EST moots "auction" for energy saving projects

A novel funding system for energy efficiency schemes - based on the competitive bidding approach used to support renewable energy projects - has been mooted by the Energy Saving Trust (EST).1 Meanwhile, the Government has pledged to set up a clear environmental framework for utility regulation - but has left unresolved questions over funding for energy efficiency measures.

The EST's initial plans for a major domestic energy efficiency programme were scuppered in 1994. Clare Spottiswoode, then newly appointed Director-General of Ofgas, refused to approve a levy on gas bills to fund the Trust's work.

Electricity regulator Offer adopted a more positive approach by requiring electricity suppliers to carry out a four-year, £102 million energy saving programme under the Standards of Performance scheme (SOPS). In April, Offer confirmed that SOPS funding for energy efficiency projects will continue at a similar level to April 2000.

But the EST argues that much more is needed to deliver the Government's target to reduce emissions of CO2. It has called for a major programme - backed by total public funds of £2 billion - to cut domestic energy use by 18% by 2010 (ENDS Report 273, pp 6-7 ).

In May, the Trust published a report by consultants Ilex which advocates holding an auction for funds raised by an energy efficiency levy. Such a mechanism is being introduced to support energy efficiency schemes in parts of the USA, including California and New England. In the UK, a similar model supports renewable energy projects via the non-fossil fuel obligation (NFFO), under which developers compete for subsidy under a bidding process.

Ilex believes that a SOPS-type approach, based on placing an obligation on suppliers, "could prove to be increasingly in conflict" with fully competitive domestic gas and electricity markets being introduced this year.

In contrast, it says, an auction could promote competition in energy efficiency services, and include players other than the utilities. Moreover, the Government would retain a role in determining total expenditure and could target funding via tranches covering areas such as appliances or social housing.

Ilex accepts that an energy efficiency auction may be trickier to run than the NFFO system because of the involvement of millions of small customers and the difficulties of monitoring contractors' performance. Other key issues include whether to target energy savings or CO2 reductions, and whether to collect a levy from supply or distribution businesses. However, Ilex says that "none of these problems are insurmountable.with careful design and, perhaps more importantly, political will."

Chief Executive Eoin Lees stresses that the EST has no preference "at this stage" for any particular funding option. "The crucial point is for a workable mechanism to be established to ensure that energy efficiency is funded," he says.

The EST was disappointed that the Government's Green Paper on utility regulation, published in March, failed to discuss funding options.2 The paper side-stepped any consideration of taxation measures - which could be construed to include an energy efficiency levy. Ministers and officials have made positive noises over the case for a levy, but no decision on funding is likely to be announced until the Government consults on its climate change strategy this summer.

The main thrust of the Green Paper was to improve protection for consumers. It proposed that regulators' existing primary duties should be replaced with a single duty "to protect the interests of consumers both in the short and longer term."

However, the Government also promised to set a "clear framework" for regulators in environmental and social areas. It proposed that they should be given secondary duties to have regard to statutory guidance setting out the Government's environmental and social objectives.

The paper offers little insight into what such guidance might contain. It suggests that it could be used to promote long-term energy supply contracts - widely seen as vital to stimulate a market in energy efficiency services - together with promotion of "green electricity" trading and technical measures to help renewables projects.

However, the Government has proposed that environmental measures with "significant financial implications for consumers or for regulated companies" must be delivered by primary or secondary legislation rather than through statutory guidance.

Interpretation of this proposal is likely to be contentious. For example, the regulators would be free to approve an energy efficiency levy provided the costs were not considered significant. The SOPS scheme currently costs electricity consumers just £1 per year.

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