Will the ‘big six’ profit from lobbying to keep homes energy inefficient?
Energy companies lobbied the government to cut ‘green levies’ from bills, and yesterday they got their wish. But now the government has announced it will be reforming a number of energy efficiency schemes, do the ‘big six’ stand to profit?
The Times this morning reported that the policy rollback could mean companies reap the rewards of selling energy that would not be needed if energy companies were made to stick to their efficiency targets. The news is likely to be poorly received by consumers and politicians who have lambasted the industry for making what some see as excessive profits in recent months.
The government says the changes aren’t a sop to the big six, however. It maintains that the policy changes will save as much energy as the previous package. We take a close look at the numbers.
£360 million extra revenue
The government has announced it will relax the requirements of an energy saving scheme that obliged energy suppliers to subsidise home insulation for low-income households – known as the energy company obligation (ECO). The Times reports that companies will be able to sell an extra £360 million worth of energy due to the changes.
The headline figure comes from energy efficiency industry group, the Association for the Conservation of Energy (ACE). It argues that because the programme is being cut, less homes will be made energy efficient, and energy companies will profit from the overall increase in energy use.
According to ACE’s calculation, the ECO cut means 300,000 fewer households will get insulation or more efficient boilers each year, for three years. So that’s 900,000 extra inefficient homes in total. The work those households could have had done might have saved them £400 on their bills, it claims. So, 900,000 households, each paying £400 more for energy than they otherwise would have, means energy companies get an extra £360 million of revenue, it says.
But the top line figure is dependent on a number of assumptions. In this case, it hinges on how much energy would be saved by having ECO work done, and how much that would have cut household bills.
So, lets take a look at each part of the calculation.
£400 per household
ACE says it got the £400 saving figure from one of the big six energy companies: SSE. ACE says SSE claimed it could save customers £400 by improving their homes energy efficiency, when it announced a price hike in October.
But on closer inspection, it’s unclear how much of this potential saving is down to energy efficiency measures, and how much can be accounted for by households generally using less energy.
The SSE press release from which ACE takes the number says:
“… underlying energy efficiency improvements make a real difference; SSE estimates that a typical dual fuel energy bill at its new prices would have been around £400 higher had usage remained at 2005 levels.”
The problem is with relying on that figure is that energy consumption has been falling consistently since 2005 – and not only because of more efficient homes.
That general trend has been reflected in a change market regulator, Ofgem, made to its industry standard consumption rates. In 2010, it said an ‘average’ household – based 2005 to 2008 data – used 16,500 kilowatt hours of gas, and 3,300 kilowatt hours of electricity.
But the regulator recently announced it was going to reduce the ‘average’ consumption estimate. Based on the Department of Energy and Climate Change’s (DECC) latest data, Ofgem says an average household should now be assumed to use 13,500 kilowatt hours of gas and 3,200 kilowatt hours of electricity.
Part of that reduction may be due to energy efficiency measures. But a lot of it can also be explained by the economic recession: people have less money to spend on energy, so they heat their homes less and use less electricity.
So all SSE is really saying in the above statement is that if people use more energy, their bills would be higher – without detailing how much of the £400 is down to energy efficiency measures.
900,000 households
So on to the second part of the calculation – will 900,000 fewer households really lose out on energy efficiency improvements?
ACE says it worked out how many households could be affected by the ECO reform by looking at how much more carbon dioxide the government expects to be emitted due to the policy change.
In its announcement yesterday, the government said an extra 2.7 to 2.9 million tonnes of carbon dioxide would be emitted due to fewer homes being made more energy efficient.
An average home is said to emit 3.2 tonnes of carbon dioxide from energy use. So ACE divided the total amount of extra emissions by the amount a single household emits – giving you about 900,000 households. As the changes will be rolled out over three years, it assumed 300,000 fewer homes would get ECO work done each year, on average.
But that calculation hinges on how much energy you assume ECO measures would save. ACE’s calculation assumes all of the 900,000 households go from average emissions to being more or less carbon neutral – which would mean some pretty effective insulation and highly efficient boilers being put in.
It’s important to note that ACE acknowledges that this number is illustrative, however. It says the calculation still works if you assume more homes are made energy efficient, but the insulation and boilers save less energy. It says the government doesn’t dispute that the ECO changes will mean almost 3 million extra tonnes of carbon dioxide being emitted, regardless of the number of homes affected.
But while the ECO reforms alone may cause emissions to increase, the government has said it has added extra measures which will negate the rise. It says, taken as a whole, the energy efficiency package is “carbon neutral”.
The table below summarises where it expects emissions to increase, and which policies will reduce them:
Image - ECO emissions table (note)
Source: Government announcement; table by Carbon Brief
The calculation only works if you don’t believe the government will fulfill these new commitments, which ACE doesn’t. It says the government’s claim that the increase in emissions from the ECO cut will be offset by new, slightly vague, “savings from transport policies” and “improving the energy efficiency of schools hospitals and other public sector buildings” is dubious.
A spokesperson told us ACE “looks forward to seeing how [the government] substantiates the claim this package will be carbon neutral”.
Extra revenue
So if the government keeps to its word, the policy changes won’t affect emissions or energy use, and energy companies shouldn’t see their profits boosted.
But if ACE is right, and the government fails to meet its new energy efficiency commitments, energy companies could stand to make money from failing to improve the efficiency of the UK’s old, leaky housing stock – albeit possibly not as much as ACE makes out.
Nonetheless, news that the companies lobbied government to relax the ECO scheme – and could stand to profit – is unlikely to go down well with the public, especially as bills continue to rise.