&Q

and CIGA for their support of the project. We are grateful to all the interviewees and

seminar participants who helped to shape the report. Particular thanks to our

steering group for their valuable input and insights: Nick Eyre, Andrew Warren, Gill

Owen, Bryony Worthington, Eoin Lees, Claire Cooper, Dave Sowden, Patrick

Heninger, Jill Harrison, Brian Seabourne, John McElroy, Phil Kear.Thanks also to Jo

Collins who has played a key role in taking the project forward and developing the

ideas.

The recommendations presented in this report are put forward by Green Alliance

and the UKBCSE, and do not necessarily represent the position of project partners or

steering group members.ne

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contents

executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

the UK climate change programme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5energy efficiency and the UK climate change programme . . . . . . . . . . . 5energy efficiency and fuel poverty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7about this project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

the domestic sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

current policy measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8will the policy measures deliver? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10new policy measures for domestic energy efficiency . . . . . . . . . . . . . . . 13the way forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

the commercial buildings sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

current policy measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18will the policy mechanisms deliver? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19the way forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

notes and references . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

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executive summary

The UK Government has a clear commitment to tackling climate change, as

evidenced by the commitments made in the 2003 Energy White Paper to set the UK

on the path towards a 60 per cent reduction in carbon emissions by 2050.

Energy efficiency is set to play a key role in delivering the Governments targets.

Both the UK’s Climate Change Programme, published in 2000, and the Energy

White Paper expect energy efficiency improvement in both the domestic and non-

domestic sectors to deliver around half of the reductions out to 2020.

What is unclear is whether the current package of energy efficiency measures

will deliver the savings needed if the Government’s targets are to be met. Green

Alliance and the UKBCSE have joined together to look more closely at this issue and

make recommendations as to what new policies will be needed to really drive

investment in energy efficiency for the long-term.

We have focussed on two particular areas: the domestic sector and what needs to

happen to the Energy Efficiency Commitment (EEC) to ensure it delivers long-term

incentives for the industry to invest in energy efficiency; and what needs to happen

to better engage the commercial buildings sector.

Our main recommendations are:

the domestic sector

• New fiscal incentives are needed to encourage demand amongst householders

(particularly owner-occupiers) for the installation of energy efficiency measures.

HM Treasury should commit to undertake a specific piece of work to look at the

benefits and feasibility of Stamp Duty, Council Tax rebates or other similar

incentives. New incentives for householders should be introduced to co-incide

with the emergence of the Home Information Packs in 2007.

• Introducing a certificate-based system, similar to the Renewables Obligation,

could transform the market for energy efficiency.The Government should make a

firm commitment to explore this further and establish a ‘government/industry

working group’ to take this forward (similar to the Energy Services Working

Group that was established to look at how to deliver the Government’s

commitment to undertake a trial relaxation of the 28-day rule to stimulate the

development of energy services).The aim should be to look at the potential to

introduce a re-vamped EEC in 2008.

• Renewed action is needed to ensure that the Government’s fuel poverty

elimination target is met.The potential to split the fuel poverty element from the

kWh saving/carbon reduction element of EEC should be explored further.

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the commercial buildings sector

• In transposing the Energy Performance of Buildings Directive, the Government

must ensure the widest possible application of building labelling, certification

and public disclosure

• The Government should indicate clearly in the revised Climate Change

Programme the level of effort expected from the larger private commercial

buildings sector.

• The Government should analyse the impact of the Energy Performance of

Buildings Directive in order to identify whether additional measures will be

needed.

• The opportunities for bringing the commercial buildings sector into emissions

trading in the future (post 2010) – either as part of a UK specific scheme or

future phases of the EU ETS - should be explored.This should include looking at

what additional measures will be needed to incentivise participation.

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introduction

the UK climate change programme

The UK has a clear commitment to tackling climate change, reflected in the

Government’s domestic target to reduce carbon dioxide emissions by 20 per cent

below 1990 levels by 2010, and the long-term pledge to reduce emissions by 60

per cent over the next fifty years, as set out in the 2003 Energy White Paperi.

