Scottish Government

2 Carbon impact assessment pilot: Energy Assistance Package

Introduction

2.1 This report provides the results and findings from the piloting of DECC's updated guidance on GHG policy appraisal to the Scottish Government's Energy Assistance Package ( EAP). As part of the pilot we have performed an appraisal of the potential greenhouse gas impacts of the package, considering a number of methodological issues and challenges that are relevant to the appraisal of fuel poverty programmes in Scotland. A number of recommendations have then been generated for the further development of the guidance.

Policy overview

2.2 The Energy Assistance Package ( EAP) is the post-runner to the Warm Deal/Central Heating Programme, whose primary policy objective is to work toward the elimination of fuel poverty in Scotland by 2016. The programme works by subsidising the cost of heating systems and energy efficiency measures for eligible households in Scotland. Alongside measures to improve the home, the EAP will also provide access to energy audits, energy tariff advice and advice on income maximisation.

2.3 The package has four stages:

• An initial energy audit available to anyone who phones the Energy Savings Scotland Advice Centre ( ESSAC) network and identifies those at risk of fuel poverty who continue to Stage 2.
• Help with improving incomes and reducing energy bills.
• A package of standard insulation measures (cavity wall and loft insulation), as part of the energy companies' obligation under the Carbon Emission Reduction Target ( CERT).
• More enhanced energy efficiency measures (such as heating systems including renewable systems, and insulation measures for hard to insulate homes for those who are fuel poor).

2.4 Adopting this staged approach will help to ensure applicants who are not eligible for the package are still informed about CERT and the support offered therein, and directed to the correct assistance. The package therefore has a role in enhancing savings delivered under CERT.

2.5 The package will be delivered in partnership with existing advice providers, energy companies and the Scottish Government. To ensure a smooth transition to the new package, Scottish Gas will act as managing agent for Stage 4 during 2009/10.

Policy scenario

2.6 The package will be supported by Scottish Government funding from a range of budgets of around £60m in 2009/10, and CERT funding from the energy companies. The current analysis is based upon the measures installed during the first year of the package from April 2009 to April 2010.

2.7 There are currently no ex-ante estimates of the projected impacts of the package on carbon emissions in Scotland, although some indicative estimates of the number of measures installed are available. It is therefore necessary, for the purposes of the pilot, to define in more detail the potential measures that will be implemented as a result of the policy, and the housing types where the measure will be installed. This will include assumptions with respect to e.g. the existing heating systems that are in place.

2.8 An illustrative policy scenario has been defined below. This illustrates the potential measures that could be installed, and does not represent an estimate of what is expected to be installed, or the respective carbon savings. Therefore, the results of this pilot should not be considered a formal carbon appraisal of the package.

2.9 In our illustrative scenario, we have assumed the following activities will take place during the first year of the package:

2.10 75,000 callers to an ESSAC who will all be provided with some energy saving advice over the phone (and offered income maximisation and tariff checks).

2.11 32,000 of these will be referred on for Stage 3 CERT measures, resulting in 10,000 cavity wall and 10,000 loft insulations.

2.12 12,000 households will be referred on for Stage 4 measures, of which 2,000 will get only draught proofing and insulation measures, 8,000 will get a replacement gas central heating system with draught proofing and a loft top up, and 2,000 will get non-gas heating system with draught proofing and a loft top up. Of the non-gas systems we will have 1,000 electric storage systems, 300 air source heat pumps and the remainder a mixture of oil, solid fuel, electric wet and LPG systems.

2.13 In terms of the housing types where the measures will be installed then the focus of the package is on households suffering from fuel poverty which may mean that a higher proportion of older and hard to treat homes are targeted.

Impacts of the policy on GHG emissions

2.14 The EAP is expected to influence emissions of greenhouse gases by reducing the consumption of fossil fuels within households. The insulation and heating measures that are implemented as a result of the package will reduce the overall energy consumption of those targeted. For some households fuel switching measures may also be implemented. Both of these actions will deliver reductions in emissions of greenhouse gases within Scotland.

2.15 The main impact of the policy will be the direct impacts on greenhouse gas emissions from the measures installed. This will include savings associated with direct fuel combustion within households, but also savings associated with reductions in electricity consumption. Indirect emissions will also be associated with the fuel supply chain (e.g. mining, refinement etc), although these emissions are typically small in comparison to the direct impacts - at least for fossil fuels. Since these supply chain impacts will be equally relevant for the baseline level of emissions then the relative impacts of the policy will be small. An exception is fuel switching measures, where the lifecycle impacts of the different fuels could be more important (e.g. biomass).

2.16 Emissions of greenhouses gases may also be released as part of the manufacture of the insulation and energy savings materials, as part of the installation process, and as part of the programme delivery. For example, petrochemical based insulation materials may have greater level of embodied carbon than natural alternatives. Likewise, installing several measures in one house, or geographic location, may be a more resource efficient approach than installing measures across a range of locations. There may also be other environmental impacts that are important when considering the full product lifecycles.

