DECC creates more chaos in the energy efficiency sector

Dr Philip Webber, SGR, takes a hard look at the government's track record in the UK home energy efficiency sector.

ResponsibleSci blog entry, 19 May 2014
 

At the start of May, the government announced the new Green Deal Home Improvement Fund. Thousands of pounds will be offered in cashback to householders who install new energy saving measures such as solid wall insulation and energy efficient boilers from June.  Ministers at the Department for Energy and Climate Change (DECC) stated that this new scheme was much simpler than before and they had learned lessons from the past.

So, what could be wrong with that?

While new incentives for home energy efficiency are certainly welcome (indeed, long overdue),  this further adjustment to the Green Deal represents yet another round of uncertainty for firms installing such measures especially as important details of how the scheme will actually run have yet to be released.

But to understand the full picture you first need a bit of the history.

At the end of 2012 all the schemes set up by the previous government to fund home energy saving measures were stopped and replaced by two new ones: the Green Deal; and the Energy Company Obligation (ECO). The Green Deal was intended to be more ‘economically efficient’ - a way of paying for energy saving measures like insulation from the savings in the energy bills of home owners. The ECO was intended to supplement the Green Deal, by providing subsidies for specific measures, aimed at helping those in low income households.  The subsidies are funded by levies imposed on the energy companies through targets – set by government – for them to reduce the energy consumption of their customers.

But installation of the energy saving measures is not carried out directly by the energy companies. They offer work via tenders and contracts to a whole range of smaller companies and installers across the UK.  As the contracts are so large, typically in the tens of millions of pounds, coalitions of sub-contractors form alliances to bid for work and they in turn employ their own sub-contractors until finally at the end of the energy sector ‘food chain’, someone actually does the work.

This is a complex set of relationships. Contracts run for at least a year - and usually several - so whenever government changes the subsidy levels or the operation of scheme with less than a year’s notice, considerable uncertainty results.

Unfortunately, the latest government announcement is yet another last-minute change in a long series of such changes.

Major problems were apparent right from the start of the Green Deal and ECO. For example, government only released the full information to consultation after the new scheme had officially begun. (Ideally, consultation should happen at least six months before any changes.) Thus energy companies essentially had to take informed guesses about what final prices they could offer to sub-contractors.  In practice, the ‘Big Six’ energy companies were simply cautious about issuing large scale contracts, which meant that many smaller sub-contractors went out of business because the volume of work reduced sharply following the end of the previous schemes. Those who did secure contracts found that the contract prices were sharply reduced around the middle of 2013 which  meant that they in turn had to reduce their numbers of sub-contractors or cut the pay they could offer per job.  Several went out of business at this stage too.

Things settled down for a while but then along came the Chancellor’s Autumn Statement. This announced a reduction in the energy levies from 1st April 2014 – particularly for the more expensive solid wall insulation – after much energy company lobbying and tabloid media hype.  This announcement had two effects. The first was a virtual panic among those companies who did have ECO contracts to carry out as much installation work as possible before it dried up. The second effect was even more delay in the issuing of new energy saving contracts as the Big Six decided to wait and see how the market responded to the latest changes. All this has led to more companies failing and more installers put out of work.

As the end of the year approached, the government realised that their much heralded energy efficiency schemes (especially the Green Deal) were looking like a failure. For example, official figures showed that the number of loft insulations carried out in 2013 was 93% less than in 2012. So they released some extra finance so households taking up measures would be offered up to £4000 cash back. This led to another flurry of activity as installation companies had to quickly develop marketing campaigns to try to attract new customers with this new incentive. Then, just as this scheme was ready to go, DECC then announced that they would offer not £4000 cash back but up to £7600 from June 2014. This meant that all the marketing information was now wrong.  But much worse, any customer who had signed up for the £4000 cash back, say in March, now cancelled their job as they realised that they could get thousands extra from June. So again, after all the frenetic activity signing up customers and scheduling jobs, new customer leads dried up and work stopped. Even worse than this, DECC failed to specify the exact date the new £7600 cash back could really be available, so no one was able to say when their job would get done. And finally, if this yo-yo state of affairs was not a ludicrous example of how not to work with the markets and the real world, DECC announced that the cash back could be offered by most contractors directly. This meant that all the companies who had spent months being trained up for and qualifying to be approved Green Deal Providers, giving them a business advantage, could have it bypassed by contractors who had not gone through the training and approval process.

If you were trying to deliberately destabilise a market by misinformed intervention it would be hard to beat the last year of home energy efficiency finance. And this fiasco follows the sudden change to the renewable energy feed-in tariff which devastated the solar photo-voltaics market for a period.

It really should not be like this. The UK has legally binding carbon reduction targets up to 2050. The way this should work is that the targets are met by a series of (roughly) 10 year strategies of work in the energy and other sectors. This is how it is done in Germany for example.

What we have in the UK is a government that is responding with a series of knee-jerk reactions to very biased tabloid pressure – e.g. to reduce energy bills (in the short term) by reducing energy levies and in the process resulting in larger energy bills in the longer term because of a much slower pace of energy demand reduction. It doesn’t make sense for householders who will pay larger energy bills in the longer term, it doesn’t make sense for all of us as climate change mitigation is woefully inadequate and it is very bad for any business trying to employ people and stay solvent in the face of dramatic changes in subsidy levels and government policies.  

Dr Philip Webber, Chair of SGR, is also a non-executive director of a not-for-profit medium-sized energy community interest company which has given him an insider’s view of the current energy markets.