Shifting the focus: 8 Conclusions

Nick Eyre

Why energy demand?

Our analysis shows that changing energy demand is critical to the development of future energy systems that are secure, affordable and sustainable. In particular, meeting the ambitious climate goals of the Paris Agreement and the UK’s Climate Change Act involves a systemic change in the energy sector – for energy demand as well as energy supply.

Supporting energy efficiency is consistent with the central goal of the Government’s Industrial Strategy of improving UK productivity. Energy efficiency is not just a ‘nice to have’ green add-on to energy policy. It is, by definition, energy productivity. It is productive investment, creating employment, supporting competitiveness and contributing to an innovative economy.

The analysis in the previous chapters shows the diversity of measures to change energy demand across the sectors in which energy is used. We deliberately use the term ‘changing energy demand’ to emphasise that the demand-side agenda is now broader than its traditional agenda of implementing modest efficiency improvements. It includes action on the fundamental drivers of energy demand – the human activities that require energy services. It also increasingly involves flexibility; changing when energy is used, and decarbonisation; the fuels used. So the energy demand agenda is complex.

Learning from experience

Improving energy efficiency at the point of use remains critically important. Efficiency improvement generally supports all three pillars of the energy trilemma (security, affordability and emisson reductions). It has the potential to deliver policy goals at a lower cost than by relying on supply-side options alone. The International Energy Agency (IEA, 2016) now refers to energy efficiency as ‘the first fuel’, that is, the first option to consider in developing energy policy.

Our evidence supports this approach. Of course, not all conceivable energy efficiency investments are sensible or cost effective, but the scale of historical under-investment means that there remain major opportunities that have bigger benefits than investments in new supply. Reducing demand should be a priority. We therefore recommend that the Government adopts the position that policymaking should, as a principle, consider energy efficiency improvement and other measures that reduce demand as ‘the first fuel’.

Drawing on the analysis set out in the previous chapters, we believe that the evidence shows that there have been three important factors in driving demand reduction.

The first important factor is innovation. As recognised in the Clean Growth Strategy, this involves more than research and development. It also includes demonstration, deployment and adoption processes through to mass deployment. Innovation needs to be considered as a systemic process as we set out in Chapter 1.

Innovation expenditure is currently strongly weighted towards energy supply. Whilst Research Council commitments to energy efficiency have increased in recent years, support for deployment has fallen. Major subsidies for deployment of some energy supply technologies dwarf the sums now allocated to supporting energy demand innovation. We recommend that the imbalance is corrected by ensuring that energy innovation support gives equal priority to energy supply and energy demand.

The second important factor is the role of energy users. The energy transition cannot be delivered without greater engagement of energy users – both in households and businesses. Some individuals already play a key role as early adopters of clean technology and advocates of lower carbon living. Similarly in the business sector, companies for which energy is a strategic priority perform better (Cooremans, 2012). But many energy users are disengaged. So the ambition of the Clean Growth Strategy for “a shared endeavour between Government, business, civil society and the British people” is important. There are decades of programme experience with a variety of users (Mallaburn and Eyre, 2014), but the lessons do not feature strongly in the Clean Growth Strategy. There is increasing evidence motivation may be driven by benefits other than cost and carbon savings. We recommend the Government develops a systematic approach to engagement on energy demand across all sectors of the economy as part of the next Energy White Paper.

The third factor is the role of public policy, which affects both technological innovation and engagement. Incentives, information and regulation all have a role, with a policy mix generally providing the most effective approach (Rosenow et al, 2016). Government has a central role in helping business and householders capture the value of energy efficiency by providing support and advice and where necessary intervening to overcome barriers and remove poor performers.

Within such a policy portfolio, clear and well-enforced standards, announced well in advance, have an important role, as shown by the effectiveness of efficiency standards for key products such as domestic heating boilers. There is uncertainty about future product standards if the UK leaves the EU Single Market. We recommend that Government commits to ensuring a continued framework of increasingly ambitious product standards, as part of a portfolio of policy instruments.

Unfortunately, much UK Government policy has become less ambitious and effective in recent years. The scale of policy-driven investment in home energy efficiency has been reduced substantially. The Green Deal policy is widely recognised to have failed and has not been replaced. There is, in effect, no support policy at all on commercial buildings. Energy efficiency advice programmes have been cut and business energy efficiency incentives and support weakened. Transport energy use has begun to rise again as fiscal measures have weakened and investment has fallen in alternatives to private road travel.

Developing a vision and framework

A vision for energy demand is missing and is now urgently required. There has been a drift in public policy towards assuming that energy demand is solely a consumer responsibility. Of course, improvements in energy efficiency result in financial benefits for households and businesses, which should be encouraged to invest without financial support where possible. However, energy demand change also has important public benefits: in improved energy security, better public health and urban environments, and major employment opportunities, as well as lower carbon emissions. Research is increasingly able to quantify these impacts. We recommend that Government assess the scale of public benefits from potential energy demand change.

