E3G outlines plan to cut Russian gas imports by 80% this year

E3G has outlined a nine-step action plan to reduce gas imports from Russia by 80% by the end of this year, whilst lowering the average household energy bill by £150.

By 2025, the environmental think tank said the measures could reduce gas demand by the equivalent of 149% of the UK’s LNG imports from Russia, which currently account for around 4% of total gas supplies.

The organisation said the actions would require £6.7 billion of public and private investment this year but this would be paid back within two years through average household savings of between £130 and £170 per year. Cumulative investment would rise to £33.6 billion by the middle of the decade but would be recouped within five to nine years through average household savings of between £145 and £240 per year that would persist long afterwards.

“Even before the invasion, energy prices had risen rapidly and were projected to rise further still, contributing significantly to a cost-of-living crisis for UK households,” E3G stated in a briefing paper.

“Over 85% of UK homes are connected to the gas grid, and our building stock is among the coldest and leakiest in Western Europe. Experts say one in three UK households will be thrown into fuel poverty if – as some analysts anticipate – energy bills rise to £3,000 or above this autumn.

“The government set out some measures to mitigate these costs in February, but the wider context has changed dramatically. Much greater ambition is now called for. Deep reductions to our demand for gas will not happen overnight.”

It continued: “We will need a long-term package of incentives, regulations, and policy support to decarbonise our grid, electrify heating through the mass deployment of heat pumps, help households install insulation and other energy efficiency measures, take sensible steps to reduce consumption, and give businesses and the finance industry the confidence needed to invest in the transition at scale.

“We must avoid the ‘boom-bust’ policies of the past which have decimated the green home retrofit industry, and long-term clarity will be needed to grow the skills and supply chains we need. But there is also a pressing need to act now, in a way that shores up energy security and cost benefits by the end of this year – by converting fossil dependency into reduced living costs – while deepening them across the decade.”

The nine-step plan

Increase support for energy efficiency through existing schemes

E3G said the existing support schemes – the Local Authority Delivery Scheme, the Home Upgrade Grant, and the Public Sector and Social Housing Decarbonisation Funds – are collectively worth just under £3.4 billion from 2022 to 2025 – £2 billion short of the pledges in the Conservative’s 2019 manifesto. The government should immediately fulfil its commitments by putting an additional £1.4 billion into the Home Upgrade Grant, £200 million into the Social Housing Decarbonisation Fund and £400 million into the Public Sector Decarbonisation Fund. The Local Authority Delivery scheme should additionally be extended to 2025 with a further £1.8 billion of funding.

The think tank said the government also needs to act to ensure a smooth transition to the fourth phase of the Energy Company Obligation (ECO) scheme and prevent a hiatus in installations: “The relevant legislation has not yet been brought to Parliament, despite the new phase being due to start in April. Government must bring this legislation forward now and extend ECO3 on a pro-rata basis to cover the transition period so that companies working to the previous scheme can continue to upgrade homes and fulfil their obligation.”

Accelerate the uptake of the most efficient appliances

The government should introduce a temporary increase, or time-limited parallel, to ECO, with the most efficient fridges, freezers, lighting, electric cookers and televisions as eligible measures.

“For households who have inefficient appliances to trade in, partnerships between energy suppliers and major retailers could promote discount vouchers on the most efficient appliances in each product class, with larger discounts offered to customers presently eligible for ECO support. The costs of this should be borne by the exchequer.”

Obligated suppliers should also be permitted to offer low-flow shower heads and smart heating controls.

Launch a major new public information campaign

“Given the current focus on these issues, the public is likely to be highly receptive to a major public information campaign – which could bolster appliance, insulation and electric heating take-up too – as was done in the oil crises of the 20th century and the COVID-19 pandemic,” E3G stated.

“In contrast to energy saving campaigns in historic crises, this time the message needs to focus on steps that do not compromise on warmth and comfort. A carefully designed national campaign would be a low-cost intervention with potentially huge results.”

