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Why is reducing electricity demand so difficult?

Posted on 11 February 2013

Here’s a puzzle: even though saving energy saves us money, especially when electricity prices keep going up, why does electricity demand keep rising?

This is an important puzzle to solve because, as a nation, we are counting on electricity demand reducing significantly. In its long range plans, the government is assuming a 16 per cent reduction in electricity demand by 2025. If this doesn’t happen and assuming we still want to stop the planet over-heating, we’d need six additional nuclear power stations or 5,000 additional offshore wind turbines. That’s probably £100 billion worth of extra investment in new generating capacity and £70 billion worth of extra expenditure on electricity than we’re bargaining for.

The government is hoping that existing policies like Green Deal, which launched last month, and the energy saving obligations on energy suppliers will help.

Green Deal allows householders to borrow money to pay for a range of energy saving measures, such as solid wall insulation and under-floor heating, and to repay the loan through their energy bills. The idea is that the cost of the loan is more than covered by the red

Why is the problem of demand reduction so intractable? I’ve seen a number of explanations. Firstly, energy is an invisible commodity, unlike fuel in the petrol tank. It comes into our homes invisibly and invisible money leaves our bank account. So we need to make energy more visually arresting, hence home energy monitors. Secondly, incentives aren’t always aligned, especially in the commercial sector and social housing sector. For example, landlords have little incentive to invest in a new heating system if the tenants pocket the benefit in lower bills. Thirdly, a lot of current policies are more stick than carrot so they don’t work with the grain of market incentives. For example, energy suppliers, which have a vested interested in selling more energy, are also the main deliverers of energy saving measures – because they are obliged to, not because they necessarily want to. So energy suppliers do what they have to and no more.uction in energy bills. Who wouldn’t jump at this chance? Well, unfortunately, most of us won’t. Don’t get me wrong: I think Green Deal is a great concept, but it’s been designed by economists, not by people who understand how reticent we are about big capital projects and major household disruption.

So important is it to crack this nut that the government is consulting on some radical new ideas. The idea I really like is also the most counter-intuitive: pay people to save energy - on top of the saving they’ll make from reducing their energy bills. It sounds profligate but it’s cheaper than other methods and cheaper than investing in new generating capacity. Furthermore, it opens up the energy saving market to entrepreneurs to try to make money out of it, and it’s not prescriptive, unlike the energy company obligations and the Green Deal. It fits with the fashionable concept of payment by results. If probation providers are paid for preventing people from re-offending, if employment companies are paid for keeping people in work, why can’t households and businesses be paid for cutting their energy use?

There are certainly measurement challenges but surely it’s worth a pilot?

If you want to read more about the idea, first aired by think-tank Green Alliance, click here.

If you want to read the government’s consultation about cutting energy demand, click here.

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