IAEEL newsletter 1/93

Britain: Barriers and Opportunities

British electric utilities have yet to become active in promoting energy efficiency. One reason is that utilities are not allowed to recover program costs and lost revenues through their tariffs. But even making this possible would not be a remedy in this case.

In 1990, the electric utility industry in the UK was privatized and the electricity market deregulated. At the same time, the Office of Electricity Regulation, Offer, was set up to supervise the increasingly competitive utility market.

All generating utilities in England and Wales sell electricity to a pool, from which the 12 Regional Electricity Companies (RECs) can buy the electricity that they distribute to their end-use customers or to smaller distributors within their areas. The utility-owned National Grid Company is in charge of the transmission grid. Scotland is an exception, with its fully vertically integrated utilities.

However, the market is not completely deregulated yet: Until 1994, utilities will only be allowed to compete for customers with a load of 1 MW or more. In 1994, franchises covering all customers with a load of 100 kW or more will be ended. By 1998, the entire franchise system will be phased out, and RECs will have to compete for all their customers, including residential ones. In practice, this means that utility A can use the distribution grid of utility B to sell electricity within the service territory of utility B. (In Europe, Sweden and Norway are presently introducing similar legislation.)

The British government had numerous motives for deregulating the market. For instance, it is hoped that competition in electricity generation and supply will be stimulated, and that this eventually will lead to an efficient and profitable utility industry. According to economic theory, this should lead to lower energy costs for consumers. Moreover, it is argued that by deregualting the electricity market (and the gas market), energy prices will be more transparent, thereby reflecting the real costs of new supply. Thus, utilities and their customers would choose to invest in energy efficiency where this is more profitable than investments in new power supply.

LUKEWARM INTEREST
In some areas, especially where the distribution grid needs upgrading and where electricity is competing with fuels, utilities are increasingly active in promotion demand-side management (DSM). (For an example, see article Holyhead Saves a Megawatt, IAEEL Newsletter 1/93.) However, many observers say that most British utilities have shown little interest in powerful DSM-activities. Thus, DSM often has been a way for a utility to improve its image, rather than actually reducing electricity demand. In the words of a utility official quoted by a market researcher: "all we need to do is to be seen promoting energy savings to Joe Public."

The present national overcapacity in generating facilities also helps to explain why utilities aren't more active, but there are also structural barriers. Last spring, in an attempt to come to grips with these barriers, Offer obtained the views of organizations from a wide range of sectors.

EFFICIENCY BARRIERS
There are a lot of "classical" explanations as to why utility customers don't do more to increase energy efficiency on their own. For example, many customers demand a very high rate of return on their investments; they may face capital constraints; the risk of having to leave their house before the investmnent has paid for itself. Here, many argue, utilities should fill the gap by introducing DSM measures that help their customers overcome these barriers. And yet they don't.

Many respondents argued that for numerous utilities the present regulatory system tends to discourage DSM activities. Utilities are, for instance, not allowed to recover program costs, nor are they allowed to recover lost revenues. Some respondents argued that the risk of short-term revenue losses would deter utilities from introducing DSM, even if they could make gains in the long run. The Confederation of British Industry wrote: "Since there is at present no … arrangement for passing through the costs of demand side investment, the facility to pass through electricity purchase costs in full clearly distorts the choice between supply and demand side investment." The utility Scottish Hydro also asserted that disincentives would have to be removed before it would "willingly adopt energy efficiency measures".

According to many respondents there is not merely a disincentive for DSM; the present distribution price formula actually encourages utilities to sell more electricity.

SOLUTIONS AND POSSIBILITIES
One of the most frequent proposals discussed is a so-called E-factor that would allow utilities to recover program costs and lost revenues. However, Offer and others justly point out that the E-factor would only work until the end of franchise. Thereafter, it would be of little help to recover short-run costs. Any utility would fear unit-price increases resulting from DSM programs since high unit prices would be a disadvantage in competition with other utilities.

Many utilities also argue that an E-factor would be unfair because customers would have to pay even if they hadn't benefitted from DSM programs or already had made efficiency investments on their own.

DSM on a contractual basis with individual customers, such as leasing schemes, could be one way to overcome both these problems, but the impacts of such arrangements probably wouldn't be as powerful as those of more general programs directed at large consumer groups.

So, what's the solution? In 1994 and 1995, Offer will be reviewing the distribution price formula and will consider possibilities for changing the present regulatory regime. Meanwhile, Offer has suggested that certain energy-efficiency expenditures be allowed within the supply price control of the RECs.

Offer also wants to use its regulatory power to ensure that decisions regarding whether to invest in increased supply or reduced demand will be assessed on an appropriate level. Other measures being considered are to reinforce the utilities' present "code of behavior" (dealing mainly with information issues) with a set of minimum energy-efficiency standards concerning their customers.

The recently established, all-utility financed Energy Saving Trust is another means of achieving reduced energy consumption. The trust will act as an impartial body to inform and lobby for energy efficiency.

There is no doubt as to the great potential for reducing UK electricity demand, and a consultancy report to Offer concluded that DSM was more profitable than new electricity supply in every case examined. The government-sponsored "Helping the Earth" campaign alone certainly can't do the job. But if Offer uses its regulatory power as intended, the prospects for an energy-efficient UK should brighten.

For comments see letters.

Nils Borg

For more information, contact:

Offer, Consumer Affaris
Hagley House, 83-85 Hagley Road, Edgbaston, Birmingham B16 8QG, UK
Tel: +44 121 456 2100
Fax: +44 121 455 6277

"Blue Peter" Helps CFL Sales

Planning CFL programs has not been easy in the UK. Lamp manufacturers and the utility industry have had a hard time coming to a consensus on the benefits of CFLs. Now, a childrens' TV program helps boost sales.

