This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Edward Davey speech to the Energy Saving Opportunity Scheme Roadshow.
Thank you all for coming.
This beautiful building we are in today has quite a rich history – for most of its life as a military club but since the 70’s as the home of the Institute of Directors.
I am also told it is licensed to hold weddings and civil ceremonies.
Which is quite apt for what we are here to discuss today – partnership.
Government and business working together.
The purpose of this event is twofold.
First, to encourage the take up of the energy efficiency opportunities out there for business.
Helping you make the most of what is already on offer for energy saving, money saving and carbon saving.
And second, to get your feedback on the energy efficiency policy landscape.
What is standing in your way?
What can be changed, improved?
And what we can do working together – how we can work in partnership.
Throughout the day there will be a number of sessions on the detail of the current energy efficiency framework – and in particular the Energy Savings Opportunity Scheme – or ESOS as we have come to know it.
So as an introduction to the day, I thought I’d set out my thoughts on the ‘why’ and ‘how’ rather than the ‘what’.
‘Why’ energy efficiency has to form a central part in the UK’s energy future.
And ‘how’ this government has chosen to go about encouraging the kind of behaviour change we need if we are going to make the necessity for energy efficiency an opportunity rather than a burden for our business community.
And I want to do something possibly unusual for a Government Minister speaking at the Institute of Directors – make the case for regulation. Smart regulation. Energy efficiency regulation.
The energy challenge
The ‘why’ all revolves around the big dilemma that is facing our society when it comes to energy.
Or more accurately – the trilemma – because our energy challenge is made up of three distinct but interconnected areas.
Energy Security – making sure our homes and businesses have reliable supplies of power.
Affordability – and that means helping the most vulnerable – or on the business side, the most exposed.
And decarbonisation – moving to the low-carbon economy that meeting our climate change responsibilities requires.
Finding the right balance between these three imperatives is what energy policy in all about.
There are some who see the third leg of the trilemma – decarbonisation – as somehow the optional part – a nice to have rather than a necessity.
But this is to make a crucial mistake - seeing climate change as somehow completely divorced from economics or the future business environment.
It doesn’t make sense when you look at the science,
And, for me, one of the most encouraging things of the last few years is how the business community, including many of the companies represented here today, has become one of the foremost advocates for climate change action.
The environment is moving from an ‘ethical’ issue – confined to corporate responsibility.
To one of business risk, sound management and market opportunity.
From the Stern Review in 2006 to the New Climate Economy report this year, the message is coming across loud and clear.
Green Growth is a necessity, a reality and an opportunity.
Of course, going green in the power supply side means major investments in everything from renewables to nuclear, from carbon capture and storage to smart grids.
But action on the demand side is at least as important. And there is so much more we can do.
The Energy efficiency opportunity
Indeed, in all three parts of this trilemma, energy efficiency - cutting out waste – is one of the keys to success.
Because without energy efficiency, we will need to produce or import more power to maintain our energy security – and at a commensurate cost.
It is estimated that the right energy efficiency framework in the UK could save us the equivalent of the output of 22 new power stations by 2020.
And without energy efficiency the scope to make lasting changes to reduce energy bills is more limited – relying on distorting market interventions or complicated subsidy or rebate schemes.
Indeed, without strong investment in energy efficiency, the models I have seen to reduce the UK’s carbon emissions in line with our legal obligations just become far more challenging.
And given business is a major energy user, our partnership with you in the energy efficiency challenge is crucial.
Energy use in non-domestic buildings makes up 18% of final consumption and 12% of emissions in the UK.
Energy use for businesses makes up around 3% of total costs on average – less for some but considerably more for others – especially our vital energy intensive industries.
And although other higher operating costs, such as staffing, inevitably receive more attention, cumulatively inefficiency on energy creates a massive fuel bill for the UK and affects our energy investment, security of supply, and emissions.
So no energy efficiency strategy can ignore the potential for financial and carbon savings in the way we run our businesses and industries.
Frankly, even if it wasn’t for climate change, energy efficiency should be high on our economic growth agenda anyway.
Our competitors know this. At the moment British businesses lead in many sectors on energy efficiency but other countries are catching up. So energy efficiency is an issue of competitive advantage – especially as energy prices have risen.
And taking this seriously can also come with additional benefits such as improved employee welfare, and improved brand image.
For instance, take Marks and Spencer’s ‘Plan A’.
M&S have reported improvement in the energy efficiency of their stores by a third compared to 2006/7.
They estimate that UK retailers use around £3bn of energy every year.
If all of them matched M&S’s achievement they estimate that would save around £1bn per year.
This would have the same impact on profits as an additional £10bn of turnover.
So this is the ‘why’ of energy efficiency – and it’s a big why.
For the country improved energy security, for businesses improved competitiveness, and for the planet lower carbon emissions.
So let me turn to the how. For business energy efficiency?
Government can set the policy framework, offer incentives where appropriate and sometimes regulate to make the process of change easier.
And that is what successive Governments in the UK have done, domestically – and at EU level.
ESOS is of course a regulatory approach – and I strongly believe it is the right one.
Even though in our political discourse, regulation is considered a dirty word.
For regulation is that proverbial red tape, that ties our businesses up in knots.
Often that’s regrettably true – but not always.
Regulation sometimes can help business - and energy efficiency is one area where that’s true more often than not.
