Norman Lamont’s decision to impose VAT on domestic fuel and power will
force many people to take a second look at how well their homes are insulated,
and whether the next fridge they buy should be more energy efficient. In
line with government thinking throughout the 1980s, the Chancellor of the
Exchequer has left the onus for improving energy efficiency – and the expense
– with individaul consumers. But it need not be so.
Demand-side management (DSM) is a technique advocated by environmental
groups and energy economists in the US that gives responsibility for energy
conservation to electricity suppliers. In the US, it has saved money, created
tens of thousands of jobs and reduced pollution. Environmental groups such
as Greenpeace and the Association for the Conservation of Energy say Britain
is now in a position to exploit DSM. Its future depends on whether it receives
political backing. Meanwhile, in the heart of the Nottinghamshire coal
belt, there is hope that a switch to DSM could provide jobs for some of
the 30 000 miners who face redundancy because of pit closures.
DSM, or least-cost planning, turns electricity com- companies into suppliers
of energy services, rather than just sellers of electricity. If giving out
energy-efficient bulbs, efficient consumer goods or thermal insulation to
consumers is cheaper than building new power stations, then it is the least-cost
option and the company will improve its balance sheet. It will also reduce
its output of pollutants.
According to Ann Davison of the Oxford Institute of Energy Studies,
DSM was developed in California in 1975, in response to price rises after
the first oil crisis, and increasing environmental objections to the building
of power stations. Electricity companies quickly became adept at stabilising
soaring demand, and then reducing it. They offered free energy audits to
large consumers and a range of opportunities for ordinary customers, such
as paying part or all of the interest on loans for thermal insulation.
By 1987, as many as 59 power companies across the US were offering rebates
to customers to encourage them to buy high-efficiency refrigerators. In
1988, South California Edison handed out 450 000 energy-efficient light
bulbs to customers with low incomes, saving 8 megawatts of electricity capacity.
Elsewhere, the Tennessee Valley Authority handed out more than $250 million
in interest-free loans to improve home insulation.
In the US, power companies act as both local distributers and suppliers
of electricity. The payback they see from DSM comes in two forms. First,
by deciding not to build new power stations they save on capital investment
and interest payments on loans. In addition, the local boards which set
electricity prices allow the power companies to pass on to consumers all,
or a proportion of, the money they spend on energy-efficiency programmes.
In many cases, the boards prevent the companies passing on the cost of new
plants, giving them an added incentive to concentrate on reducing demand.
The Worldwatch Institute, an environmental organisation based in Washington
DC, estimates that by 1988, conservation measures taken by the six biggest
American power companies had removed the need to build 7.24 gigawatts of
generating capacity, or roughly six plants the size of Sizewell B. Between
1982 and 1990, annual spending on new plants across the US declined from
$50 billion to $17 billion.
Last December, Green-peace published a study of demand-side management
in the US carried out by the Boston-based firm of analysts, the Goodman
Group. It estimates that power companies spend $3.1 billion a year on DSM,
and that every dollar invested in DSM avoids spending of between $1.5 and
$1.75 on building new plants.
The Goodman Group found that, up until now, DSM has created 80 000 new
jobs. Directly, DSM generates jobs in home insulation, double glazing and
other areas of the construction industry. But reduced fuel bills give companies
more money to spend elsewhere, which leads to an indirect increase in jobs.
The study estimates that DSM is roughly 70 per cent more effective as a
means of creating jobs than constructing new power stations.
Betty Krier, the report’s author, says American power companies spend
only about 1 per cent of their turnover on energy efficiency so there is
plenty of scope for expanding DSM schemes. ‘Investing in electricity efficiency
is a major focus of US utilities with expenditures set to reach between
$6.7 billion and $10 billion per annum by the end of the decade. Our analysis
shows that the net employment benefits could increase from around 80 000
jobs today, to approaching 500 000 as a result.’
DSM is not just a sophisticated device for developed economies, but
a general principle for electricity provision. For example, in 1989, a study
by the Lawrence Berkeley Laboratory in California calculated that conversion
of just 20 per cent of India’s lighting to efficient compact fluorescent
lamps over ten years would avoid the need to build 8 gigawatts of new capacity
and save the country $450 million – even if the bulbs were given away free.
Why then has DSM not figured in the British debate about electricity?
Before privatisation of the electricity supply industry in 1990, the monopoly,
state-owned, Central Electricity Generating Board (CEGB), had a statutory
duty to meet whatever demand was needed. While it could encourage consumers
to use power at different, more convenient times of day, it had no obligation
to reduce consumption. The local distributing companies were also part of
Privatisation split up this close relationship. Regional electricity
companies, which took control of local distribution, were given separate
identities from National Power and PowerGen, which emerged from the old
CEGB. While giving regional companies permission to build their own power
stations brought the British system closer to the American set up, there
was no increase in enthusiasm for DSM.
