Royal Commission on Environmental Pollution

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CONTENTS

EXECUTIVE SUMMARY

1. INTRODUCTION AND OBJECTIVES OF THE STUDY
1.1 Introduction and Background
1.2 Objectives and Outline of Report

2. ENERGY SAVING PROSPECTS IN UK HOUSING
2.1 Overview of the Housing Sector and its Energy Usage
2.2 Potential For Energy Savings
2.3 Barriers to Uptake of Economic Potential
2.4 Possible Policy Measures to Increase Uptake of Energy Savings
2.5 Conclusions and Outstanding Issues

3. ENERGY SAVINGS PROSPECTS FOR THE UK SERVICE SECTOR
3.1 Overview of the Service Sector and its Energy Use
3.2 The Potential for Energy Saving
3.3 Barriers to the Uptake of the Economic Potential for Energy Savings
3.4 Possible Policy Measures to Increase the Uptake of Energy Savings
3.5 Conclusions

4. PROSPECTS FOR ENERGY SAVING IN INDUSTRY
4.1 Overview of Industrial Sector and its Energy Use
4.2 Potential for Energy Saving
4.3 Barriers to the Uptake of the Economic Potential
4.4 Possible Policy Measures to Increase Uptake of Energy Savings
4.5 Conclusions and Outstanding Issues

5. PROSPECTS FOR ENERGY SAVING - TRANSPORT SECTOR
5.1 Overview of Transport Sector and its Energy Use
5.2 Potential for Energy Savings
5.3 Barriers to Uptake of Economic Potential
5.4 Possible Policy Measures to Increase Uptake of Energy Savings
5.5 Conclusions and Outstanding Issues

6. CONCLUSIONS AND OUTSTANDING ISSUES
6.1 Conclusions
6.2 Outstanding Key Issues

Endnotes

References

Appendix A Data and Modelling for Energy in Housing

Appendix B Energy Saving in Specific Subsectors of the Services Sector

Appendix C Profiles of the Major Industry Subsectors

Appendix D The Energy Efficiency Best Practice Programme

Appendix E Units for Measuring Energy Consumption and Conversion Factors

Appendix F Acronyms and Abbreviations

TABLES

Table 1.1 Energy Consumption by each Sector in 1996
Table 2.1 Fuels Supplied to Final Users in 1996
Table 2.2 Technical Potential for Energy Savings
Table 3.1 Technical Potential for Energy Saving in the Service Sector in 2010
Table 3.2 Economic Potential for Energy Saving in the Service Sector in 2010
Table 3.3 Market Potential for Energy Saving in the Service Sector in 2010
Table 3.4 Potential Energy Savings for the Service Sector in 2010
Table 4.1 Short Term Energy Saving Measures
Table 4.2 Medium Term Energy Saving Measures
Table 4.3 Long term Energy Saving Measures
Table 4.4 Projections of the Energy Efficiency Savings Potential in 2000.
Table 4.5 Projections of the Energy Efficiency Savings Potential in 2010
Table 4.6 Projections of the Energy Efficiency Savings Potential in 2020
Table 5.1 Projected Transport Energy Consumption (Mtoe)
Table 5.2 Policy Measures to Save Energy: Transport Sector
Table 6.1 Projected Energy Consumption (Mtoe)
Table 6.2 Policy Options to Achieve Economic Potential Energy Savings
Table 6.3 Additional Policy Options to Reduce Energy Consumption
Table C.1 The Metals Industries
Table C.2 The Ceramics and Minerals Industries
Table C.3 The Chemicals Industry
Table C.4 The Food & Drinks Industries
Table C.5 The Paper & Textiles Industries
Table C.6 Engineering and Other Industries

FIGURES

Figure 2.1 Energy Delivered to the Housing Sector by Fuel 1970 to 1996
Figure 2.2 Breakdown of Housing Energy Consumption by End Use and Fuel (1995)
Figure 3.1 UK Service Sector Energy Consumption by Fuel Type
Figure 3.2 Portion of UK Energy Use Attributed to the Service Sector 1977-1996
Figure 3.3 Service Sector Energy Uses
Figure 4.1 Summary of Industrial Energy Use
Figure 4.2 Energy Consumption by Subsector
Figure 4.3 Energy Consumption for Manufacturing Industry
Figure 4.4 Effects of Promotional Measures on Industrial Energy Efficiency
Figure 5.1 Transport Energy Use in the UK
Figure 5.2 Modal Split of UK Transport Energy Use in 1995
Figure 5.3 UK Road Transport Energy Use by Journey and Vehicle Type
Figure 5.4 Future Growth in UK Transport Energy Use
Figure 5.5 Technical and Economic Potential of Different Energy Saving Options

EXECUTIVE SUMMARY

1. This executive summary presents the findings of a review and analysis of the available information on the prospects for saving energy in the domestic housing, services, industrial and transport sectors in the UK.

2. In the absence of any additional policy measures, the likely realisable energy savings will not be sufficient to prevent total final energy consumption rising significantly by about 18% between 1996 and 2010. The increase will be most pronounced in the transport, service and industrial sectors.

3. Energy consumption might be reduced to below 1996 levels if there were to be a full uptake of the economic potential for energy saving techniques. However, the available assessments of this economic potential do not take account of the transaction costs of obtaining information on the techniques and their cost-effectiveness nor do they take account of consumer preferences.

4. The main barriers to achieving the economic potential are:
   • limited awareness of saving energy in the services and transport sectors;
   • lack of specific information on the more energy efficient techniques available, especially for house purchasers and industry;
   • low priority to energy saving since energy costs represent a small proportion of total costs; and
   • limited time for individual householders to obtain information on energy saving options and details on their performance and cost-effectiveness.

5. These barriers particularly affect small and medium sized enterprises (SMEs).

6. Tackling these barriers will require extension of the existing information and technical assistance programmes, such as Energy Efficiency Best Practice Programme, and new measures such as providing information on the energy consumption of houses at the point of purchase and guidance on how to overcome any potential risks concerning the energy saving techniques.

7. Critical factors for the success of these policies include the need for:
   • a package of measures that tackle specific barriers for particular target segments or actors in each sector;
   • close contacts with the key actors in each (sub)sector;
   • operating through the existing networks that provide information for the diverse energy consuming sectors, especially those with many SMEs.

8. Little data are currently available on the costs and effectiveness of the policy measures outlined in (6) above. But these policy measures are unlikely to be sufficient to prevent energy consumption from rising in future above current levels.

9. Consequently additional policy measures would be needed to reduce energy consumption. The main options include:
   • economic instruments such as environmental taxes that raise energy prices;
   • a gradual phasing-in of tighter building regulations; and
   • regulations such as the fuel economy and CO₂ standards for vehicles and the Integrated Pollution Prevention and Control Directive's provisions concerning energy efficiency.

10. The critical factor for the acceptability, effectiveness and success of these additional policies, especially any tax changes, is that they must be part of a complementary integrated package of measures, including measures to offset the equity implications of price changes by support for energy efficiency measures, especially for needy and low income groups. They should also be accompanied by an information and awareness programme explaining their role, objectives and rationale.

11. Outstanding gaps and issues which the Commission might wish to consider in their study include:

1. What are the costs and effectiveness of policy measures and programmes designed to tackle the barriers to the uptake of economically worthwhile energy savings?

2. What policy measures could most effectively reduce individual householders' and firms' transaction costs of finding energy saving options that are appropriate to their circumstances?

3. How to devise combinations of measures that will enhance the cost-effectiveness of each element of the programme and take account of interactions between them?

4. To what extent will the programmes and measures persist into the future and continue to yield energy savings in the long run?

5. How can the Government realistically achieve its environmental targets (e.g. cutting CO₂ emissions by 20%)?

6. What additional measures would be needed to cut energy consumption and how can these measures be packaged to enhance their effectiveness and acceptability?

7. What specific targets and policy measures will be required for each of the sectors covered in this study? What would be the costs of these measures?

8. To what extent has the commitment to annual rises in fuel duties increased the price elasticities of demand and hence increased the cost-effectiveness of this measure? Would a similar commitment to gradual rises in other energy taxes likewise increase their effectiveness?

9. Would the effectiveness and acceptability of the tax rises be increased if they were accompanied by measures to tackle the barriers to greater energy savings and by measures to offset their impacts on needy and low income groups?

10. How to enhance the links between the various policy issues and actors concerned with energy efficiency (e.g. local and global pollution policies, building regulations, housing, fuel poverty, energy regulation, transport and competition policies).

