Energy Efficiency, Smart Meters and Climate Policy

The Chief Executive of the UK’s electricity and gas regulator, Ofgem, has published a prominent article in The Daily Telegraph reassuring the public about the Smart Meter programme, and stressing its potential benefits. Unfortunately, Ofgem is no longer the independent consumer champion that it once was, and the statement cannot be taken at face value.

It is a commonplace of conventional thinking in climate policy that improvements in the conversion efficiencies of processes and devices ranging from industrial techniques to engines to domestic boilers to washing machines will deliver reductions in total energy consumption. The following chart from the International Energy Agency, taken from Dr Birol’s Melchett lecture last year (discussed on this blog here), is perhaps the locus classicus for this view:

Figure 1: Global CO2 emissions reductions in the central and 2C scenario by technology. Source: International Energy Agency (2017).

The light blue wedge representing “energy efficiency”, a misnomer since the IEA actually means energy conservation (i.e. a reduction in the consumption of energy), accounts for about 40% of emissions reductions in 2040.  But as discussed elsewhere on this blog (“Energy Efficiency: Lessons from the Green Deal and Energy Company Obligation”) practical, real-world experience of energy efficiency policies is very discouraging. Such policies don’t work as well as forecast, either because they are not adopted or because the claimed efficiencies don’t materialise (Shortfall), or because the hoped for conservation of energy is offset or more than offset by an increased use of that process or device or by the use of of the saved energy for another purpose (Rebound and Backfire). Indeed, there is a steady stream of information reporting negative practical experience relating to supposedly efficient devices, with The Times alone publishing two in the last few weeks (“Mis-sold boilers cost homeowners hundreds of millions in extra bills”; “Ignore the energy ratings on TVs and washing machines”).Nevertheless, without any sound theoretical or empirical justification, the International Energy Agency and many other organisations persist in their use of assumed “conservation” to deliver the projected emissions savings. In spite of that apparent confidence, it is notorious amongst analysts that the IEA’s 40% figure is unreasoned, and is simply the residual after all the other options for emissions reductions have been applied to the plausible maximum. Faced with the limits to even optimistic assessment of potential for renewables, and the knock-on devastation of prospects for nuclear and gas (which might in an otherwise undistorted market actually deliver affordadable substantial emissions savings), the IEA simply opted to square the circle by arbitrarily suppressing world demand for energy in its model, camouflaging this casual dirigisme with the cynically deployed term “efficiency”. One wonders how Mr Birol, the Executive Director of the IEA, has the nerve to stand in front of this slide.Improvements in energy conversion device efficiency occur spontaneously in any economy – consumers have every incentive to adopt genuinely better engines and appliances – and the confiscation of this wholly desirable process by governments seeking to save face is one of the more depressing aspects of contemporary energy and climate policy. Something very similar is happening in relation to “Smart Meters”. There is nothing inherently objectionable about sophisticated Information Technology at the metering point, with the aim of allowing the consumer to take advantage of cheaper electricity prices if available. But it is very doubtful whether the consumer advantage would currently be sufficiently strong and widespread to motivate the spontaneous adoption of such meters on the scale that government requires in order to reschedule household consumer demand to facilitate the integration of uncontrollable renewable generation. Some consumers might indeed judge them to be worthwhile, but it is very unlikely that 11 million households, nearly half of the UK total, would have done so to date without having their minds made up for them by the zealous administrators of the Department of Business, Energy and Industrial Strategy (BEIS) who have put considerable regulatory pressure on suppliers to push Smart Meters at their customers with some fairly hard selling.Is this actually good value? Government seems to be nervous of the public response, and yesterday (12.08.18) in a pre-emptive strike sent Mr Dermot Nolan, Chief Executive of the regulator for the gas and electricity markets, Ofgem, into the pages of the Daily Telegraph to support the policy. Mr Nolan tells us that the “roll-out” of Smart Meters is one of the most significant “upgrades” to domestic energy in decades; and that Ofgem is “working with” Government to “ensure all consumers reap the benefits today and in years to come.” Some of these benefits are complicated. “Increasingly cheap” renewables don’t always arrive when required, and “In the past”, Mr Nolan remarks, that would have meant consumers footing the bill for higher system costs, but thanks to Smart Meters consumers can now say goodbye to  “expensive back-up power station” misery. Only, as it turns out, it's not quite goodbye. In one of several faint twinges of conscience that give the game away throughout his article, Mr Nolan admits that smart meters will only “save on some of those costs” not all of them. Since he provides some numbers we can arrive at rough estimate of the magnitude. He writes:

