DETR rules out levy to fund domestic energy efficiency drive

In 1992, the former Government set up the Energy Saving Trust (EST) to oversee a major domestic energy efficiency programme. Most of the cash was expected to come from levies on gas and electricity consumers - with total annual funds rising to a peak of some £300 million.

In 1994, however, Clare Spottiswoode, the newly appointed head of gas regulator Ofgas, refused to sanction a continued levy on gas bills. She also declined to set mandatory energy efficiency "standards of performance" (SOP) for gas suppliers.

Electricity regulator Offer took a more positive approach. It required electricity suppliers to carry out a four-year energy efficiency SOP scheme. The scheme costs some £25 million annually - about £1 per customer - and is overseen by the EST.

The performance and cost-effectiveness of the SOP scheme exceeded initial projections, delivering savings to consumers of £4.21 for each £1 spent. This year, the National Audit Office reported favourably on the environmental and consumer benefits of the scheme - and Offer confirmed that funding will be made available for a further two years to 2000.

The EST has continued to press for a major efficiency programme backed by total public funds of £2 billion (ENDS Report 273, pp 6-7 ). However, its hopes of securing a levy are dashed by an "informal discussion paper" on energy efficiency funding, circulated by the DETR at the end of October.

The paper says that a levy would effectively be a tax - and as such "would not be in line with Government's policy of no increased tax on domestic fuel and power." Ministers have been painted into a corner by Labour's successful attack on the last Government's bid to apply full-rate VAT on domestic fuel.

Instead, the DETR proposes to impose an obligation on energy suppliers or distributors to deliver agreed energy savings. Ironically, consumers would still meet the costs of such a scheme - but because they would do so indirectly the political embarrassment may be less acute.

The DETR suggests that an obligation mechanism would build on the existing electricity SOP scheme, and extend it to the gas market. However, it would have to be introduced by primary legislation rather than under the regulators' discretionary powers, in line with the recent White Paper on utility regulation (ENDS Report 283, pp 39-40 ).

A key question is which companies should be subject to an obligation. The current SOP scheme applies to the public electricity supply companies, which have a close relationship with their customers. However, in the forthcoming liberalised markets it will prove tricky to apply obligations equitably to existing and new entrant suppliers. Moreover, customers will be free to switch suppliers at 28 days' notice - threatening to undermine energy efficiency measures with relatively long paybacks.

The DETR therefore appears to favour imposing obligations on the gas and electricity distribution companies - a potentially simpler option because of the fixed number of participants. A new regulatory mechanism would be needed to ensure that the costs passed on by distributors to supply companies and customers are reasonable.

Ministers would be responsible for setting the overall level of obligation. The DETR suggests itself or the new combined energy regulator - but not the EST - as possible candidates for overseeing implementation. Key tasks would include setting obligations for individual companies, setting criteria for eligibility and assessing, monitoring and enforcing the scheme. Penalties for non-attainment of obligations could include fines and, in severe cases, withdrawal of licences.

Other ideas floated in the paper include the possibility of trading SOP savings between companies to minimise compliance costs. The DETR also sees "no reason in principle" why companies' SOP programmes need be restricted to savings of gas or electricity alone, as measures such as insulation will reduce consumption of both fuels. But it suggests that savings of gas and electricity towards SOP targets should be weighted to reflect the different carbon content of the two fuels.

Finally, the DETR invites views on whether a future obligations-based system should be extended to cover large energy users. So far, SOP programmes have focused on domestic and small commercial users. However, any move to extend the scheme to industrial users would need to take account of energy efficiency obligations under the integrated pollution prevention and control (IPPC) Directive and the impact of any future industrial tax.