Recent government estimates suggest

that the UK is not on track to meet the 20%

reduction target. The Government

acknowledged when it launched its review

of the Climate Change Programmeii that

carbon dioxide emissions could, on the

basis of current policies and measures, be

about 14 per cent below 1990 levels by

2010.The review will need to address this

gap and identify the areas where more

action is needed to bring us back on track.

This report details the findings of a Green Alliance and UKBCSE project that

looked at current energy efficiency policy to identify what action is needed if the

Government is to meet its 2010 target.

energy efficiency and the UK climate change programme

Energy efficiency is the mainstay of the UK Government’s action to reduce

emissions.The UK Climate Change Programme, published in 2000iii, outlined the

policies and measures that would be needed to deliver a reduction of 17.75 MtC by

2010 (a 19% decrease in carbon dioxide emissions). Measures in the domestic and

business sectors were expected to deliver over 50 per cent of this reduction (around

9 MtC).

More recently, the 2003 Energy White Paper indicated that, beyond 2010, an

additional reduction of 15 – 25 MtC would be needed by 2020 to keep the UK on

track to deliver a 60 per cent reduction by 2050. Energy efficiency improvement in

the domestic and business sectors is expected to deliver around half of these

reductions (8-12 MtC).

In April 2004 Defra published its energy efficiency action planiv detailing how

the targets for energy efficiency outlined in the White Paper would be delivered.The

Action Plan suggests that some 12 MtC could be delivered by 2010 (4.2 MtC from

the domestic sector and 7.9 MtC from the business and public sector), slightly more

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“ the Government now has astatutory target to improveenergy efficiency in domestichouseholds…the currentpolicy mix will need to bestrengthened if the target isto be met”

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than previously expectedv, and that a further 10 MtC of reductions is achievable by

2020.The majority of these savings are expected to come from the EEC in the

domestic sector and the Climate Change Levy (CCL) in the business sector.

In November 2004, an amendment to the Housing Bill (now the Housing Act)

was passed, requiring the Government ‘to ensure that by 2010 the general level of

energy efficiency of residential accommodation in England has increased by at least

20 per cent compared with the general level of such energy efficiency in 2000’vi.

This has two implications. First, the Government now has a statutory target to

improve energy efficiency in domestic households; secondly, a 20 per cent increase

in energy efficiency is equivalent to a reduction in emissions of 5 MtC more than

the 4.2 MtC reduction detailed in the Action Plan.This means that the current policy

mix will need to be strengthened if the target is to be met.

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energy efficiency and fuel poverty

Energy efficiency also forms part of the Government’s drive to alleviate fuel

poverty.The Energy White Paper reaffirmed the Government’s commitment to end

fuel povertyvii in all vulnerable householdsviii in England by 2010, and that no

household in Britain should be living in fuel poverty by 2016-2018.This is now a

statutory duty under the Warm Homes and Energy Conservation Act.

In November 2004, Defra published its Fuel Poverty Action Plan for Englandix,

outlining how it would set about meeting the targets for fuel poverty alleviation

outlined above.The Action Plan reaffirms the Government’s goal to end fuel poverty

for vulnerable households (in England) as far as is reasonably practicable by 2010,

and details the measures needed to deliver this. The Warm Front programmex is the

main measure aimed at alleviating fuel poverty providing grants for the installation

of energy efficiency measures, including central heating in low-income households.

about this project

Energy efficiency is critical to the delivery of the Government’s climate change

and fuel poverty targets. However, it is not clear whether existing policy will deliver

the necessary improvements. Green Alliance and the UKBCSE reached the

conclusion, having taken soundings from a range of players in the energy efficiency

market, that the current package of energy efficiency measures would not deliver

the long-term savings necessary to meet the Government’s targets for emissions

reductions.

This joint project took a fresh look at energy efficiency policy, to explore a

number of issues in more detail and identify what additional policy measures are

needed.

The project began with a workshop involving a range of key players – energy

suppliers, installers, policy experts and government – to identify the gaps in energy

efficiency policy and steer the direction of the project. This workshop identified two

key areas: the commercial buildings sector – a sector with a rapidly increasing rate

of energy use but with no clear policy measures directed at addressing energy

efficiency; and, the potential for moving the EEC to a more tradeable instrument,

involving the use of certificates, whilst at the same time creating an incentive for

householders to “demand” energy efficiency solutions.