2.17 The DECC guidance is focussed upon the delivery of carbon savings in line with the UK's carbon budget. Whilst certain indirect impacts would be captured within this boundary, emissions embedded in products and services that arise outside of the UK will not be captured. Whilst for the EAP the emissions associated with energy consumption within the UK will far outweigh these indirect greenhouse gas impacts, by not quantifying these impacts the appraisal may underestimate the full impacts of the package.

Determination of the baseline

Requirements of the guidance

2.18 The DECC guidelines require that all polices should be considered relative to a 'business-as-usual' baseline. This effectively describes the level of activity and/or emissions that it is expected would occur in the absence of the policy that is being evaluated.

2.19 In defining the baseline the guidelines recommend that the business as usual should be consistent with the latest DECC energy model projections. These projections include the impact of implemented policies, so can help to adjust for policy overlaps.

Application of the guidance to the Energy Assistance Package

2.20 Since the Energy Assistance Package will replace the existing Central Heating and Warm Deal programmes, then in defining the baseline it is first necessary to decide whether the policy should be assessed on an individual or cumulative basis. This decision depends upon what is most important from the analysis. If it is to understand the overall impacts of fuel poverty programmes in Scotland, including the impacts of historical programmes, then a combined analysis should be carried out. If however, the primary aim of the appraisal is to assess the impacts of the new policy, it is most appropriate to appraise EAP in isolation - in which case the impacts of the earlier programmes should be accounted for within the baseline. For the purposes of this pilot we have appraised the package in isolation.

2.21 In addition to the previous fuel poverty programmes it is important that other existing policies are taken into account in the baseline. In particular, there is a direct overlap with the carbon emission reduction target ( CERT). In the absence of the EAP a certain level of savings would have occurred in Scotland anyway, as a result of existing CERT activities. Since CERT determines a target obligation that each of the energy companies is required to meet, then the activities under the EAP are unlikely to deliver additional savings on a Great Britain ¹¹ wide basis ¹². However, the EAP may reduce the overall cost to energy suppliers of delivering their CERT targets; it may influence the types of households that receive support under CERT; and, it may influence the geographic location of savings. Specifically, since the CERT targets are set on a GB wide basis, the EAP may facilitate a greater 'share' of the measures to be installed in Scotland than would have occurred in the absence of the package.

2.22 Further overlaps may exist with the area-based Home Insulation Scheme. Although one of the aims of this scheme is to improve the performance of other existing programmes. This may result in a more cost-effective delivery of the EAP, but is unlikely to deliver any additional savings since the overall level of funding is fixed.

2.23 In considering the 'additionality' of the package, it is also important to recognise that for a subsidy programme of this kind there is the potential for free riding, or deadweight. That is, some of the measures installed as a result of the programme may have been implemented anyway - especially since they deliver a net economic benefit to households, so an existing incentive exists. However, given that the focus of this programme is upon households that are suffering from fuel poverty, then it is less likely that these investments would have happened anyway. The possible exception is the measures installed under CERT as part of stage 3. In DECC's appraisal of CERT, an adjustment for this deadweight is made to the overall savings projections ¹³. A similar adjustment could be made to the CERT induced savings under the EAP if deemed necessary.

2.24 Taking these above factors into account, we consider that accounting for deadweight is not necessary for this policy. However, consideration of the overlaps with CERT is potentially important in defining the baseline. Two options exist to deal with this:

2.25 Assume that all savings delivered under CERT¹⁴, including those stimulated by the EAP, are part of the baseline. This would mean that the additional impacts of EAP would not be quantified, although a record could be kept of the numbers of measures and savings that have been facilitated by the EAP.

2.26 Attempt to estimate the level of 'additional' savings that have been induced under CERT in Scotland that would not have happened without the EAP. This would involve defining a baseline level of CERT activity in Scotland, and then estimating the 'additional' level activity that is projected to results from the EAP.

2.27 Overall the scale of measures influenced by the EAP is considered to be not sufficiently large, in relation to the overall number of measures installed under CERT¹⁵, to warrant the use of a modified baseline for the appraisal of Stage 3 insulation measures. For measures that are not covered by CERT i.e. Stage 4 measures, the issue of additionality is less of an issue, since it is unlikely that these measures would have been implemented without the policy stimulus. It is therefore appropriate for the package to claim 100% of the savings that arise from these measures.

2.28 On this basis our baseline assumes that all of the Stage 3 measures delivered under CERT would have happened anyway so are included within the baseline for the carbon appraisal. However, all savings that are delivered under the Stage 4 measures are assumed to be over and above what would have happened in the baseline.

