Government scheme encourages colder homes

Andy Mayer

January 23, 2023

Britons rejoice, for between 5 to 6pm this Monday, should you delay your child’s fishfinger and waffle supper, you will be rewarded. Our kind overlords, through the mechanism of a Demand Flexibility Service, will reduce your bill should it show evidence of using less energy. This, we are assured, is not essential to stop the lights going out this winter. Although it might be in future.

How much you ask? Three whole pounds could be yours for every kilowatt hour saved. That’s the equivalent of running an oven or washing machine for half an hour, or your daily shower. Better still, this is overpayment.

The underlying cost is around a quarter or an eighth of, dependent on whether we use the real or capped price of power. The difference however enough to placate your hungry nipper with a lolly with enough left over to mildly dent your £210 per month typical bill. Super.

Around a million customers are signed up for the scheme, so far. Those who have smart meters, installed at a typical cost of £420 per household, paid for through costs added to everyone’s bills.

At least those that are still functional, unlike mine with older first generation technology, which some suppliers won’t upgrade yet. So if you are one of the 27.7m who isn’t yet participating, despite over half having working meters. You can at least be reassured you’re doing your bit, by subsidising further the households already in receipt of subsidised kit and capped bills.

That aside from a free market perspective, the principle of payments for demand reduction is perfectly sound. Whether security of supply is achieved through increasing supply or reducing demand is a matter for the price mechanism, not central planning. Politically it has the attraction of appealing to the growthphobic green left, as much as eco-conscious new right, because energy not consumed creates, by definition, zero emissions. The points of this scheme is to delay or smooth energy consumption, improving security of supply.

Whether this scheme works well is too soon to say. We would for example expect the payments to fall as participants increase or rise as suppliers compete to attract new customers. Although the price cap has effectively destroyed such competition, and there may be gaming behaviours. If you know the comparison period for example, you are incentivised to cook a chicken, do the laundry, and bath the dog, to maximise your later return.

A more reasonable criticism of the scheme is that we shouldn’t be in the position of needing it at all. The underlying cause of recent energy insecurity is the post-pandemic return of global demand and supply shock of the Ukraine war. Our poor preparation for both however rests on the witless decision of successive European Governments to cripple their energy systems by undermining investment in dispatchable power – meaning fossil fuels; before the alternatives are ready.

Having made the decision to leave the UK’s oil in the north sea, and gas under our feet, while ‘sensationally cheap’ renewables now face the same cost pressures as the rest of the economy, we are where we are. And that means politicians will have to manage the optics of the unintended consequences.

Demand reduction for many households is not a choice, and many of these will not have smart meters. They are also those most likely to welcome the discount, while it’s trivial for the rest. As with blocked streets, emissions charges, and carbon taxes, this scheme is most likely to force behavioural change on the poor. While, as with the price cap or heat pump subsidies providing needless welfare for the well-off.

As does a general sense that a modern economy should not be reliant on putting tea-time on a rota some 80-90 years after we built a national grid. This does not feel like progress, and however rational, it adds to the complexity of our energy system. Until the green agenda looks more like real growth, and less like Soviet-era controls attached to higher payments for basic needs, it will continue to create problems for the mainstream parties of Government.


  • Andy Mayer

    Andy Mayer is Chief Operating Officer and environment, energy and infrastructure analyst at the Institute of Economic Affairs.

Written by Andy Mayer

Andy Mayer is Chief Operating Officer and environment, energy and infrastructure analyst at the Institute of Economic Affairs.

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