The historical foundations of UK energy policy since the 1940s

Guest blog by Dr David Vincent

Since 1945, UK energy policy has undergone seismic shifts, starting with the energy industry nationalisations of the late 1940s and moving on to energy industry privatisations of the 1980s and 90s. These shifts were tempered with some ground-breaking, longer term thinking with respect to the climate change mitigation aspects of energy policy. It is this backdrop which I think has defined, more than any other single factor, how energy efficiency policy has developed in the UK over the last few decades and into the new millennium.

A recent paper on policy packaging or policy patching analyses and discusses how energy efficiency policies and programmes have developed in the UK and Finland respectively from 2000-2014 and explores how the UK’s approach compares, or contrasts, with that of Finland. While the paper covers the period from 2000-2014, reading the paper got me thinking about how the UK’s energy efficiency policies have developed and I think it is helpful to put this period into the wider context starting in the 1940s.

Richborough Power Station, which is now derelict, was built in the late 50s, and burned millions of tonnes of coal. Credit: Andrea (CC BY-NC 2.0).

In the 1940s and 1950s the Government of the day directly intervened, for example, to create an energy efficiency for industry service. Compare this with the early 1980s when the UK’s energy policy under the then Secretary of State, Nigel Lawson, was “to set a framework which will ensure that the market operates with a minimum of distortion and energy is produced and consumed efficiently”.

Privatisation has created a totally new energy landscape of generators, distribution companies and electricity and gas transmission systems operators (National Grid) operating in a highly complex market overseen by the regulator, Ofgem.

Energy technologies, similarly, have seen major changes – disruptive changes in the modern terminology. These include, for example the development of nuclear power in the 1950s (a technology adventure with which we are still fixated); the progressive shift out of coal into gas for power generation, and the development of combined cycle gas turbine technology; the exploitation of unconventional fossil fuels – tar sand extraction and fracking; the tentative introduction of renewable energy technologies; the amazing developments in battery and storage technologies which will enable intermittent energy generation technologies like wind power to play a fuller role; and the first, tentative steps to smarten up our grids and the way we use energy.

Reviewing this historical context is important. First, because attitudes and mind sets towards policy formulation develop years, if not decades, before and become part of our very own set of status quo biases. Second, because past events drive, or extinguish, interest in topics. And third, I think that the development of the UK’s energy policy since nationalisation in the 1940s to now is absolutely fascinating and has lessons for today’s policy makers.

Events driving action on energy efficiency

Two examples of events driving interest and action on energy efficiency in the UK over that longer period are:

  • Energy shortages during and after the Second World War made it essential for everyone to use energy efficiently. At the macro-economic level, the surplus of domestic energy production in the 1930s would become a serious deficiency by the late 1940s. This situation was likely not only to persist, but to worsen. The Committee on National Policy for the use of Fuel and Power Resources (the Ridley Committee) concluded that much could be done to reduce the deficit by eliminating waste, and recommended that “the Ministry of Fuel and Power should invite industry to set up an organisation to provide a greatly increased fuel efficiency advisory service for industry, and the Ministry’s Fuel Efficiency Service (set up during the war) should be retained and should continue to give advice on fuel efficiency to industry.” The National Industrial Fuel Efficiency Service came into being in December 1953 as a direct result of Government intervention.
  • The first oil price rise in 1973 resurrected Government action on energy efficiency. I say “resurrected” because since the Second World War, when energy shortages drove action to improve energy efficiency in industry, Government interest in energy efficiency took second place to action to promote the growth of our energy supplies. Electricity generation and the transmission and distribution networks were expanded. So too was gas use as open fire coal combustion was restricted by the 1956 Clean Air Act and gas supplies were developed as North Sea gas was brought ashore. 1973 changed that policy position. A four-fold increase in oil prices forced not only the creation of the first Department of Energy that year but also a rethink about energy efficiency.

My first job in energy efficiency was in the former Department of Industry in 1975. We realised that, whereas there was good data on energy supply, there was very little information on energy use. We had little idea about how efficiently or not energy was being used by the manufacturing industry. We also had little idea about what measures could be applied in manufacturing companies and their processes to use energy more efficiently. The Department’s Industrial Energy Thrift Scheme was the first industry-wide attempt to gather information on energy use and to provide advice on how to improve energy efficiency on site. Over 6000 site visits were carried out during the mid-late 1970s and the information gathered was aggregated and published in industry sector guides.