Comments and recommendations

2.29 For both the baseline scenario and policy scenario it is important to define the household type and baseline energy consumption. The DECC guidance suggests that the baseline should be consistent with UK projections. The DECC energy model provides projected trends in energy consumption in the residential sector across the UK. Whilst this is useful for understanding the aggregate changes in fuel consumed and the assumed impacts of existing energy efficiency policies and measures, it provides limited information on the impacts on individual households. The aggregate energy data that is provided by the model is therefore of limited use in defining a baseline for the impact of the EAP on households within Scotland.

2.30 To enable a better assessment of the policy overlaps it is necessary to have a more detailed assessment of the impacts of existing policies in Scotland. This includes both UK and Scottish specific policies. Ideally, this information would be available on a measures basis. This is a detailed issue and beyond the scope of the revised guidance, but will become increasingly important in the future as the Scottish Government is required to monitor progress against the Climate Change (Scotland) Act.

Policy overlaps

Requirements in the guidance

2.31 The DECC guidance requires that attempts are made to work out the effects of only the policy concerned. Hence, overlaps with other policies should be described in the appraisal and taken into account in the costs and benefits assigned to the policy in question. The guidance suggests that where there are clear policy overlaps it might make sense to analyse two or more policies together.

2.32 A specific overlap that is addressed by the guidance is the overlap between UKGHG policies and the EU Climate and Energy Package. This is accounted for by splitting out the savings that arise in sectors covered by the EU Emissions Trading Scheme and those that are not covered by the EUETS. In addition, changes in final energy consumption and their impact on the cost of the renewable energy target are considered alongside changes in the amount of delivered renewable energy.

Application of the guidance

2.33 As described above the EAP has an explicit overlap with CERT. However, there are potentially other policies that overlap with the EAP that need to be considered. This includes both UK wide and Scottish specific polices.

2.34 Under the staged approach it is relatively straightforward to isolate the measures that are installed under CERT (stage 3) from those that are installed as a result of the funding provided under EAP (stage 4). What is less clear is whether any additional funding or support contributes to the measures installed under stage 4. Certain other policies may have had a contributory influence. However, since the EAP funding actually pays for the installation of these measures then it is reasonable for the package to claim 100% of the savings.

2.35 What is less clear is the extent to which any savings can be claimed by the activities under Stage 1 and Stage 2. Recent work funded by DECC (Enviros, 2008) ¹⁶, which reviewed the potential for behavioural and demand-side management measures to save energy, concluded that generic advice on energy reductions ¹⁷ had 'some potential' to deliver additional energy savings. In contrast General and tailored education of consumers and the supply-chain ¹⁸ had considerable potential when used in conjunction with other tools. For the purposes of this pilot we assumed that no additional savings can be attributed to the Stage 1 and Stage 2 activities over and above the baseline. This may lead to an underestimate of the total impacts.

2.36 On this basis we have assumed the following:

• The savings from the 10,000 cavity walls that are filled and the 10,000 lofts that are insulated, under Step 3, are attributed to the CERT programme.
• The savings from 12,000 households that are referred on for Stage 4 measures are attributed to the EAP.
• Other policies may make a contributory influence to the above savings but have not been allocated a proportion of the savings.

Comments and recommendations

2.37 As discussed above the policy space is relatively complex with a large number of policies and stakeholders potentially influencing the implementation of insulation and heating measures within the existing housing stock.

2.38 It is difficult to provide generic guidance on dealing with policy overlaps, since the issues is very policy/sector specific. The current DECC guidance provides some advice (if policies cannot be isolated then appraise as a package) and also provides an example of where this might be appropriate. The guidance could potentially be expanded to provide a few more examples of how policy overlaps might be addressed in specific circumstances, but as stated, it is difficult to provide generic guidance on this issue.

Quantification of the impacts on energy consumption

Requirements in the guidance

2.39 The DECC guidance requires that the policy appraisals specify any change in UK final energy consumption. Ideally, the estimated reductions in energy consumption would also be split by fuel type. However, the DECC guidance does not provide any specific advice as to how the changes in energy consumption should be quantified.

Application of the guidance

2.40 Reducing the energy consumption within households, and the associated energy bills, is the primary objective of the EAP. In the absence of specific guidance on how the changes in energy consumptions should be quantified the methodology employed has been based upon experience gained from the evaluation of UK wide policies and measures.

2.41 Specifically, work to underpin UK/ GB energy efficiency policies provides estimates, on a measure by measure basis, of the annual energy savings that are possible from the installation of insulation measures. These estimates are based upon modelling using BREDEM¹⁹. Table 2.1 below shows the annual energy savings used in the consultation for Community Energy Saving Programme ²⁰ for a selection of domestic insulation heating measures. These values have been used because they represent the most recent estimate of savings from individual measures.

Table 2.1: Annual savings per measure for the average 3-bed semi-detached house

Source: Consultation on the Community Energy Saving Programme http://www.decc.gov.uk/en/content/cms/consultations/open/cesp/cesp.aspx

2.42 For the purpose of appraising the impacts of the policy, the energy savings derived from the BREDEM model are based upon an average 3-bed semi detached house for the insulation measures. Savings for other measures have been calculated by various methods, based upon their likely effect on the energy consumption of a 'base case' dwelling (Defra, 2007). Furthermore, the energy savings are based upon the installation of a measure in isolation, so the impacts of measures installed in combination cannot simply be added together.

