Why the energy efficiency gap is smaller than we think: quantifying heterogeneity and persistence in the returns to energy efficiency measures

Produced as part of the Incentives for behaviour change CCCEP research programme theme

Despite a considerable body of literature assessing energy efficiency measures and polices, there is limited information on their longer-term impact in terms of savings, and how this varies by measure and household-type. This paper fills a gap in the literature by providing new evidence on these aspects of energy efficiency.

Ascertaining the extent of savings actually delivered by energy efficiency measures is crucial to understanding why households appear to under-invest in these measures, and to assessing whether policies that support energy efficiency are cost-effective. Providing information on the rate of return on measures also helps to understand why financial institutions may or may not reward ‘green’ investments.

The analysis focuses on measures installed through the UK Supplier Obligations, the principal policy instrument for delivering energy efficiency measures in the UK and widely used in other European countries.

Key points for decision-makers

• The research finds that cavity wall and loft insulation deliver average annual savings of about 9% and 3% respectively. Heating system replacements deliver average annual savings of about 9%. These results are very much in line with previous estimates.
• Households in more deprived areas experience lower savings for all measures, with the most deprived households saving about half as much as the least deprived. It is possible that lower income households take back some of the savings in the form of increased thermal comfort, but the data in this paper do not allow the authors to confirm this.
• For heating system replacements, the savings erode more quickly over time for more deprived households, in some cases reducing by 50% within six years for measures expected to last twice this amount of time. This result is not observed for less deprived households. The data do not allow a full explanation for this: it might be due to a behavioural response from households or due to technical issues relating to the equipment.
• If savings are greater and last longer for better-off households, this raises concerns about how the costs are distributed across society. It also suggests that policy costs should not be levied as a flat-rate tariff, and echoes previous calls for definitive evidence on how policy costs are applied.
• The measures are generally still cost-effective, and compare favourably with the cost-effectiveness of other initiatives, but the returns are much lower than engineering models would suggest.
• At an individual household level, the private benefits of energy efficiency measures need to be reconsidered, with a greater focus on the non-financial benefits. The total welfare gains from upgrades to more deprived households may be considered greater if those households place more importance on increased internal temperatures and any resultant improvements to health and wellbeing than on energy and cost savings.
• At a societal level a greater focus on reducing carbon emissions, as opposed to cost-savings, is required.
• The results show that the ‘energy efficiency gap’ – the gap between the level of efficiency households are willing to invest in and the higher level that would be socially or even privately optimal – requires less explanation than some might suggest.
• The research draws on the National Energy Efficiency framework Database (NEED), which covers over four million households and a period of eight years.