This post is by Dustin Benton and Amy Mount.
After a summer of wiping the slate clean, the one remaining certainty about the government’s attitude to UK energy policy is that it is committed to minimising cost. This was the aim behind last week’s Big Energy Saving Week, the core ‘switch and save’ message being that customers can save money by switching suppliers. This was odd, given that switching has nothing to do with saving energy.
The truth is that DECC no longer has an energy efficiency strategy. Switching to a new supplier to save money means consumers will still be buying much the same mix of gas and coal as they did before, and in the same amounts. But, if ministers wanted to, DECC could easily turn its switching strategy into a powerful and effective means of saving energy and money, by focusing less on switching supplier and more on switching to measures that reduce demand for energy.
A different strategy would really cut bills
Underlying the government’s switching strategy is the belief that competition will drive down price. Competition can be a powerful tool but, unfortunately, in this case it doesn’t benefit consumers much. This is because no matter how competitive energy retailers are, they still only control the roughly 20 per cent of the bill that is related to administration and profits.
A different strategy, encouraging competition between power supply companies and services that help people cut the electricity they use and shift demand away from peak times, would really drive down prices. Replacing megawatts with these ‘negawatts’ costs less than half the price of building new electricity generating capacity. Competition to save and manage energy better would put pressure on the 72 per cent of the bill that covers power generation and network costs. And the money saving potential is significant. We estimate this could knock £2.4 billion off consumer bills by 2025. By 2030, it could reduce electricity demand equivalent to the generating power of eight gas-fired power stations.
The UK energy market is skewed towards supply
An electricity efficiency strategy could also address major market distortions. As it stands, the UK market is skewed strongly towards creating new sources of electricity supply to meet demand. Energy companies can only really make money by selling more energy to consumers, pushing up bills unnecessarily. Because energy saving services can’t compete on equal terms, only a third of one per cent of UK peak demand is currently being met by negawatts.
Compare the situation in the UK to the east coast of the US, where progressive efficiency strategies mean that more than ten per cent of peak electricity demand is covered by ‘demand response’. Businesses are being paid to turn off non-essential equipment during peak demand times. Becoming virtual power plants in this way makes financial sense for the companies and is much cheaper than running power stations. It’s also more reliable: during the US’s widely publicised ‘polar vortex’ in 2014, these demand response measures kept the lights on while the coal piles froze. And, because energy companies make money from selling efficiency, Texan consumers saved over $300 million in 2010 alone.
A modern energy system shouldn’t just be about meeting rising demand with more and more supply, but about managing demand and supply intelligently, keeping costs as low as possible and the system reliable. If the government wants to lower bills, it should switch strategy and make watts compete with negawatts.