2.43 Certain measures that may be implemented under EAP do not feature under the CESP list of measures, or do so at a level of resolution that is insufficient for the policy appraisal. This is particularly the case for fuel switching measures. Since the EAP is likely to target older and hard to treat properties then the installation of new heating systems is likely to be an important measure. Research by BRE (2007) ²² provides some estimates for fuel switching measures, as shown in the table below. The estimates, based upon BREDEM calculations, were carried out to assess the likely energy, cost and carbon savings resulting from each of these upgrades for a typical dwelling, based upon a 2005 stock average home.

Table 2.2: Energy savings from fuel switching measures

2.44 Further estimates of the energy savings from heating systems are available from alternative studies. For example, in 2008 the Scottish Government performed a review of the Scottish Renewables Heating Pilot ²³. The aim of the study was to pilot the installation of renewable-based central heating systems in properties off the gas grid. The pilot concentrated on air source heat pumps ( ASHP) and ground-source heat pumps ( GSHP). Based upon the average performance levels experienced during the pilot the annual carbon savings delivered by the technologies, when compared to electric storage heating was 4,900 kgCO2 per year for ASHP and 5,100 kgCO2 per year for GSHP. These are comparable to those quoted in the BRE study above.

2.45 A further issue that needs considering in the calculation of energy savings is that under the Stage 4 of the EAP the households that are supported are likely to be provided with a range of measures e.g. upgrade to heating system and insulation measures. Therefore, when quantifying the energy savings it is important not to double count savings from the individual measures. In general terms it is reasonable to assume that the savings that are delivered from separate insulation measures can be added together (e.g. loft & cavity), but savings from a combination of heating and insulation cannot.

2.46 The procedure that was adopted for appraisal of the proposed Community Energy Savings Programme ( CESP) is to estimate the percentage reduction in heat demand from insulation, and then to apply the percentage reduction in fuel demand from the new heating system. We have used a comparable approach for the evaluation of the Stage 4 measures under the EAP.

2.47 It has not been possible to assess the full range of measures combinations that may be installed under the EAP. Therefore, the analysis has used three example packages of measures to illustrate the potential energy savings from the EAP. These have been defined as follows:

• Package 1 - Insulation measures only (cavity wall, virgin loft or loft top-up and draught proofing) at 2,000 households
• Package 2 - Heating and insulation (Replacing 60% efficient boiler with 90% efficient boiler, loft top up and draught proofing) at 8,000 households
• Package 3 - Renewable heating and insulation (Replacing electric storage with Air Source heat pumps, loft top up and draught proofing) at 1,000 households

2.48 For each of the three packages the energy savings have been quantified using the typical values for energy saving by measures as used in the CESP analysis. To account for the cumulative savings from both insulation and heating measures, and to reduce the risk of double counting, the savings from heating measures have been scaled back to reflect the lower level of 'net' savings that will be delivered, if installed in combination with insulation measures. On this basis, the average saving per household and the total aggregate saving across all households, are shown in Table 2.3 and Table 2.4, respectively. It is important to note that these values should be considered indicative. The true savings will be specific to the households in question. Therefore, whilst the total savings may be considered reasonable, assuming the mix of households is representative of the 'average', the actual savings per household may be very different from the average values presented below.

Table 2.3: Gross annual energy savings per household ( GWh)

Table 2.4: Gross annual energy savings from insulation measures during year 1 of the EAP ( GWh)

2.49 Package 2 delivers the largest energy saving. This relates both to the large number of measures installed, but the large savings per measure from the replacement gas boilers.

Issues and recommendations

2.50 As described above, the energy savings estimates used within the appraisal of existing UK wide policies typically assess the energy savings from individual measures based upon GB average conditions. Whilst this provides a pragmatic approach, it may not reflect adequately the full complexity of the housing stock. Specifically, it may not reflect difference between the Scottish housing stock and the GB average. This may have implications for both the types of measures that are installed under existing programmes, and also the level of energy savings that are delivered by those programmes.

2.51 In practice the actual energy savings that will be delivered from the installation of the above measures will depend upon the house in questions. For the purposes of the policy assessment the BREDEM model is based upon an average 3-bed semi detached house, which is based upon GB average circumstances. Clearly, this is a major simplification in terms of representing actual impacts, but it does enable policies to be appraised on a consistent basis.

2.52 Based upon this analysis the following comments can be made on the DECC guidance:

• The guidance specifies that changes in energy consumption should be quantified but does not prescribe how the savings should be calculated. This is a detailed issue and probably beyond the scope of a cross-sectoral guidance document. However, it would be beneficial to make reference to existing work where certain issues have been examined in detail already.

