This response covers general issues about design of policy for energy efficiency improvement in SMEs, and offers specific evidence on Option 2: a business energy efficiency obligation.
Authors: Tina Fawcett (University of Oxford), Sam Hampton (University of Oxford), Peter Mallaburn (UCL)

We welcome the idea of offering more policy support to SMEs to enable the uptake of energy efficiency opportunities, to the benefit of their enterprises, the economy as a whole and the environment. Researchers have previously argued that there is not enough policy focus on SMEs (Banks et al, 2012, Hampton and Fawcett, 2017) and this consultation was valuable as part of a wider process of policy development.

This response covers general issues about design of policy for energy efficiency improvement in SMEs, and offers specific evidence on Option 2: a business energy efficiency obligation.

SME diversity: one scheme will not fit all

The consultation document notes that SMEs are very diverse in sector, size, energy end uses and in terms of efficiency opportunities. There might be efficiency savings available from many different actions including building retrofit, specialist energy end-uses, energy management and control systems, behaviours and energy-related practices, and management of business processes.

Some efficiency options, which require capital investment and changes to the building fabric or building management systems, are only open to landlords or building owners, not to SMEs who are tenants. Many smaller SMEs do not operate in specific business premises – they operate from home, or in clients’ premises (e.g. builders, mobile hairdressers). For policy designers, the conclusion from acknowledging this diversity should be that one SME energy efficiency scheme will not be suitable for all SMEs.

Scale and segmentation

Before deciding which energy efficiency policy instrument to develop further, we suggest that BEIS think carefully about which segment of SMEs it is intended to influence. There are number of different possible approaches to SME segmentation, including: size of organisation; sector; location; business strategy; building type; building tenancy; technology; problem-focussed (e.g. a focus on reducing urban air pollution); data availability; practices; determinants of behaviour (Hampton and Fawcett, 2017). Some of these segmentation approaches are easier to write into policy design than others.

Aligned to segmentation, is the issue of scale. The scale of expected savings and anticipated timescales of operation are pertinent to the design of any scheme.

Type of energy efficiency improvements

There are many different sorts of energy efficiency improvements which could be covered by a scheme, however the implication is that a scheme would be designed to cover investment in energy efficiency end-use equipment, or building efficiency measures. However there are many other important source of energy savings such as improved management of working practices, buildings or business processes, which may not require major capital investment.

Fuel switching, and considering how to integrate electricity use flexibility into business decisions could also deliver cost savings (and carbon savings across the electricity system as a whole). These routes to carbon and energy saving are important and often have synergies with capital investments. While the schemes cannot cover all opportunities, the government’s overall approach to SME policy should acknowledge the different types of opportunity available.

The importance of existing networks

The consultation document suggests the options presented are based on IEA’s three core components for successful energy efficiency programmes. Two of these focus on who is delivering the energy efficiency advice / measures: “SMEs need information tailored to their specific needs and delivered in a convenient form from a trusted source”, “programmes should … aim to build the capacity of energy consultants…”

Surprisingly, there is no mention of existing networks of energy advisors, such as those funded via ERDF, programmes managed by LEPs, the Energy Saving Trust, the Carbon Trust. Whichever policy instrument is chosen, for it to be effective, there needs to be consideration of who can deliver the expert advice and assessments needed. Using existing experts and networks as a starting point would seem to be a good idea.

Salience as a principle informing policy-making

We welcome the statement that each option should increase the salience of energy efficiency among SMEs. Mallaburn (2018) works through in detail what it might mean to take salience seriously as a principle informing policy-making for energy efficiency in organisations. To pick out some key points:

  • policy needs to differentiate both between organisations and sectors and to support investments as they move along the decision-making process;
  • government needs to understand how salience drivers (internal and external factors influencing decision-making, and how decisions are framed) vary between target organisations and sectors, and to segment policies accordingly;
  • the most effective policy will often be some degree of regulation, especially if it is carefully planned and has the support of industry;
  • piloting – ‘learning by doing’ – is important to build capacity and market expertise in government and to build confidence in the target organisations and sectors.

Download the response here