January was the month of energy efficiency. The Green Deal went live, ECO started, the Prime Minister even declared that “energy efficiency is essential to economic growth” and that “it would be the greenest economies that would prosper”. Even conservative think-tank Policy Exchange now says efficiency is the way forward to fight climate change. Is this time for real?
The business case – without ‘green’ confusion
To avoid confusion let’s take away the ‘green’ element and look at the purely financial case. Energy efficiency makes sense. If you can get the same service or level of comfort with two units of energy why use three? Using less energy improves my productivity – and so my bottom line.
The big picture
Looking at the bigger picture, think of the amount of energy we use to power our economy and wealth, as measured by GDP. Let’s say a country uses 210 million tonnes of oil equivalent to get a GDP of £1,437 billion. Those are the actual 2011 stats for the UK. They show that as a country we’ve already made huge strides in energy efficiency.
The UK’s energy ratio – that is, the ratio between energy use and GDP – has more than halved since the ‘70s. It dropped from 386 tonnes of oil equivalent (toe) per £1 million of GDP in 1970 to 146 in 2011. Yes, a lot of that comes from the ‘de-industrialisation’ of Britain with energy intensive industries moving abroad, but that’s not the whole story. The industry which remained is more efficient than it was.
Energy use per household has also gone down. While consumption in the residential sector may have risen, it has done so only marginally since the early ‘70s, from 38million tonnes of oil equivalent to around 44mtoe today. That’s in spite of a bigger population, household incomes leaping by around 200% and people owning many more electric appliances. So energy efficiency is nothing new.
Get more bang for the buck
Of course, government policy demands much more effort to hit our low carbon targets. But is there more room to improve? Studies have shown there is – with huge gains on the table if we can. If the UK boosted its efficiency by 10% by 2020 (compared to 2011) it would save the nation around £20 billion in energy costs, based on today’s prices of course.
So how do we get more bang for the buck? If I need to invest £100 in measures that end up saving me only £80 then it stops making sense. That takes us back to a bigger version of the ‘Golden Rule’ so famously advertised in the Green Deal.
Even if the investment has a good return (let’s say I invest £70 and save £80) could I have bagged a better return in jobs and economic activity if the money had been pumped into another sector? The gains would still probably justify an investment in energy efficiency – but that’s something we’ll need to come back to another day.
Backing the best horse
In the meantime how do we back the best horse? Is money better invested in homes, or the industrial and commercial (I&C) sector?There’s an argument to say energy efficiency is best deployed in I&C, where returns on investment are higher. But companies don’t vote – so expect attention to stay fixed on the domestic side.
This could be a shame as the larger opportunity is in non-domestic sphere. A policy unlocking this potential could be a real game changer but so far the non-domestic Green Deal hasn’t matched expectations. Maybe it’s time for the government to go back and give it a closer look.
Filippo Gaddo is an independent economic consultant who previously worked at Ernst & Young and the Department of Trade and Industry before it was replaced by BIS.