2.53 For example, a number of studies have been commissioned by Defra to examine differences between the technical potential and actual savings from insulations measures. This has led to default correction factors that are used in the evaluation of UK policies. Whilst not without limitations, for consistency then reference to this research may be beneficial.

2.54 GB wide conditions may not adequately reflect conditions in Scotland. The guidance may consider the use of adjustment factors to reflect the real savings that are likely in Scotland. However, in applying any adjustments it is important to ensure that the savings can be compared with those derived from UK (or GB) wide policies.

Quantification of direct rebound effects

Requirements of the guidance

2.55 Energy efficiency policies can be associated with both direct and indirect rebound effects. Direct rebound effects can occur where households who have their fuel bills reduced due to the measures installed use some of the financial savings to fund an increase in the temperature of their homes and so take additional thermal comfort. This is known as comfort taking.

2.56 The implications of comfort taking are that the savings that are projected to arise from the installation of energy savings measures are not realised to the same extent in-situ ²⁴. Without adjusting for these rebound effects the estimated energy and carbon savings can be over-stated.

Application of the guidance

2.57 Whilst the DECC guidance suggests how direct rebound effects should be valued, it does not elaborate on how these effects should be quantified in energy terms.

2.58 In practice, a large amount of evidence has been accumulated over the years on the direct rebound effects associated with energy efficiency polices in the residential sector. The available evidence is partly based on experience and evaluation, and partly based on a programme of commissioned research by Defra to address specific issues.

2.59 On the basis of this evidence, current appraisals of UK energy efficiency polices in the domestic sector assume that comfort taking reduces the emissions savings by 40% for all insulation measures installed in low income areas.

2.60 However, research suggests that after a home has reached a comfortable temperature of approximately 21ºC in the living area further bill savings will not be taken as increased comfort. To account for this, when considering a whole house approach, comfort taking has only been applied to insulation measures ²⁵ within existing policy appraisals. This approach has been followed in the appraisal of the carbon savings from the EAP.

2.61 On this basis the potential energy savings that can be assumed to be taken as additional comfort can be estimated as follows.

Table 2.5: Quantification of direct rebound effects ( GWh)

2.62 As discussed above comfort taking is only assumed for the insulation measures, hence the level of net savings is the same as the gross savings for the heating measures.

Comments and recommendations

2.63 Direct rebound effects can have an important influence upon the level of energy savings, and the associated carbon impacts, in situ. Therefore assumptions that are made with respect to comfort taking can have a strong influence on the overall level of savings.

2.64 The current DECC guidance requires that direct rebound effects are valued, but provides little description of how they should be quantified in energy terms, or any reference to the existing evidence on the potential levels of rebound. Whilst this is a detailed issue, further explanation would provider a greater awareness of the issue, and understanding of the circumstances where it might be appropriate, and is overall importance. This would also ensure that comfort taking is evaluated consistently.

2.65 For completeness, the guidance might benefit from some commentary on indirect rebound effects, if only to state that they should be assessed on an economy wide level.

Quantification of the impacts on GHG emissions

Requirements in the guidance

2.66 The DECC guidance stipulates that, where relevant, changes in greenhouse gas emissions should be based on the estimated energy saved, converted using the marginal emission factors outlined in the guidance. The change in GHG emissions should be calculated over the lifetime of the measures ²⁶.

2.67 The guidance also requires that greenhouse gas emissions from the ETS (i.e. traded) and non-traded sectors are valued separately, and in turn, this requires that when quantifying the impact of the policies on greenhouse emission the traded vs. non-traded split needs to be taken into account.

Table 2.6: The following table is provided in the guidance to help with the attribution of emissions to the traded sectors.

Application of the guidance

2.68 In order to quantify the carbon emissions arising in the traded and non-traded sector, and also the air quality impacts associated within the policy, it is necessary to determine the sectors in which the energy savings will arise. This is also important for valuing the energy savings using consistent price assumptions.

2.69 The reported energy savings used in CESP analysis represent a weighted average acceding to the GB stock average for the insulation measures. For the replacement boiler then the savings assume the replacement of an old gas boiler with a new more efficient boiler, hence the fuel savings are all gas. For air source heat pumps it is assumed the measures are installed in households that currently use electric heating. This percentage split is assumed to remain unchanged in all future years ²⁷.

Table 2.7: Assumed mix of fuels/heating types in CESP modelling

Source: CESP Consultation

2.70 These energy savings, by fuel type, can then be applied to the emission factors provided in the DECC guidance, as repeated below, in order to determine the carbon dioxide savings arising from the scheme.

Table 2.8: Emission factors

Source: IAG guidance

2.71 Application of the above factor to the individual energy savings estimates for each of the insulation and heating measures provides an annual CO2 savings from the package. These values are repeated below for each of the measures. It is important to note that the CO2 savings are based upon the assumed energy savings after adjusting for any direct rebound effects. Furthermore, the savings from the heating measures have been scaled back since they will be implemented alongside the insulation measures so the net savings will be lower.

