Does carbon trading make a difference?

September 8, 2008 6:16 AM

Why should energy supply companies bother making people houses greener when they are essentially reducing demand for their good? (quite a UK based question)

I've been looking at carbon credits, the EU Emissions trading scheme and CERTs and have a good handle on it now but the main question is why should the energy suppliers (British gas, powergen etc) bother?

Electricity suppliers such as British gas are obliged to help improve the energy efficiency of peoples homes, from a cert certified process they receive carbon credits. However from a bit of basic maths it seem silly for a business to reduce the demand for their good.

If a house was insulated and then needed 10% less gas to heat the home, on a £800 yearly bill the energy supplier would lose £80 a year. A house around that size probably produces 4 tonnes of carbon a year - 10% of that is worth about £8 in carbon credits.

£80 - £8 = £72 worse of?

So why should British gas, eon, powergen etc bother to really improve peoples energy efficiency?

posted by henry.oswald to work & money (11 comments total)

How much do the carbon credits cost otherwise? As in, if they have to buy a carbon credit (I'm assuming to offset whatever they are producing) for 500 pounds, or they can get one by improving the efficiency of people's homes for 72 pounds, it would make more sense to improve efficiency than to buy the carbon credits.
posted by Grither at 6:25 AM on September 8, 2008

In the US electric industry, it's called demand-side management. Here's the way it was explained to me: It costs a lot to build a new power plant to meet increasing demand. So it's actually more profitable for electric utilities to encourage people to reduce their use, thus delaying the need to build the new plant. The company still makes a profit from the energy used, plus they avoid the huge expense of expanding. Maybe the idea is similar for carbon credits.
posted by PatoPata at 6:30 AM on September 8, 2008

carbon credits cost (on average) about £20ish

so a house producing 4tonnes is worth £80 in carbon credits, theoretically.


To Patopata, I can understand the demand side argument, however the energy suppliers are not responsible for generation they are in essence the middle men (essential middle men). So why would it be their concern about meeting future needs?

I understand the government are forcing the suppliers to do this, but apart from the credits is there another way? am I missing something?
posted by henry.oswald at 6:45 AM on September 8, 2008

Check out the wiki for more information on how carbon credits work.
posted by Grither at 6:46 AM on September 8, 2008

Ah, didn't see your post before I posted that.... and if it's a government enforced program to make them improve efficiency to get carbon credits, then....um... way to go government for missing the point?
posted by Grither at 6:51 AM on September 8, 2008

Electricity suppliers such as British gas are obliged to help improve the energy efficiency of peoples homes, [...] it seem silly for a business to reduce the demand for their good.

Here's how it works:

1. Energy companies decide to put their prices up by 40%, 26%, or whatever. Few people move suppliers when this happens, so there's really no disincentive to doing this.
2. People start talking about 'fuel poverty' and a 'windfall tax' on energy company profits.
3. Politicians are populists, and get the blame for what's going on in the economy. They 'come under fire'.
4. Power company bosses are called to testify before parliament. They blame prices on the world market, and talk about reducing demand through efficiency increases.
5. Power companies post £5 worth of energy-saving lightbulbs* to each customer and act like this somehow offsets the substantial price rises.
6. Repeat next year.

* Gas up 30%, electricity up 20% and I get sent one (useless) 60 watt equivalent energy saving bulb and one 100 watt equivalent energy saving bulb. When my house is already energy saving bulbs throughout. Thanks a lot, southern electric.
posted by Mike1024 at 7:13 AM on September 8, 2008 [1 favorite has favorites]

There may actually be an incentive for the energy production industry here. The industry has a pretty well-defined maximum output threshold unless they want to sink millions and millions of dollars into new infrastructure. This is not only expensive, but a real pain in the ass, as power generation facilities are pretty hard to find sites for these days. As the population is still growing, and per capita energy demands are rising too, any way of increasing individual energy efficiency staves off the date when major energy producers need to sink hundreds of millions into new infrastructure. People don't really like paying their utility bills, but that's nothing compared to the unpopularity of brownouts caused by lack of capacity.

