The government is looking at ways for the forthcoming Energy Bill not only to drive investment in new sources of low carbon power but also to pay for much needed investment in energy efficiency. There are different ways this could be done but the government’s lead option is to enable energy efficiency projects to take part in a new capacity market aimed at making sure we have enough electricity generating capacity to keep the lights on.
At first glance this is a welcome step. It would ensure that, to maintain security of supply as well as investing in new power stations, we also invest in ways to reduce electricity demand. However, there are serious pitfalls with this route and a danger of missing the huge opportunity energy efficiency presents to help the UK meet its energy demand and secure supply.
Today, Green Alliance has sent a joint letter (with The Co-operative, the Association for the Conservation of Energy, WWF and University of Oxford energy expert Dr Nick Eyre) to DECC Secretary of State Ed Davey, urging the government to think again on energy efficiency.
What’s wrong with the government’s energy saving proposal?
Our letter outlines three significant problems with using the capacity market as the main form of support for electricity saving:
1. It won’t provide enough money
We estimate that reducing electricity demand by a further ten per cent – well within the range that government considers possible – would require investment in the region of £1 billion a year. Energy efficiency has been included in other capacity markets and experience from the US shows that, at best, it receives only three per cent of the auction money. Given that the government only expects the entire capacity market to provide £1 billion a year, this would mean that energy efficiency wouldn’t get the funding it needs and deserves.
2. It won’t properly reward energy saving
The capacity mechanism is designed to reward flexible resources that can help out when the power system is under stress. This currently tends to be at periods of high demand eg 5pm on a cold winter’s night. However, efficiency projects reduce electricity consumption at other times too. Some may not help with reducing the pressure at peak times but are still worthwhile, eg more efficient air conditioning. Only rewarding projects for reducing peak demand, not for the energy they save all year round, undervalues the contribution energy saving can make to wider energy supply and security issues.
3. It doesn’t provide enough certainty for energy saving business
The final design of the capacity market is still being ironed out and it will be some time before the new market will start operating and we know how much capacity it needs to buy, let alone what sort of price bidders are likely to be paid. Relying on such an uncertain income stream is a hopeless way to encourage and give confidence to new energy saving businesses.
The better alternative
The alternative option, a simple feed-in tariff that would pay people a predictable amount per unit of electricity they saved, would be much more accessible and would be more likely to release the huge potential for electricity saving in our homes, offices, hospitals and factories. There’s a big prize at stake: reducing electricity waste would reduce the number of new power stations we need to build, thereby reducing the UK’s reliance on imported fossil fuels and lowering our electricity bills. We should be sure to pick the option likely to deliver the most significant savings and to launch a new wave of energy saving enterprise.