Table 2.9: Annual CO2 savings from the EAP, by measure (ktCO2/yr)

2.72 In addition to presenting the annual savings, it is also necessary to determine the impact of the policy upon the future carbon budgets. The lifetime or persistence of the savings from each of the measures, has been calculated on the basis of the lifetime assumptions outlined in the table above, as used in the analysis of CESP. For example, this means that the installation of cavity wall insulation in 2009, will deliver energy savings until 2049. The level of savings is assumed to persist at the same annual level, over the full 40 year lifetime. This assumes that in the absence of the policy no insulation would have been installed within the property at any time over the next 40 years. It also assumes that the level of savings and the interaction with other measures in the household (e.g. efficiency of boiler) remains the same over the whole lifetime ²⁸.

Table 2.10: Change in CO2 emissions by UK budget period

Notes: negative values represent a reduction in emissions. Emission expressed in terms of the cumulative emissions arising across all of the years within the given budget period.

Comments and recommendations

2.73 The emission factors outlined in the DECC guidance are consistent with the factors used in the compilation on the UKGHG inventory for direct fuel combustion. Whilst the carbon intensity and/or calorific value of the individual fuels may vary, overall these emissions factors are considered relatively robust and are equally applicable to fuel consumption in Scotland as the rest of the UK.

2.74 For grid electricity the emission factor of 0.43 kgCO2 per kWh represents the value used by UK government for calculating emission savings. This is based upon long-term marginal factor. In the long run it is assumed that the carbon dioxide saved by policies which reduce electricity corresponds to the fossil fuel plant that would otherwise have been constructed if the policies had not been in place. This is not the same as the plant switched on or off in real time as a response to real time variations electricity consumption, because the long run marginal effect (which this factor captures) is a function of decisions about plant construction. DECC energy models indicate that it should be assumed that the long run marginal plant is Combined Cycle Gas Turbine ( CCGT) and that changes in CCGT capacity do not significantly affect the load factor for other generators. This assumption is assumed to hold for Scotland.

Valuation of changes in energy consumption

Requirements in the guidance

2.75 The DECC guidance requires that changes in energy consumption should be valued at the resource costs of energy supply i.e. excluding the fixed costs. The guidance provides the latest energy price to be used in the appraisal, based upon the latest DECC modelling assumptions. Values are provided for the central prices scenario, together with low and high price scenarios for sensitivity analysis.

Application of the guidance

2.76 The valuation of the energy consumption is relatively straightforward once the change in energy consumption, by fuel type and adjusting for any direct rebound effects, has been taken into account. The main methodological challenge is therefore the quantification of energy savings, as described above.

2.77 In the pilot the benefits to consumers from reduced energy consumption have been calculated by taking the savings in energy use (in GWh) identified above and multiplying these by the domestic variable element electricity prices published in the DECC Guidance (for the respective years from 2009 to 2050). The energy savings have been calculated in terms of a total benefit over the lifetime of the policy (expressed as net present value). The values are expressed in 2008 prices; in accordance with the current DECC guidance.

Table 2.11: Energy savings from the EAP ( NPV, £ million)

Comments and recommendations

2.78 No major issues or challenges were faced during this step of the appraisal. Likewise no areas were identified where the guidance should be modified to reflect the circumstances in Scotland.

Valuation of the avoided cost of additional renewable generation

Requirements of the guidance

2.79 The UK's renewable energy target, under the EU Climate and Energy Package, is a function of UK final energy demand. Therefore, changes in final energy consumption (post-2011) will alter the level of delivered energy the UK is required to achieve. The updated guidance requires that changes in UK final energy consumption are quantified and valued. The valuation reflects the avoided cost of additional renewable generation. This is estimated at £18/ MWh, which is equivalent to 15% (i.e. the % of final energy consumption target) of the marginal cost of generation.

2.80 The guidance requires that changes in the level of renewable energy delivered should be valued using the full marginal cost of delivering it from other sources i.e. £118/ MWh.

Application of the guidance

2.81 The reduction in electricity requirements resulting from the installation of the energy efficiency measures will mean that the UK will be able to meet its targets for the contribution of renewable energy sources to overall energy at a reduced cost. Currently, renewable energy sources are more costly in financial terms than other sources of energy and reducing overall energy requirements will generate an additional benefit by reducing the need to make energy reductions through renewables. This benefit has been estimated at £18 per MWh. Applying this factor to the estimated energy savings arising from the EAP results in a net present value of almost £18 million associated with the reduced renewable energy requirement.

Comments and recommendations

2.82 It is not the intention of this pilot to review the values within the DECC guidance, but instead to pilot the application of the guidance. The valuation of the avoided cost of delivering renewable generation is straightforward once the quantity of renewable energy generated has been calculated.

