Regulating energy suppliers to deliver energy demand reduction

Dr Nick Eyre, Environmental Change Institute, University of Oxford 

Regulation of energy companies to provide energy efficiency improvements for their customers has a long history, but the UK has led the way in using energy efficiency obligations on energy suppliers to households in fully liberalised markets through the Energy Efficiency Commitment (EEC), now renamed the Carbon Emissions Reduction Target (CERT).  This has increased deployment of cost effective energy efficiency technologies and therefore reduced energy demand growth.

EEC is widely seen in the UK as a successful policy and has influenced recent developments in other countries.  However, it has limitations.  The obligation structure does not allow actors other than energy suppliers to own EEC credits, and therefore has not generated a transparent market in energy efficiency.  Mechanisms that allow removal of the volume sales driver for energy suppliers in regulated monopoly markets are not replicable in liberalised markets.  And energy efficiency obligations do not seek to address the growing demand for energy services.  So EEC has not fundamentally changed energy supplier business models, nor has it delivered incentives to consumers to change their ‘in use’ energy behaviour.

In the context of the UK Government target of reducing emissions by 60% or more by 2050, a number of bolder policy interventions in household energy supply have been suggested.  These include more liquid markets in energy efficiency certificates, capping supplier carbon emissions and tradable permits for individual consumers.

This paper sets out in more detail this historical context of the regulatory framework for household energy efficiency.  It describes the rationale for the suggested policy changes and concludes that all have the potential to deliver on the primary goal of reducing carbon emissions.  It also considers a wider range of objectives – economic, social and political – against which Governments are likely to judge such policies and compares each option against these criteria.  It concludes that none of the suggested policy options is unproblematic, as each potentially conflicts with some of the widely held (but often unstated) assumptions about energy policy, such as the benefits of liberalised energy markets, consumer freedom and low cost commodities.