Special Report on the Electricity Industry: Cleanliness through efficiency: Alison Eadie examines how companies are responding to the pressure to reduce energy consumption

THE SIGNING of the Climate Change Convention at the Earth Summit in Rio de Janeiro is good for energy efficiency, according to Lord Strathclyde, the Environment Minister. Britain is committed to return emissions of carbon dioxide and other greenhouse gases to 1990 levels by the year 2000. Lord Strathclyde said: 'This will provide a significant spur to energy efficiency, since improving the way we produce and consume energy is the most immediate and cost-effective step we can take to tackle greenhouse gas emissions.'

Energy efficiency in the electricity industry has been under the spotlight for some time. Last December, the Office of Electricity Regulation (Offer) published a consultation paper on the subject.

Professor Stephen Littlechild, Director-General of Offer, has suggested the introduction of an 'E' factor in the price control formula along the lines adopted for gas. The 'E' factor would allow the cost of energy-saving programmes to be reflected in prices.

Tony Boorman, director of consumer affairs at Offer, said it had become clear that many people believed there were substantial energy and financial savings to be had from investment in demand-side measures. 'If this is the case, then the fact that this is not taking place suggests that there are significant market distortions.'

He pointed out that electricity companies said competition between them and the gas industry was promoting energy efficiency. Growing competition between electricity suppliers could also be expected to have a positive impact on efficiency, he said.

The dilemma for electricity companies is that their profits depend upon selling electricity. If they promote energy efficiency measures, the cost of which they cannot recoup, they can expect to sell less electricity. The present distribution formula encourages maximising sales, because the cost of maintaining the network is fixed and each additional unit sold goes straight to profit.

The answer, according to Tim Woolf, research director at the Association for the Conservation of Energy, is the introduction of three things: the 'E' factor mentioned above; a 'well designed' revenue cap which reflects fixed and variable costs; and additional incentives and guidance from the electricity regulator.

The revenue cap would revise the distribution formula to remove the incentive to maximise sales and to curb unlimited profits growth. It would also address the problem of lost revenues.

The best way of altering the system, said Mr Woolf, was to change the distribution formula. So far only Northern Ireland has a distribution formula one which includes a revenue cap. As a second- best, Mr Woolf added, instead of changing the distribution formula, an 'E' factor could compensate companies for lost revenue rather than for the cost of energy efficiency programmes.

The House of Commons Select Committee on Energy is also in favour of change. 'We do not believe that electricity supply companies will actually promote energy efficiency among their customers unless the disincentives in the price control formulas are removed,' the committee stated.

Despite the disincentives, electricity companies are promoting energy efficiency. In May, 11 of the regional companies joined forces with British Gas to establish an Energy Savings Trust to develop such programmes.

Keen competition with gas is also encouraging the electricity industry to promote the use of energy efficient electricity technology in new processes as a way of gaining market share. The Government is also keen to be seen to be promoting energy efficiency. It is a partner in the Energy Savings Trust. It also supports the objectives of the European Community's Specific Action for Vigorous Energy Efficiency (Save) programme, established last year.

The first two energy-saving directives were formally agreed in May dealing with standards of efficiency for new central heating boilers and domestic appliance labelling. The Commission is expected to propose a Save framework directive, which will set out where progress in energy efficiency should be made, but will leave the precise details to individual member states. The likely areas are building energy labels, heat metering, insulation standards, boiler and vehicle efficiency inspections, third-party finance in the public sector and energy audits for companies.

Britain supports the development in principle but has argued that member states should generally decide what efficiency measures are appropriate to their domestic circumstances.

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