Valuation of Direct Rebound Effects

Requirements of the guidance

2.83 The DECC guidance requires that direct rebound effects are valued, and suggests that they should be valued at the full retail price, since consumers are willing to pay at least the full retail price for the comfort benefit. No guidance is provided on indirect rebound effects, although these are normally dealt with at an economy wide, rather than policy level.

Application of the guidance

2.84 The results from the application of the guidance are provided in Table 2.12 below. All measures will be installed in low income households.

Table 2.12: Direct rebound effects associated with the EAP (£)

Comments and recommendations

2.85 No major issues or challenges were faced during this step of the appraisal. Likewise no areas were identified where the guidance should be modified to reflect the circumstances in Scotland.

Valuation of GHG emissions

Requirements in the guidance

2.86 Changes in emissions within the ETS sectors are required to be valued at the 'market price of carbon', which can be represented in terms of the EU allowance prices. The economic benefits to the UK are represented as the additional reduction in UK emission in the ETS sector, multiplied by the price of EU allowances.

2.87 In the EUETS sector emissions reductions are only considered additional if they would not have been delivered by the price signal from the EUETS alone. It will be necessary to provide a justification for claiming additionality. The guidance provides forecast price data from the DECC carbon price model to value future carbon savings.

2.88 Emissions reductions within the non- ETS sector are valued, in accordance with the DECC guidance, at the Shadow Price of Carbon ( SPC).

Application of the guidance

2.89 The EAP will act upon emissions within both the traded and non traded sectors. Direct fuel combustion within households is not covered by the EUETS, so is valued at the Shadow Price of Carbon. However, the change in emissions that will result from reduced electricity consumption is calculated using the projected EU Allowance price under the EU Emissions Trading Scheme (i.e. the revenue gained from selling permits for emissions).

2.90 The carbon savings are valued by taking the annual savings in tonnes of carbon dioxide equivalent and multiplying it by the correct price. The values are based upon the central estimates for both the SPC and EUA price.

Table 2.13: Valuation of carbon (central scenarios) (£ million)

2.91 Since the bulk of carbon savings arising from the policy will act upon the direct emissions from households then they will not be captured within the traded sector. Consequently, the value of the carbon savings in the non-traded sector is much greater than in the traded sector.

Comments and recommendations

2.92 No major issues or challenges were faced during this step of the appraisal. Likewise no areas were identified where the guidance should be modified to reflect the circumstances in Scotland.

2.93 The main uncertainty surrounds the values used for the monetisation of the carbon impacts. Large uncertainties surround both the SPC and the EUA price. Therefore the valuation of these impacts has a high level of uncertainty. However, this is the case for all GHG policies, and is not specific to Scotland.

Valuation of air quality impacts

Requirements in the guidance

2.94 Many policies that influence changes in greenhouse gases will also influence emissions of air quality pollutants. The DECC guidance states that where a policy that is being evaluated or appraised is expected to have a major impact ²⁹ on air quality then it is recommended that full modelling be undertaken to assess the effect of the policy on both health and ecosystems.

2.95 If, however, the air quality impacts are expected to be relatively small, then it is possible to assess the impacts based upon the expected impacts of different pollutants (PM10, NOX, SO2, NH3). This is done using damage cost estimates that reflect the effect per tonne of pollutant in monetary terms.

2.96 The DECC guidance outlines damage costs associated with the consumption of fossil fuels for transport and domestic heating, to be used in the policy appraisal.

Application of the guidance

2.97 The economic damages associated with emissions of air quality pollutants are related to the point of release. For example, ground level releases in densely populated urban areas are likely to results in greater levels of human exposure, and associated health impacts, than emissions from tall stacks in rural locations. Therefore, the damage costs from air quality releases from domestic heating in inner conurbations are much greater than the damage costs from domestic heating in rural locations.

2.98 Furthermore, the emissions of air quality pollutants are related to the fuels that are used for heating. Per unit of energy output, the emissions (and associated damages) are greater for typical biomass and solid fuels systems than for natural gas systems. Therefore, the air quality impacts associated with fuel switching measures are particularly important.

2.99 In the absence of detailed data on the location of households that will be targeted by the EAP then it is difficult to quantify with any certainty the level of air quality damages. For the purposes of the pilot, we have assumed that the households targeted by the EAP will be consistent with the urban-rural split of households for Scotland as a whole. The following has been assumed:

• 30% of measures are installed in rural households
• 70% of measures are installed in urban households

2.100 The results from applying this split are shown in the table below.

Table 2.14:Valuation of air quality (central scenarios) ( NPV, £ million)

Comments and recommendations

2.101 The EAP leads to net benefits associated with the air quality impacts deriving from the reduced energy consumption. The analysis has been based upon the average fuel mix used in the CESP/ BREDEM calculations. In practice, measures introduced under the EAP may include a large proportion of solid fuel or oil heating systems than the average - since the focus is on low income households. These systems are associated with greater air quality emissions per unit of energy than a comparative gas heating system. Consequently, the air quality impacts, and therefore the benefits of energy efficiency improvements, would be greater. On this basis the air quality impacts valued for the EAP above are potentially underestimated.