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the domestic sector

Households in the UK are responsible for around 30% of total energy use, which

is equivalent to around 40 MtC - about 25% of total UK emissions. If the

Government’s targets are to be met, it is clear that action must be taken to increase

the uptake of energy efficiency measures in domestic households.

current policy measures

The main policy measures aimed at delivering energy efficiency improvement in

the domestic sector are the EEC and the Warm Front programme.The Government

has been tightening Building Regulations and plans later this year to make

replacement boilers energy efficient as the norm.The Government also supports EU

labelling schemes for appliances and has introduced a UK version. However, EEC

and Warm Front are the prime measures for tackling the main challenge facing

household energy efficiency – the existing housing stock.

the energy efficiency commitment

The EEC is the main instrument for delivering energy efficiency improvement in

the domestic sector. Under EEC, all energy suppliers with more than 50,000

customers are required to deliver a certain level of energy savings through the

installation of energy efficiency measures in customers’ homes. Failure to meet the

target is a breach of a supplier’s supply licence and can result in a fine of up to 10%

of turnover.The costs of delivering EEC are passed through to final consumers via

energy bills, ie every domestic customer pays a proportion of the total EEC cost.

The first phase of EEC runs from 2002-2005 and is expected to deliver 62 TWh

of savings (the target for each supplier is proportional to the number of customers).

As of November 2004, suppliers had delivered over 98% of the target and it is

anticipated that the full 62 TWh target will be easily met.

The Government has recently tabled legislation for the second phase of EEC to

run from 2005-2011.This lays down a target of 130 TWh of savings to be met in

the period 2005-2008, with a target for 2008 onwards to be set in 2007.

To ensure that effort is distributed equally to all consumers and to contribute to

the Government’s fuel poverty targets, 50% of the EEC target has to be delivered in

the Priority Group.These are low-income consumers who receive various ‘passport’

benefitsxi. Some, but not all, of these will also be classified as fuel poor.The EEC

Priority Group includes around 8.8 million consumers, and there are around 2

million people in fuel poverty, not all of whom belong to the EEC Priority Group.

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warm front

Warm Front is the Government’s main grant-funded programme aimed at

tackling fuel poverty. It provides grants for the installation of energy efficiency

measures – mainly heating and insulation – to vulnerable consumers eligible for a

number of passport benefits. The scheme provides two levels of assistance, with a

grant of up to £1,500 for families and the disabled and up to £2,500 for the over-

60s in receipt of income related benefits through Warm Front Plus. According to

Defra, over 900,000 households have received assistance, with some £600 million

spent on the scheme to the end of March 2004, with insulation (cavity and loft)

being the main measure installed.

The scheme has been criticised from a number of quarters, most recently by the

National Audit Officexii. As a result the Government has recently announced changes

to improve the targeting and increase the measures it provides.The Government has

also announced that it will provide a further £140 million funding for the next

three yearsxiii.

new building regulations and EU energy performance of buildings directive

The Building Regulations exist to ensure the health and safety of people in and

around all types of buildings and set standards for energy efficiency, access to and

use of buildings. Part L of the regulations covers the conservation of fuel and power

and is the section where minimum energy efficiency standards are laid down.

In line with its commitments in the Energy White Paper, the Government is

currently revising Part L of the Building Regulations with the aim of delivering

buildings of a higher efficiency.

The Energy Performance of Buildings Directive was issued in January 2003 and

must be transposed into national law by January 2006. In the UK, part of the

implementation of the Directive is being carried out through the revision of Part L

of the Building Regulations.The Directive applies to all buildings – domestic and

non-domestic – and includes an article requiring an energy performance certificate

to be made available when a building is constructed, sold or rented out. It also

requires ‘public’ buildings over 1,000m2 to display an energy certificate in a place

clearly visible to the public.

The Government intends to deliver the requirements of the Directive in the

private domestic sector by including energy certification in the proposed Home

Information Packs, expected to enter the market in 2007. Proposals for the non-

domestic sector are currently being developed and are examined in the Commercial

Buildings section below.

