Comments on Britain’s mini-budget: OECD comments on UK approach to energy efficiency

It has been just over a week since the UK provided its latest approach to grow the economy. The UK publication Energy in Buildings & Industry (EiBI) provides the follow two comments related to the mini-budget. It should be noted that this week the government has injected £1.5 billion to support upgrades for 130,000 social housing and low income homes in England. Local authorities and social housing providers will be able to submit bids for funding and will deliver upgrades from early next year until March 2025. Jan Rosenow from RAP spoke on the BBC Radio 4 Today programme on September 29th that this is not new money but “too little and too late.”

• Comments on energy efficiency

September’s infamous “mini-budget” splurge by the new Truss Government did include just one token nod towards helping energy efficiency. Tucked away unpublicised in the Treasury statement was a solitary gesture, the only initiative intended to ‘improving energy efficiency in the UK.”

The penultimate paragraph of the document, 4.36, includes a commitment that “to make homes cheaper to heat, the government will bring forward legislation to implement new obligations on energy suppliers to help hundreds of thousands of their customers take action to reduce their energy bills.”

At the same time, the Government has undertaken to refund all expenditure incurred by those energy companies undertaking improvement works under the fourth round of the Energy Company Obligation (ECO4) scheme, which officially started this past April. The Obligation anticipates combined expenditure by the energy companies of £1bn each year for the next three years. The energy companies will simply pass on all invoices they have incurred to the Treasury, thus potentially reducing their incentive to operate as efficiently as possible.

The “mini-budget” announcement of “new obligations” does not specifically link this additional scheme to the revised ECO4 arrangements. Instead, it commits to spending just an additional £333million extra per year for the next three years, beginning in April 2023, and concluding in March 2026 well after the next General Election is due.

Over the past ten years, the ECO scheme has installed more than 3.5m improvements in 2.4m properties. It is now saving beneficiaries approaching £1,000 p.a., and has helped reduce overall gas consumption by over 20%. Surprisingly, the Treasury has reduced considerably the savings anticipated from this new initiative. Instead, all this “help”- as the Government modestly describes it – will be “delivering an average saving of around £200 a year”.

Or in other words, these improvements will only cut the average residential fuel bill, now set at £2.500 p.a., by as little 8%. It is difficult to see precisely which energy saving measures will be installed which could make so marginal a difference.

• Countries where natural gas is a large part of their current energy mix need to reduce its consumption as a matter of urgency, warns the OECD’s chief economist, Álvaro Pereira

The Organisation for Economic Co-operation and Development (OECD) is the key intergovernmental organisation with 38 member countries including the UK, founded in 1961 to stimulate economic progress and world trade. Its’ recommendations are regularly adopted in full by responsible member governments.

Pereira said the world was paying a steep price for the Ukraine war, and Russia’s decision to restrict access to gas supplies more tightly than was forecast in June. However, the Paris-based policy organisation was most alarmed by the outlook across Europe, which is most directly exposed to the fallout from Russia’s war in Ukraine.

He warned that a dependency on expensive gas for heavy industry and home heating will plunge the three main European users, Germany, Italy and the UK into a long period of recession. He predicted no growth at all in the UK before 2024, when the next General Election is due.

He said governments needed to encourage households and businesses to reduce their consumption of gas to help weather a difficult winter. Both Italy and Germany have already introduced purposeful programmes designed to cut gas consumption over this winter (see EiBI Sept 2022). Across the European Union all 27 member States have set up programmes designed to reduce overall gas demand over this winter by 15%.

No such programme seems to have been considered by the new Truss government. Instead, it is seeking only to expand gas production, both in the North Sea, and by stimulating fracking throughout England. This directly contradicts the commitment made by the Conservatives at the last General Election in 2019 that “we would not support fracking.” Any gas so recovered cannot possibly be available this winter.

Pereira also supported the determination of central banks to reduce inflation by raising interest rates. “We need to reduce demand, there is no doubt about that. And monetary and fiscal authorities need to work hand in hand to achieve it,” he said.