The RCEP may wish to consider holding a series of policy workshops bringing together experts in these various areas to explore how an integrated package of measures could be devised to tackle the above policy issues.

1. INTRODUCTION AND OBJECTIVES OF THE STUDY

1.1 Introduction and Background

Total energy consumption in the UK declined slightly between 1970 and the early 1980s because of significant energy efficiency improvements following the oil price rises. However, energy efficiency has improved less rapidly in the 1990s as the effect of the previous energy price rises has worn off (Schipper, 1997), so that energy consumption in the UK has been rising since the early 1980s, especially in the service and transport sectors. In 1996, final energy consumption in all sectors rose due in part to the recent falls in energy prices resulting from the reductions in VAT and increased competition in the energy market. If prices continue to fall in real terms, then it might be difficult to achieve sufficient improvements in energy efficiency to prevent energy consumption from rising in future - with the associated increases in emissions of pollutants such as CO₂.

Energy savings can arise through more efficient utilisation of energy¹ or from forgoing some benefit associated with the use of energy - the former involves no loss of welfare, while the latter does. The term energy efficiency has been used increasingly in recent times to address the former mechanism. It is defined as getting the same service from less energy by various means such as using better equipment or better management.

Energy savings may be made by technical means, such as: better insulation, more efficient heating systems, and by the utilisation of waste heat; or through improved management of energy in the home arising from enhanced understanding of energy using equipment and controls. Finally, it might be possible to induce consumers to reduce their demand for energy dependent services (e.g. by turning down thermostats) either by appealing to their commitment to environmental objectives or by raising prices.

Energy efficiency policies are driven by concerns to reduce fuel bills for low income groups and to improve the warmth and housing conditions especially for those on low incomes, and by environmental policies - most significantly in respect of climate change.

Prior to the Conference of the Parties to the Framework Convention on Climate Change in Kyoto in December 1997, the UK Government stated that it intended to set the challenging target of reducing CO₂ emissions to 20% below 1990 levels by 2010. The European Union (EU) proposed to reduce greenhouse gas emissions in the EU to 15% below 1990 levels by 2010 - provided that others make similar efforts (Department of Trade and Industry, 1997a).

At the conference in Kyoto, the EU agreed to reduce its greenhouse gas emissions by 8% by 2008-2012; while other developed countries signed up to smaller emissions reductions. The EU will now discuss how this new overall target should be allocated between European countries, which will probably allow growth in emissions in some countries such as Spain and Portugal to be offset by cuts in other countries, particularly in Germany and the UK which are the biggest emitters of total greenhouse gases in the EU.

Concrete policy measures to improve energy efficiency are likely to form an important element of the UK Government's proposed measures to deliver its commitments at the Kyoto conference. This is partly because some of the energy efficiency improvements can be achieved at low cost and could also help attain other objectives such as enhancing competitiveness, improving housing conditions and reducing fuel bills for low income groups. Moreover, at present there appears to be a reluctance to rely (solely) on measures involving major increases in energy prices (e.g. a carbon tax) on account of concerns about the UK coal industry and the effects of energy price increases on low income groups and impacts on industries' competitiveness - given the relatively limited commitments by other developed countries. The Labour Manifesto of 1997 advocated a major push to promote energy conservation and cleaner, more efficient energy use and production, including increased use of Combined Heat and Power (CHP) systems.

1.2 Objectives and Outline of Report

The objective of this report is to assess the prospects for energy saving and reducing the demand for energy in the UK. The aim is to provide background information for the Royal Commission on Environmental Pollution's (RCEP) study of the environmental implications of energy prospects for the 21^st century.

The study covers the following main energy using sectors:

• domestic housing (see Chapter 2);
• services (see Chapter 3);
• industry (see Chapter 4); and
• transport (see Chapter 5).

Chapter 6 presents the conclusions of our analysis and outstanding issues that the RCEP may wish to consider examining.

Table 1.1 shows that these four sectors accounted for about 98% of total energy consumption in 1996. Agriculture and construction were not considered in this study since they account for only a small share of total energy consumption.

Table 1.1 Energy Consumption by each Sector in 1996

⁽¹⁾ This includes energy consumed in both industrial processes and industrial buildings

Source: DTI (1997a, p 263)

Appendices A - C provide more detailed information on the domestic housing, services and industrial sectors. Appendix D describes the Energy Efficiency Best Practice Programme, which promotes energy saving in the domestic, services and industrial sectors. Appendix E gives a set of conversion factors. Appendix F lists acronyms and abbreviations used in this report.

1.2.1 Methodology

Each sector is assessed in terms of:

1. Trends in the total energy use for the sector and the key factors shaping them.
2. The technical, economic and market potential for energy savings. Each of these terms and scenarios is defined below.
3. The barriers to achieving the economic potential for energy savings.
4. Possible policy measures to increase the uptake of energy savings and critical factors for their success. The policy measures focus on tackling specific barriers (identified in (3)). Where possible, this section draws on experience in other countries.
5. Conclusions on prospects for energy saving and key outstanding issues which the Commission might wish to consider in its study.

Assessing the Potential for Energy Savings

This section describes the methodology applied in this study to assess the potential for energy savings (see point 2 above).

The technical potential is the maximum uptake of all technically possible (ATP) energy saving measures as soon as they become available, regardless of costs.

The economic potential is techniques for which the savings (e.g. in energy) over the life cycle of the items exceed their resource costs. Non-energy benefits (such as reductions in raw material costs) are also included in the calculation. We have used an 8% real discount rate in determining this economic potential - as here defined - since this was the discount rate used in the available data and analyses. However, in one subsector (new domestic buildings), the existing appraisals apply a discount rate of 6%.²

However, the available assessments of this economic potential do not take account of the transaction costs of, for example, management time to obtain information on the techniques and their cost-effectiveness and applicability. Nor do they take account of consumer preferences. The last Government's investigation of CO₂ control policy options made an implicit allowance for such (hidden) costs by marking down the energy savings benefits. But this was arbitrary since there are no robust analyses of economic potential which allow adequately for these hidden costs.

In this briefing paper, we have reported the available estimates of economic potential which just take account of the resource costs and benefits associated with the energy saving techniques. We have highlighted in the section on barriers the important transaction costs and consumer preferences that constrain the achievement of the economic potential for energy savings. This can then help identify policy options to reduce these transaction costs. The implication of consumer preferences is particularly significant for the transport sector.

The market or likely realisable potential represents the extent to which the actors in each sector would actually take up the energy saving techniques. This is also referred to as the Business As Usual (BAU) scenario and assumes that present government policies are unchanged. This scenario is based on the Department of Trade and Industry's (DTI) latest energy projections in their Energy Paper 65 (see DTI, 1995a) - hereafter referred to as the EP65 projections - under their central economic growth (of 2.35% pa) and low energy prices scenario.³ This scenario assumes that electricity prices will fall slightly between 1995 and 2010.

The assessment for this scenario is based on expert judgements about firms' and individuals' likely behaviour in the face of the projected changes in key factors such as economic growth and energy prices. For the service sector, there are no projections of likely future uptake of energy saving measures. Therefore we have defined the market potential for energy saving for this sector as being half of the energy savings from measures that were found to be cost-effective using a discount rate of 15%.

We have examined prospects for various energy saving techniques over the following time horizons:

• The immediate term (i.e. measures that could be adopted immediately).
• The medium term, which allows for the application of the energy saving measures when existing capital is altered. This includes changes in ownership of properties as well as new house construction and investments in new plant, equipment and vehicles.
• The long term, which allows for the development and introduction of possible new technologies.

The actual length of each of these time horizons varies between the techniques depending on their characteristics such as lifetimes and normal replacement cycles. The total economic and the likely realisable market potential energy savings are presented for 2010 and, if possible, also for 2000 and 2020.

The potential energy savings are given in terms of million tonnes of oil equivalent (Mtoe) in line with recent official DTI statistics on energy (Department of Trade and Industry, 1997a).

There are considerable uncertainties surrounding any projection of future energy consumption. Ideally an analysis should encompass a range of projections to explore sensitivities and identify key elements. However, this was not possible in this review. Consequently to focus the analysis on prospects for energy saving measures, our analysis is based on the DTI's EP65 projections.

This report comprises a review of the available data and analyses. It has not been possible to carry out any original research or data collection for this study. Nevertheless, the study provides an original synthesis and analysis of the available data. The team held one brainstorming meeting to review the first draft of each chapter and to enhance the consistency in the methodology and definitions applied.