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will the policy mechanisms deliver?

the energy efficiency commitment

It is clear that EEC has been successful, given that 98 per cent of the target has

been reached and it is anticipated that the target will have been met in full by the

end of the EEC1 period. What is less clear is whether the EEC2 targets will be met.

The target for EEC2 is double that of EEC1 and there are concerns as to whether the

industry has the capacity to deliver the number of installations needed and whether

enough new householders can be found who are willing to have measures installed.

Delivering energy efficiency measures in the

domestic sector, as part of EEC, requires energy

suppliers to find consumers who are willing to both

endure the disruption of having the measures

installed and, if they are in the non-priority group,

pay for them. Unless customers are classified as being

on a low income (in which case they will receive the

measures free of charge), they will have to make a

contribution to the cost of the measure, albeit at a

subsidised rate. Given that energy bills are a relatively small amount of total

household outgoings, the householder has to do all of this for a measure that will

only have a minimal impact on an already small amount of money.There are also a

number of cases where suppliers have offered insulation for free and have still got

very little response.

The indications are that selling energy efficiency measures, particularly

insulation, to owner-occupiersxiv will be difficult. This is borne out by the evidence.

Ofgem have indicated that, in the first two years of EEC, only 160,000 owner-

occupiers paid to have cavity wall insulation installed.This should be compared to

the one million installations that are expected to be needed, in the private sector, to

meet the EEC2 target. In addition the Energy White Paper indicated that some 4.5

million cavity walls would need to be filled between 2005 and 2010; and overall

there are currently 10 million cavity walls unfilled.

Given that much of the ‘low-hanging fruit’ has already been taken up, ie those

consumers who were easy to attract will already have been targeted, finding the

additional one million willing households is going to be extremely challenging.This

has implications not only for delivery of the target, but also for the overall cost of

the EEC programme, and ultimately on the final cost to consumers. Suppliers will

need to ramp up their marketing efforts to find willing consumers, which could

lead to increased costs overall.

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“ one million installationsare expected to beneeded, in the privatesector, to meet the EEC2target”

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Without additional support to stimulate consumer demand for energy efficiency

it will therefore be difficult, if not impossible, to meet not only the shorter term

EEC2 targets but also the longer-term targets for energy efficiency improvement.

We also looked at the structure of EEC itself, and the incentive it gives to market

players to make long-term investments in energy efficiency. During the course of

our research, comparisons were made between the structure of EEC and the

structure of the Renewables Obligation (RO). A number of players commented on

the differences in how the mechanisms were viewed by energy suppliers.

The EEC structure puts all the pressure on the suppliers to deliver. If a supplier

fails to deliver its EEC target, it is in breach of its supply licence and can be fined up

to 10% of turnover.The only way a supplier can demonstrate that it has met its

target, and avoid a fine, is by ensuring that measures are installed.This results in

suppliers exercising tight control of the market to ensure that the targets are met.

This has resulted in there being little, if any, opportunity for third party players

(installers etc) to directly enter the market – to get any value from installing

measures they have to deal directly with a supplier. It also stifles innovation as

suppliers are not prepared to take risks with their target.

In contrast, the RO is seen as much more of a market opportunity for energy

companies.This is due to distinct elements of its structure. It is based on a long-

term target (out to 2027): this gives the market certainty that investments in

renewable energy will have a long-term value. It offers suppliers flexibility in how

the target is met: suppliers can either present Renewable Obligation Certificates

(ROCs - that are awarded to individual renewable generators, who then sell them

onto suppliers), or pay a buy-out price, that is recycled back to suppliers on the

basis of how many ROCs they surrender.The fact that suppliers can use certificates

purchased on the market or pay a buy-out price means that the suppliers no longer

have all the control over the market and are under less pressure to micro-manage

delivery of the target. It helps stimulate innovation and allows third-party

independent generators to enter the market and assume some of the risk.

This structure has been broadly successful, as demonstrated by the growing

number of integrated and stand-alone renewable energy companies that have been

established and the large sums of money flowing into renewables projects. It has

also stimulated investment in emerging, innovative technologies, including by some

of the major players in the energy market, into technologies that are not yet

mainstream, but will need to be brought forward in the next few years if the long-

term target is to be met.