Since 1989, sales of compact fluorescent lamps (CFLs) have risen by 30-35% per annum in the UK. In 1991, total sales of integral CFLs amounted to appr. 1.5 million units. By 1992, sales of integral CFLs exceeded 2 million units, an increase of more than 30%, according to the British Lighting Industry Federation (LIF), covering the four major brands in the UK: Osram, Philips, GE, and Sylvania.

These figures might seem impressive - and they are to a certain extent. However, when Britain is compared with other highly industrialized Western European countries, the picture changes. For instance, a recent market survey in the UK indicated that only 10% of all households had an average of 1.5 CFLs installed. In the Netherlands 50% of all households had an average of three lamps installed (1992). The Netherlands is the country with the highest penetration rate in the world, but the comparison with the Netherlands is interesting in other ways as well.

First, a large share of the CFLs sold on the UK market are magnetically ballasted, whereas CFLs presently sold in the Netherlands are almost entirely electronically ballasted.

Second, utility industry attitudes on a national level differ greatly between the Netherlands and the UK. Planning CFL campaigns in the UK hasn't been easy. Granted, some electric utilities have shown a very positive attitude towards CFLs and have promoted them in their own electric appliance stores. However, in Europe lots of confusion about lamp sizes, lumen output, economic benefits, power quality, etc., has hampered sales, and the utility industry as a whole has not always been willing to address these problems. "RECs were bringing up problems with CFLs because they did not like the idea of promoting them…", commented one official at the Office of Electricity Regulation in early 1992.

By contrast, Dutch utilities coordinated CFL program policies and CFL requirements on the national level more than two years ago. (See IAEEL Newsletter 1/92)

However, Mr. Ernest Magog of LIF is optimistic about the future of CFL sales as households become increasingly aware of the environmental benefits: "Not long ago, CFLs received extensive coverage over several weeks on the immensely popular childrens' TV program "Blue Peter", with 5.5-6 million viewers." In the program, children were asked to do energy audits at home. The government sponsored the audit campaign, and 1.5 million leaflets with an "audit form"" were distributed. The first 2 000 children who sent in a filled-in leaflet obtained a free CFL. 55 000 leaflets were submitted. Blue Peter also announced a competition for designing a character which could be used to promote CFLs. In this competition, over 90 000 entries were submitted! CFL sales reportedly increased directly.

Moreover, the problems arising from confusion about CFLs - a big issue for a long time - have, happily, now been solved: The UK Energy Efficiency Office (at the Department of the Environment which is running the campaign "Helping the Earth Begins at Home"), the LIF, the Electricity Association (the British Utilities' Association), and the Retail Consortium, which represents the UK's main department store chains, have jointly produced a consumer leaflet on CFLs. A revised version incorporating the winning design from "Blue Peter" competition will be distributed regional electricity company showrooms in the autumn, and at the Ideal Home Exhibition which is bound to attract masses of visitors.

As for the commercial sector, not many numers are available. Electronic ballasts have a penetration rate of only a few percent. "When a contractor builds a building, lighting always comes in late, by which time the project is running short on money. Then contractors tend to choose the cheapest possible luminaries", Mr. Magog says.

Holyhead Saves a Megawatt

The Holyhead Power Save Project is an initiative targeted to reduce demand for electricity in the town of Holyhead on the small island of Anglesey in North Wales. One feature of this all-sector program is to offer compact fluorescent lamps installed directly in the homes of residential customers.

The electricity-distributing utility Manweb, one of 12 Regional Electricity Companies (RECs) in Wales and England, sells about 17 TWh of electricity per year and serves about 1.3 million customers in its area. In the target area of the project, the utility serves about 3 500 customers, and peak demand is a little less than 10 MW. With a business-as-usual scenario, the utility expects that the distribution grid in the target area must be upgraded within a few years. With this all-sector £ 0.5-million program (ca. $ 750 000), Manweb hopes to achieve a sustainable peak demand reduction of 1 MW (10% of the present demand) within the first six months of 1993).

Residential customers, who account for 51% of the total electricity consumption in the target area, will be given special attention. Activities in the residential area include:

Each customer is offered two electronic CFLs (a choice of wattages), installed directly by utility-nominated staff at a cost of 70p (ca. $ 1) per lamp to the customer, a reduction by more than 90% compared with the normal retail price of £ 10 (ca. $ 15).
Free insulation of electric water heaters.
Substantial cash rebates for efficient appliances.

Says Technical Sales Development Manager David Walker: "We considered giving lamps away, but thought it would be better if people felt they were contributing something themselves. The price that we are offering is very close to that of an incandescent bulb."

Smaller commercial customers will be offered the same services as residential customers. In addition, Manweb is exploring more specific actions directed to this customer segment involving, for example, energy-efficient refrigeration, fluorescent lighting retrofits, free energy-audits, and advice for pubs and restaurants.

Few industrial customers are located in the area, and Manweb is therefore planning a more individual and tailormade approach for each industrial customer. This will include audits followed by assistance with identified programs, such as fluorescent lighting retrofits, efficient motors, improved compressed air systems, improved metering, and power factor correction equipment to adjust the precise delivery of electric current to the specific needs of the site.

The program is reportedly the most ambitious DSM project ever in the United Kingdom. It will be carefully evaluated, and we hope that the results will be available by early 1994.

The project is part of a regional economic development project, and is also supported financially by the European Community "SAVE" program.

Nils Borg

For more information, contact:

David Walker, Peter Benstead
Manweb, Sealand Road
Chester CH1 4LR, UK
Tel: +44 1244 377 111
Fax: +44 1244 652 896

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