2. ENERGY SAVING PROSPECTS IN UK HOUSING

2.1 Overview of the Housing Sector and its Energy Usage

Housing accounts for almost 30% of all energy consumption in the UK, significantly more than industry and more than double the services sector. Moreover, the continuous availability of energy is vital to the habitability of our homes, both for comfort and for powering the increasing array of equipment on which modern living depends.

2.1.1 The UK Housing Stock

In 1914, almost 90% of housing was rented from private landlords, a proportion that has declined ever since. Private renting has since been displaced by owner occupation and the social rented sector, the latter reaching its peak in 1979 when it accounted for 31% of the total. Since 1980, the "right-to-buy" legislation has allowed many council tenants to become owner occupiers and the majority of new building has been for owner-occupation. This is reflected in the age characteristics of the houses for the following different categories at present: the private rented sector has a very high proportion of old dwellings; the social rented sector a large proportion of post-war dwellings; and the owner occupied sector a broad spread of dwellings including the majority of both the oldest and the newest.

By international standards, the UK housing stock has an unusually large proportion of old buildings (over 40% built before 1940) and is being replaced at a very slow rate (effectively over several centuries). It also has a high proportion of owner occupied dwellings (68%) and a low proportion of flats (18%).

2.1.2 Energy Consumption in 1996

There is a wealth of data relating to energy use in the housing sector, enabling detailed analysis to be carried out. Appendix A describes the principal data sources. Table 2.1 shows domestic housing energy consumption by fuel for 1996. In total domestic housing accounted for 29.9% of all energy delivered to final users in the UK. Housing is particularly significant in its consumption of gas and electricity, accounting for 57% and 35% respectively of their total final consumption. Coal has long since been displaced as the dominant household fuel, although households still account for 28% of coal deliveries made directly to consumers (i.e. excluding electricity generation). Within the housing sector, gas accounts for 67% of all consumption and electricity a further 19%.

Table 2.1 Fuels Supplied to Final Users in 1996

Source: Digest of UK Energy Statistics (DUKES) DTI (1997b)

2.1.3 How Demand has Changed with Time

Figure 2.1 shows that, since 1970, the use of solid fuel has declined and the use of natural gas has increased greatly. Overall electricity consumption shows relatively little change in total, but closer examination reveals that the use of electricity in household lights and appliances (other than cooking) has more than doubled over the period and now accounts for over 60% of all household electricity consumption (DTI, 1997b). Oil has never been an important heating fuel in the UK, unlike North America and some countries in North Europe, so housing constitutes only a small part of the market for petroleum products; likewise, liquefied petroleum gas (LPG) is only used by a small minority of households. It should be noted, however, that oil and LPG are used proportionately much more in rural locations, where piped supplies of natural gas are not available.

Figure 2.1 Energy Delivered to the Housing Sector by Fuel 1970 to 1996

Source: DUKES (DTI, 1997b)

2.1.4 Household Energy Expenditure and Fuel Prices

Average household expenditure on fuel, excluding motor fuel, was £13.35 per week in 1996/97 (Family Expenditure Survey (FES), 1997). At 4.3% of all household expenditure, that proportion has shown little variation for most of the last half century, although it fell by about a percentage point during the decade to 1990. Expenditure included £5.57 per week on gas. Because of its high unit price, consumers spent even more on electricity (£6.73 per week), despite that fact that it accounts for a much smaller proportion of the energy delivered.

The FES shows that fuel expenditure varies little with income; the second lowest income decile group spends 71% of what is spent by the ninth decile. The lowest two decile groups devote almost 10% of all expenditure to fuel and individual low income households frequently spend well over 10% of their income on fuel. Thus, although fuel expenditure is a minor part of total expenditure for the better off, fuel bills can be a very serious burden for those with low incomes, especially single-person households living on state pensions and benefits. It is not surprising, therefore, that the cost of keeping warm in winter remains a strongly emotive issue, articulated by an effective "fuel poverty" lobby.

Fuel prices, as identified in the fuel, light and power component of the Retail Price Index, were about 6% higher in real terms in 1996 than in 1970. But there were significant changes during that period, with heating oil prices rising by a factor of two between 1973 and 1983 and electricity and coal prices each rising by about 40% during the same period. The price of gas actually fell in real terms during the decade to 1980, after which it increased by over 30% in just 4 years. Since 1985 all fuel prices have been decreasing in real terms and in 1996 their weighted average was some 17% lower than their 1983 peak. Over the whole period (1970 to 1996) the net changes to gas and electricity prices, which together account for over 90% of household fuel expenditure, have been in opposite directions; electricity is about 17% more expensive in real terms in 1996 than it was in 1970, while gas is 28% cheaper.

In terms of its heat content, on-peak electricity costs the householder about 5 times as much as gas and is predominantly used for purposes in which gas or other fuels could not be substituted. Most electric space and water heating uses off-peak electricity which is supplied at a lower price, but electricity is significantly more expensive for heating than gas and has become less attractive as a means of heating than it was in 1970 due to the rising price differential.

2.1.5 End Uses of Energy in Housing

Figure 2.2 shows that space and water heating account for the great majority of all energy delivered to households. Precise allocation of consumption to space and water heating is difficult because most UK dwellings derive both from a single boiler, but it has been estimated that space heating alone accounted for over 60% of all consumption, and water heating for over 20% in 1995. Household lighting and appliances (Lts & Appl) accounted for 11% of energy delivered, almost all of which was electricity; consequently, appliances and lighting accounted for over half of all household electricity consumption, with the remainder shared between space and water heating, and cooking. Only 5% of energy delivered is estimated to be used for cooking.

Source: Building Research Establishment (Shorrock, 1998)

2.1.6 Factors Affecting Usage

Household energy demand since 1970 has grown by 31%, matching almost exactly the increase in the number of households over the same period. This means that the energy use per household is about the same as it was in 1970. Other factors affecting energy demand include improved efficiency of appliances and heating systems, demand for improved warmth and light and increased demand for energy using appliances and lighting, and social and economic factors. These other factors have broadly cancelled each other out - there have been substantial improvements in heating standards and the efficiency of heat producing systems, as well as more limited changes to the insulation of buildings. Electrical appliances have assumed a relatively larger share of energy demand, reflecting their vastly increased numbers which have offset their improved efficiency.

Models of energy use have been developed to help analyse the changes that have taken place and estimate their impacts on overall demand. The DTI has generally favoured econometric modelling, while the Building Research Establishment (BRE) has developed a detailed physical model of the housing stock to estimate the effect of individual improvements such as better insulation and more efficient boilers. The Environmental Change Unit of Oxford University has also developed a detailed model called DECADE (Domestic Equipment and Carbon Dioxide Emissions) to examine in great depth the opportunities for improved energy efficiency of electrical appliances and lighting (DECADE,1995,1997a,1997b). DECADE (1997b) uses a vintage model (i.e. takes account of the age profile of each type of appliance) of the appliance stock and a scenario approach. Appendix A gives more information on these models.

Overall price changes have been relatively modest and have had little effect. Nevertheless, the decline in consumption in the early 1980s coincided with an overall rise in prices and the recent trend towards higher consumption may have been related to prices falling in real terms. Prices have significantly affected choice of heating fuel, benefiting gas at the expense of electricity. Oil tended to lose market share during the years when it was expensive but has staged a recovery in the most recent decade, when it has generally been the lowest cost fuel.

2.1.7 How The UK Compares With Other Countries

The energy efficiency of UK housing is often compared adversely with that of other countries, notably Sweden and Denmark, which have placed great emphasis on improving energy efficiency in their housing stocks and currently set standards for new dwellings that are much more demanding than in the UK, even allowing for their colder winters. For example, the heat loss through building elements permitted by building regulations in Sweden is typically half of that in the UK. BRE monitored under carefully controlled conditions dwellings constructed side by side to UK and Swedish minimum regulations standards, and found that the latter required over 40% less energy for space heating than those built to UK standards (Rayment, 1998). Comparisons of actual energy use in the respective housing stocks present a somewhat different picture, however. Analysis carried out for the International Energy Agency (IEA, 1997) shows that the UK actually has lower space heating energy use per dwelling than either Denmark or Sweden. Closer examination shows this to be due in large part to the much greater floor area of dwellings in these latter countries. When floor area is allowed for, both Denmark and Sweden have slightly lower energy consumption than the UK, despite their colder climates and better standards of heating. The IEA comparisons extend over a period dating back to the early 1970s so they are able to show that space heating energy per square metre in Denmark has reduced by almost 50% since 1973. This helps to confirm that significant savings could be made in the UK also.