The think tank noted that lowering the flow temperatures on all condensing boilers – “a very simple step that millions of households will be able to take” – could save 17TWh in demand and cut household gas bills by 6 to 8%, whilst turning down thermostats by just one degree Celsius would lower average gas bills by 10% and potentially reduce demand by 21TWh.

Expand the Boiler Upgrade Scheme

The Boiler Upgrade Scheme is due to commence in April, offering £5,000 grants to households to replace their gas boiler with an electric heat pump.

However, with only £450 million allocated to the scheme until 2025, E3G said it will only support the installation of up to 90,000 heat pumps: “This is well short of the government’s own delivery targets which call for the heat pump market to scale to deliver at least 600,000 installations per year by 2028. The scale and urgency of the challenge we now face make it clear that the scheme is insufficiently funded.”

It said funding should be increased to £4.15 billion to enable the installation of 820,000 heat pumps by the middle of the decade to reduce an annual gas demand by around 8TWh.

Remove VAT from energy saving upgrades

E3G noted energy efficiency upgrades and low-carbon heating installations are currently subject to a 20% VAT rate on both materials and labour, compared to 5% for new build construction. It said this VAT should either removed entirely or equalised to 5%.

The think tank cited research by the Federation of Master Builders and RICS which found that lowering VAT on home improvements to 5% until 2025 would create a £51 billion stimulus and create nearly 350,000 jobs at a cost of just £2.7 billion to government.

Remove legacy policy costs from energy bills

The briefing said levies on energy bills to pay for historic investment through schemes such as the Renewables Obligation, Feed-in Tariff and Contracts for Difference schemes fall disproportionately on electricity bills, distorting the relative prices of gas and electricity and disincentivising fuel switching to the latter.

Whilst noting that the government has already committed to the issue through a consultation on fairness and affordability later this year, E3G said: “By paying for legacy policy costs through general taxation, the government could lower energy bills noticeably at a stroke and simultaneously eliminate an importance disincentive to the electrification of heat.”

Introduce a comprehensive training offer to fill skill gaps

Although the UK has relatively few trained heat pump installers, E3G said there are 130,000 registered heating engineers who could quickly add heat pump installation to their skillset.

The think tank said paying the full training and accreditation costs – £300 for a four or five-day course and £750 per person respectively – would cost just £10.5 million for 10,000 installers. Compensating them for the training time, either directly or through tax incentives, would increase this figure to £19.5 million.

“If it chose, the government could cover the entire costs of training every one of the 50,000 heat pump installers needed by 2030 to get British homes off gas and meet our net zero target for less than £100 million spread over eight years,” it remarked. “The returns on this relatively limited investment could be enormous.”

Incentivise energy efficiency through stamp duty

E3G said home purchases are an important “trigger point” when households are more likely to undertake improvements: “The point of purchase is also a unique moment where the value of the home is unlocked and those with asset wealth but without high incomes can retain capital to cover the costs of home energy upgrades.”

The paper said the government should offer a lower stamp duty rate for more energy efficient homes, with buyers being able to claim a rebate within two years of purchase: “An enhanced rebate level, which tapers out as property value increases, could be set to give greater support to those buying lower-value homes. This policy has the advantage of affecting all homes, including owner-occupiers ineligible for other support.”

The think tank said research has suggested this would be revenue neutral for the Treasury, whilst catalysing significant investment. It could also be announced immediately, “sending a clear message of intent to homeowners and the marketplace” before the actual changes come into effect in 2023.

Accelerate the shift to net-zero-ready new builds and end the installation of gas boilers in new homes

The government’s new Future Homes Standard is due to come into force in 2025 but E3G said this is too long to wait: “The government should do everything it can to limit the number of new households who will be left with high gas bills and boilers they will need to replace.” It said the new standard should be brought forward to 2023, including the proposed ban on the installation of gas boilers in new homes.