Also, it's impossible to underestimate the incentive created by legislative mandates. True, there is at least the possibility of a minor reduction in revenue, but compare that against the massive regulatory penalties Parliament can come up with should the industry fail to cooperate.
posted by valkyryn at 7:18 AM on September 8, 2008

As Mike1024 points out, it's about perception. By seeming to act 'responsibly' via relatively low-cost schemes, companies can minimise the risk of unfavourable government intervention while enhancing their public image.
posted by malevolent at 7:36 AM on September 8, 2008

I've been wondering about this for a while too, and my current best guess (not supported by any research beyond reading a power company's website) is that they're diversifying a bit - selling insulation, new boilers etc and presumably making a profit off all those sales. By applying some crazily high discount rate, it's possible that they could convince themselves that in the long term, they will have more profit from insulation-etc sales now than more power sales in the future. This would make more sense if they also forecast prices going down a bit in a while.

If they factor in some sort of public perception into their maths - oh look, they're helping us insulate our home, as opposed to oh look, the bill's just gone up again - possibly involving higher customer retention or more people switching to them, as a consequence of their environmentally friendly / customer friendly actions, this would also help the model with the whole 'more long-term income' thing.
posted by Lebannen at 8:49 AM on September 8, 2008

They are essentially been forced to do so by the UK energy regulator, OFGEM.
One problem with energy regulation in the UK is that it was devised with pretty much the single goal of selling energy at the lowest possible price. Leaving aside the fact that it hasn't been very good at this (the abandonment of pool pricing in 2000 after it became apparent that the companies where price fixing beign a good example) this leaves a number of issues where the market isnt very good at providing, the most obvious being environmental issues, security of supply and fuel poverty. Increasing political pressure relating to these three issues has meant action has had to be taken to address them. Unfortunately the regulator is actually pretty limited in what it can do, it can only operate within what its legally defined 'duties'. The government can change these duties but are never keen to do so as they prefer to avoid interference with the markets where possible. This has led Ofgem to establish efforts to address social and environmental goals, though these tend to be pretty weak. At the same time government tries to address these problems with other policy instruments, for example, by supporting efforts to increase energy efficiency in housing which tends to reduce fuel poverty if you target the right people. Labour were actually doing pretty well on fuel poverty until the prices went crazy, now lots of people (i.e. millions) are back in fuel poverty.
As Mike1024 points out this looks bad for the government, so they have effectively pressurised the utilities into coming up with some stronger measures for helping those in 'vulnerable groups' (officially old people and families). The threat of a windfall tax has certainly focused some minds, but there have been programmes already in existence prior to that to assist various vulnerable groups to reduce their energy use and costs.

One thing that might be of interest to you and which may develop in the future (and which, fingers crossed might attract me some research money) is an increase in the level of Energy Services that companies can provide. In the UK these are defined as be “Any activity taken by energy companies and/or other market actors which results in demonstrable and sustained savings of supplied/delivered energy in their customers’ households and which includes the option of initial investment by other than the household or property owner”. Basically, the utility comes to your house, pays for energy efficiency kit which should reduce your energy costs by £X00p.a. then takes Z% of that saving to cover their costs and make a profit. You get to keep the rest of the money, the utility still makes money and its good for the environment. There are lots of variations on this but that's the basic model. Alas, you do't see much of this as yet for one reason or another in the UK, and not that much elsewhere either as far as I'm aware. You'd need a regulatory system which allowed this model to be profitable befiore anyone would consider it, you'd also need utilities that would try it, if you had proper competition in the energy system it might be useful, but who has?
posted by biffa at 9:44 AM on September 8, 2008

"However from a bit of basic maths it seem silly for a business to reduce the demand for their good."

Sometimes you see this when they can sell the power to a more profitable customer. For every Erg they don't sell you for a dollar they might be able to sell it to someone else for a dollar ten.
posted by Mitheral at 9:45 AM on September 8, 2008