The following trends have been apparent in most developed countries, although not always starting from the same position: rising numbers of households with central heating; rising ownership of domestic appliances and increasing electricity demand as a result; and smaller household sizes leading to household numbers growing faster than population.

2.2 Potential For Energy Savings

Energy savings may be made in the household sector firstly by technical means such as better insulation and more efficient heating systems; or secondly through improvements in energy efficiency through better management of energy in the home. Finally, it might be possible to induce people to limit their demand for energy (e.g. turning down thermostats) either by appealing to their commitment to environmental objectives, or by raising prices. Although easy to distinguish in principle, the second and third ways are difficult to separate in practice in the household sector. For example, the use of taxation to increase consumer fuel prices might well cause some people to respond with better management but cause others to forgo heating to an extent that could cause hardship.

It is often observed that improvements in energy efficiency do not always result in reduced consumption but appear instead as increased comfort within dwellings. This is particularly likely in the case of properties that are insufficiently heated before the improvements are made, a situation most commonly associated with low income households. In practice, this effect is largely short term, because heating standards are rising and the savings will eventually be realised. BRE's estimates of savings resulting from heating-related improvements assume that 70% of potential will be realised as savings. The physically based modelling undertaken by BRE takes account of rising standards of heating, which are therefore included in the historical analysis of consumption and allowed for in the projections.

2.2.2 Technical and Economic Potential in New Dwellings

Currently around 200,000 new dwellings are built each year in the UK. Their construction is subject to the Building Regulations⁴ in England and Wales (and equivalent legislation in Scotland and Northern Ireland) which include requirements for the conservation of fuel and power dealing particularly with thermal insulation and controls of space and water heating. These requirements have been upgraded significantly from the nominal values that applied in the early 1970s. The most recent revision, in 1995, allows the requirements to be met with a high degree of flexibility, not only allowing trade-offs between the levels of insulation in different building elements but also taking account of heating system efficiency and even the cost of the fuel used for heating. The basic levels are set according to the cost-effectiveness of measures applied to individual elements of the building, such as roof insulation and wall insulation. Theoretically, the regulations are based on current costs and heating standards and use a discount rate (6%) appropriate for appraising public policies and regulations - i.e., they aim to achieve economic potential. There are some limitations to that, however: insulation can be less cost-effective when applied to some methods of construction than others, and the regulations are pitched at a level which does not effectively eliminate widely used methods of construction that are relatively costly to insulate. Were it not so, it is likely that higher standards of wall insulation would be stipulated and that traditional masonry walls might suffer a cost penalty relative to timber frame construction. It may therefore be observed that the economic potential pursued by the regulations is tempered somewhat to minimise disruption to current building practice. Overall, the effect of the building regulations is that a typical new dwelling should require less than half the energy for space heating as its counterpart built before 1976. With a falling trend in fuel prices, the justification for higher standards in future revisions of the regulations may require a change in the cost-effectiveness criteria, for example, by including environmental damage costs in fuel prices used in the appraisal.

The long term technical potential for new dwellings is very much larger. Individual houses have been constructed in the UK which require much less energy than typical new houses, while standard construction practice in Sweden produces houses that would achieve a similar result (see Section 2.1.7).

Most of the new houses built each year in the UK are additions to the stock rather than replacements for older houses. This means that the overall contribution to short term targets for energy savings that can be made by improvements to new houses is small. At the present rate of building, we may expect about 2.5 million new dwellings to be built by 2010 (although recent projections suggest that rate may have to rise somewhat). If setting higher standards reduced their energy consumption for space and water heating to about half its present level, the aggregate annual saving by 2010 would be about 0.9 Mtoe (2% of present consumption in housing) or little over half a million tonnes of carbon. Therefore, although very important in the long term, building regulations applied only to new dwellings cannot yield big energy savings in the short term.

2.2.3 Technical Potential in the Existing Stock

In the existing stock, the great majority of dwellings were constructed when there was little or no formal requirement (or market pressure) to insulate. As heating standards have risen, the benefits of improving the insulation of those dwellings have become much clearer. However, compared to the installation of central heating, progress to improve insulation has been slow despite significant efforts by the government to encourage it. There are also many old electrical appliances in use, which are significantly less efficient that those in the shops today, and the useful life of appliances (typically about a decade) is usually much shorter than that of a building.

The following sections draw on various studies that use different approaches and base years and assess market and economic potential as well as technical potential. An attempt has been made to extract estimates of technical, economic and market potential from the published results, in some cases requiring some additional assumptions or calculations to derive the estimates. Shorrock (1995) summarised one study of the reductions in carbon dioxide emissions that would result from cost-effective energy savings based on 8% and 15% discount rates. The published paper did not give the energy savings on which the carbon dioxide reductions were calculated but these have been obtained directly from BRE with permission to use them in the context of this study. The full list of measures considered coincides well with our definition of technical potential, because it includes all of those based upon the application of generally available techniques and materials. The estimates are based on 1993, although they would have differed very little for 1996.

Another study was recently conducted for the Electricity Association by the Association for the Conservation of Energy (ACE, 1997) to examine the potential for energy efficiency improvements in UK housing. It used a scenario approach to produce estimates of how much carbon dioxide emissions might be reduced relative to Business As Usual government projections. Although the results are primarily expressed in carbon dioxide terms, it is possible to deduce energy savings from them and compare them with the corresponding figures from BRE's work. The report identifies untapped potential for most of the same measures as BRE which again equates to our definition of technical potential. However, it should be noted that ACE's "untapped potential" excludes savings expected to occur by 2010 under prevailing trends, and cannot be compared directly with the numbers derived from BRE's work.

A recent study by the Energy Saving Trust (EST) (1997) also examined the potential for energy saving measures to reduce energy and carbon dioxide emissions up to the year 2010 and set out a programme that the EST believes would achieve an 18% reduction in UK domestic sector energy use by 2010. The report suggests a technical potential very similar to that estimated by BRE, although covering a narrower range of measures.

DECADE (1997b) identifies the economic and technical potential for efficiency improvements to electrical appliances using proven technology based on the level of energy efficiency that would be justified to the consumer over the lifetime of the appliance. Like the technical potential identified for housing, this is a relatively conservative definition because it excludes feasible technical developments that are not yet close to production. On this basis, it is estimated that energy required by appliances and lighting in 2010 could be reduced by 33% relative to what is projected to arise under present trends, and CO₂ emissions by 3.4 MtC⁵, about 9% of all housing related carbon emissions projected for 2010. This illustrates the high importance of domestic electricity demand to CO₂ emission abatement policy - although the consumption reduction amounts to little over 5% of current energy demand for the domestic sector, the potential for reducing CO₂ emissions is almost twice as much because of the high emissions arising from electricity use.

Table 2.2 presents the results from all four studies. The studies by BRE, ACE and EST identify that the largest outstanding technical potential is for wall insulation, including cavity wall insulation. The EST did not examine solid wall insulation, possibly because it generally needs to be done in conjunction with other work to make it cost-effective. On the other hand, EST estimates a larger potential from cavity wall insulation than the others. Boiler replacement, particularly using condensing boilers, is also identified by BRE and EST as offering very large potential, but there is wide divergence on the extent of the saving. EST shows the number of potential dwellings for condensing boilers to be 15.7 million compared to BRE's 9 million, which explains the difference between their respective estimates. Part of the explanation of ACE's lower estimate for condensing boilers may be that ACE's estimates are just for the additional uptake of more energy efficient boilers over and above that already projected to arise in the Business As Usual scenario.

The potential for electricity savings in lighting and appliances amounts to energy savings ranging from 1.7% to 6% of energy consumption in UK housing in 1996. While this may seem relatively modest, it should be noted that, because the savings are in delivered electricity, they are much more significant in terms of primary energy and carbon dioxide since electricity is a more carbon intensive source of energy (especially coal fired electricity) than gas on account of the efficiency losses in electricity generation and transmission.

