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Electricity and Gas (Energy Company Obligation) Order 2018

Volume 793: debated on Tuesday 30 October 2018

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Electricity and Gas (Energy Company Obligation) Order 2018.

My Lords, this order was laid before the House on 19 July of this year and I beg to move that it be approved. The Government place great importance on supporting low-income families and ensuring that their energy bills are as low as possible. To that end, we continue to provide direct financial support to vulnerable households through the warm home discount scheme, while the energy price cap will protect around 11 million energy customers who have been stuck on poor value deals. Our election manifesto restated our commitment to tackling fuel poverty by increasing the energy efficiency of homes and the energy company obligation, or ECO, is the key policy in meeting those commitments.

Under ECO, energy suppliers in Great Britain are regulated to reduce domestic energy bills by installing energy efficiency measures. Since its start in 2013, more than 2.4 million measures have been installed in around 1.9 million homes. In 2015, the Government stated their intention to reform ECO to provide more help to those who need it most. The ECO order that we are debating completes that reform and will result in the whole scheme being focused on low-income and vulnerable households until March 2022. We will continue to fund the scheme at £640 million per annum until 2022, and in the Clean Growth Strategy we committed to funding domestic energy efficiency at least at that level until 2028. The Government consulted on proposals for the new scheme in spring and received 239 responses. Most responses were broadly supportive.

Currently, energy suppliers become obliged to act under ECO when they have 250,000 customer accounts. These thresholds were set in 2013, when the “Big Six” energy companies dominated the market. There are now more than 70 domestic suppliers in the market and we consider it appropriate that more are covered. Therefore from April 2019, suppliers with 200,000 customer accounts will be covered, falling to 150,000 from April 2020. We have expanded the eligibility criteria of the scheme so that households on certain disability benefits, their Ministry of Defence equivalents and low-income working households in receipt of child benefit are newly eligible for support. This increases the number of households eligible for support from 4.7 million under the affordable warmth part of the previous scheme to 6.6 million households under the new scheme. We believe this strikes the right balance between supporting those households most in need and keeping delivery costs low. We have also increased the proportion that can be delivered under the local authority flexible eligibility scheme from 10% to 25%. This allows local authorities to refer households for help, including people with health conditions exacerbated by cold homes.

To support the industrial strategy and the clean growth challenge, suppliers will be able to deliver up to 10% of their obligation using measures not previously supported under ECO. While encouraging a broader mix of measures, we will continue to maintain safety and installation standards. The scheme allows the equivalent of 35,000 broken heating systems to be replaced each year so that low-income households can receive support, should their heating system be beyond repair. While other forms of energy efficiency may have greater long-term benefits, a broken boiler can be the immediate crisis point for a struggling family.

We are allowing oil systems to be replaced so that rural households without a viable alternative can continue to receive support. However, coal heating is ineligible. Only ground source heat pumps will continue to qualify for support under both ECO and the renewable heat incentive. We have limited the potential for double subsidy, but have made an exception for ground source heat pumps due to their high up-front costs and the long-term value of ground loops. Energy suppliers will have to deliver at least 15% of their obligation to rural households, maintaining this important safeguard for households with a greater propensity for fuel poverty.

To encourage installers to take a broader approach to improving the energy efficiency of homes, inefficient heating systems can be replaced if they are delivered alongside high-value insulation. We have retained a solid wall minimum requirement at the equivalent of 17,000 solid wall homes per year, but we have introduced flexibility by allowing suppliers to meet this minimum through a combination of other measures if they deliver the same bill savings as solid wall insulation.

The changes that we have made to the scheme are important. They will help to upgrade the homes and reduce the bills of more than 1 million low-income and vulnerable households during the period of this order, while paving the way for new measures. This will add further impetus to meeting our fuel poverty and carbon reduction goals by encouraging more cost-effective, customer-friendly solutions. I commend the order to the Committee.

My Lords, I thank the Minister for his very detailed explanation of what this secondary legislation does, although I have a few questions. This is an example of where we pretend we are not taxing consumers. As this is not public expenditure, we have to put it through energy companies, which are in the private sector. They decide and spend a lot of time working out who should get these things when it could all be done a lot more simply if we did not go through this public expenditure pretence. When I go through ECO, it always seems to me that it would be so much better if it was administered by local authorities. They know households with problems and have all sorts of obligations towards private renters, who are a real problem in terms of energy efficiency and getting landlords to implement these sorts of schemes. It would be so much easier if we were honest with ourselves. This is a form of taxation, it is public expenditure, and we should just sort it out, rather than go through all the bureaucratic inefficiency that we have.