In contrast, events can extinguish interest. For energy efficiency, the easy availability of cheap energy imports in the 1960s, the discovery and exploitation of North Sea oil and gas in the 1970s onwards, and the faith we had then in the rapid expansion of nuclear power all combined to depress policy interest in energy efficiency. “Too cheap to meter” was interpreted by many as not worth bothering about energy efficiency – an antithesis to the adage “if you can’t measure it, you can’t manage it”.

Energy efficiency from bit part to supporting role

Building our energy supplies was essential to underpin the development and growth of the post-war UK economy. However, the lack of interest in the efficient use of energy during a time of relatively cheap energy, though understandable, unfortunately laid the foundations for thinking about energy efficiency for decades to come: build more supply; energy is cheap; no need to think about energy efficiency – unless circumstances change.

Apart from that immediate post-war flurry of policy interest, and the four-fold oil price rise in 1973, action on the energy efficiency front lost momentum. North Sea oil and gas, the growth of our electricity generating capacity and, importantly, relatively cheap energy prices and easy availability once again took the policy spotlight off energy efficiency. Even the Miners’ strikes of 1972 and 1984/5 did little to stimulate action on energy efficiency.

Only when Peter Walker was appointed Secretary of State at the Department of Energy in 1983 did we see real political support for energy efficiency. He was the first (and some might say, with regret, the last) peacetime political heavyweight champion of energy efficiency. The creation of the Energy Efficiency Office (EEO) in April 1986, with strong support from Peter Walker, was a huge step forward for energy efficiency. (As an aside, the EEO came into existence not because of an energy supply event or price rise. It came into being as a direct result of Prime Minister Margaret Thatcher’s desire to see energy efficiency improvements in Whitehall. The formation of the EEO was the result of an efficiency exercise; and, ironically, launched at a time when oil prices had actually dropped!).

Ministerial weight and interest raised energy efficiency from the doldrums and almost to the status of energy supply. I say “almost” because although energy efficiency was more important in the mid-late 1980s than hitherto, it never achieved parity with energy supply. Careers weren’t made in energy efficiency: they were made in energy supply.

Attitudes, status quo bias and the demise of the Energy Efficiency Office

Attitudes are formed by what we see and what we have grown accustomed to over decades. Since the end of post-war rationing in the 1950s, we have not needed to save energy or use it more efficiently. It has always been available (barring wartime rationing, extreme weather events and the “three day week” during the 1972 Miners’ strike). Our attitude towards energy efficiency has been conditioned by the fact that most of us have always had enough energy supplies, and can afford to pay for them. Status quo bias suggests (some might say dictates) that, from our previous experience, we don’t need to be energy efficient – unless there is a significant change in status quo; and that not to respond to that change would leave us significantly worse off.

The EEO was an exceptional policy initiative that ran alongside, but never ahead of, energy supply policy. Unfortunately, like all good things, the EEO came to an end. In 1992, the EEO “dissolved” into the then Department of the Environment. Energy efficiency per se was subsumed into the wider Departmental policy. These changes separated energy efficiency policy from energy supply policy, which became the responsibility of the then Department of Trade and Industry. Government policies on energy efficiency in buildings, in industry and in transport were distributed across Government Departments, under the ever-watchful eye of the Treasury.

From the above brief tour, you can see that the stage is set for the development of the energy efficiency story in the UK from 2000-2014, which is examined in this paper and compared with the energy efficiency experience in Finland. I will explore this paper in more detail in my next blog.

Dr David Vincent is a former senior civil servant, who contributed to the development of the UK’s energy efficiency policies and programmes from the mid-1970s to 2001. He was the Carbon Trust’s Technology Director working on various energy efficiency and low carbon technology programmes and initiatives from 2001 to 2011. He is now an independent energy consultant, a member of the Sussex Energy Group (SEG) and Centre on Innovation and Energy Demand’s Steering Group.

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Efficiency First: a new paradigm for a sustainable energy system

The UK’s energy policy is at crossroads. Ambitious carbon targets, an aging energy infrastructure, rising fuel poverty and a legacy of fossil fuel investment warrant bold political decisions to ensure the UK transitions to a sustainable low-carbon energy system. Because of the long-term nature of investment in energy infrastructure, decisions made over the next five to ten years will shape the trajectory along which the energy system will evolve. Getting those choices right is key for ensuring a sustainable, affordable and secure energy future – the principle of Efficiency First delivers on all three. Read more ›

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After the 2016 Autumn Statement: The low carbon transition – still blowing in the wind?

