This is one garment that will not fit all sizes

Is the Energy Efficiency Commitment the right tool for the UK Government to meet its commitments to the new European Energy End-use and Energy Services directive?

Throughout the western world, the drafty state of British homes has long been a standing joke. The widespread introduction of central heating may have eliminated winter chilblains as a consequential common illness. But it has not stopped all too many of us from spending more on heating the birds on the roof, than keeping ourselves comfortable.

It is widely accepted that even today the average homes could easily operate just as successfully, whilst burning just two-thirds the fuel. In all too many cases, that percentage figure is even higher.

In some ways, this makes the government’s task of meeting its obligations under the new European directive, Energy End-use & Energy services, rather easier than for most of its counterparts.

Under Article x, within nine months each country has to publish a plan detailing how it will deliver energy saving improvements at an annual rate 1% higher than achieved to date. Pity the poor Scandinavians, with their super energy efficient homes, but still obliged to deliver further savings.

It is obvious from recent Government policy papers, on climate change and following the energy review, that Britain intends to approach this target using predominantly two public policy weapons.

The first has been to tighten up standards for new homes, under the Building Regulations. These have been changed twice since 2000 – although they are still less ambitious than in comparable Nordic climates – and should do so again at the end of the decade. There is growing evidence about how poorly compliance with these standards are policed. There is also a very slow replacement rate of existing housing. Which is where most of the savings will need to be made.

Unlike other European governments, ours has eschewed using the tax system seriously to provide incentives to improve the energy efficiency of homes.

Uniquely, we chose not to impose our energy tax (the climate Change levy) on housing. We levy VAT at the lowest permitted rate (5%), whilst charging the full 17.5% on energy conservation measures a householder might install himself. We cannot offset expenditure on energy saving measures against income, or council, tax. Or stamp duty for that matter. There are no generally available government grants to install energy saving measures, apart from £17m a year to encourage microgeneration – contrast that with the 1.4 billion the German government provides annually to improve the energy standards of pre-1978 housing.

The sole game in town is the Energy Efficiency Commitment. Which is paid for entirely by the six energy companies serving the residential sector. It is now halfway through its second triennial phase, having confounded all the pessimists by delivering 40% more energy (and carbon) savings than anticipated in its first phase.

The government is currently consulting as to how the third phase, beginning April 2008, should operate. Because the present rules require the energy companies to deliver savings in gigawatts, each company seeks to deliver at minimum cost to itself. The calculations are the same for each. Even though it uniquely carries a 30% “penalty” for producing comfort rather than energy saving, insulation (more specifically, cavity wall insulation is the favoured option. Over 80% of expenditure is devoted to it. And because fuel bills grow higher by the month, it is not proving difficult to persuade householders to have it installed. So much so, that the scheme overseer, the regulator OFGEM, is reporting that two-thirds of the savings required for the second phase had been achieved little more than a year into the three year scheme.

The government is concerned that next year; the amount of activity under EEC will fall, as the companies achieve their targets early. There was great satisfaction at the smooth transition between the first and second phase of the programme. But with the third phase due to see a sharp uplift, at least doubling, of the overall target, this could lead to an alarming roller-coaster ride in the market size. What to do?

One option might be to acknowledge that EEC3 (as it is called) is going to need to be so much bigger – if only to start hitting that EU directive target! – that work under it needs to start earlier. But there is not much incentive for the energy companies to start spending money any earlier than they strictly have to do. The main reason why they did so at the close of the first phase (EEC1) was that the ‘rewards” for installing some energy saving items diminished, so it became cheaper to do more earlier.

There is no good reason for this to occur again. Indeed the pressure is on the government to provide an uplift in rewards for undertaking some less overtly cost-effective measures, like microgeneration or consumer advice (although how this will be measured accurately remains a puzzle). They are even positing allowing EEC to include “larger scale measures for increasing the amount of electricity generated …using low emission technologies” – which could imply EEC providing funds for off-shore windfarms or even nuclear power stations.

Because EEC is effectively the only game in town regarding improving the energy performance of existing housing, there is a danger that every conceivable option is thrown within its orbit.

Certainly the government is right to be looking beyond the completion of

EEC3 towards introducing a more holistic target for energy companies, related to restraining overall consumption levels – rather than limiting it to installing energy saving measures.

But to try to shoehorn into EEC every kind of carbon reduction option, both demand AND supply-side, is foolish. Those running EEC should stick to doing what they have proved good at. That is, stimulating the installation of the most cost-effective energy saving measures in homes.