Yes - there are occasions when regulation is ill-conceived and over-complicated providing little in terms of outcome when compared to the burden it imposes.
Yes - the wrong kind of regulation can be market restricting – deterring new entrants, denuding competition.
Indeed, when I was a Business Minister before, I led successful efforts at the EU level to drive a more deregulatory culture in Brussels.
But regulating better does not mean no regulation at all.
Regulation isn’t an ideological issue, it’s a pragmatic one.
We continually fail to recognise that regulations are sometimes the cheapest, most effective way of getting things done and achieving our goals.
Regulation can help people make better choices – Their presence may be invisible to consumers – but no less meaningful.
Improving the quality of buildings or the performance of electrical products are two clear examples where smart regulation can boost business and lower costs.
Take energy efficiency in privately rented buildings.
The private rental sector has great untapped energy efficiency potential.
I’m convinced that only through regulating can we ensure that potential is realised.
By setting energy efficiency standards for privately rented homes we can ensure our housing stock is radically improved over the next decade, along with people’s quality of life.
That is certainly the direction my party will be taking regulation, with the support of many in business, according to our consultations.
And regulation can help the overall business environment too.
Creating a level playing field for competition – where you know your competitors are playing by the same rules.
Cutting out the cowboy operators.
Acting as a spur to innovation – so we make things better, faster.
Regulatory deadlines set intelligently far ahead can unleash the creative juices of business.
That is why I believe there is a role for smart regulation to achieve our ends in the most efficient way.
A clear legislative and regulatory framework to provide business with certainty.
Unlocking the financial and carbon savings that can deliver green growth.
So let me turn to one specific regulation that I believe falls into this category of smart regulation – namely the Energy Saving Opportunity Scheme.
ESOS is the UK Government’s response to the requirement to implement Article 8 of the EU’s Energy Efficiency Directive.
But we have ensured that we haven’t gold-plated, we haven’t over-regulated, and we avoided as much red-tape as possible.
It simply requires companies employing more than 250 staff, the UK’s 10,000 largest companies, once every four years to measure their energy use and identify where there are opportunities to become more energy efficient.
We estimate that it could lead to businesses saving over £250m a year on their energy bills if they reduce their consumption by less than 1% as a result of energy audits.
But there’s a challenge for you.
Can you exceed these estimates for your shareholders, as the size of the prize is much larger?
We estimate that the UK’s largest 10,000 firms are unnecessarily spending £2.8bn a year through using inefficient technologies.
The energy being wasted is equivalent to the output of nearly five power stations.
And that doesn’t even take account of potential savings from behaviour change.
The CBI’s ‘Shining a Light’ report last year on the potential for business energy efficiency estimated that large firms can shave 15% off their energy bills with better energy management.
But perversely, only 28% of firms consider this a high priority.
So ESOS is a tool that enables energy managers to put evidenced based business cases in front of their directors to show them where energy, and therefore money can be saved.
So what must you do with these audits? Well that’s up to you.
Implementation of any recommendations is purely voluntary – meaning you can make the best decisions for your businesses based on what works for you, when it works for you.
This is in recognition of the fact that Government doesn’t have all the answers.
We spent the last year consulting with business groups to ensure that the best practice that already exists can contribute to regulation compliance.
We didn’t want to re-invent the wheel.
But I am also clear, that while take up of recommendations under ESOS is voluntary, this process will become a burden if the savings identified are not realised.
Having paid for the audit, we believe you’ll want to use it.
Think of it as a menu of things you can do to save money.
Of course, if you see ESOS as a compliance burden it will become one.
And if an ESOS report just ends up gathering dust on a shelf that it will become a dead investment.
But if you invest in the process, the opportunities and rewards will flow.
The power is in your hands.
But I know that many of you share our ambitions on energy efficiency.
Which is why today is also about looking at what barriers still remain and what we can do about them in partnership.
I for one, am well aware that if left unattended the regulatory framework can become a kind of primordial alphabet soup.
New schemes over-lapping with old schemes, the relationships between them unclear – leading to duplication and cost without benefit.
This is why the Government has recently simplified the CRC Energy Efficiency scheme, so that it continues to incentivise energy efficiency while reducing administrative burdens by around £275m.
The Energy Savings Opportunity Scheme has also been carefully designed for ease of compliance - allowing you to use activity under other schemes to support ESOS compliance.
And this flexible approach has been welcomed by industry.
Smart regulation can help us deliver as much energy efficiency as possible with the minimum amount of red-tape.
So we will be reviewing the CRC Energy Efficiency Scheme and the Energy Savings Opportunity Scheme in 2016 to listen to your views.
There is the potential for a broader simplification of existing non-domestic energy efficiency policies.
And for these reviews to achieve that aim we will need your input, your experience, your engagement - and your ideas.
How much more can we be doing to help you become energy efficient?
And what will you, as the business community, do for yourselves?
Together, how can we be smarter?
This Government’s new approach to regulation – smart regulation – is about working with the market.
It is based on a deeper understanding of how to create enduring change - incentivising businesses to exploit the potential to save money - ensuring the appeal to change is not based on altruism, but hard business facts.
Our approach gives clear signals, and provides you with the power to make decisions, to change.
And I hope today that you have the opportunity to put your ideas forward about how we can use the energy efficiency regulatory environment to help business grow - and grow green.