carbon limited

In Whitehall, advocates of PAYS and an expanded suppliers obligation are clashing over which mechanism should be used to refurb existing housing. This is the second post of two. If you missed it, read the first part here.

Here’s a quick summary of the two mechanisms:

The holy grail of refurb, PAYS uses the value of future energy savings to help pay for the capital cost of refurb. There was a lot of excitement generated by PAYS in 2009 culminating in the UKGBC steering group (PDF), which itself inspired a number of pilots. But it’s dubious whether any of the pilots should, strictly speaking, be considered PAYS. And since the New Year the whole movement seems to have stalled.

When I first came into contact with PAYS for UK retrofit, I was quite sceptical  about its value. Following a piece of work we did for the Energy Efficiency Partnership (public version should be out shortly, I’ll post it here), my views have changed. PAYS may not be a silver bullet but it’s an excellent way of accessing the value created by retrofitting for energy efficiency.

The supplier obligation refers to the requirement for electricity and gas suppliers over a certain size to put money towards energy efficiency measures. The current incarnation is CERT, which runs until the end of 2012.

The SO is mainly a tool for Government to socialise cost of energy efficient refurb without increasing taxes. You won’t see it on your energy bills, but the cost is built into each kWh of electricity and gas you consume. I don’t want to get all Mail on Sunday about it, but basically it’s a tax by another name (I couldn’t bring myself to write the phrase stealth tax).

The Government hope that by imposing a carbon saving requirement on energy companies, they’ll find the lowest cost means of saving carbon. And it’s worked pretty well for low hanging fruit like cavity wall and loft insulation, where the cost is around £17/tonne.

The big problem is that we’re now talking about a hell of a lot more than rolling out mineral wool in a loft. Making some reasonable assumptions about sharing of value and cost of borrowing, the costs are probably more than £250/tonne (see the EEPfH report). Or looked at another way, it could add around £500 to every household’s annual energy bill.*

More importantly it also involves a radical reduction in energy use and a fundamental transformation of the way we use energy. As I wrote in part one, we’re asking every existing home to exceed the very high performance standards that won’t even be asked of new build until 2016.

Here are my problems with using the SO to fund retrofit:

1. It’s unfair – everyone pays, while only a small proportion of households get a retrofit in a given year
2. It’s inappropriate – you’re asking the big energy companies to transform the energy market when their mission is the diametric opposite
3. It’s a false market – government loves to let the market solve problems (quite right too!) but the supplier obligation isn’t a market, it’s just regulation. Large energy companies may be motivated to find the least cost option but not where the results would threaten their core business. This includes opening up the energy market to new players.

PAYS on the other hand only affects those whose houses are refurbed and should keep bills steady rather than increase them. And done correctly, it could create a very large market of small and medium businesses, spawning competition and innovation.

The problem with PAYS? First, it won’t solve the whole issue – there isn’t enough value in the savings to pay for all the measures, but it does do a lot to fill the hole.

Second, and more importantly, it requires changes to primary legislation. To work properly, it needs Government to step in and overhaul the antiquated property laws that have kept PAYS hamstrung. And this is something they seem absolutely terrified of doing.

And so, increasingly desperate and lacking backbone, Government may choose to rely on a few large companies whose primary interest is to maintain the status quo to deliver the zero carbon retrofit of all UK housing. It’s a recipe unlikely to result in success.

*Assume £13bn spent each year spread across 26m households.