Task 4: Full Cost Benefit Analysis
196. Based on the build/fuel mix, capital and lifetime costs, benefits and transition period defined in Section 0, the national costs and benefits for the low, medium and high ‘with fossil fuel’ cases compared with continuation of the existing 2015 standards are shown in Table 88. The analysis is based on the HM Treasury Green Book standards and the accompanying supplementary guidance on the valuation of energy use. Relevant assumptions include:
- Energy savings are valued at the variable rate in accordance with the supplementary Green Book guidance. This is appropriate for social analysis and assumes that the retail energy savings enjoyed by the consumer occupying an energy efficient building does not fully reflect the social benefit.
- The appraisal time period for estimating the impact of the policy is 10 years with a consistent build rate and mix in each year equivalent to that forecast for 2021. We assume a 60-year building life from the year of construction resulting in a total model period of 70 years.
- A discount rate of 3.5% has been used for the first 30 years of building life and 3% for subsequent years.
- Construction costs are in 2020 prices energy and carbon prices and costs are in 2019 prices all results are presented in line with a 2021 policy implementation year.
|Element reported on||Option 1: Section 6 2021 ‘Low standard’, no change in heating fuel||Option 2: Section 6 2021 ‘Medium standard’, no change in heating fuel||Option 3: Section 6 2021 ‘High standard’, no change in heating fuel|
|Energy savings (£M)||150||245||264|
|Incremental costs (£M)||(230)||(366)||(497)|
|Total financial benefit/(cost) (£M)||(80)||(121)||(234)|
|Carbon savings - non-traded (£M)||(11)||(4)||22|
|Carbon savings - traded (£M)||16||24||24|
|Total carbon savings (£m)||5||20||46|
|Air quality savings (£m)||69||78||80|
|Net benefit/(cost) (£m)||(6)||(23)||(107)|
|Amount of gas saved (GWh)||(1,005)||(467)||1,492|
|Amount of electricity saved (GWh)||4,125||6,684||6,746|
|Amount of CO2 saved - non-traded (MtCO2)||(0)||(0)||0|
|Amount of CO2 saved - traded (MtCO2)||0||0||0|
|Cost effectiveness – non-traded (£/tCO2)||36||(335)||424|
|Cost effectiveness – traded (£/tCO2)||89||129||356|
197. The results show that none of the options have a net benefit even after the value of carbon and air quality benefits are considered although the cost associated with Option 1 is relatively small relative to the overall costs and benefits associated with the policy.
198. The value of air quality benefits is significantly larger than the value of reduced carbon emissions and is primarily due to the avoided use of biomass in one of the primary school archetypes. Given the introduction of a primary energy metric, there is significantly less benefit of adopting biomass compared to gas heating. For the purpose of this analysis, it is therefore assumed that the primary school will now adopt gas heating. Table 88 shows the value of air quality improvements varying between £69m and £80m across the three options. In all cases the value of the improvements from reduced use of biomass is calculated to be around £50m (the reminder is associated with reduced gas and electricity use). Therefore, if biomass use continued at a rate similar to that indicated in the EPC database then the net cost of all options would be increased by around £50m.
199. Table 88 shows an increase in gas consumption over the counterfactual for options 1 and 2. As explained in Paragraph 146, this is primarily driven by large increase in lighting efficacy which reduces the internal heat gains and thus increases the space heating demands. This increase in gas uses is more than countered by a corresponding reduction in electricity use.
200. The financial benefit / cost of each option is relatively consistent with the level of additional incremental cost involved although the ratio of costs to benefits does increase with increasing levels of energy efficiency i.e. from 1.5 times between options 1 and 2 to 1.9 times between options 2 and 3. This would be expected as a result of reduced incremental savings from additional investment where there is no major change in technology. However, the net benefit / cost after carbon and air quality savings are considered is substantially larger. This is because of the very large air quality benefit associated with all options from the avoidance of biomass which is only included in the counterfactual scenario. The scale of the benefit from avoiding biomass does not vary much between Options 1 and 3 meaning that the total net cost of Options 2 and 3 are proportionately larger than their incremental financial cost would suggest (i.e. the financial cost of Option 3 is around three times that of Option 1 whereas its total net cost is around 19 times higher).