SBS Blog > Insulating ourselves from another energy crisis by Matthew Hannon

Insulating ourselves from another energy crisis

By Matthew Hannon - Posted on 30 September 2021

With just weeks until COP26 kicks off in Glasgow, Matt Hannon has written a blog looking at another issue which is in the climate crisis spotlight - the energy sector.

It began with a trickle and then became a flood. Initially, the first couple of energy suppliers went bust but many more have followed. As I type, the UK's sixth largest supplier - Bulb - is currently seeking a bailout. It turns out the whole sector is in crisis.

Underlying this domino effect are record energy prices or, to be more specific, wholesale gas prices, which have increased by more than a factor of 5 in the past year (Ember). The roots of this crisis have already been well-documented (see Jane Lucy blog):

a cold winter that depleted reserves;
post-COVID economic rebound;
growing demand from Asia for LNG gas;
low UK wind power output; and
France-UK interconnector outage etc.

There are obvious and potentially catastrophic knock-on effects for householder bills, which are expected to rise by £139 in October; a rise limited only by Ofgem's energy price cap. This price hike sits alongside other forthcoming pressures on household finances: 1) a cut in Universal Credit; 2) a rise in National Insurance; and 3) the end of furlough. This makes for a potent cocktail of unexpected costs and one that could push countless additional households into fuel poverty this winter; on top of the 3.5 million already fuel poor homes.

The crisis has prompted almost every media outlet to bellow warnings that a 'winter of discontent' is in the offing. This is despite the Prime Minister's claim that "Christmas is on"; a claim eerily reminiscent of the same promise made last year during the height of the pandemic. However, for all the coverage of the energy crisis and its causes, one contributing factor has been largely ignored: the UK's failure on household energy retrofit.

Energy efficiency and insulation

Whilst the bulk of the factors that are pushing up prices lie outside the UK's immediate control, the UK's failure to deliver a nationwide low-carbon retrofit scheme does not. The failure to insulate our housing stock has meant that householders have not been insulated from the damaging effects of record energy prices.

The vast majority of the UK housing stock leaks like a sieve and is hungry for gas. Just 40% of (or 9.9 million) dwellings were in a SAP energy efficiency rating (EER) band of A to C (MHCLG); the rating you see on your household Energy Performance Certificate.

In a bid to improve efficiency levels, UK Government has committed to support as many existing homes as possible to hit EPC Band C by 2035 (BEIS) - although these must be "practical, cost-effective and affordable". Upgrading a band D home to band C would result in average savings of £179, whilst upgrading from band E would provide £594 of savings (MHCLG). With the recent surge in energy prices, these savings would be much greater today.

To deliver on net-zero, the Climate Change Committee estimates we will need to insulate approximately 11 million lofts, 3 million wall cavities and 1.5 million solid walls by 2050 (CCC). Unfortunately, we are not insulating anywhere quickly enough to achieve net-zero and, in fact, progress is in decline (CCC). For example, the annual installation of loft insulations needs to be 22 times greater by 2025 than in 2020. This means that for every home that installed loft insulation last year, we require another 21 homes on top of that to be installing the measure by 2025 - just a few years away. That's the equivalent of insulating a whole street versus a single home, within just a few years.

Ironically, back in 2012, we were actually delivering insulation above the targeted annual rate that the CCC deem compatible with the UK's net-zero target. The problems started post-2012 when the Energy Company Obligation (ECO) was introduced. Rosenow and Eyre document its many issues but broadly - versus its predecessor policy CERT - ECO was more administratively complex and focused more on expensive and complicated interventions, thus demanding greater contributions from households and were rarely free-of-charge.

This lack of policy support, coupled with the high cost of retrofit, is primarily responsible for the UK's snail-paced progress on retrofit. For example, to upgrade a band E home to band C, would cost £13,285 and the payback period would be over 22 years (MHCLG). Non-fuel poor homeowners currently have very few schemes to access to help cover these upfront costs.

To their credit, the UK government tried to address this issue with the Green Homes Grant. This achieved relatively little during its short life but this was more a failure of policy design than a lack of appetite from the public to access these efficiency grants. Despite delivering just £256m across 47,500 households - a fraction of the targeted impact - the voucher scheme web page attracted over ½ million unique views, suggesting a high level of interest (NAO).