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Based on this evidence, we believe that there is a case for looking at the structure

of the EEC mechanism and whether it is possible to introduce a more dynamic

market structure that mirrors the incentive model of the RO.

fuel poverty

Good progress has been made to date in delivering fuel poverty improvement.

The Government’s latest figures published in November 2004xv, indicate that there

has been a steady decrease in the number of households in fuel poverty since 1996.

This is a position supported by the Fuel Poverty Advisory Group (FPAG)xvi, who

concluded in their latest annual report that good progress has been made in

delivering fuel poverty elimination. However, the group also concluded that more

needs to be done if the Government’s 2010 target is to be met.

This project has identified that there is some

confusion concerning the role that EEC plays in

delivering fuel poverty alleviation. EEC is

fundamentally a measure to deliver emissions savings

through the installation of energy efficiency measures

in domestic premises. However it also delivers energy

efficiency improvements to low-income households

through the so-called ‘Priority Group.’This is to ensure

that low-income households are treated equitably –

without the Priority Group there would be a natural

bias towards those consumers who could contribute

more towards the costs of installing the measures.

There are also issues around the level of integration between EEC and Warm

Front.They are separate programmes and there is little co-ordination between the

two – we have found examples of the same householder being approached, at

different times, by both the Warm Front team and their energy supplier.

There is a strong case for reinforcing the split between the carbon saving and

fuel poverty elements of EEC.There is also a need for a more targeted mechanism

that focuses on delivering fuel poverty alleviation as effectively as possible.

Removing the fuel poverty element of EEC will allow it to be more closely focussed

on delivering carbon reduction.

These measures would make delivery of both targets easier and allow EEC to

focus on delivering carbon reduction through the installation of energy efficiency

measures.

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“ There is a strong casefor reinforcing the splitbetween the carbonsaving and fuel povertyelements of EEC”

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new policies for domestic energy efficiency

More needs to be done to incentivise the up-take of measures if the

Government’s targets for energy efficiency in the domestic sector are going to be

met. Consideration needs to be given to a number of measures:

new fiscal incentives for householders

As outlined above, finding householders who are willing to have energy

efficiency measures installed, and contribute to the cost of them, will be key to the

delivery of the targets. It will also be extremely challenging and the Government’s

aims will only be met if new incentives are introduced.

This project has identified fiscal incentives, where a householder is given some

form of tax reduction in return for installing energy efficiency measures, as a

mechanism that could deliver an incentive.Two measures that we believe should be

pursued further by Government are Council Tax rebates and/or Stamp Duty rebates.

These both fall directly on the householder, who is the person we need to

incentivise, and they are both significant items of household expenditure, meaning

that any opportunity to reduce the level of payment would be received favourably.

Stamp Duty has the added attraction of being levied at the point of house

sale/purchase, a time when the seller and/or purchaser often carries out other

improvement work and when the house (and loft) is empty, making installation of

the measures much simpler.

The introduction of the Home Information Pack (HIP) in 2007, including

information on the energy performance of the house, offers the perfect complement

to a mechanism that offers some form of tax rebate for raising the energy

performance of a house to a certain level. The pack is likely to identify a variety of

possible energy efficiency measures that could be installed and, linked to the offer

of a tax rebate for undertaking them, could deliver a real incentive to the

householder to take action.

A substantial amount of work has already been

done by a number of other organisations to show

how fiscal incentives can be used to encourage the

take-up of energy efficiency measures.The Energy

Saving Trust (EST) are carrying out work to identify a

range of possible fiscal incentives, and are conducting

market research to examine consumer reaction to the

concept.The insulation industry and Association for

the Conservation of Energy have looked at how stamp

duty rebates could operate and both Fenland

Councilxvii and, more recently, British Gas have run

pilot projects on Council tax rebates.

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“ More needs to be doneto incentivise the up-take of measures if theGovernment’s targetsfor energy efficiency inthe domestic sector aregoing to be met”

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The work for the insulation industry has recently been published and outlines in

detail how a Stamp Duty rebate could be administered and what the costs and

benefits could bexviii. British Gas is running a pilot with the Local Authority in

Braintree, Essex to offer £100 reductions in Council Tax in return for installing

energy efficiency measuresxix. To date, the scheme has generated considerable

interest from consumers although it is too early to say what the impact of the

incentive will be.

a new framework for EEC

We have concluded that there is a case for looking at how the EEC structure can

be developed to deliver a more dynamic market in the delivery of energy efficiency,

and there is broad support for looking at how this could be achieved.

