Energy suppliers should cut customers’ energy use

CSE calls for policy shift

15 December 2014

“Cut your customers’ energy use, year on year” should be the simple and sole focus of the next energy saving obligation the Government sets for energy suppliers from 2017. This approach will reduce costs on fuel bills and increase the effectiveness of other vital energy policy measures, while helping energy suppliers adjust commercially to the low carbon, low energy demand future which is the central goal of UK energy policy.

This is the principal conclusion of a new independent study by the Centre for Sustainable Energy (CSE), funded by energy supplier SSE. The report (including Policy Makers’ Summary) is now available to download on CSE’s website.

The ‘Average Customer Consumption Reduction Obligation’ (ACCRO) is proposed as the replacement for the current Energy Company Obligation (ECO), the latest in a long line of increasingly complex and costly domestic energy saving obligations imposed on energy suppliers by successive governments over the last 20 years.

Lead author of the report, CSE’s Chief Executive Simon Roberts said: “We need policy to change tack in 2017. Rather than obligate energy suppliers to do increasingly complex housing improvement works, as required by ECO, we should simplify the whole process and get the suppliers focused on (a) what we need them to do and (b) what they are best placed to do.

"That means cutting energy demand by helping their customers take full advantage their new smart meter and all the low cost opportunities for more efficient energy use in the home.”

The ‘Beyond the ECO’ study tracks the development of these obligations since 1994 and revisits the original rationale for imposing an energy saving obligation on energy suppliers; that it’s cheaper to save energy than it is to supply it. Because energy suppliers were not then supporting energy saving, regulators and government agreed they needed to be obligated to do so. This study concludes that this rationale remains valid.

Successive obligations have been highly effective in securing mass public take up of cavity wall and loft insulation and compact fluorescent light bulbs (CFLs). On average, these low cost measures reduced customers’ fuel bills more than the obligations added to them. But in recent years, the obligation has been restricted to increasingly complex and expensive energy saving and heating measures, and actually banned many cheaper ones. This has increased the financial burden on consumers and required suppliers to procure complex building improvement works, a significant departure from their core business.

The report highlights three discontinuities in the scale and nature of opportunities for saving energy in our homes, that the next incarnation of the supplier obligation policy, due in 2017, should reflect:

  1. The significant constraints on the availability in the GB housing stock of further low cost housing insulation measures (i.e. cavity walls and under-insulated lofts) to fulfil any energy saving obligation.
  2. The opportunities unleashed by the roll-out of smart meters to GB homes: consumer engagement with their energy consumption; demand reduction; electricity demand response; and improvement of suppliers’ understanding of their customers’ energy use patterns, which enable tailored interventions.
  3. The technological and energy efficiency improvements in appliances and other power-using equipment, in particular LED lighting, which create a range of significant, relatively low cost energy saving opportunities.

The report also argues that, because UK energy policy objectives all point to a future needing lower, more flexible energy demand, the supplier obligation policy should align with this and support energy suppliers to become viable businesses in a low energy demand world.

The study reviews a number of options for revising the energy supplier obligation from 2017 to reflect these discontinuities. The Average Consumer Consumption Reduction Obligation – which would require energy suppliers to reduce average demand of their domestic customers – came out a clear winner.

Simon Roberts concluded:  “Compared with alternatives, this approach cuts costs for consumers and focuses energy suppliers on helping their customers manage their energy use. There are plenty more questions to answer with this new policy, but they look more straightforward than those raised by any of the alternatives.

This approach also has the huge advantage that it makes energy suppliers commercially interested in ensuring that government policies to drive the use of smart meters, improve energy saving standards and secure rapid take up of low energy technology are all successful.”

The report additionally highlights the need for a major programme to tackle the heating and insulation improvements needed by fuel poor households, currently funded in England from fuel bills through the ECO. CSE proposes that this is stripped out of the supplier obligation and funded from general taxation because that is a far less regressive funding method and it would provide opportunities for a wider range of agencies (such as local authorities and landlords) to target and deliver these improvements.

A more regressive alternative to general taxation, still compatible with the proposed ACCRO supplier obligation, would be for a levy to be raised on fuel bills to fund such a programme but where suppliers were not obligated to deliver it.

The full report and Policy Makers’ Summary are available to download.

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