The technical potential for energy saving through the increased use of combined heat and power (CHP) is not mentioned above. By combining heat generation with electricity generation, CHP yields better overall utilisation of primary energy, essentially because it utilises heat that would otherwise be discarded to the atmosphere or to cooling water. In the long term it offers considerable potential for improving primary energy utilisation through integrated planning of heat and power distribution. This has been done very successfully in Denmark, where the Heat Supply Act of 1979 caused the provision and use of district heating around large towns to be extended. In principle, similar developments could be made in the UK, but large scale development of CHP would require the involvement of planning and power generation interests and is unlikely to take place in the context of housing development alone. For the present, the greatest potential is where there is an existing heat distribution system, particularly for social housing in inner city areas. For example, at the Rowlatts Hill estate in Leicester, tower blocks formerly served by coal fired district heating now have a 175 kW CHP unit. CHP is also a suitable replacement for electric heating, particularly in tower blocks; the London Borough of Waltham Forest has a good example in its Beaumont Road Estate.

⁽¹⁾ ACE figures scaled from carbon savings in report, using emission factors for heat and electricity
⁽²⁾ ACE and DECADE potential based on reference case in year 2010

All of the sources agree that there is considerable technical potential based on existing materials and techniques. The smaller figure arrived at by ACE is the potential estimated to be still extant in 2010 and, as such, is broadly consistent with the others at over 30% of 1996 consumption.

2.2.4 Economic Potential in Existing Housing

In assessing the economic potential for energy saving measures in existing housing, it is necessary to take account of the opportunities that arise when equipment or building components are replaced or other work is undertaken. Improvements that are normally feasible at any time in the life of a building are: the insulation of lofts, cavity walls, hot water storage cylinders and pipes; the draughtproofing of windows and doors; the replacement of light bulbs by compact fluorescent units; and the fitting of improved controls to heating systems. Others are usually only economic when replacement or refurbishment work is being undertaken: double glazing when windows are being replaced; interior or exterior insulation of solid walls and ground floor insulation as part of a major refurbishment; boiler replacement with a high efficiency type when an old boiler reaches the end of its useful life; and buying more efficient electrical appliances when replacing old appliances. The implication is that economic potential must be assessed in relation to replacement and refurbishment cycles for a range of measures, particularly for the insulation of floors and solid walls, and for heating system improvements.

Shorrock (1995) assessed economic potential using 'low' and 'high' costs for a range of measures. The former measure is based upon the marginal cost of making the improvement in conjunction with other work, such as installing double glazing when windows are being replaced for other reasons. A wide range of improvements are found to be cost-effective at an 8% discount rate when they are undertaken over an extended period, during which opportunities will arise for them to be undertaken at low cost as part of the normal replacement or refurbishment cycle. In the alternative assessment under the high cost assumptions, the full costs of carrying out an improvement is attributed to energy efficiency. This is more appropriate to the short-term and means that certain improvements, such as the insulation of solid walls, double glazing and condensing boilers, are not cost-effective.

In the long term, the economic potential is much larger. BRE's estimates of cost-effective potential range from 17% of current consumption in the short term, to 34% in the long term, which for solid wall insulation may extend to half a century.

ACE (1997) gives a technical ranking table, which includes costs of carbon saved calculated with a 10% discount rate. It shows savings of 6.1 MtC to be cost-effective out of a total technical potential of 9.7 MtC savings analysed, corresponding to about 15% and 25% of current 1996 consumption respectively. Direct comparison with the BRE figure is not possible because by 2010 some of the BRE potential will have been taken up (which should have the effect of reducing the total) and because the ACE approach includes the gradual up-take of replacement opportunities (which should tend to increase the total above BRE's short run estimate). Our conclusion is that they are broadly compatible. The EST study does not explicitly identify cost-effective potential, adopting an approach based on market take-up. However, it may be inferred that EST regards all of the measures it includes as cost-effective in the long term, which makes it broadly consistent with the BRE low cost scenario.

The economic potential for energy savings clearly depends on the time scale over which it is assessed, because of the replacement cycles. In general, however, the estimates given in all sources are generally consistent with short term potential of about 15% of energy consumption for the domestic sector in 1996, rising to about 30% over a period of 20 to 30 years.

In the short term, all the studies show the largest cost-effective potential (6-8% of present consumption in the housing sector) to be in cavity wall insulation (CWI), which can be carried out economically at any time in the life of the building. It should be noted, however, that there are some technical risks associated with CWI, which have in the past contributed to its low rate of installation (see Section 2.3.1 below). Also, over the period to 2010 the large number of expected boiler replacements generates considerable potential for condensing boilers (which are generally economic to install only at the time of replacement), amounting to a figure variously estimated at between 1.7% and 6% of present energy consumption in the housing sector on the basis of the figures given in the different studies.

DECADE (1997b) identifies economic and technical potential for efficiency improvements to electrical appliances (using proven technology) based on the level of energy efficiency that would be justified to the consumer over the lifetime of the appliance. Although it is a relatively conservative definition of technical potential, it is a demanding definition for economic potential that requires consideration of the whole life of the appliance. Accordingly, DECADE used policy scenarios to illustrate how different policies might be combined to realise part of the potential and concluded that savings of up to 2.7 MtC could be realised by 2010. However, this level of energy saving was found to require strong political support for a systematic programme of European legislation, including minimum efficiency standards for a number of appliance types.

2.2.5 Market Potential

The EST and ACE studies cited above both contain estimates of the extent to which market trends will contribute to savings in the year 2010. BRE has also published a 'reference scenario' for the UK housing sector (Shorrock et al, 1997) based on projections of current trends.

The EST estimates that the energy savings that would occur were present trends to continue would amount to annual savings of 2.0 MtC, or about 5% of current (1996) energy demand for the domestic sector, about enough to offset the effects of growing household numbers and appliance usage. The BRE study is based on a model which takes account of increased demand arising from growing household numbers and greater use of central heating, as well as improvements to insulation and heating systems. It draws upon the DECADE work on electrical appliances and lighting to assess the impact on the use of electricity. Overall, BRE estimates that energy consumption in 2010 will be 2% below 1995 levels, including a decline of 9% for space heating and a 10% rise for lights and appliances.

The official DTI projections in EP65 (DTI (1995a)) show a range of cases based on different assumptions about economic growth and prices. The central growth/low fuel price projection shows an increase of 3% in total domestic sector consumption by 2010. The ACE study adopted the same EP65 case for its 'reference case', which it presented in terms of carbon savings.

In general, the above sources agree that the likely realisable energy savings (market potential) will be just about sufficient to offset the effects of growth arising from household numbers and increased demand for heating and increasing ownership and use of electrical appliances.

2.2.6 Gap Between Economic and Market Potential

The difference between the market potential and the economic potential is very significant because it represents the opportunity for policy action to realise the potential. The EST study gives explicit estimates of the potential and the Business As Usual savings for the period 2010, which can be used to identify where the greatest gaps are.

Cavity wall insulation (CWI) offers the greatest cost-effective potential for energy saving, but householders are showing a very low propensity to invest in it; the reasons are discussed in Sections 2.3.1, 2.3.4 and 2.3.6. Perhaps 10 million households could benefit from reductions in their fuel bills that would recoup the necessary investment cost in 4 to 8 years, a better rate of return than they can get from most other types of investment. Yet in practice well under 1% of those households have CWI installed each year. Although the figures are presented differently, the same inference may be drawn from the ACE and BRE work. A large gap is also apparent for condensing boilers and electrical appliances. The most successful market appears to be for double glazing, which is seen principally as a home improvement rather than an energy efficiency measure and is expected to achieve about two thirds of its potential by 2010.

In new housing, few builders go beyond the minimum requirements set by building regulations, indicating that market pull for energy efficient housing is weak. That leads us to conclude that regulations are to a large extent determining the market. There are exceptions, however, particularly in the social housing sector, where some landlords are keen to achieve standards that will allow tenants to afford reasonable warmth. There is evidence that their desire to do so is not only altruistic, but also prompted by the knowledge that benefits will accrue to the landlord, through a lower void rate and lower maintenance and management costs arising from reductions in the problem of lack of heating and consequent condensation (Energy Efficiency Office (EEO), 1995).

2.3 Barriers to Uptake of Economic Potential

The failure of households to invest in energy saving measures may be explained in part by barriers which inhibit the uptake of measures.

2.3.1 Availability of Information

CWI provides a good illustration of the barriers preventing uptake of energy saving measures. Although most people are aware of CWI to some extent, relatively few have a clear understanding of what it could do in their particular circumstances. Hedges (1991) found that householders were reluctant to install CWI because they underestimated the benefits, overestimated costs, associated CWI with damp and fumes, and were unsure if they had cavities or did not know if their cavities were already filled. All those reasons are to some extent the result of poor information. The worries about damp and fumes are not wholly without foundation, although normally arising in restricted circumstances. Good research is needed to ensure that any such risks are well understood and can be avoided, and its results clearly communicated to prevent mistaken perceptions of risk. Recently, a new problem with CWI had considerable publicity; despite the fact that it only related to a particular type of wall insulation (urea formaldehyde foam) in conjunction with a particular type of wall tie, it may add further to public perception of risks with CWI. Contrasting with CWI, double glazing was recognised by most respondents in the Hedges study as an insulation measure which is perceived to yield other benefits, including enhanced appearance of the house.