The Austrian economist Joseph Schumpeter famously described the “winds of creative destruction”: a process of industrial transformation in which product and process innovations revolutionise the existing industrial structure, destroying the old one by creating a new one. But the Chancellor’s 2016 Autumn Statement – delivered just five days after the UK ratified the Paris climate change agreement – provided more of a waft than a gale.

If we are serious about making the transition to a low carbon economy, we must recognise that as well as supporting innovation and deployment of low carbon technologies, it is equally important to phase out existing high carbon technologies like unabated coal fired power generation.

Research from the Centre for Innovation and Energy Demand at Sussex University shows that policy makers tend to focus more heavily on policies that support the creation of new innovations, but that less attention is given to how existing, unsustainable, practices and technologies will be phased out. An analysis of UK policies across the heating, electricity, and mobility sectors as well as generic innovation, energy and climate policy identified 68 policies that supported the creation of new innovations (shown as C- creation functions in the figure below), but only 19 aimed at phasing out or disincentivising high-carbon technologies (shown as D-destruction functions below). Examples include the EU emissions trading scheme, the carbon price floor, and the ban of incandescent light bulbs.

The UK has started to take steps in this direction with a proposal to phase out unabated coal by 2025. This should be welcomed. But while The Chancellor resisted calls to scrap the carbon floor price, his decision to continue to continue to cap the level at £18 per tonne of CO2 until 2020 was a missed opportunity.

As Simon Evans from CarbonBrief has argued: “The doubling of the floor from £9 to £18/tCO2 in April 2015 has been a major factor in driving coal out of the UK electricity mix. Coal output is down two-thirds in 2016 so far, compared to the same period last year”. At £18/tonne the carbon price floor may still play a role in phasing out the use of unabated coal in the UK electricity mix but a stronger and longer term signal would have been welcome and had the potential to end coal use earlier than would otherwise be the case. It would have also worked as a hedge against potentially increasing future gas prices which could reverse the recent trend of gas replacing coal.

As the Government draws up its ideas for a new industrial strategy, it needs to consider carefully not just what it wants to support, but also whether existing structures might act as a barrier to potential areas of growth, and how they might be phased out in a predictable and planned way. The plans to phase out coal are a good start, but this approach must be applied across all sectors if we are to deliver the low carbon transformation that the planet needs.

 

 

Dr Florian Kern is a Senior Lecturer for the Science Policy Research Unit at the University of Sussex and Co-Director of the Sussex Energy Group.

Photograph of Dr Florian Kern

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Energy efficiency: the sweet spot for an economic stimulus after Brexit

Brexit has opened a new era in British politics. Economic uncertainties and a potential slowdown in investment are likely to stay with us in the short to medium term. The Chancellor has made clear that he is prepared to ‘reset’ fiscal policy after Brexit and the Prime Minister announced the launch of a ‘proper industrial strategy’. Energy efficiency is a perfect fit for both. Now is the right time for a major investment in upgrading the UK’s inefficient building stock.

hand with money

Independent analyses show that when compared to infrastructure projects like the first phase of HS2 and the roll-out of smart meters, efficiency provides very comparable monetary benefits and this is even without quantifying many of the social benefits of energy efficiency such as health and wellbeing improvements. Yet, “we are underinvesting in energy efficiency” as Larry Summers, former US Treasury Secretary, put in a keynote to the World Built Environment Forum earlier this year.

An ambitious investment programme in energy efficiency will create new jobs, support the construction sector, and will reduce consumers’ energy bills thus allowing them to spend more which in turn helps the economy.

Others have done this before

There are many precedents for using public investment in energy efficiency as an economic stimulus. Major economies have previously identified energy efficiency as a key target area for public investment in times of economic downturn. Probably the two most prominent examples are the US and Germany.

Following the 2008 economic crisis, the German government announced the biggest economic stimulus programme since World War II, including £2.6 bn of additional funding for energy efficiency. The main purpose of the programme was to help the struggling construction sector and support jobs.[1]

Similarly, in February 2009, the US Congress passed and the President signed into law an economic stimulus package estimated to cost $787 billion over two years. The American Recovery and Reinvestment Act of 2009 (ARRA) includes the single largest investment in energy efficiency in US history, with approximately £13 billion allocated specifically for efficiency.