We have also concluded that introducing a number of the elements of the

current RO mechanism could transform the energy efficiency market. We believe

that it is the existence of a long-term target, the use of tradeable certificates, and the

existence of a buy-out price and its recycling mechanism that have delivered a

robust market in renewable energy and the opportunity to bring these elements into

the EEC should be explored.

we have identified three options for developing the EEC market:

Option 1:

EEC stays much the same as now, with the introduction of a long-term target,

but certificates, which can be generated by third-parties are used to prove delivery.

Whilst this mechanism might stimulate third party involvement, suppliers would

still take all the risk in terms of meeting their energy saving target. In addition, as at

present, there would be no control over the overall costs of delivery and therefore

no capacity to limit the impact on the cost to consumers.

Option 2:

EEC structure moves to a mechanism that more closely resembles the Renewables

Obligation. In particular, this should include: a long-term target; the use of

certificates (that can be generated by a third party) to prove delivery; and, the

introduction of a buy-out price.

Option 3:

This is a more radical measure. Moving forward, the current focus on energy

efficiency and the installation of specific energy efficiency measures will become

less important and more attention will need to be paid to the overall carbon

emissions from domestic houses. With this in mind, consideration should be given

to whether a broader mechanism based on delivering carbon reductions would be

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more appropriate.This would broaden the focus beyond the installation of measures

to improve end-use efficiency and include measures that would impact on the

source of the energy, for example renewable heat technologies and micro-

generation technologies.

renewed effort on fuel poverty

There is a strong case for the introduction of a more focussed measure that

actually addresses fuel poverty and encourages better integration between Warm

Front and EEC, to run alongside a revamped EEC.

A sub-group of FPAG have looked at this issue and suggested two options to

deliver better integration:

Option 1:

This involves offering EEC uplift or enhancement, linked to some measure of

fuel poverty elimination such as overall Standard Assessment Procedure (SAP)xx

improvement. Under this scheme, a supplier might fund some insulation work and

then work with Warm Front to ensure central heating is installed to get the extra

EEC credit. Alternatively, suppliers could pay Warm Front scheme managers to

deliver the whole package and claim an EEC credit.

Option 2:

This a more radical change and involves an effective split of EEC into a

kWh/carbon reduction measure and a separate fuel poverty measure.The fuel

poverty measure would become a ‘social obligation,’ under which suppliers would

be required to assist a number of fuel poor households (which could be defined in

a variety of ways – low SAP rating for example). Delivering fuel poverty

elimination, through raising the SAP for example, would earn a ‘social’ certificate.

Suppliers would then face the choice of funding the improvement work themselves,

buying in ‘social’ certificates (ie paying someone else to do the work), or paying a

buy-out price.

We fully support work being taken forward to develop a more focussed approach

to eliminating fuel poverty.This should look at a range of possible incentives

including the idea of introducing a ‘social obligation’.

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the way forward

There are three main conclusions from our work on domestic energy efficiency

policy:

















kWh saving/carbon reduction element of EEC should be explored further.

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Since 1973, energy use in the UK commercial sector has risen almost 70%, and

this trend is expected to continue into the future.This is being driven by, amongst

other things, the greater use of air conditioning, artificial lighting and ICT

(information and communication technology).This would indicate that the current

policies and measures aimed at delivering emission reductions in this sector are not

delivering.

This project initially set out to look at how the commercial buildings sector

could be brought into a re-vamped UK Emissions Trading Scheme (UK ETS).The

current phase of the UK scheme – which offered financial incentives to participants

in return for compliance with a voluntary carbon reduction target – expires in

2006. However, it will need to continue beyond 2006 to allow participants in

Climate Change Agreements to meet their targets. There is also the potential to

extend the scheme to sectors not covered by the EU Emissions Trading Scheme (EU

ETS), including the commercial buildings sector. However, we have concluded that

bringing the commercial buildings sector into a re-vamped UK ETS is not feasible,

at the present time.This is for a number of reasons:

• The lack of any real drivers for action in this sector means that much of the

sector is not yet engaged in the need to take action to reduce emissions. More

needs to be done to engage the sector before considering whether emissions’

trading is the most suitable instrument.