2.3.2 Low Resale Value of Investments in Energy Efficiency

An investment in insulation normally has a long life, perhaps as long as the dwelling in which it is installed, so in theory the value of the investment should be retained and be capable of being recouped when the property is sold. There is evidence that this is not so for some types of insulation, especially ones like CWI which cannot be seen on the exterior. In a sense, this is another information problem, based on a lack of understanding by possible future buyers of the property. In general, there is little information for the prospective purchaser of a property on its energy efficiency, so it is hardly surprising that no value is put on it by most purchasers.

2.3.3 The Landlord/Tenant Problem

In rented housing, the landlord generally has to make the investment but the tenant benefits from it. In theory, the improved energy performance of the dwelling and the reduced heating costs should, like many other facets of the quality of the dwelling, be reflected in its market rent so that the investment can be recouped. In practice, this appears not to be the case. This makes private landlords reluctant to invest in energy efficiency measures. In social housing, however, there is evidence that benefits accrue to the landlord as well as the tenant (see Section 2.2.6 above) and also that there is a willingness to pay a higher rent for a property that costs less to heat, in some cases significantly reducing combined expenditure on fuel and rent. Once again, the root of this problem lies in a lack of understanding on the part of tenants (and perhaps also landlords) - the market does not operate effectively when there is inadequate information.

2.3.4 Access to Capital

The capital needed to invest in CWI is modest, perhaps £300-500 for a typical house, and for many can be found without recourse to a loan. However, it is perhaps too small a sum to interest a lender on its own, because of the transaction costs involved in setting it up. The double glazing market indicates that access to capital does not appear to be a strong limiting factor, despite the relatively high cost. Perhaps this is also explainable in terms of transaction costs because replacement windows are usually offered for sale with a ready made finance package that leaves the purchaser with no additional action to take.

In general, capital may be readily available but at the unattractive rates available for unsecured loans and much higher than those available when secured by a mortgage - energy efficiency measures would be significantly more attractive if they could be associated with major improvements and financed at home loan interest rates.

Low income households are more likely to have no capital of their own to invest and to find access to low rate loans more difficult. This helps to strengthen the rationale for targeted grant schemes such as the Home Energy Efficiency Scheme (HEES), which are likely to induce investments that would not be made otherwise.

Capital for investment in privately rented housing may also be difficult to obtain at favourable rates, and investment in improved energy efficiency may be more difficult to justify if there are doubts that the capital can be serviced through higher rent for improved properties. Again it makes most sense to incorporate improvements when major refurbishment is undertaken. Capital for investment in social housing is generally available at market rates but may be restricted by the need to restrain public expenditure.

2.3.5 The Small Size Of Fuel Expenditure In Relation to Other Outgoings

From the householder's perspective, the problem is simply that the savings from energy efficiency investments are too small to merit serious consideration. For example, a more efficient fridge may consume 50 fewer kWh per year and thereby save £5 per year in electricity costs. Therefore it is not surprising that such savings in electricity running costs get scant consideration from most purchasers, particularly if the information on energy costs is not readily available at the time of the purchase.

Small investments may have similar transaction costs to larger investments. Such costs inhibit their uptake. This must come into play in the case of some energy efficiency improvements, such as CWI, where we are expecting an investment of perhaps £400 to yield a return of about £80 per year. Although this is a good rate of return, its significance to overall household budgets is small and it is therefore not likely to be assigned top priority by many households. In this case the implication must be that investments are more likely to be taken up when they are aggregated to reduce the relative importance of transaction costs, for example, by a landlord undertaking the same improvement on a number of properties. For owner occupiers the key factor is to get improvements financed at home loan rates, either at the time the house is purchased or when a major improvement is made that requires a new or increased loan.

2.3.6 General Observations on Barriers

The owner-occupied part of the housing sector is particularly prone to information barriers because decisions on investment are taken by individual householders, normally with little professional advice. This leads to underestimation of benefits and false perception of risks, as well reduced tradability of improvements once they have been made. Hedges (1991) found that 'people were often vague about spending on energy' and that only a minority could say how much they spend annually. Lack of awareness may be compounded by falls in (real) prices for the main fuels.

In the social rented sector, there is evidence that information and understanding have improved considerably in recent years. The problem of hard-to-heat properties is now much better understood, as are the priorities for its resolution. Availability of capital is probably the key factor now limiting further progress. Efforts to overcome the capital problem by using third party finance channelled through energy service companies (ESCOs) seem to be having a limited impact at this stage.

Transaction costs are clearly also a problem which must be borne in mind when policy is considered, particularly for owner occupiers. This leads to the conclusion that efforts should be made to minimise the additional effort required to make energy improvements, where possible by combining opportunities to invest in energy efficiency with other investment decisions associated with home improvements or house purchase.

2.4 Possible Policy Measures to Increase Uptake of Energy Savings

2.4.1 Building Regulations

Before the energy crisis in the 1970s, levels of insulation required by building regulations were nominal, and could be met simply by the construction of standard cavity walls and placing 25 mm of insulation in the roof. Those levels were upgraded in 1976, 1982, 1990 and 1995, and the legal basis for them formalised in the 1984 Building Act. Revision of the Regulations has always involved a high degree of consultation with construction interests. In broad terms, proponents of energy efficiency have advocated higher standards, while those engaged in the construction process have urged caution based on the premise that changes to existing practice causes increased cost and the risk of unexpected failures. In practice both sides have been vindicated to some extent. In general, new houses have been constructed successfully and shown to need less energy than old ones, but some problems have been attributed to changes in building practice induced by regulations. Most notably, rain penetration through walls is thought to have been aggravated by the presence of insulation in cavities, although research has shown that these problems can be avoided by attention to detail in design and construction.

Section 2.2.2 above has shown that more stringent requirements for new buildings imposed now could only make a small contribution towards achieving reductions in UK energy demand by 2010. However, changes to the regulations are a vital component of energy efficiency policy, because they tend to define standard practice and have a wider impact on the availability of insulation materials.

However, potential is limited by the fact that the application of regulations is restricted to new construction and major refurbishment, and by current methods of demonstrating cost-effectiveness. Concerns about technical risk would also be raised were large changes to be proposed. The following steps could be taken to overcome these limitations and difficulties:

• some extension to include wider range of work undertaken on existing buildings;
• the cost-effectiveness criteria could be extended to include environmental damage costs of energy in energy prices;
• concerns about technical risk can be alleviated by allowing a phased introduction of changes to those aspects where there is an identifiable risk.

The greatest uncertainty is what to do about controlling heat lost through ventilation, which is covered by a separate part of building regulations that is aimed at ensuring adequate ventilation to maintain air quality. In Canada and Sweden there are specific requirements to construct dwellings to high standards of air-tightness, which in turn creates a need for controlled ventilation, usually involving mechanical systems. However, Denmark, which is much more like the UK in construction practice and in climate, does not require air-tightness despite setting stringent requirements for insulation. At the time of writing, it is understood that the Department of the Environment, Transport and the Regions (DETR) is about to engage in a fundamental review of the Building Regulations for England and Wales (Part L - The Conservation of Fuel and Power), which will provide an opportunity to consider all of the issues raised above. The outcome of that review could lead to legislation in 1999, but would be unlikely to come into force until late 2000; any radical changes proposed might well be phased in over a longer period.

2.4.2 Regulations and Labels for Energy using Equipment

For electrical appliances, the situation is more complicated because much of the potential can only be realised if investment is made initially by manufacturers as part of their product development. Such investment has to be justified on the expectation that it will be rewarded though increased margins on their sales, which can only happen if consumers are able to recognise and value the benefits that will accrue during the useful life of the appliance.

Until recently, the consumer had little information on the energy performance of appliances at the time of purchase so there was very little chance of it being taken into account. Therefore providing such information is an essential first step (see possible measures outlined below). However, the evidence suggests that they do not assign much importance to energy efficiency (see Section 2.3.5). Therefore this raises a further question about the extent to which consumers act on such information where it is available. Consequently, in order to be fully effective, the labelling measures outlined below need to be complemented by an awareness raising programme (see Section 2.4.4) and measures to increase energy prices and hence the level of the energy savings (see Section 2.4.6).

