How the 'rebound effect' makes us use more energy (and what it is, exactly)
15th January 2020
We often take energy for granted, but getting it from grid to business can be complicated. When you start investigating the principles of supply and demand, it can get even more complex.
One economic phenomenon that we think is pretty interesting (as energy industry enthusiasts) is known as 'the rebound effect'.
Energy-efficiency technology means we use less energy, right? Not always. Read on to understand what the rebound effect is, what causes it, and how it can be combatted.
The Rebound Effect: The lowdown
The rebound effect is an economic phenomenon which sees trends between energy prices and demand; it refers to the responsiveness of demand to a change in price. This generally means that higher energy prices will lead to less demand, while lower prices will create increased demand.
The effect is seen frequently with energy use, and has been described by Dieter Helm, a Professor of Economics at the University of Oxford, as “the elasticity of demand,” or “the responsiveness of demand to a change in price.”
Interestingly, the effect is seen when the savings from some energy efficiency measures are mitigated by increased energy demand caused by those measures.
For example, people who swap from regular lightbulbs to energy-saving lightbulbs may feel comfortable leaving lights on in empty rooms because the new bulbs use less energy than the old ones. This behaviour would inadvertently mitigate the energy saving measures and use more energy than before - and in there we have the rebound effect.
As the UK looks to meet its commitments on reducing carbon emissions, one of the most important questions to consider is how we can start to reduce the impact of the rebound effect.
How can we move away from this model towards more sustainable energy use, where lower costs don’t necessarily drive higher demand and increased use?
How to avoid the rebound
One of the ways to combat the rebound effect is through the carbon price, which Helm believes would both help to reduce energy demand and increase energy efficiency specifically, while also contributing significantly to the UK’s decarbonisation efforts generally.
Drax, the parent company of Opus Energy, has long been in favour of a carbon price. Drax has praised the governments’ recent Clean Growth strategy and called on the government to “ensure [that] the UK has a robust and strong carbon price” to help reduce emissions, deliver coal phase out by 2025, and accelerate the transition to low-carbon generation. You can read the letter in full here.
How does carbon pricing work? By applying a levy to carbon emissions, it is possible to de-incentivise the use of carbon-heavy fuels.
Traditional electricity generation (by burning fossil fuels such as coal and gas) emits carbon dioxide, whereas renewable electricity generation (wind and solar, for example) emits no carbon dioxide.
As such, carbon pricing acts as a deterrent against traditional generation and make low- and zero-carbon technologies more attractive. This can in turn help to speed up the transition towards renewable generation and wider decarbonisation.
The UK currently operates a carbon price, called the Carbon Price Floor (CPF), set at £18 per tonne of CO2 emitted. It will remain at this price until 2021, and is also supplemented by the European Union’s carbon price, set at £5 per tonne of CO2.
This means that power generators pay £23 per tonne of CO2, which has helped the UK to rapidly shift away from carbon-intensive generation; figures from the Department of Business, Energy & Industrial Strategy indicate that the introduction of CPF has coincided with a sharp decline in coal burn.
A 2016 research paper published by the Centre for Climate Change Economics and Policy – an organisation established by the University of Leeds and the London School of Economics and Political Science - argues that the introduction of carbon pricing is the only way for countries to meet ambitious emissions reductions targets.
How being an Opus Energy customer can offer price certainty
It’s not just positive changes like increased energy efficiency or decreased consumption which affect energy prices, however. Other factors, like weather conditions or fluctuations in oil prices across the globe can all affect on the price of electricity.
However, you can protect yourself from this sort of price volatility by choosing the right energy supplier and right contract for your business.
Fixing the bottom line is important for most businesses, which is why Opus Energy offers Fixed Term Contracts - that means a price gets set for the energy you use at the start of your contract, which won't change until your contract does.