• It is unclear how the sector could be incentivised to join a trading scheme.The

full rate of the CCL is not delivering an incentive to take action, so offering a

CCL discount for engaging in a trading scheme, or developing a CCA for the

sector, would not be enough to encourage involvement in the scheme.The other

option is to use legislation to force the sector to join an emissions trading

scheme. However, the Government does not currently have the powers to do this

and would need to introduce primary legislation to bring this about.

• The sector has a high electricity footprint, which is already covered by the EU

ETS. It is therefore unclear how action to reduce emissions from electricity use

could be included in a sector-specific target.

• The revised Building Regulations and Energy Performance of Buildings Directive

(EPBD) have yet to be fully implemented and are not yet having any impact on

the sector.Time is needed to see what effect these new measures will have on

emissions in this sector before looking to introduce new measures.

For these reasons, we have concluded that, in the short term, the focus should be

on ensuring that implementation of the EPBD delivers real incentives for the sector

to take action.

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The rest of this section looks in more detail at the current policy measures in this

sector and what needs to happen to ensure that the sector makes a real contribution

to emissions reduction.

current policy measures

the climate change levy (CCL)

Introduced by the Government in 2000, the CCL is an additional charge on the

use of fuels by business. The levy does not apply to fuels used by the domestic and

transport sector and electricity generated from renewable sources and Good Quality

CHP is exempt.

As part of the levy package and in an attempt to make the overall tax effect

revenue neutral, the levy receipts are used to fund a one per cent reduction in

National Insurance Contributions (NICs) (although recent increases in the level of

NICs have reduced the overall neutrality of the instrument). In addition, revenue

generated by the CCL is used to fund various programmes run by the Carbon Trust.

In order to protect some of the more intensive users of energy, the Government

negotiated agreements (Climate Change Agreements - CCAs) with a number of

sectors, who got an 80 per cent discount on the rate of the levy in return for

meeting energy efficiency targets. The Government initially entered into agreements

with some 40 energy intensive sectorsxxi and, in Budget 2004, announced that it

was to extend the eligibility criteria to include a wider range of sectorsxxii.

building regulations and the energy performance of buildings directive (EPBD)

These measures also apply to commercial buildings. Elements of Part L of the

Building Regulations also apply to non-domestic buildings, meaning that, in future

commercial buildings will have to be built to higher standards of energy efficiency.

Once implemented, the EPBD will require amongst other things:

• the measurement and certification of the energy performance of buildings;

• regular inspection of boilers above 20 kW;

• regular inspection of air conditioning systems;

• raised and regularly reviewed minimum standards for new buildings and

refurbishments.

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will the policy mechanisms deliver?

the climate change levy

The simple answer here is no. We have concluded that the combination of the

current energy price plus the addition of the Climate Change Levy does not deliver

any real incentive for the commercial buildings sector to take action to improve its

energy efficiency.This is demonstrated by the fact that the commercial buildings

sector has not been lobbying to sign a CCA. If the sector is not motivated by the

opportunity to get a reduction in the levy, it is clearly not having much, if any,

effect. In addition many of the bill payers (building tenants) do not see the CCL as it

is just part of the overall costs allocated by the managing agent. Even for owner-

occupiers or those who have their own meters the level of the CCL is not sufficient

to stimulate investment in energy efficiency measures to reduce the cost of the CCL.

building regulations and the energy performance of buildings directive

It is not yet clear what the effect of the EPBD will be on the sector as the

legislation has still to be finally implemented.The Directive has to be transposed by

2006 and it is therefore unlikely that we will begin to see its impact until 2010 at

the earliest

One of the key elements of the EPBD is the article

that requires an energy performance certificate to be

displayed when a building is constructed, sold or

rented out. It also requires ‘public’ buildings over

1,000m2 to display an energy certificate in a place

clearly visible to the public.

