by Jan Rosenow and Richard Cowart

The United Kingdom was once a world leader in energy savings. We proved that investing in buildings, insulating lofts, and switching to efficient boilers, motors, and lighting created jobs, saved money, and lowered the environmental costs of energy systems. But in recent years we have turned our back on our own evidence, reducing the breadth and depth of energy efficiency programmes.

In this less ambitious scene, the government has finally revealed its plans for the next phase of the Energy Company Obligation (ECO). Happily, the new version contains some important design improvements over earlier plans. Unhappily, the programme as a whole is still too narrow and too small, failing to deliver bill savings to the vast majority of UK households (businesses remain unserved too).

Here is a quick summary of the new changes to the ECO for energy savings:

Lower ambition, narrower target: From 2017 onwards the current expenditure for ECO of £870 million per annum will be reduced to just £640 million, a 26 percent cut. Since efficiency is our lowest-cost clean energy choice, this reduction in effort is a false economy, but it was expected—in the Spending Review and Autumn Statement 2015, the former Chancellor set out his plans to reduce the spending for ECO. The other key change is a shift from delivering savings across all types of households towards addressing households in fuel poverty alone—the budget for the fuel poverty related target of the future ECO will be increased by 45 percent to £450 million per annum. After 2018 all ECO spending is supposed to be allocated to fuel poverty alleviation.

Better programme design: As always with efficiency programmes, details matter, and the design of ECO will change in some useful ways. The government will return to using predetermined savings estimates (called deemed savings) for energy efficiency improvements, an approach that RAP has long advocated, since it lowers administrative costs whilst still providing confidence that real savings are being delivered. In addition, energy efficiency measures in social housing with an energy performance certificate (EPC) rating of E or below are planned to be included, which will increase the targeting efficiency of the programme. Both of these changes are steps in the right direction, both reducing costs and increasing the targeting efficiency of ECO when it comes to fuel poverty.

In a nutshell, the overall ambition of ECO is being reduced, but the design will improve and be more in line with the “keep it simple principle” that is so important for effective Energy Efficiency Obligations. We support most of these design modifications and have argued for many of them over the years. However, the overall target for ECO and the level of investment is insufficient to meet our national targets both on fuel poverty and on carbon reduction.

Why are we stuck in this debate? The government’s main argument for reducing ECO spending is affordability, as some of the costs of efficiency programmes end up in consumer bills. But since investing in cost-effective efficiency actually saves more than it costs, that arithmetic is upside-down. Investing in efficiency does cost something, but so do investments in power stations, transmission upgrades, capacity requirements, and gas imports—and the supply-side options cost even more. More ambitious ECO targets for energy suppliers have generated significant net-benefits to consumers, both to those who directly participate in the programme and those who do not. A narrow focus on the cost of Energy Efficiency Obligations such as ECO is misleading, since the benefits on bills as well as the benefits in health, environment, and energy security outweigh the programme costs. This conclusion is supported by previous analysis by the Department of Energy & Climate Change (DECC) which concludes that “in 2020 households are estimated on average to save around 11% […] on their energy bills compared to what they would have paid in that year in the absence of policies.”

However, this analysis was made before the current government announced plans to reduce spending on energy efficiency programmes. In the autumn of 2013, the consensus that rising energy prices are best addressed by improving energy efficiency started to break and the exact opposite became government policy. Interestingly, in the past, and in many other places around the world, rising energy prices were a trigger for increasing energy efficiency spending—academic analysis shows that the target of CERT, the predecessor of ECO, was increased by 20 percent in 2009 following wide-spread media coverage of rising energy prices and windfall profits made by the energy companies.

The new Prime Minister recently said she wants “to see an energy policy that emphasises the reliability of supply and lower costs for users.” The cheapest and most effective way to achieve this is investing in energy efficiency. We know how to do this from several decades of experience. Now is the time to get serious about energy efficiency and launch an ambitious national programme that helps us achieve the new Carbon Budget, reduce bills, and stimulate the economy in times of uncertainty.

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

Dr Jan Rosenow is a Senior Research Fellow at the Centre on Innovation and Energy Demand, based in SPRU at the University of Sussex.