Why are households using less energy?

August 28, 2013

Last week, the Office for National Statistics released data that surprised many people in the energy debate. They said that between 2005 and 2011, overall energy consumption in UK homes has fallen by more than 25%. That’s right, we are using a quarter less energy in our homes than we were just a few years ago. So what is going on and what does this mean for our climate and energy policy?

A chart from our report, Smarter, Greener, Cheaper gives one possible answer: price. The average household energy bill has spiked by about 70% percent over the same period. Higher prices equals less demand, surely?

Annual UK domestic energy demand vs average annual household bill

However, it is not quite as simple as that. Firstly, household energy demand is not completely elastic. A rise of 10% in energy costs does not mean a similar % fall in demand. An excellent paper by Tooraj Jamasb and Helena Meier looked at historical UK energy data and found that up to a certain income level, elasticity is very low (i.e. if you need to heat your home, you need to heat your home, even if it costs more). The people in the income bracket £20,000-£35,000 (part of the ‘squeezed middle’ identified by Ed Miliband) adjust consumption the most when prices go up. The richest people, perhaps unsurprisingly, do not seem to be too affected by price and continue to heat their homes by burning £50 notes or whatever it is they do.

So price is a factor, but not the only one. What other explanations might there be:

  • Insulation policy. Large scale energy efficiency policy really kicked in about this period. Under CERT, just the latest of the large-scale schemes, 5.3 million homes received free loft insulation and 2.6 million got their cavity walls filled. DECC point out that the average house has moved from an E to a D, partly as a result of these measures (although that is since 1996).
  • Standards. Since 2005, all new boilers have at least a B rating. National Grid thinks that this move has saved more than 30TWh a year in reduced demand. This could account for more than a 40% of the overall drop in household demand.
  • Lifestyle changes. People living in smaller properties and more shared accommodation, partly in reflection of higher prices.
  • Environmentalism. Awareness of our carbon footprint and efforts by the Energy Saving Trust and others to encourage people to use less energy may have had an effect, although assessing how big or small is very difficult and there is no consensus among academics.
  • Peak stuff. Chris Goodall and other have argued that developed countries have basically just stopped using as much stuff. This fits with the planning of lots of oil majors who say European and US markets will only deliver flat or falling petrol demand in the future.

So what does all this mean for policy, in particular low carbon policy? First, it means that absolute reductions in energy use across UK are possible. This, in many ways, turns conventional wisdom on its head. It was previously assumed that overall demand would just keep growing, but only the rate could be slowed.

Second, it presents a major challenge for the Coalition to show that the Green Deal, Energy Company Obligation and other measures will continue the previous reductions (recognising that lots of the easier stuff has been done). In particular, they need to show they are successfully helping the poorest people.

Thirdly, it raises very awkward questions about where the cost of policy falls. If poor households find it difficult to change the amount of energy they use, policies that load costs on to everyone’s bills, rather than through general taxation, hit the poorest hardest. For those of us who advocate carbon pricing, we also need to have an answer for how you protect the poorest in society (luckily UCL Professor Paul Ekins and others have looked at how you can make a carbon tax neutral for the poorest in society using the benefits system, so it is not impossible). And obviously, if price is a crucial factor, what happens if prices fall?

The findings also highlights how important smart meters could be. The next frontier in reducing energy demand is how you get people to recognise where they might be wasting energy and show them how they can change behaviour (an end to burning £50 notes might be one idea). That gets into much more difficult and controversial policy terrain.

This article originally appeared on BusinessGreen

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