Having said that, I welcome the scheme very much in terms of moving this agenda forward. The present scheme, as I understand it, ran out at the end of September. We now have this instrument in front of us. I do not know how long it will take to get the thing started. I understand that there are some roll-over functions, and I welcome that, but so often with this sort of funding—even more so with European funding—there is always a risk that the companies and installers involved in this have a cash-flow crisis because we stop and start these programmes. I may be worrying unnecessarily, but I would be interested to understand how that gap is coped with and when the scheme is expected to really take off.

I noted with some amusement paragraph 7.20 of the Explanatory Memorandum, which said:

“There is a high level of interest in the scheme from energy suppliers who deliver the scheme, fuel poverty groups and installers, and some interest in the scheme from the public”.

That is extremely honest of the instrument, but I am sure we would all agree that it would be good if the public, who are affected by this, were motivated to push to get the scheme going. From that evidence, there may be a real need for some sort of public information scheme. I would be interested to hear from the Minister how that will be solved.

I find some of this order a little bit difficult to follow. Clearly there is an emphasis on social housing, which I welcome. Given the budget of the ECO—it is not insubstantial but it is limited—I also welcome that it is going on areas of fuel poverty rather than just carbon savings. No one is more committed to climate change issues than me but it is right to concentrate expenditure on fuel poverty.

What do we do about the rest of the housing stock that is not covered by this? The Minister mentioned that there is still a real gap in the Clean Growth Strategy in dealing with household efficiency in the rest of the market. I notice that the strategy states that it will:

“Support around £3.6 billion of investment to upgrade around a million homes”.

The programme covers 900,000 homes with an average spend of £640 million per calendar year. That works out at only about £2 billion for the time that is left until the end of March 2022. I would be interested to see what happened to the other £1.6 billion between the strategy and this paper.

On the private sector side, how do we check that landlords are meeting their legal obligations? How do we check that the measures work? I am sure that there is already a process for this but the instrument mentions the “monitored measure” option. I do not want to go into great detail but that option gives bonuses to suppliers or accounts in additional savings or help.

From the evidence, we all know that fuel poverty families getting better insulation does not tend to reduce their energy spend. Quite understandably, it just makes sure that the family is warmer than it was before, so I do not understand how we measure the effect of this given that people will probably use more energy to keep warmer instead of being cold. Are the Government confident about how these schemes are audited?

I welcome the fact that the scheme will continue beyond this until 2028, as in the Clean Growth Strategy, and I welcome the concentration on fuel poverty. Again, following the unfortunate relative failure of the Green Deal during the coalition Government, we absolutely need a national scheme to find a way to upgrade the rest of the UK’s housing stock.

My Lords, I bow to the superior knowledge of the noble Lord, Lord Teverson. I have a couple of questions. I want to press my noble friend, if I may.

At the outset, I declare my interest in the register as a vice-president of National Energy Action. I have long taken a close interest in the Warm Front programme. Like the noble Lord, Lord Teverson, I welcome the continuation of the scheme. Obviously, it is a matter of record and ongoing regret that around 4 million households are still in fuel poverty. Any scheme that can be seen to reduce that is very welcome. How does the scheme compliment what is already happening? What more could potentially happen through building regulations? A more joined-up approach to warm homes would be very welcome indeed.

Being half Danish, I am particularly interested that we currently export residual household waste from the city of York and north Yorkshire to Holland at a cost to the local taxpayer. However, at the end of the day, the benefit is to Dutch residents, because the waste is burned and energy from waste is recovered in the form of district heating. My aunt in Denmark gets the benefit of that—although not from our residual waste in north Yorkshire—through cheaper electricity, hot water and heating. I am very interested to know the potential number of new district housing connections that could be made through the continued scheme before us this afternoon. Does my noble friend have a projection of that? What plans do the Government have to retrofit? There is a firm in Denmark that has changed its name to Ørsted, but I prefer the old name of DONG—the Danish Oil and Natural Gas company—which is easy to remember. It claims it could retrofit properties here in London. Is that something that the department has considered?

My last question is about the figure in the order before us today for potential savings. Is the overall home-heating cost reduction target of £8.2 billion realistic? How do the Government plan to achieve that?

I thank the Minister for his introduction to the order before the Committee today. As he explained, it introduces a completely new energy efficiency programme—ECO3—focused essentially on those in fuel poverty but with elements of ECO2 and 2t. Indeed, the first ECO order, made in January 2013, was itself a successor to previous government energy efficiency schemes such as Warm Front, CERT and CESP. These previous schemes were more centrally funded, whereas ECO is an obligation on energy companies to fund and finance energy efficiency measures using their own resources and without additional government support. In that regard, austerity is still continuing.

