How should Government address irrationality?

2nd Mar 2020

 

What should a responsible government do about economically irrational behaviour? And more importantly, should it be advocating policy that is economically irrational?

These might be huge philosophical questions, that industry shies away from, but they are important discussion points. Without addressing them, achieving Net Zero will be made more difficult, if not impossible.

My attention has been drawn to the logic of large scale energy efficiency improvements and the question that needs answering, is “who pays?” I’ve taken a few moments to study the English Housing Survey and its analysis of energy efficiency. It throws up some interesting figures.

For example, to carry out all the potential energy improvement measures highlighted by EPCs, would cost £239 billion (England only) – on average, just over £13,000 per house. According to EHS, the average household saving would be £452 a year, a payback period of 29 years. For fellow accountants, the IRR is nil and it has a negative NPV. It would be economically irrational to do it, based on current costs and energy prices. Energy costs would have to increase by a third to make it economically rational to do the works.

So who should pay?

Let’s begin by acknowledging that there are wider benefits for improving the energy efficiency of the home, but often these aren’t monetarised. Greater comfort levels might mean improved health but may reduce the actual “saving”. Reducing overall demand for energy should make it easier to decarbonise the fuel, and carbon savings currently don’t carry a money value to the consumer either. So it’s a market failure (economist speak) and government needs to step in. Before it does so, they also need to recognise that energy efficiency alone will not achieve Net Zero for domestic buildings. This £239 billion, might get you half way there.

Suddenly policymakers have to think what was previously the unthinkable, perhaps energy efficiency shouldn’t be the priority. Perhaps getting to Net Zero means we need to change our mentality and with it our focus. Does changing the actual fuel to zero carbon make more sense? Is it easier to deliver than an average retrofit of £13k on 20 million homes (which still only gets you half what you need)? Is greening the gas, oil and LPG actually an easier task logistically than 20 million energy efficiency improvements plus whatever else is needed to achieve Net Zero? I’m not giving an answer, just posing a question that requires us to address some inconvenient truths.

 Best wishes

Mike Foster, CEO