Many of the assets requiring energy efficiency investment, notably buildings and mass transit infrastructure, have the characteristics of infrastructure. They should receive the same focus and support as energy supply infrastructure. We recommend that Government departments and the National Infrastructure Commission should develop plans to ensure low-cost capital is available for infrastructure investments in energy demand reduction.

These benefits should be reflected in policy support. The Government accepts the case for a stable framework for low carbon energy sources in order to reduce investment risk. The case for similar support for energy efficiency is even stronger, as the public benefits are at least as big and the non-financial barriers to investment are often larger. The higher cost effectiveness of energy efficiency means the public benefits derived from public investment tend to be higher. We welcome the fact that the Clean Growth Strategy sets ambitious targets. If these are to be achieved, the weakening of policy needs to be reversed, through comprehensive policy intervention. We recommend that Government develops a long-term framework for incentivising demand-side investment in all sectors that at least matches the priority assigned to supply-side policy. This should cover demand reduction, demand response and fuel decarbonisation.

This would be consistent with the broad approach of the Clean Growth Strategy of setting clear long-term visions, within which business and civil society can plan. We welcome the commitments to ending the sale of petrol and diesel vehicles. Other areas where Government could take a similar lead with the potential for popular support include: a shorter timescale for requiring net-zero carbon new-build than 2025; ambitious goals for high-performance building renovation; targets for reduced road vehicle use in urban centres; and goals for reducing the use of carbon intensive materials.

Winning the broad argument for change will need to accompany the legal and policy framework required to implement it. People are therefore central to any coherent programme on energy demand. Long term, systemic change inevitably involves the energy practices and services that drive the need for energy. We recognise the reluctance of policymakers to be seen to interfere in consumer decision-making, and therefore to prefer policies relating to ‘things’ rather than people. But it is a false dichotomy. Many policies frame, shape or constrain individual decisions and there is ample evidence that consumers want and expect Government to make decisions that are in the public interest. They do not want the ‘right’ to have a cold home, a polluted environment or throwaway products. The key issue is to ensure that decisions are understood in terms of public good and working with the community, rather than as arbitrary constraints on individual freedom. It will be important for Government to be explicit about this and to build support within civil society. We recommend that Government consults on and develops a long-term ‘national conversation ’ of citizen engagement, addressing both the personal impact of policy measures and wider issues.

Developing a transition plan

The Clean Growth Strategy provides a starting point. What is now needed is a Clean Growth Implementation Plan. The detail will be important as any plan for energy demand has implications for consumer behaviour, business decisions, innovation and governance.

In the buildings sector, energy demand has fallen, but the trend is now weakening, as there has been a reduction in ambition for both the energy performance of new buildings and the rate of renovation of the existing stock. The latter is the tougher challenge, but both need to be addressed. Both housing and non-domestic buildings need to be addressed. This will need a range of interventions, including tighter standards, better enforcement and incentives. One critical aspect of delivery will be to re-skill the workforce to meet the task of delivering buildings that are high performing in practice, not just on paper. The longer-term challenge is complete decarbonisation of heating in buildings, where options need to be opened and a route map developed.

In the transport sector, there are many similar challenges in ensuring the continued improvement of vehicle efficiency. Again, the progress in practice recently has not matched what is claimed by the industry due to poor enforcement. There are clear signs of the early stages of light vehicle electrification; this is welcome although it raises new challenges for generation and distribution.

Freight transport, aviation and shipping remain more difficult. In transport, there is also very large potential for reducing demand by changing the patterns of land use and by modal shift. This is frequently neglected in discussions about transport and energy demand, and this deficiency needs to be addressed.

In industry there remains significant scope for technical efficiency improvement, although less so than in other sectors. The potential is least in energy intensive manufacturing processes. This points to the need for consideration of two more fundamental issues. The first is the role of energy intensive materials and products in modern society – how they are used, reused and recycled, and the extent to which they can be substituted. The second is the development of different process technologies, using electricity and/or other decarbonised vectors to replace fossil fuels.

In all sectors, there needs to be a focus on performance rather than merely technology. There is a long history of both energy management in business and energy advice to the general public that shows the scope for performance improvement with any given set of technology. New technology will be critical to the transition, but is not a panacea. There is a chronic performance gap, between design and use in both vehicle and buildings technologies. Better real-time data provides a huge opportunity to help address these, both by improving the quality of policy instruments such as labels and standards, and by enabling smart technologies to provide real-time support for energy decision-makers.