Instead, the regional companies sought to decrease their reliance on
National Power and PowerGen by building their own gas-fired plants. The
results are now well known: last year, National Grid forecast that by 1998
Britain will have 52 per cent more generating capacity than it needs.
According to Steve Thomas, a senior researcher at the Science Policy
Research Unit at the University of Sussex, by aiming to reduce electricity
prices through market forces, the government encouraged the building of
power stations: the opposite of the trend in the US during the 1980s.
But there are signs of renewed interest in DSM. There will soon be no
scope for building more power plants, so regional companies will need another
way to increase their profits. One way is to minimise the need to upgrade
local distribution networks by reducing the demand for power.
Ken Spiers, head of environmental systems at East Midlands Electricity,
says his company ‘has been dipping its toes in the water of demand-side
measures’. Faced with the prospect of having to increase the capacity of
a substation serving Great Gonerby in Lincolnshire, East Midlands attempted
to reduce consumption in the area. Its aim is to smooth out peaks in demand
by encouraging people to use electricity at times when consumption is low.
Last May, the company introduced a new tariff system, making electricity
cheaper at times of low demand, and told consumers when to use power and
when to switch off.
But the prospects for such schemes are limited because DSM only makes
sense when the distribution system is running close to its full capacity,
or when new investment is needed. To some extent regional companies can
balance their spending on energy-efficiency programmes by buying less electricity
from other suppliers such as PowerGen. But the problem still exists that
regional companies only make money if they sell electricity. To increase
the number of DSM projects, the companies would have to be allowed to pass
on investments they make in energy efficiency to their customers.
Such a decision is in the gift of the Office of Electricity Regulation
(Offer). The legality of a change of this type remains unclear, and the
messages coming from the head of Offer, Stephen Littlechild, are mixed.
In a recent report on ‘economic purchasing’, a policy that forces regional
companies to buy electricity at the best price for consumers, Littlechild
wrote: ‘It would be in the spirit of the economic purchasing conditions
for RECs (regional electricity companies) to explore the potential for demand-side
management measures.’ But, despite these encouraging noises, Offer has
so far rejected regional companies’ demand for an efficiency or ‘E’ factor
to be included in the equation they use to calculate electricity charges.
According to Stewart Boyle, director of energy policy at Greenpeace
International, the door for energy efficiency has just started to open in
Britain. ‘The only thing that now stands between the situation today and
the spending of millions of pounds on demand-side management is a change
in the regulations,’ he says. Boyle’s optimism stems in part from the setting
up of the Energy Savings Trust, to which all the regional electricity companies
and British Gas are contributing money. The new body, which was founded
with government blessing to promote ways of saving energy, has £6
million of industry money to fund projects. Boyle argues that if Offer obstructs
new schemes introduced by the trust it will look very bad.
Boyle points out that consultants to Offer report that to fund a reduction
in demand of 6 per cent through DSM would need just 0.1 pence per kilowatt-hour
to be passed on to consumers. For an average domestic customer, this would
mean an increase of a £4 a year on their electricity bills, but it
would generate global savings of £1.1 billion per year.
Andrew Warren of the Association for the Conservation of Energy (ACE)
agrees that ‘the Energy Savings Trust is the best way to unlock energy conservation’s
enormous potential, but it needs more money; at least £250 million
a year’. Analysis by ACE estimates that spending on DSM of £15.5
billion over ten years would reduce emissions of carbon dioxide by 264 million
In the offices of Newark and Sherwood District Council, hope exists
that energy efficiency projects could help some of the miners facing redundancy
as a result of the regional companies’ increasing independence from PowerGen
and National Power. Chief architect David Pickles started the Boughton
Village 2001 Project in a district threatened with more pit closures than
any other. His target is to reduce the amount of carbon dioxide emitted
in providing heat and light for Boughton to 60 per cent of its 1989 level
By improving energy conservation, Pickles thinks he can find work for
248 men for a year, save the NHS £1.5 million over ten years from
cold-related diseases and turn this unemployment black spot into an energy-saving
example to Europe.
Because it is designed to increase energy efficiency, DSM would encourage
more of these projects. For the same reason, Boyle says managing demand
is more effective than Lamont’s VAT increases. ‘Increasing VAT is a revenue-raising
method . . . It will affect only those with access to capital and its effects
will be fairly small,’ he says. As far as the amount of energy and carbon
dioxide saved, Boyle says DSM is ‘three or four times more cost effective
than the very crude method of increasing VAT’.
Chris Cragg is editor of FT Energy Economist.