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new policies for energy efficiency

Business Council for

Sustainable Energy UK

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new policies for energy efficiency

by Russell Marsh Published by Green Alliance, March 2005, ÂŁ15 Artwork and printing by Seacourt Printed on Revive matt - 75 per cent post-consumer waste.

ISBN 0-9549757-1-5 Š Copyright Green Alliance 2005 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Green Alliance. Within the UK, exceptions are allowed in respect of any fair dealing for the purposes of private research or study, or criticism or review, as permitted under the Copyright, Design and Patents Act, 1988, or in the case of reprographic reproduction in accordance with the terms of the licences issued by the Copyright Licensing Agency.

This book is sold subject to condition that it shall not, by way of trade or otherwise, be lent, resold, hired out or otherwise circulated without the publisher's prior consent in any form of binding or cover other than that in which it was published and without a similar condition including the condition being imposed on subsequent purchaser.

Green Alliance 40 Buckingham Palace Road, London SW1W 0RE tel: 020 7233 7433 fax: 020 7233 9033 ga@green-alliance.org.uk www.green-alliance.org.uk Green Alliance is a registered charity number 1045395 Company Limited by guarantee, registered number 3037633

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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.

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contents executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

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

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current policy measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . will the policy measures deliver? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . new policy measures for domestic energy efficiency . . . . . . . . . . . . . . . the way forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

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current policy measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . will the policy mechanisms deliver? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . the way forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

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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 nondomestic 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

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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.

“ the Government now has a statutory target to improve energy efficiency in domestic households…the current policy mix will need to be strengthened if the target is to be met”

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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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 over60s 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 nondomestic sector are currently being developed and are examined in the Commercial Buildings section below.

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will the policy mechanisms deliver?

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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.

“ one million installations are expected to be needed, in the private sector, to meet the EEC2 target”

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 owneroccupiers 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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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 longterm 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 longterm 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.

“ There is a strong case for reinforcing the split between the carbon saving and fuel poverty elements of EEC”

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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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.

“ More needs to be done to incentivise the uptake of measures if the Government’s targets for energy efficiency in the domestic sector are going 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 ÂŁ100 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 microgeneration 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: • 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 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?

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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 owneroccupiers 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.

“ 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”

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 way forward • 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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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 • 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 of EEC should be explored further and feed into the work on developing EEC outlined above. 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 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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• 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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notes and references i ii iii iv v vi vii viii ix x xi xii xiii xiv xv xvi

xvii xviii xix xx xxi xxii xxiii

DTI 2003, Our energy future – creating a low carbon economy Defra 2004, Review of the UK Climate Change Programme Defra 2000, Climate Change:The UK Programme Defra 2004, Energy Efficiency:The Government’s Plan for Action The increase is the result of greater reductions (some 2 MtC) now expected to come from the business sector.

For further details see the Association for the Conservation of Energy Press Release: www.ukace.org Defined as those households that need to spend more than 10 per cent of their income to heat their homes adequately and affordably Defined as: older households, families with children and householders who are disabled or have a long-term illness Defra 2004, Fuel Poverty in England:The Government’s Plan for Action For more details on Warm Front see: http://www.Defra.gov.uk/environment/energy/hees/index.htm For a full list of the ’passport’ benefits see: http://www.legislation.hmso.gov.uk/si/si2004/draft/20040162.htm National Audit Office 2003, Warm Front: Helping to Combat Fuel Poverty Defra 2004, Fuel Poverty in England:The Government’s Plan for Action 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.

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

For more details see: www.fenland.gov.uk/ccm/content/council-tax/taxcredits.en For a copy of the full report see: www.ukace.org/ For more information see: www.britishgasnews.co.uk/index.asp?PageID=19&Year=2004&NewsID=632 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.

For further details see: www.Defra.gov.uk/environment/ccl/index.htm For further details see:www.Defra.gov.uk/environment/ccl/extension.htm For further details see the Association for the Conservation of Energy Report ‘Invisible Property Investment’: www.ukace.org.uk

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Green Alliance 40 Buckingham Palace Road, London SW1W 0RE tel: 020 7233 7433 fax: 020 7233 9033 email: ga@green-alliance.org.uk website: www.green-alliance.org.uk