Energy inefficiency

Promoting energy efficiency has proved hard for governments. Everyone agrees it is a good thing – both for energy bills and to reduce CO₂ emissions. But relatively few people care enough to fork out the cash upfront to take the measures needed.

On paper the Green Deal is a rational policymaker’s dream: assess what measures would make a home more energy efficient; allow the householder to access finance to implement these measures, which then gets repaid over time through their electricity bills. At a stroke you overcome the short-term discount rate that deters consumers from investing upfront in energy efficiency. What could possibly go wrong?

The answer is a lot. The Green Deal closed in July 2015, after only two years. It suffered from chronically low uptake with only 14,000 people using Green Deal finance (a further 35,000 households went through assessment and then appear to have taken up measures but steered clear of Green Deal finance). The conclusion was that ‘Green Deal finance has saved negligible amounts of CO₂. The Department believes it is “unlikely to have provided any material additional energy and carbon saving over and above what would have been delivered by other policies”’. Put more succinctly, a flop.

The NAO picks out some lessons on why the Green Deal underperformed so dramatically, which resonate with our work on policy implementation. In particular they single out:

• a lack of clarity about the purpose of the scheme
• a failure to understand and plan for how the scheme would be delivered in practice, particularly the likely behavioural responses of citizens.

As our case study of the Labour Government’s 2001 Fuel Poverty Strategy showed, household energy use has long been an area bedevilled by multiple objectives and by co-ordination problems. There is no state-run energy efficiency service which the taxpayer funds to bring housing up to scratch. Instead governments rely on a mix of incentives and obligations to bring consumers and providers together. Government may put in some subsidy – but it primarily looks to energy bills as the source of finance of energy efficiency.

And, as the NAO report shows, the ‘delivery chain’ looks more like a bowl of spaghetti through which a consumer has to navigate. As the NAO also points out, DECC did not help itself. It never set a target for exactly how ‘green’ it wanted the Green Deal to be (although the NAO drily note that for DECC the expected lifetime saving of 0.4 MtCO₂ ‘is clearly below its expectations’). The department failed to test or pilot to see if the assumptions about consumer behaviour that underpinned the theory of the Green Deal would work in practice.

It based its forecast of demand on a stated preference survey, which proved to be a poor indicator of how many people would be aware of the policy, let alone follow through and convert that preference into a commitment (we have looked at when departments have more successfully been involved in awareness-raising schemes in advance of policy rollout in our case study of automatic enrolment into pensions). The scheme itself was hard to explain – and the notion of the savings was even harder – against a baseline of potential higher bills without the energy saving measures.

The Green Deal interest rate (7% at a time of very low interest rates) made Green Deal finance very unappealing to anyone with access to other funds. And, although the NAO doesn’t mention this in its report, householders who might otherwise have been interested were put off by the fact that the liability to repay the Green Deal loan was attached to the house – and might affect future saleability.

The bottom line on the Green Deal is that policy that looks good on paper still needs robust implementation stress testing before full scale launch to make sure that they translate into practice. More due diligence upfront can save much grief (and wasted money) later.

Read the full NAO report – Green Deal and Energy Company Obligation