The Energy crisis and energy efficiency in the UK
Following Russia's invasion of Ukraine, the energy crisis has already affected Europe for the previous six months and is now spreading around the globe. Going into the winter of 2021, Europe has already experienced significant energy price hikes, with Brent crude hitting a 5-year high and natural gas prices rising by more than 500% annually. According to a government news item, the quickest way we can help households and businesses adapt to rising energy bills is by making UK buildings more energy efficient. Fossil fuels are used to heat over 90% of our homes, which accounts for a third of all gas used in the UK. Households are particularly vulnerable to these changes due to the price surges in the gas market and could incur energy expenditures of up to £2,000. Our dependence on imported gas may be decreased by roughly 20%, and our heating costs might be cut by improving the efficiency of our homes.[i] Double glazing, cavity walls, insulation, and energy-saving light bulbs are all examples of energy-efficiency methods that can support UK homes and businesses. According to Carbon Brief, energy bills last hit headlines in 2013, when rising gas prices prompted then-opposition Labour leader Ed Miliband to promise to cut energy bills if he won the following election.[ii] The National Audit Office later labelled the "green deal" efficiency programme as a "fail[ure]" as part of the modifications that David Cameron's government at the time, which was in coalition with the Liberal Democrats, made.[iii] These changes included lowering spending on energy-efficiency upgrades and implementing the programme. Almost immediately, by 92% and 74% in 2013, respectively, the number of homeowners having their lofts or hollow walls insulated fell precipitously, and it has never recovered.
Source: Carbon Brief
More recently, high energy bills have dominated headlines, and as a consequence, criticism of energy efficiency strategies has increased. The criticism is not new and was considered a key learning point in the CCC’s 6th carbon budget released in 2020.[iv] With measures recently released to counteract high energy bills, the Institute for Government (IfG) has released a report in which they describe a gap in dealing with the UK's energy efficiency issue, which they say would be one area where the prime minister's proposal lacked all substance, but that could make a significant difference. The homes and buildings in the UK are among the least energy-efficient in all of Europe, which makes the crisis particularly difficult for families and companies.[v] Surprisingly, the Johnson administration and, it seems, the Truss administration have thus far overlooked this in their comments. Now that the government would be adding such high energy expenditures directly to its balance sheet, the case for action is even greater.
Lessons from around the world
The IfG report outlines five strategies that have shown promise around the world in the pursuit of robust and effective energy efficiency strategies.
1. The most effective approaches are stable, long-term, large in scale and combine a range of policy levers
A solid, long-term strategy has been crucial in most countries’ adopting a combination of the aforementioned levers to bring about change. Germany is a wonderful illustration of this. Currently, it combines grants of up to 50% of the cost of upgrades, a long-running low-interest loan programme to cover remaining expenses, grants for advice from energy efficiency specialists, and tax rebates for the cost of both improvements and receiving advice. Additionally, it levies a tax on the use of fossil fuels and energy (effectively a carbon tax, but electricity generated by renewable sources is exempt) while gradually tightening construction codes. In Germany, the adoption of energy efficiency programmes has been high and has risen quickly in recent years as programmes have been expanded. Applications for energy efficiency programmes almost quadrupled in size between 2019 and 2020 (from 326,000 to 600,000), while requests to build heating systems powered by renewable energy rose from 76,000 to 280,000. A crucial takeaway from Germany is that the extensive and ongoing loan programme, supported by the KfW bank (which has strong ties to regional banks), has contributed to establishing a trustworthy supplier base and reducing costs to the point where the programme is now self-financing.[vi]
2. More targeted policies can help support low-income households
In France, a similar blend of grants, loans, guidance and support finding a contractor, a reduced rate of VAT and iterative implementation of more progressive building standards. Differing from the German approach, however, the French government is also targeting support at vulnerable low-income households. Their financial aid for installing energy-efficient measures is not just based on the type of improvement carried out but also the household's income to which it is applied, meaning more personalised support. The scheme, at least in the short term, is showing positive results. Since the scheme’s inception in 2020, more than 1 million French homes have been renovated, and in the period from January to March of this year, 300,000 projects have been financed. The scheme’s users were surveyed, and 2/3rds said they would not have completed the work without the government’s assistance.[vii]
3. Aggressive schemes can kick-start markets, but they risk poor targeting and implementation problems