So why the poor take-up and its premature end? The scheme received 3,000 complaints from applicants, focusing on two main issues: 1) delays in issuing and paying vouchers; and 2) difficulties in finding certified installers. Despite significant funding and consumer interest, the scheme ended after just a few months. The upshot being that more homes this coming winter remain highly inefficient and exposed to rampant energy prices. Sadly, another UK energy efficiency policy failure.

Low-carbon heat

Of course, energy efficiency is only one tool to reduce households' exposure to gas price shocks. The other is to move homes away from gas entirely. Renewable power, coupled with electric heat (e.g. heat pumps) or the production of green hydrogen, offer a route away from our addiction to gas.

The costs of renewable power generation continue to tumble too and now undercut gas; good news for the renewable electrification of heat. Ember’s analysis of IRENA’s renewable power costs suggests that generating electricity from existing UK fossil gas power plants is three times more expensive than from new onshore wind and almost twice that from new solar.

A comparison of costs between gas heating versus heat pumps is less clear. A 2020 study suggested that the current policy regime meant that heat pumps were more expensive versus gas boilers. However, it is quite possible heat pumps are much more attractive today versus a year ago considering that whilst UK electricity prices tripled in the past year, gas prices grew by 5.5 times. It is also important to note that the tripling of power prices was itself link to rising gas prices, with 86% of the increase linked to gas prices. This highlights an opportunity to further reduce power prices by decoupling from gas in a bid to reduce the cost of electric heat.

Importantly, renewable power is not immune to short-term price shocks given its inherent intermittency; i.e. the sun doesn’t always shine and the wind doesn’t always blow. In fact, the current energy price crisis is partly attributed to low wind output and it being the least windy summer since 1961. Even so, shifting the UK’s reliance on gas to renewable power, and coupling this with significant amounts of electricity storage (e.g. pumped, EV vehicle-to-grid) and smart grid technology will be critical to synchronising periods of power supply with demand. The hope is this will - in the long-term - reduce household energy bills.

Interconnectors will be critical too, by facilitating the two-way exchange of power: exporting power during times of plenty and importing during times of want. For example, the recent UK-France power interconnector outage highlights how its absence has contributed to escalating power prices, highlighting its role in flattening power prices. Baseload generation from non-intermittent low-carbon power (e.g. nuclear, tidal) will also help to mitigate intermittency and electricity price volatility.

Summary

As long as the UK's homes remain reliant on gas, householders will remain vulnerable to the damaging consequences of gas price shocks. Wholesale energy prices are shaped by international trends, which the UK can do little to control.

Even so, the UK is not powerless. It has an important degree of control over the situation because reducing the effects of record gas prices can be achieved by reducing our consumption of gas, primarily by: a) improving the energy efficiency of our homes, and b) shifting their heat supply away from gas. Our sluggishness to decarbonise heat and insulate our homes has meant householders remain vulnerable to global gas price rises - the buck stops with us.

A nationwide low-carbon retrofit, and overhaul of the power network to facilitate heat electrification, will undoubtedly require significant investment. Whilst recent energy price rises mean payback periods are being slashed, once gas prices fall again the economic incentive to retrofit our homes will evaporate. It is essential that the public's current interest in keeping their energy bills down this coming winter is not an aberration but a long-term concern.

To capture and cultivate this national interest demands thoughtful and robust energy policy. Whilst the design of the Green Home Grants scheme was clearly flawed in its design, it offered sufficient incentive to reveal the hundreds of thousands of householders keen to retrofit their homes. Government must take appropriate action by ensuring its long-awaited Heat and Buildings White Paper puts in place a long-term framework that makes energy retrofit both easy and economically attractive to householders. If this framework already existed, maybe 60% of homes wouldn't be below EER band C, household bills would be lower and the current energy crisis wouldn't cut so deep.

Now is the time for government to acknowledge that these record energy prices are a function of our addiction to gas and to take immediate steps to wean households off this fossil fuel. By insulating UK homes, we can also insulate our households from the damaging effects of unpredictable and uncontrollable gas price shocks.