Sensitivity analysis

Requirements of the guidance

2.102 The DECC guidance suggests that key sensitivities in assumptions or data should be tested to ensure robustness of the methods used.

Application of the guidance

2.103 Scottish specific energy consumption

2.104 A sensitivity analysis has been made to reflect the potential variation relating to the use of GB wide assumptions.

2.105 A correction has been made for the colder climate in Scotland, which results in a higher level of energy consumption in Scotland to a comparable ' GB average' house, and therefore a higher level of energy savings per household. Whilst this makes no adjustment for the different mix and size of households in Scotland, and the relative variances in energy savings that are associated, it does at least provide some Scottish-specific adjustment to the energy savings. In order to test this sensitivity a degree days correction factor of 17.95% has been applied, based upon the analysis in the Scottish Energy Study ( AEA, 2008) ³⁰. This effectively assumes that annual energy consumption is 17.95% greater in Scotland than a GB average.

2.106 A second adjustment has been made to reflect the different average mix of fuels used in Scotland. Space heating of houses in Scotland uses a higher proportion of electric and solid fuels, and a lower proportion of natural gas than the GB average. This can affect the relative carbon emissions per unit of energy. An adjusted mix for Scotland has been derived based upon statistics on the mix of fuels used to heat Scottish homes versus the GB average.

2.107 The results from this sensitivity analysis are provided below for carbon savings.

Table 2.15: Scottish specific adjustment: annual carbon savings (ktCO2/yr)

2.108 As shown in the table above the crude adjustment for Scottish specific circumstances results in increased carbon savings from the policy.

Overall results and recommendations

Determination of the baseline

2.109 The aggregate energy data that is provided by the DECC energy model is of limited use in defining a baseline for the impact of the EAP on households within Scotland.

2.110 To more accurately determine the baseline level of activity it is necessary to have a more detailed assessment of the impacts of existing policies in Scotland. This includes both UK and Scottish specific policies. Ideally, this information would be available on a measures basis. Whilst this is a detailed issue and beyond the scope of the revised guidance, it will become increasingly important in the future as the Scottish Government is required to monitor progress against the Scottish Climate Change Bill.

Policy overlaps

2.111 It is difficult to provide generic guidance on dealing with policy overlaps, since the issue is very policy/sector specific. The current DECC guidance provides some advice (if policies cannot be isolated then appraise as a package) and also provides an example of where this might be appropriate. The guidance could potentially be expanded to provide a few more examples of how policy overlaps might be addressed in specific circumstances, but as stated, it is difficult to provide generic guidance on this issue.

Quantification of energy savings

2.112 The guidance specifies that changes in energy consumption should be quantified but does not prescribe how the savings should be calculated. This is a detailed issue and probably beyond the scope of a cross-sectoral guidance document. However, it would be beneficial to make reference to existing work where certain issues have been examined in detail already.

2.113 For example, a number of studies have been commissioned by Defra to examine differences between the technical potential and actual savings from insulations measures. This has led to default correction factors that are used in the evaluation of UK policies. Whilst not without limitations, for consistency then reference to this research may be beneficial.

2.114 The energy savings estimates used within the appraisal of existing UK wide policies typically assess the energy savings from individual measures based upon UK/ GB average conditions. Whilst this provides a pragmatic approach, it may not adequately reflect the impacts in Scotland. The guidance may consider the use of adjustment factors to reflect the real savings that are likely in Scotland. However, in applying any adjustments it is important to ensure that the savings can be compared with those derived from UK (or GB) wide policies.

Quantification and valuation of rebound effects

2.115 Direct rebound effects can have an important influence upon the level of energy savings, and the associated carbon impacts, in situ. Therefore assumptions that are made with respect to comfort taking can have a strong influence on the overall level of savings.

2.116 The current DECC guidance requires that direct rebound effects are valued, but provides little description of how they should be quantified in energy terms, or any reference to the existing evidence on the potential levels of rebound. Further explanation on this issue would provide a greater awareness of the circumstances where it might be appropriate, and its overall importance. This would also ensure that comfort taking is evaluated consistently.

2.117 For completeness, the guidance might benefit from some commentary on indirect rebound effects, if only to state that they should be assessed on an economy wide level.

Valuation of energy savings and direct rebound effects

2.118 No major issues or challenges were faced during this step of the appraisal. Likewise no areas were identified where the guidance should be modified to reflect the circumstances in Scotland.

Valuation of GHG emissions

2.119 No major issues or challenges were faced during this step of the appraisal. Likewise no areas were identified where the guidance should be modified to reflect the circumstances in Scotland.

Air quality valuation

2.120 Air quality impacts are important and represent a co-benefit of the policy. Since the EAP may deliver greater reduction in solid fuel and oil consumption than the average household, the overall impacts may be underestimated.