Does decreasing energy demand really cost 10 times as much as increasing energy supply?

Energy efficiency suddenly doesn’t seem to be  such a cheap alternative to building more power stations. In a small auction concluded in the last few days, DECC agreed to pay organisations to reduce their peak late afternoon electricity demand. Chains of shops such as Dixons, council buildings and industrial companies promised to cut winter electricity use in 2015/16 and will receive over £200 a peak kilowatt saved between 4 and 8pm.  It looks as though most of the savings are going to be gained by switching to LEDs from less efficient forms of lighting.

This scheme was the reverse of the capacity auction concluded a couple of months ago. In that process, DECC committed to paying £19 a kilowatt to electricity generators in return for a promise to operate their plants over the winter. In other words, energy demand reduction is costing the government over ten times more than keeping generator online.

Both auctions are distorted. The generation auction was horribly flawed by the inclusion of plants that would stay open anyway (such as nuclear) and therefore offered very low prices. The latest energy efficiency auction is the first-of-a-kind and participants were probably a little wary of the cost of upgrading their lighting to LED. Nevertheless, the unfortunate headline conclusion is that cutting energy demand is currently an order of magnitude more expensive than increasing supply.

But should it really have cost over £228 to achieve a kilowatt of demand reduction?

Go into your kitchen. If your home is typical, it probably has about 200 watts of halogen bulbs in it. Scattered around the house might be another 200 watts or so of the little hot lamps like the ones above the cooker. Replacing just the ten or so bulbs in the kitchen with ten LEDs (a plug-and-play switch) and the cost will be about £80. (The colour of the light isn’t quite the same but the difference between halogen light and ‘very warm’ LED is now small).

Your switch will save about £15 a year in electricity and perhaps £5 in halogen purchase costs because they blow far more often than LEDs. Total benefit £20 compared to a cost of £80. So payback will be just four years in a domestic house, and much less in a shop or other commercial premises where the lights are often on all the time.

Isn’t a four year payback good enough? Do you – or Dixons or Leicestershire County Council - really need a further financial incentive to make the move to LEDs? However if you had banded together with your neighbours and sensibly entered the auction then you personally would have been paid about £35, meaning that the net cost of new LEDs would have been £45 and your payback would now be about two years. That looks far too generous to me.

So £228/kW isn’t really the price of energy efficiency. Despite today’s warped result, the replacement of halogen bulbs by LEDs is now financially rational for almost everybody without any subsidy. And the net impact on demand of just replacing domestic halogens is large;  probably 3-4 GW, or around 7% of UK peak demand. If we are serious about energy efficiency, we need a national programme that encourages us to throw away those dreadfully inefficient halogen bulbs in our kitchens and bathrooms. Give me £228 a kilowatt and I’ll switch all the neighbours for you, DECC