To address the information problem, the EU has established a system for labelling the performance of refrigeration and washing appliances, and plans to extend that to mandatory standards of performance. The logic for an international approach to the performance of domestic electrical equipment is strong, because it is usually manufactured and traded on an international basis.

There is some evidence that the labels are having an effect on consumer decisions. About a third of consumers in an Oxfordshire survey found the label useful and took it into account in making purchase of refrigerators, freezers and fridge freezers (DECADE, 1997a). Manufacturers may also have responded to labels by improving the performance of their equipment, but they may also have been anticipating the need to comply with minimum performance standards that are due to be introduced in September 1999.

Other regulations may be aimed at improving the performance of energy using equipment when it is produced. In the USA, there are mandatory performance standards for a range of electrical appliances, which have a very significant impact on demand for electricity

Domestic heating boilers are also subject to EU standards, which are already having an impact by eliminating the least efficient boilers from the market. One consequence will be larger efficiency gains when boilers are replaced. This will have a significant overall effect as about 750,000 boilers are currently replaced per year in the UK (Building Services Research and Information Association (BSRIA), 1997).

DECADE (1997a) concluded that the effect of EU energy efficiency standards for refrigeration appliances could be to reduce energy consumption by those appliances by as much as 18% by 2020, but possibly by as little as 2%. Even the higher figure would be less than a quarter of the relevant economic and technical potential identified. If that seems disappointing, it is not due to fundamental limitations in what standards can achieve; it is rather the result of the very modest level at which the EU standards have been pitched, being aimed initially at eliminating only the least efficient models from the market. In a later report, DECADE (1997b) identified more demanding standards across a wider range of appliances as "the main drivers that will ensure the spread of technology further into the market" and a key component of a strategy that could achieve annual carbon savings of over 2 MtC.

2.4.3 Least Cost Planning and Integrated Resource Planning

The term 'Least Cost Planning' (LCP) means setting requirements for fuel supply utilities to ensure that cost-effective opportunities for energy saving are considered in conjunction with the appraisal of investments in new capacity. 'Integrated Resource Planning' (IRP) is broadly synonymous with LCP and the two terms are often used interchangeably. LCP was widely adopted by American utility regulators (typically called State Public Utility Commissions) and was the main driving force behind "demand side management" (DSM) in the USA. DSM, essentially investment in energy end-use efficiency, became a standard part of fuel utility operations, working to programmes approved by the utility regulators. The system worked when there was a monopoly of energy supply in the area covered by the regulatory bodies, but activity has declined since the advent of competition in energy supply required by the Energy Policy Act of 1989. The UK regulatory systems were developed during privatisation and had the opportunity to draw from experience then being gained in America. In practice, the detailed accounting approach applied by individual states in the USA was deemed to be unsuited to the UK and LCP/DSM did not make a successful crossing of the Atlantic. The simple statutory obligation placed on the Office of Electricity Regulation (OFFER) to promote energy efficiency contrasts sharply with the detailed accounting rules that were applied in parts of the USA. In practice, the Standards of Performance scheme operated by the EST has been the main outcome, spending the equivalent of £1 per electricity consumer per year.

2.4.4 Information Programmes

Section 2.3 above highlighted that lack of information was a particular problem in the housing sector, which has been recognised by governments in many countries, including the UK. Some activity has been aimed directly at householders, such as the Monergy campaign of a decade ago and the more recent EST campaign featuring an Albert Einstein look-alike. Both programmes aim at reaching a large audience through promotional techniques, including television commercials. Other programmes have concentrated their efforts on specialists and professionals, including the Energy Efficiency Best Practice Programme (EEBPP).

In the housing sector, its principal targets were professionals engaged in the design and construction of housing, such as architects and surveyors, builders, and those engaged in the management of rented housing, typically employed by local authorities and housing associations. Its tools were typically guidance documents and case studies, written by independent consultants, on how improvements could be made in practice.

It is difficult to measure the success of an information programme of this kind, particularly to get a good estimate of the extent to which the programme has added to improvements that would have occurred in any case. Surveys to measure impact (Boyle, 1997) have shown that there is a high level of awareness among the target audience for the programme and a corresponding acknowledgement of influence by it. In particular, the social housing sector seems to have benefited strongly from the programme. The long duration of the EEBPP, the consistency of its message and the coherence with the priorities of DETR's housing policies have also reinforced its impact. The experience gained under the EEBPP should be of great value for future information programmes, which are likely to be an essential part of an integrated energy efficiency campaign.

2.4.5 Energy Rating for Houses

One potentially useful method of raising the profile of energy efficiency with house buyers is to provide them with energy information at the point of sale. Denmark introduced a system of energy inspections in 1979, initially as a precondition for obtaining grants for energy efficiency improvements. Since 1985, however, the inspections have been required by law when houses are sold. In the UK, the DETR has encouraged development of home energy ratings over an extended period, initially by encouraging independent schemes devised by the National Energy Foundation and Starpoint. It later published its own Standard Assessment Procedure for energy rating, based closely upon the common features of the two independent systems. While the ratings were originally conceived to provide an indication of energy running cost to householders, they were adopted as an option for showing compliance with the building regulations. They have also been widely used in the social housing sector as a means of specifying affordable heating and identifying priorities for improvement.

However, the prime target for energy ratings - house buyers - has generally not been reached. The rating companies originally hoped that the mortgage lenders would provide the ratings, either to a public willing to pay directly, or as an integral part of its valuation survey. The connection between valuation and energy rating is very significant because it provides an opportunity for the ratings to be provided at much lower cost than if a separate visit to the dwelling had to be made to carry out the rating. The Home Energy Efficiency Bill, currently before Parliament as a Private Members Bill, could require mortgage lenders to provide energy ratings. At the time of writing, it seems likely that the Bill will not be opposed by the government and may eventually be enacted.

Even if the ratings were provided to all house buyers, there is no guarantee that the information would be acted upon. Nevertheless, the change of ownership provides an important opportunity to achieve improvements and to obtain finance for the improvements at favourable rates. A requirement for all houses to have certain improvements made at the time of sale would be a much more demanding piece of legislation but one that could produce a very strong effect.

2.4.6 Fiscal and Pricing Measures

Domestic fuel has a reduced VAT rate, while domestic energy efficiency improvements are currently subject to 17.5% VAT. Proposals to eliminate this distortion in the recent Green Budget seem to be restricted to measures for low income and pensioner households applied under Government programmes. However, the more interesting lesson from the domestic fuel VAT story is the powerful political forces it aroused and the warning it issues to any government wishing to use prices as a way of reducing demand. Perhaps the outcry raised about VAT was due to an unusual combination of political circumstances, because there was no similar occurrence when the real price of domestic gas was raised by 30% through government action at the start of the 1980s. The argument against taxation hinges on its impacts on low income householders (see Section 2.1.4). The estimated price elasticity of fuel is low, typically -0.04 in the short run (one year) and -0.2 in the long run (which the DTI has taken to be 15 years (DTI, 1995a)), so that large increases would be required to achieve a significant effect. However, the arguments for taxation to reflect the costs of environmental impacts have been well articulated and high rates could be justified. The present falling trend in prices may also offer a good opportunity for introducing fuel taxes with less adverse impact than they would have in times of rising prices.

Energy pricing policies to reduce demand have been applied in Denmark, particularly for heating oil, for which prices have been maintained at the high levels they reached during the early 1980s. It should also be noted that relatively modest levies applied through the regulatory mechanism could raise substantial revenues for reinvestment in energy saving measures. If EST funding were to have its originally envisaged level of £200-400 million, then this might entail a 2-3% levy on electricity and gas.

2.4.7 Grants and Incentives

Government grants for loft insulation and hot water storage cylinder insulation were available to all households in the UK under the Homes Insulation Scheme, which ran from 1979 to 1990. During this period there was a very large increase in the number of dwellings with loft insulation, in part directly attributable to installations carried out with a grant and probably assisted by the wider availability of insulation materials in DIY stores which it induced. Grants were initially available at 66% for all households and latterly 90% for households in receipt of certain state benefits. More recently, the HEES has offered grants for certain energy efficiency measures to low income and pensioner households. It is widely accepted that grants encourage the uptake of measures but they are expensive to the exchequer and may involve considerable "dead-weight" expenditure by giving grants to people who would have implemented the worthwhile energy saving measures anyway. Consequently, they are likely to be restricted to cases where there is particular need, such as low income households.

