Wasting assets

Clive Bates asks how many investors it takes to change a light bulb

What investment offers a risk-free 400 per cent annual return? It's not a fashionable hedge fund or an exotic credit derivative. It's a light bulb. Replacing one ordinary, incandescent light bulb, that is used for about three hours per day, for a low-energy, compact fluorescent one costs a few quid up front but it will save electricity worth about £50 over its lifetime. It is probably the best-performing investment in the world. While it is making money, the bulb also saves carbon emissions, typically by three-quarters. Perhaps if they had a £50 note pinned to the box, low-energy light bulbs would be flying off the shelves.

There are many technologies that have the investment characteristics of low-energy light bulbs, though not always at such extravagant rates of return. It can be a building, a boiler, a fridge, an electric motor, a furnace, an advanced window, a bicycle or a car. This "light-bulb philosophy" involves an upfront investment; a reduction in running costs that far outweighs the upfront cost; and large environmental benefits arising from reduced energy consumption. The best new buildings can reduce energy consumption by 90 per cent and we can make large savings through retro-fitting older buildings.

As a nation, we do manage to make some of these investments. A barely noticed government report (Synthesis of Climate Change Policy Evaluations, Defra, April 2006) shows that the measures taken in the UK to address climate change so far will have a net lifetime economic benefit of more than £80bn. This excellent return comes almost entirely from applying the light-bulb philosophy to quite unexciting technologies such as insulation, double-glazing or boilers.

We don't have to rely on future technologies for a "jam tomorrow" response to climate change. The challenge is to greatly increase uptake of technologies that already exist.

On the basis that energy saved is as valuable as energy produced if it gives the same service, we could think of energy-savings potential like oil reserves. As with oil, more energy savings become economically viable as energy prices increase and technology improves.

So why aren't we "drilling" flat out for these secure, carbon-free and cheap reserves of energy savings? For one thing, it's a hassle for householders and small businesses. You have to know that it represents value for money and have the cash available. Sometimes the person making the upfront investment isn't the same as the person making the savings - for example a housebuilder might provide the "super-windows" that transmit light but reflect heat, but the homeowner benefits from the energy savings. But none of this is insurmountable. The problem is that exploitation of the energy-saving potential relies on thousands of busy people who have other things to do with their time and money.

The bills we pay to power companies contribute to a return on capital of 10 per cent or less, whereas our light bulb earns 400 per cent. This suggests a lot of money is wastefully misallocated to poor investments in energy supply. What if the energy market could change to making money from energy saving instead? Our energy market isn't yet organised to promote real competition - that is between low-energy light bulbs (and hundreds of equivalent technologies) and power stations or pipelines. Competition across the full spectrum of approaches will be especially important in any new mechanisms created to put a value on carbon savings over the longer term (see Dieter Helm on page viii). The challenge for the energy review is to put the horse before the cart and reshape the energy market to reward energy saving.

To do this, some new business models will be needed, with contracts between customers and suppliers that enable the economic benefits of energy saving to be shared by both. It will need a cap on consumption or emissions for some sectors, as proposed by the Carbon Trust. What if the government capped public-sector energy consumption and auctioned its energy bills to the private sector, offering contracts to companies that could reduce them the most? If it achieved one thing, the energy review should understand that a kilowatt hour saved is as valuable as a kilowatt hour produced, and that we are sitting on top of a huge reserve of cheap, pollution-free, energy-saving potential.

Clive Bates is head of environmental policy at the Environment Agency

Read more from the New Statesman 'Heat and Light' energy supplement at


This article first appeared in the 15 May 2006 issue of the New Statesman, The worst man in the world?