Post date: Tuesday, 17th July 2012

UK could cut electricity demand by 40%, says McKinsey

 
Greg Barker, Minister of State for Energy and Climate Change

Greg Barker, minister of state for energy and climate change, at the launch of the Energy Efficiency Deployment Office, which commissioned the research, in February.

The UK could decarbonise its electricity supply system at a much lower cost through greater demand reduction, according to new government-sponsored research.

A huge total of 40%, or 155 terawatt-hours, of present demand could be eliminated by 2030. Reducing demand by such an extent would mean that many of the more expensive or risky forms of generating electricity currently being considered could be put on the backburner.

The figure comes from a draft report, 'Capturing the full electricity efficiency potential of the UK', commissioned from McKinsey and Co., that has been published by the Department of Energy and Climate Change for peer review.

The analysis says that current Electricity Market Reform proposals would only realise 54 terawatt-hours (TWh), or around one third of the full potential savings. Further measures would therefore be required to capture the remaining savings.

The review concentrates on the three largest categories of abatement measures per sector, which it says could together deliver 127 TWh of savings, or 80% of what is possible.

In the residential sector, these measures include better insulation, energy-efficient lighting and more efficient appliances, which could achieve 58 TWh reduction. Three quarters of this demand reduction is already expected to be achieved through current or planned policies, primarily in increased appliance efficiency.

In the services sector, the measures include better insulation, lighting controls and heating, ventilation and air conditioning (HVAC), which could achieve 45 TWh reduction. 15% of this is expected to be achieved through current or planned policies.

In the industrial sector, the measures include pump, motor and boiler optimisation, totalling 24 TWh of savings, of which only about 5% is expected to be captured through current or planned policies.

The researchers reckon that by 2020, 115 TWh could be saved, of which 60% is expected to be achieved by current policies.

Catch-22

But the energy efficiency sector seems to be caught in a Catch-22 situation. Because it doesn't seem worthwhile for many business users to invest in energy efficiency, the market has not matured. However, it won't mature unless there is sufficient demand. It is therefore up to the government to nurture that demand.

For example, a green finance provider said that energy service companies have to bring in people from outside to provide quality advice on energy efficiency for clients. A utility company said that even if one could save 20% of an annual average bill for an SME, it still wasn't worth the initial investment. This was because of the “high transaction costs... such as closing the business for two days".

The research included interviews with key stakeholders, and uncovered 11 similar barriers to capturing the remaining demand reduction potential. They range from market-based mechanisms to regulatory ones like taxes and obligations on suppliers.

It found that while policy is quite good at addressing barriers in the residential sector, those in the service and industrial sectors are less well addressed.

Moreover, the complex and constantly changing policy landscape results in confusion and delays investment in energy efficiency. Consequently, utility companies and many intensive industrial users largely focus on buying new renewable energy sources to reach their carbon targets.

One commercial user said: "The biggest barrier is the shifting sands that the Government has introduced by changing the goal posts (e.g., solar FiTs). This curtails investment. The carbon reduction landscape is extremely complex and I would like to see that simplified."

A utility company representative offered the following insight: "We would appreciate more visibility and stability in terms of policy. CRC [the Carbon Reduction Commitment] has changed significantly and we still don’t know what it will look like tomorrow."

Payback periods need to be more favourable to attract the initial investment, which is often perceived as being too high. The commercial and industrial sectors expect payback periods of around two years, but investments on average have a payback period of around five years.

In the residential sector, it is the rental subsector which needs the most attention. The review says that changing people's behaviour remains a significant opportunity here, and will capture as much as 15% of savings, though this proportion will diminish as technical innovations spread.

In the commercial sector, 61% of commercial space is leased, and 75% of the corporate sector outsources its facilities management requirements. In general, neither of these presently offer incentives for reducing energy use.

While electricity-intensive users do focus on demand reduction, the majority of users, which represents 60% of total industrial electricity demand, are less likely to achieve the potential opportunities.

One industrial user pointed out that their investments in biofuels and waste fuels reduces their carbon emissions but increases their electricity usage, while a utility company commented that 90% of its energy efficiency programmes were directed toward saving gas and electricity.

"There’s a mass of different assistance in energy efficiency areas," said one electricity-intensive user. "It's bewildering what’s on offer. I have never heard of the Enhanced Capital Allowance. Maybe that could help some of our business cases."

Yet this magazine, along with other government agencies, has been offering information about Enhanced Capital Allowances and similar measures for at least ten years.

Barrier-busting options

Amongst the policy options considered to stimulate the market are the use of tradable certificates in energy efficiency, as piloted by Connecticut Energy Saving Certificates in the United States. In that case, suppliers are obliged to meet 4% of electricity supplied through the purchase of the certificates.

Also in the States, an EPA Portfolio Manager is an online benchmarking tool for commercial buildings which helps tenants and buyers find the most efficient solution to their problem. Participation in a similar scheme here could be either voluntary or compulsory.

The ISO New England scheme is a forward capacity market which allows demand-side resources to compete with generation. Capacity payments provide sponsors with the incentives and stability to encourage investment in energy efficient products. Implementing a similar scheme in the UK would involve expanding the role of the National Grid in order to manage the market.

Finally, the report considers a scheme in Texas managed by utilities using two types of incentives: which allow standard offer programs consumers to choose the most cost-effective measures; and market transformation programmes would incentivise specific efficiency measures that need help to overcome structural barriers.

The report vindicates findings by campaign groups like Zero Carbon Britain and Greenpeace, which have themselves previously floated scenarios which contain similar levels of demand reduction in order to arrive at a 100% renewably-powered Britain by 2050.

DECC is welcoming feedback on the report, which is available on its website.

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