Alternatives to grants have been developed under the auspices of the EST, which has instigated a series of incentive schemes involving "cash backs" and promotional campaigns involving co-operation between manufacturers, distributors and fuel suppliers. Part of its work has been done under the Electricity Standards of Performance (SOP) scheme agreed with OFFER and intended to discharge OFFER's statutory obligation to promote energy efficiency. The EST was originally expected to get its funding from levies on gas and electricity consumers, but its scope has been limited by the Office of Gas Supply (OFGAS)'s and OFFER's concerns that this would mean that the recipients of the energy efficiency assistance were being cross-subsidised by other energy consumers. The EST's own analysis claims high levels of cost-effectiveness for all its work, identifying the average cost of each kilowatt-hour saved under SOP at just 1.5 pence. Although the EST has not reached the levels of expenditure originally intended, there might be scope for it to do so if the regulators' roles were to be extended to include a specific obligation to ensure a minimum level of investment in energy efficiency and to permit extra funding for the EST through a levy on gas and electricity consumers, although this would involve some cross-subsidy.

2.4.8 Technology Procurement

The Swedish National Board for Technical and Industrial Development (NUTEK) has pioneered the use of 'technology procurement' for promoting energy efficiency. The basic idea is to bring together a consortium of interests wishing to acquire high efficiency equipment and to invite suppliers to bid to supply it, in the process creating a new leading edge to the market. Success is achieved when that triggers a general rise in the performance of similar goods coming on to the market more quickly than would have happened otherwise. In the domestic context, examples of successful procurements include high performance windows and fridge/freezers. The "Golden Carrot" programme in the USA - essentially a large prize offered for the development of high performance equipment - was inspired by the same idea and, in the UK, the EST has shown some interest. Perhaps the most promising area for technology procurement is electrical appliances, where it can be used to encourage the development of high performance equipment at the leading edge of the market.

2.4.9 Critical Success Factors

Critical factors to the success of policies to save energy in domestic housing include:

• Many strands of energy saving policy are to a large extent complementary and are best applied in combination.
• Information is vital to the achievement of energy efficiency in existing housing because of the lack of understanding that is clearly prevalent among householders. Information programmes appear to work best when they are carefully targeted, sustained for a long time and coherent with other aspects of policy. The specific case of home energy rating has received much government attention; although it has proved to be very successful as a means of assessing social rented housing, it has yet to be widely applied for existing owner occupied housing, where it could have the greatest impact.
• A key factor to achieving energy savings in domestic housing is reducing the individual householders' transaction costs of finding out about appropriate energy saving measures, determining their applicability and cost-effectiveness for them and then securing a loan and implementing the measures effectively and easily.
• Building regulations have undoubtedly been effective in reducing the energy demand in new houses both in the UK and, more clearly in Scandinavia where more stringent regulations were set and changes were made earlier. Their effect is long term, especially if they are applied solely to major construction work as at present, but they are also important because they tend to establish standard practice which has a wider effect.
• Mandatory standards for the performance of boilers and electrical appliances also offer significant promise, demonstrated by the success of the appliance standards in America. As many appliances are made and sold on a truly pan-European basis, this is a subject that matches well to EU directives, and the EU is taking the lead.
• Government grants can certainly be effective, as demonstrated by the uptake of loft insulation led by the Homes Insulation Scheme and the grants programme for Danish housing in the early 1980s. However, they involve considerable dead-weight expenditure and the cost to the exchequer militates against their widespread use at a time when public expenditure is under such strong pressure. This prompts consideration of alternative sources of finance such as a levy on fuel industries to be spent through the EST.
• Fiscal and pricing measures offer an efficient market mechanism for encouraging energy efficiency but need to be used with great care in housing. The example of the gas price rises in the early 1980s shows that price increases can be accomplished without serious political resistance, but the VAT-on-fuel episode of the 1990s shows how difficulties can easily arise.
• Persistence and coherence of policy appears to pay off in the long term. In the Scandinavian countries high standards have been achieved over a long period with a blend of policies including all of the above. Apparently unpalatable measures like high fuel taxes have achieved public support, helped by good information.

2.5 Conclusions and Outstanding Issues

1. Data availability for housing is generally good, both on energy consumption and the factors that affect it.
2. Energy demand in UK housing is expected to remain at about 1995 levels up to 2010 under business-as-usual projections. During this period, real prices of fuels are expected to decline.
3. Short term economic potential for savings is estimated to be about 15% of 1996 consumption, based on improvements that are cost-effective when installed specifically to save energy. Opportunities for implementing the improvements in conjunction with other work raise that potential to over 30% over the longer term (up to 30 years). For new housing, substantial improvements are possible but the cost-effectiveness criteria used to set building regulations would need to be widened to justify tighter standards, which might have to be gradually phased in.
4. Immediate technical potential for energy saving in existing houses is estimated to be over 30% and in new houses over 50%, in both cases based on readily available materials and skills. Long term technical potential is much larger - houses with near zero space heating needs have been built in climates comparable to that of the UK.
5. Lack of information remains an important barrier to the realisation of the economic potential, particularly for owner occupiers, where there is little professional advice given on energy matters. Transaction costs are also important, given the relatively small investments and returns involved. Availability of capital may be an important constraint in social housing.
6. Cavity wall insulation (CWI) offers the largest cost-effective technical improvement that can be applied in the short term, but has never been the subject of a strong market. A major issue for existing houses will be the extent to which uptake of CWI can be accelerated, through information and technical guidance especially to overcome concerns about risks of damp and fumes.
7. Price rises induced by fiscal or regulatory action are unlikely to succeed if applied in isolation because of the very low price elasticities and would face considerable political resistance because of their effect on low-income households. A levy on fuels might be used to fund investment in energy saving measures. However, OFGAS and OFFER have opposed this since it would entail those benefiting from the energy saving measures being cross-subsidised by other energy consumers. Consequently they have limited the scope of the EST's activities. But this should not be taken to indicate failure on the EST's part to promote energy saving.
8. Experience from Denmark suggests that a sustained programme of regulation, incentives and, in the case of oil, taxation can succeed if backed by good information to increase public understanding. The more restricted example of the UK's social housing sector also shows the benefits of a concerted and sustained information and demonstration programme, which has transformed attitudes and understanding among those charged with providing and managing social housing.
9. Technical understanding of the energy performance of housing is well developed except in one area: heat losses attributable to ventilation, and the extent to which they can be reduced without an adverse effect on indoor air quality. Research using new measurement techniques could improve understanding.
10. The way forward in policy development is much less clear. The policies pursued over the past decade seem highly unlikely to deliver the targets to which the government is committed or perhaps even to maintain the limited momentum observable at present. The conclusion is that current rates of investment in techniques like cavity wall insulation and high efficiency boilers must be raised substantially. Legislation would need to be draconian - e.g. requiring all houses to be improved when sold - if used in isolation. Taxation on fuels would have to be at a very high rate if it were the principal policy instrument and government assistance at the required level would be prohibitively expensive.
11. The most promising policy to achieve energy savings is likely to be multi-pronged:
    • some element of fuel levy;
    • reinvestment of the proceeds through a body like the EST;
    • energy ratings when houses are sold, initially as an information measure but with the possibility of later linkage to mandatory improvements;
    • government funding to support investment for those on the lowest incomes, particularly in rented housing;
    • more stringent requirements for new housing and some extension of building regulations to cover improvements to existing housing;
    • support for the EU initiatives to set standards for the performance of equipment;
    • and an information programme to help the public understand how all of these measures combine to deliver the objectives of environmental protection and affordable heating.

The conclusions above raise many issues for the RCEP to consider. These hinge on the following key questions:

• How much does the government expect the housing sector to contribute towards its target for reducing carbon dioxide emissions by 20% from 1990 levels by 2010? No target for housing has been published.
• Which policy options are most likely to be acceptable? Can the policy measures be packaged (see conclusion (11) above) with measures to offset impacts on those on low incomes so as to overcome the concerns raised during the debate on VAT on domestic fuel and thereby enable fiscal/pricing policies to play a significant role?
• Will public expenditure constraints prevent government assistance to householders other than those on the lowest incomes?
• Can the EST be developed in such a way as to stimulate significant investment without worries about public expenditures or cross-subsidy?
• How far will the government be prepared to go with legislation that will require home owners to invest in energy saving measures or implementing energy rating schemes for their properties?

The RCEP may wish to consider holding a series of policy workshops to explore these questions and how an effe