There are good reasons for using investment in energy efficiency as a vehicle to stimulate the economy – the macroeconomic benefits of public energy efficiency programmes have been illustrated by economists time and time again.[2]

Economic case also stacks up in the UK

Analyses of energy efficiency investment in the UK context come to similar conclusions:

  • Verco and Cambridge Econometrics estimate that if delivered as part of a major infrastructure investment programme for £1 invested by government £3.20 is returned through increased GDP resulting in increased employment of up to 108,000 net jobs per annum.
  • A recent study by Frontier Economics calculates that an energy efficiency infrastructure programme could generate £8.7 billion of net-benefits to the economy.[3]
  • Focusing on solid wall insulation investment, IPPR and Ricardo Energy & Environment show that a government-funded loan scheme could achieve significant employment and economic impacts.

The evidence suggests that programmes with a high degree of leverage such as loan schemes are likely to deliver the largest net effects due to relatively low subsidy cost compared to the total investment created.

The available evidence suggests that employment creation from investing in energy efficiency is 2 times to 4 times larger than that the fossil fuel-based energy supply sector per unit of energy saved/produced.[4] This is because of the higher labour intensity of the energy efficiency industry and its supply chain. Investments in energy efficiency also compare favourably to renewable energy as the investment costs are offset to some extent or even completely by the energy savings.

Fiscal net-benefits rather than costs

Programmes supporting the installation of energy efficiency measures typically incur a cost in the form of subsidies as well as lost VAT income due to reduced energy consumption. However, those costs are to some extent offset by tax receipts and other revenue streams generated as a result of the activities promoted under an efficiency programme. The main contributors to those positive fiscal impacts are value added tax paid by households taking up energy efficiency measures, income tax paid by employees working along the supply chain, additional corporate tax paid by the companies indirectly benefiting from the subsidies through reduced relative cost of the technologies they supply/ install, and the avoided cost of paying unemployment benefits to workers who were not working previously.

We have known for some time from the German KfW loan scheme that public subsidies are more than offset by the increase in tax revenues and savings in welfare spending due to lower unemployment.[5] There is now an emerging evidence base showing similar effects in Ireland, Croatia[6] and the UK[7] [8].

Now is the time to do this in the UK.

The economic uncertainty caused by the Brexit vote will prevail for some time until Britain’s new status becomes clearer. At the same time, there will be no energy efficiency programme for the able-to-pay sector after 2017 and funds for fuel poverty alleviation are falling short of what is required to achieve the target. The economic evidence is clear – energy efficiency provides a golden opportunity for an economic stimulus in the UK. Major economies around the world have proven that this works, creating jobs and boosting industry. Government borrowing costs are at historical lows allowing investments to be made at much lower cost. Now is the time for the British government to take a bold step and deliver an energy efficiency revolution.

 

END NOTES

[1] Rosenow, J. (2013): The Politics of the German CO2 Building Rehabilitation Programme. Energy Efficiency 6(2), pp 219-238

[2] Copenhagen Economics (2012): Multiple benefits of investing in energy efficient renovation of buildings: Impact on Public Finances. Commissioned by Renovate Europe

[3] Frontier Economics (2015)

[4] Rosenow, J., Platt, R., Demurtas, A. (2014): Fiscal impacts of energy efficiency programmes – the example of solid wall insulation investment in the UK. Energy Policy 74, pp. 610-620

[5] Kuckshinrichs, W., Kronenberg, T. and Hansen, P. (2010): The Social Return on Investment in the Energy Efficiency of Buildings in Germany. Energy Policy, 38(8), 4317-4329

[6] Mikulić, D., Bakarić, I.R., Slijepčević, S. (2016): The economic impact of energy saving retrofits of residential and public buildings in Croatia. Energy policy 96, pp. 630-64

[7] Rosenow, J., Platt, R., Demurtas, A. (2014): Fiscal impacts of energy efficiency programmes – the example of solid wall insulation investment in the UK. Energy Policy 74, pp. 610-620

[8] Verco and Cambridge Econometrics (2014)

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Equity and justice in the energy system – the case of fuel poverty in the UK

energy justice

We are again getting to the time of the year when the days are getting shorter and the nights colder. Many of us are turning  our heating on, without having to think too much about it. However, many others are in a situation where they cannot afford heating in their homes and this time of year can have dire consequences on their health and wellbeing. We at the Centre on Innovation and Energy Demand, together with South East London Community Energy, a community group developing sustainable energy projects, have been researching community-led initiatives that address fuel poverty. Read more ›

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The views and opinions expressed here are solely those of the individual authors and do not represent Sussex Energy Group.

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