Ultimately, to meet the UK’s obligations under the Paris Agreement, it is likely that the fuels used in every sector will need to be completely decarbonised. To date, priority has largely been given to decarbonising electricity. Decarbonisation has therefore been seen as primarily a supply-side issue. However, attention will increasingly need to be paid to decarbonising heat and other difficult sectors, whether by electrification or otherwise. The practices, preferences and choices of energy users are then critical. Hence the importance of a national conversation about what is needed.

In all sectors, what is needed is more than marginal efficiency improvement. To facilitate the transition to a society powered largely by renewables, demand needs to be reduced and made more flexible. Flexibility is a newer challenge and is particularly important for electricity use. It can be delivered both by enabling energy using practices to be more flexible and by using various forms of energy storage. Our judgement is that both approaches are likely to be required, and that both need policy support.

It will be tempting for policymakers to focus on the technical innovation required to deliver such fundamental change. However, for the reasons set out above, ‘end users’ cannot be neglected in considerations of ‘end use’. Policies will need to address people as well as technologies. In a sustainable energy system, deep demand reduction, flexibility and decarbonisation are likely all to be critically important. This is a newer research agenda than modest demand reduction. However, for both demand response and fuel switching, there is a substantial amount to be learnt from energy demand reduction experience in consumer behaviour, supply chain development and policy design.

CREDS plans to develop the evidence base and an approach to policy integration. We recommend the Government coordinates the development of policies for demand reduction, flexibility and decarbonisation in an Energy White Paper.

The energy sector also needs reform. Energy demand and supply can no longer be governed separately. The UK led the way in the mid-1990s in ensuring that energy regulation required energy suppliers in liberalised markets to deliver energy saving programmes. This catalysed similar activity across Europe, but this leadership has now been thrown away. The very strong focus of existing policy on wholesale markets in energy policy, e.g. in the process of Electricity Market Reform (EMR), is very unhelpful. With the growth of distributed generation and the increasing availability of storage, the assumption that energy will be sold as an undifferentiated commodity is under threat. Self-supply and peer-to-peer trading are increasing and may undermine existing markets. A new vision is needed in which energy retail policy does more than control unit prices. We welcome the renewed interest in retail market design issues in Ofgem, but a more fundamental review is required. We recommend that Government initiate a review of the fundamentals of electricity and gas retail markets, and whether their focus on commodity sales is fit for purpose in the context of the energy transition electricity.

Throughout this report, the implications of digitalisation for energy demand are apparent. These are likely to be mixed, but are also unpredictable and rapidly moving. The obvious early impact for energy demand in the UK is from the roll-out of smart meters. The initial cost-benefit analysis relied heavily on reducing demand through improved user engagement. This relies on meters being installed with this as an objective (Darby, 2010), which is an example of the need for better engagement in general. From our analysis, smart meters are important, not primarily to achieve modest demand reductions, but to enable innovation and make demand flexibility a realistic option.

Understanding the benefits of action on demand

We welcome the emphasis in the Clean Growth Strategy on the need to consider the energy transition in the context of its wider implications for the economy and society. This is particularly important when considering the role of the demand side.

Local studies (BEIS, 2017 page 26) show the extent to which low carbon sectors are increasingly important within local economies. There is a range of contributions, but it is changes in energy demand that are frequently the source of most benefits. We know enough about these multiple benefits of addressing demand to better inform policy. So our research will focus on how decision-making might better use this type of analysis, including at the local level and through the Commission on Travel Demand.

We can also improve our knowledge. Our research on industrial energy efficiency and on digitisation aim to quantify the macroeconomic effects of improved energy productivity. Our research on buildings will address the importance of the comfort and health benefits that are often neglected. Our work on transport will also consider the health benefits of transport technology change, but importantly also the multiple benefits of lower-impact travel modes.

References

Show all references

• BEIS (2017). The Clean Growth Strategy: Leading the way to a low carbon future, pdfOpens in a new tab
  
• Cooremans, C. (2011). Make it strategic! Financial investment logic is not enough. Energy Efficiency, 4 (4): 473-492. doi: 10.1007/s12053-011-9125-7
• Darby, S. (2010). Smart metering: what potential for householder engagement? Building Research & Information, 38 (5): 442-457. doi: 10.1080/09613218.2010.492660
• IEA (2016). Energy Efficiency Market Report 2016
• Mallaburn, P. & N. Eyre (2014). Lessons from energy efficiency policy and programmes in the UK from 1973 to 2013. Energy Efficiency, 7 (1): 23–41. doi: 10.1007/s12053-013-9197-7
• Rosenow, J., Fawcett, T., Eyre, N. & Oikonomou, V. (2016). Energy efficiency and the policy mix. Building Research & Information, 44: 562–574. doi: 10.1080/09613218.2016.1138803

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