Once building energy certificates start to be

publicly displayed, this could have a dramatic effect

on the market. A number of FTSE100 companies

already mention building energy use in their

Corporate Social Responsibility (CSR) or environmental reportsxxiii. Once this

information becomes more readily available through the introduction of certificates,

there may be public pressure on companies to occupy buildings that have low

energy use, and an increased demand for low energy buildings.

This will require public certification to be applied as widely as possible. We are

concerned that the Government is currently proposing a very narrow interpretation

of the Directive, appearing to want to restrict the requirement to publicly display

certificates to public sector buildings, not the wider ‘buildings frequently visited by

the public’ including larger commercial buildings. We would also like to see the

information contained in certificates being made publicly available beyond just

being displayed. Ensuring wide disclosure would increase the incentives for major

companies to occupy buildings with high performance ratings.

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“ the current energy priceplus the addition of theClimate Change Levydoes not deliver any realincentive for thecommercial buildingssector to take action”

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the way forward



and public disclosure.



buildings sector.

• The Government should analyse the impact of the Energy Performance of

Buildings Directive in order to identify whether additional measures will be

needed.




what additional measures will be needed to incentivise participation.

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conclusions

The Government will fail to meet its new energy efficiency targets, and the 2010

CO2 reduction target, unless new policies are introduced.

A new package of measures is needed in the domestic and commercial buildings

sector to fill the gaps.This should include:

the domestic sector

















kWh saving/carbon reduction of EEC should be explored further and feed into

the work on developing EEC outlined above.




and public disclosure.



buildings sector.

• The Government should closely monitor the impact of the Energy Performance

of Buildings Directive in order to identify whether additional measures will be

needed.

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what additional measures will be needed to incentivise participation

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notes and references

i DTI 2003, Our energy future – creating a low carbon economy

ii Defra 2004, Review of the UK Climate Change Programme

iii Defra 2000, Climate Change:The UK Programme

iv Defra 2004, Energy Efficiency:The Government’s Plan for Action

v The increase is the result of greater reductions (some 2 MtC) now expected to come

from the business sector.

vi For further details see the Association for the Conservation of Energy Press Release:

www.ukace.org

vii Defined as those households that need to spend more than 10 per cent of their

income to heat their homes adequately and affordably

viii Defined as: older households, families with children and householders who are

disabled or have a long-term illness

ix Defra 2004, Fuel Poverty in England:The Government’s Plan for Action

x For more details on Warm Front see:

http://www.Defra.gov.uk/environment/energy/hees/index.htm

xi For a full list of the ’passport’ benefits see:

http://www.legislation.hmso.gov.uk/si/si2004/draft/20040162.htm

xii National Audit Office 2003, Warm Front: Helping to Combat Fuel Poverty

xiii Defra 2004, Fuel Poverty in England:The Government’s Plan for Action

xiv Owner-occupiers make up some 70 per cent of the housing market and are therefore

the important sector in terms of meeting the EEC target.

xv DEFRA 2004, Fuel Poverty in England:The Government’s Plan for Action

xvi The Fuel Poverty Advisory Group is an Advisory Non-Departmental Public Body

sponsored by Defra/DTI. Its primary task is to report on progress of delivery of the

Government’s Fuel Poverty Strategy and to propose and implement improvements to

regional or local mechanisms for its delivery.

xvii For more details see: www.fenland.gov.uk/ccm/content/council-tax/taxcredits.en

xviii For a copy of the full report see: www.ukace.org/

xix For more information see:

www.britishgasnews.co.uk/index.asp?PageID=19&Year=2004&NewsID=632

xx SAP is the Governments method for assessing the energy performance of dwellings. It

is expressed on a scale of 1 – 100, the higher the number the better the standard.

xxi For further details see: www.Defra.gov.uk/environment/ccl/index.htm

xxii For further details see:www.Defra.gov.uk/environment/ccl/extension.htm

xxiii For further details see the Association for the Conservation of Energy Report ‘Invisible

Property Investment’: www.ukace.org.uk

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Green Alliance40 Buckingham Palace Road, London SW1W 0REtel: 020 7233 7433 fax: 020 7233 9033email: [email protected]: www.green-alliance.org.uk

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New policies for energy efficiency