UK energy policy is in flux after its government last week launched its long-term Clean Growth Strategy for decarbonising the economy. Now is a good time to take stock and rethink energy policy, insist Jan Rosenow and Richard Cowart.
Jan Rosenow and Richard Cowart are energy efficiency experts with the Regulatory Assistance Project (RAP).
Energy price caps are back on the political agenda, and the government has launched a review into soaring energy bills. How can we meet ambitious decarbonisation targets whilst ensuring affordability? Our new report explains how this goal can be attained by implementing the principle of “Efficiency First.”
What is Efficiency First?
More than £200 billion will be invested in new energy supply infrastructure over the coming years, ultimately out of the pockets of energy consumers. But very little attention is devoted to reducing the need for such investment in the first place.
The UK needs to meet the demand for energy services more efficiently and more flexibly on the demand side. This not only avoids more costly investments in energy infrastructure and fuel, it is essential to the cost-effective, timely decarbonisation of the economy.
In recognition of this key strategy, the National Infrastructure Commission named energy efficiency as the first priority for achieving a low-cost, low-carbon future in its new report published last week.
Before billions of consumer-funded pounds are locked into new energy supply infrastructure, we should ask where we can reduce the need for supply-side investment through energy efficiency and more flexible demand.
This decision-making logic has been coined Efficiency First. It is a principle applied to policymaking, planning, and investment in the energy sector.
Put simply, it prioritises investments in customer-side efficiency resources (including end-use energy efficiency and demand response) whenever they would cost less, or deliver more value, than investing in energy infrastructure, fuels, and supply alone.
But does this really work? Here’s a tangible example from New York: in 2014, one of the world’s oldest utility companies faced a $1.2 billion substation upgrade because electricity demand for the Brooklyn-Queens area was increasingly putting stress on the distribution system.
Most network companies would have simply approached the substation upgrade in the old-fashioned way. ConEd, however, decided to do things differently.
They designed a $200 million demand-side management programme instead. So far, participating customers include about 6,000 small businesses, 1,400 apartment blocks, and 8,800 homes.
Participants have reduced load on the distribution system, while reducing their own energy bills. Now, ConEd is rolling out this successful approach across different neighbourhoods.
How can this be applied in the UK?
In RAP’s new report, we identify a number of key areas where we see potential for the Efficiency First principle to lower emissions, whilst also delivering a wide range of benefits associated with energy efficiency improvements.
In particular, we focus on Efficiency First in the context of policy decisions that will be made over the next years, including the design of a new able-to-pay energy efficiency programme, energy network regulation, infrastructure spending, revisions of the capacity mechanism, and the levy control framework.
For example, one area where Efficiency First can be applied imminently is network regulation—this is also one of the ideas on which the government consulted in its call for evidence on building a market for energy efficiency.
Ofgem, the Office of Gas and Electricity Markets, is currently reviewing the RIIO price control framework for network companies. In its open letter to stakeholders, Ofgem stated that “rolling out energy-efficiency measures may well defer or avoid the need for costly network enhancement.”
Building on RIIO’s current outcomes and incentive structure, Ofgem should introduce additional incentives and/or primary and secondary deliverables that provide impetus for energy efficiency investment by the network companies.
This would reduce the need for network investment—a prime example of Efficiency First in practice.
What needs to happen next?
We recommend that the UK government build on the momentum around Efficiency First by carrying out a systematic review of how this principle can be applied to all other energy policy areas and then drafting an appropriate action plan.
Both Germany and the EU are already investigating where and how the Efficiency First principle should be applied across the energy system. In the UK, network regulation provides a promising opportunity to jump-start this process.
Adopting a “hard look” policy to examine and invest in Efficiency First is the most important step the government can take toward unlocking the huge reservoir of low-cost, low-carbon savings that sits untapped in every part of the UK.