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.



[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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Germany Adopts “Efficiency First” Principle – Let’s Work to Make it a Reality

Jan Rosenow and Andreas Jahn

The German government recently published its Green Paper on Energy Efficiency and launched a consultation process inviting comments on the ideas put forward in the green book. RAP’s detailed response provides evidence and examples of the essential role that end-use energy efficiency must play in a faster and lower-cost transition to a clean energy economy. The key policy decision is to put “Efficiency First” whenever saving energy is less expensive or more valuable than investing in supply-side energy resources.

Efficiency First is a high-level principle that recognizes the central role that cost-effective energy savings can play in meeting European energy, climate, and economic goals. The green book cites Efficiency First as the guiding principle of future energy policy in Germany. RAP has developed a body of work around best practices for energy efficiency and the principle of Efficiency First, based on deep experience in U.S. states, including integrated resource planning and utility efficiency obligations, as well as a number of European examples developed over the last years. RAP’s Berlin office took the lessons learned globally from successful scale-ups of end-use efficiency and distilled them into a streamlined strategy for integrating Efficiency First into Germany’s legislative and regulatory framework. Germany is the first country in Europe to prominently adopt the Efficiency First principle—RAP welcomes this important first step.

Solar Settlement, Freiburg, Germany. Image by Andrewglaser at English Wikipedia. Attribution CC BY-SA 3.0

Solar Settlement, Freiburg, Germany. Image by Andrewglaser at English Wikipedia. Attribution CC BY-SA 3.0.

The ambition of the Energiewende (energy transition) is high. In addition to its renewables goals, the German government established aggressive targets for improved energy efficiency—a 25 percent reduction in total power consumption by 2050 (relative to 2008), even with the expectation that the heat and transport sectors will drive a significant shift to electricity via heat pumps and electric vehicles. This requires new thinking. The principle of Efficiency First helps to minimise the costs of this transition and increases its feasibility going forward. In the response to the green book, RAP draws on international experience and sets out several concrete policy recommendations for bringing Efficiency First to life.

New decision rules and metrics are needed to ensure that energy suppliers and regulators compare demand-side options with supply-side technologies before committing to major energy projects or new market rules. One approach that falls into this category involves applying the levelized cost of energy, which accounts for all of the costs and benefits of saving or supplying one unit of energy over the lifetime of an energy investment or policy choice. A recent study commissioned by RAP, in partnership with the European Climate Foundation and Agora Energiewende, confirms for Germany what international experience in this area has demonstrated: namely, that comprehensive, long-term, and aggressive investment in end-use energy efficiency in Germany will yield substantial cost savings in the power sector. The value of these savings, in levelized costs, is in the range of € 0.11‑0.15 per kilowatt-hour. Simply put, new efficiency is often cheaper than old coal, and deeper efficiency can greatly lower the cost of the needed switch to renewable power. This is powerful motivation to expand Germany’s efficiency programs, such as those delivered by the KfW Bank, and the new tenders for efficiency investments under the National Action Plan.

In addition, the Efficiency First principle should be applied to infrastructure investment decisions in the power and natural gas sectors. Decision-makers should, as a matter of standard practice, take a “hard look” to determine whether the outcomes sought through investment in utility systems can be achieved at lower cost and lower risk through energy efficiency measures. For example, major grid investments should only be undertaken after considering whether cost-efficient demand-side options could instead address the need for grid upgrades or extensions.

Energy efficiency retrofits in buildings comprise a large portion of the potential for reducing energy consumption in Germany. As part of Efficiency First in Germany, RAP recommends a reform of the property transfer tax in a way that helps building owners to make energy efficiency retrofits at the time of sale, which is often a trigger point for building works. RAP has recently developed such an approach for Germany, drawing on its work in the U.K. on the same issue. At the same time, carefully laid out minimum standards for energy efficiency applicable at the point of sale or rental agreement provide a regulatory option to ensure basic efficiency measures are implemented first. RAP also recommends revisiting the concept of an energy efficiency obligation in Germany as a regulatory tool to assist families and businesses in saving energy and lowering their energy bills on a routine basis.

In response to the green book’s treatment of European energy policy, RAP suggests that the 2030 energy efficiency targets should be binding at the member state and European level (similar to other 2030 targets) and be increased to 40 percent to bring them in line with the 2050 greenhouse gas reduction trajectory.

Over the coming years, Germany will implement the Efficiency First principle—bringing it to life by adjusting existing and introducing new policies to ensure that the Energiewende is both economical and affordable. Let’s get to work and make it happen.

RAP’s full response (in German) to the German Efficiency “Green Paper” can be downloaded here.

This blog was originally posted on the Regulatory Assistance Project (RAP) website.


Jan RosenowDr Jan Rosenow is a Senior Research Fellow for the Centre on Innovation and Energy Demand, based in SPRU at the University of Sussex and a Senior Associate at the Regulatory Assistance Project

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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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