According to research from Imperial College, having a more flexible energy system, supported by smart meters, could save Britain between £17bn and £40bn by 2050. That means lower energy bills for all homes and businesses.

2050 is 32 years off, so the saving comes to between £500 million and £1.25 billion per year on average.  There are about 26 million households, so even assuming that all the saving is felt directly by those households, the benefit would amount to between £20 and £50 per household per year.While welcome, that saving makes hardly a dent in the cost of the renewables policies. In 2014, the last time that government released detailed estimates of price and bill impacts (Estimated Impacts, 2014), the then responsible department, the Department of Energy and Climate Change (DECC) projected that in 2030, and in its central fossil fuel price scenario subsidies to renewables, the capacity mechanism needed to secure supply in the presence of flaky wind and solar, and the carbon price would together add about £220 a year to the average household electricity bill. In the low cost fossil fuel scenario, this figure was projected to be £272 a year. No wonder that Mr Nolan’s conscience was twitching.Furthermore, DECC estimated that Smart Meters would save consumers about £19 per year, close to the lower figure suggested by the more recent Imperial College study cited by Mr Nolan. However, and very curiously, DECC estimated that only £5 per year of that saving would be delivered by “price effects”, in other words the ability to take advantage of lower prices at offpeak hours and at times of wind and solar surplus, which Mr Nolan presents in effect as the Unique Selling Proposition of the smart meter. The bulk of the saving, £14 per year, was expected to be accounted for by the “energy efficiency” effects of Smart Meters, which of course means lower demand. DECC’s analysis in Estimated Impacts suggested that this would amount to a reduction in consumption of something like 100 kWh per year, a 2% cut.All in all, close reading of Mr Nolan’s statement, in conjunction with DECC’s 2014 analysis, makes it clear that Smart Meters offer only very modest benefits at best, and presumably few people would have adopted these devices spontaneously on the basis of a truthful prospectus. Why then is the regulator colluding in the administrative push for deployment? If read with a knowing eye on the legislative context, Mr Nolan’s Telegraph statement actually explains the situation. He writes:

“Ofgem, whose sole purpose is to protect the interests of energy consumers, is working with the Government to help deliver the smart meter roll-out. It’s our job to make sure that energy suppliers meet their obligations in offering and installing them.”

But, a reader might think, if it is truly Ofgem’s sole purpose to protect the consumer interest, why is the regulator not warning consumers that the benefits from Smart Meters are small at best, and that mileage may vary, indeed that it may vary to the extent that for many individual consumers there may be no benefits at all? Can Mr Nolan be speaking in bad faith? Of course not, but his understanding of the term “consumer interest” in this sentence is not quite what the unsuspicious reader would take it to be. Mr Nolan is thinking, as is his duty, of Ofgem’s remit as it is defined in Ed Miliband's Energy of Act of 2010 (discussed in more detail in an earlier blog), where the term “consumers” is taken to refer to both present and future consumers, and “interest” is “taken as a whole” and to include “the reduction of gas-supply/electricity supply emissions of targeted greenhouse gases”.This represented a very significant revision of Ofgem’s remit, as previously defined in the Utilities Act of 2000, and in effect made the regulator part of the climate policy delivery mechanism. Smart meters may not save a consumer much money, if at all, but they are an integral part of the renewables policy, which is itself a key element in the climate policy, and by definition in the long term interest of present and future consumers. As such, Ofgem cannot speak out against smart meters, and indeed must “work with government” to deliver that policy.