Italy’s approach is led by the “Superbonus” scheme, a tax relief of 110% of the price of energy efficiency improvements alongside solar panels and EV charging points. The scheme was well received by the people of Italy, with over €21bn spent up to March 2020. Despite domestic plaudits, the IMF criticised the scheme for being poorly targeted and supporting richer households that would have carried out the work anyway. Furthermore, whilst the rapid rollout of the scheme at its onset, fraud was a major issue, and further checks had to be introduced; additionally, the supply chain suffered bottlenecks, and as such, prices rose, resulting in the introduction of a price cap.[viii]
3. Policy design needs to take account of consumer behaviour
Successful overseas schemes have demonstrated a solid understanding of the financial and other obstacles that can deter customers from paying for upgrades. For instance, a relatively low-interest rate enabled the German programme to be implemented on a massive scale, but a high rate played a significant role in the poor uptake of the Green Deal. Of course, the government will pay a price for supporting more lenient lending conditions, but the data shows it is a trade-off worth making if it promotes a vibrant industry to provide renovations and lessens vulnerability to energy surges. Building the trust and confidence of customers requires both independent and qualified guidance. Many consumers are confused about which home improvements would be most advantageous and cost-effective, or they worry about being taken advantage of with subpar labour. A mix of reliable, easily accessible guidance and efficient regulation and enforcement is needed to increase consumer confidence. After poor installations and maintenance due to a lack of quality control slowed down the early adoption of heat pumps in Finland, the country responded by implementing certification programmes for installers and heat pumps in the 2000s. In other nations, financial assistance, access to approved suppliers, and guidance are all combined into what Ireland has referred to as a "one-stop shop." A study from the journal “current research in environmental sustainability” assessed consumer behaviour in India. The study divides Indian millennials into five groups based on their consumption patterns, including aware consumers, conscious consumers, consumers in transition, unwilling consumers, and rejecters, which helps to map the heterogeneities among the Indian millennials in terms of their consumption patterns. The study also shows that Indian millennials are more concerned with the environmental aspect of consumption than the social and economic aspects, which has clear policy ramifications for raising awareness and sensitising the public.[x]
5. Consistent tax signals in support of a national mission can be as important as grants
Finland's transition away from oil and biomass heating and toward heat pumps during the 1970s is another helpful example for UK policymakers. Finland had been particularly vulnerable to the oil crises of the 1970s, and as a result, succeeding administrations launched a deliberate national effort to lessen the country's susceptibility to price shocks in the future. Initially, this comprised minor loans and subsidies for heat pumps offered to homes converting from oil heating to more energy-efficient solutions. In the late 1980s and early 1990s, district heating gained in popularity. Initial issues with heat pump installations and maintenance were resolved, and the government played a significant role in fostering the growth of a supplier base. Along with this, the government provided large tax credits for the installation of heat pumps and gradually raised taxes on fossil fuels; from 2004 to 2017, the tax on coal was increased fourfold, the tax on natural gas by six times, and the tax on heating oil by two times. Since 2001, the minimum energy performance requirements for both new construction and retrofits have been increasingly stringent. Overall, Finland's strategy has been quite successful in lowering its susceptibility to oil shocks. It consists of a relatively solid long-term policy aim, explicit tax incentives, and flanking policies. By 2018, 41% of homes had heat pumps, and 70% of tiny new homes opted for them, with adoption speeding up in response to the present energy crisis.[xi]
Should the UK follow suit?
Following a lost decade in which rates of progress to energy efficiency have fallen, the UK is one of the most susceptible countries in Europe to the recent surge in costs. However, despite the fact that rising energy prices are negatively impacting UK individuals and companies, UK policymakers have relatively little interest in tackling this vulnerability. Other nations demonstrate what is feasible. A national mission to increase energy efficiency and decrease reliance on gas might begin to show results within a year and result in significant savings over three to five years, during which predictions indicate that gas prices would stay much higher than pre-crisis patterns. Darren Jones, chair of the Business, Energy and Industrial Strategy (BEIS) committee, told City A.M:
“The Government has made this winter much worse due to ministers’ failure to deliver a successful, national home insulation programme since 2010. Reducing the amount of heating needed to keep our homes warm is an obvious way to reduce energy bills. That’s why energy efficiency works are the permanent solution to reducing costs.”
“Ministers must now come forward with a bold, fully funded, national home insulation programme before the end of the year as a long-term solution to this crisis.”[xii]