The order extends to 2028, which, as I mentioned last week, is only four years short of 2032, the end period for the fifth carbon budget. We note that the Government are at risk of failing to meet that. The new ECO3 measure, as suggested, replaces the wider remit of former ECO schemes, which were based on a carbon-saving metric and encompassed a number of programmes relating to energy efficiency for carbon-saving purposes, where only a minority of the overall funding was directed specifically towards people in fuel poverty. The main programme therefore restricts measures to those households in band E, F and G properties. For these reasons, I cannot fully endorse the order before the Committee today. I also detected a slightly less than encouraging response from the noble Lord, Lord Teverson, and perhaps some criticism.

The order is a continuation, reducing and restricting policies that fail to address the wider issue of energy efficiency on a more comprehensive basis. Nevertheless, it does contain some good measures in response to previous Labour criticisms. The Government should be commended for reducing the obligation threshold for suppliers from 250,000 to 150,000 accounts over time, and for looking at the problems encountered by customers when switching from a company above the threshold to a smaller company operating below the accounts threshold.

Also to be welcomed is the Government’s response to extending the 25% of the suppliers’ obligation to be met by local authority flexible eligibility. It is, in effect, a nominations scheme in which local authorities can participate, whereby area-based activity can be undertaken to improve similar properties in a location. Another important aspect of this measure is the focus on innovation and the benefits it can bring—for example, Q-Bot, which undertakes the laying of insulation in inaccessible places.

The fuel poverty measures contained in the order are also welcome, especially the extensions to further participants in the scheme and the measures to maintain at least 15% of the obligation to rural households. They are important. However, concentration on the problems of fuel poverty is certainly important, but whether this should be to the exclusion and at the expense of all other aspects of energy efficiency is a matter of concern. This would fundamentally alter the carbon savings brief of the original obligations programme. When it was first introduced in 2013, ECO represented a change from the previous Government’s programmes—namely, the carbon emissions reduction target, the community energy saving programme and the Warm Front scheme.

In the context of the Clean Growth Strategy, which the noble Lord and others have mentioned and which I quote:

“We will need to ensure existing buildings waste even less energy”.

This order reduces the overall envelope of the ECO programme for 2018-22 and onwards. The rate of improvement in properties can only diminish. This order represents a continuing substantial cut in overall obligation requirements, from £1.67 billion per annum in 2013 for CERT, CESP and Warm Front, to £1.12 billion for the ECO replacement, to £0.87 billion per annum for ECO2, reducing now further to £640 million under ECO2t and the ECO3 measure. This represents a more than 60% drop in energy efficiency funding through government schemes, however funded, since 2013—and a regrettable lack of ambition. This obligation level falls well short of what is required to meet statutory fuel poverty targets. Indeed, the Committee on Fuel Poverty has indicated that even this order’s concentration on fuel poverty will not be sufficient to meet current poverty reduction targets—a reflection of the overall size of the scheme and its ambitions within the overall setting.

Labour is committed to a programme of insulating 4 million homes in a period of one Parliament, and to repeating that commitment for another two Parliaments to reach the level of domestic energy efficiency required to meet contributions to the fifth carbon budget by 2032. This commitment, including both state funding and the accompanying company obligations, will enable both carbon obligation targets and fuel poverty targets to be met, including specifically through a prioritisation of measures relating to fuel poverty within the overall programme.

Even after refocusing ECO3 to deal exclusively with households in fuel poverty, this measure falls short, even in its own terms, to meet statutory fuel poverty targets. It does not deal with the carbon reduction imperative, provides no new public sector funding and does not deal with the challenge to improve energy efficiency requirements for the UK’s housing stock. I can approve the order only on the basis that it is a starting measure while the Government consider more comprehensive measures to bring forward.

The memorandum provided with the regulation states that one of the core aims of the instrument is to contribute to carbon reduction targets. Bearing in mind the assessment of the Committee on Climate Change in achieving the fourth and fifth carbon budgets, what action will the Government be taking to meet the UK’s target?

My Lords, I welcome the generally positive tone of the noble Lord and my noble friend Lady McIntosh, both of whom recognised that this order is a genuine reform of the ECO system. As I made clear in my opening remarks, it is designed to target it far better at those who are less well off and those who find it harder to adapt their houses to make them more energy efficient. It has achieved a great deal in the past and will continue to achieve a great deal.

I am sorry that the noble Lord, Lord Grantchester, takes a less positive approach to this and accused us of a lack of ambition, given that I talked about increasing very dramatically the number of people that we intend to try to reach, and recommended generally spending more taxpayers’ money in a rather haphazard manner. I point out to him and to the noble Lord, Lord Teverson, that technology will encourage those who can afford it to make changes that will lead to a reduction in the use of energy. One only has to look at, for example, the reduction in the cost of things such as LED lights over the past few years, which has made it far easier for people to change to those lights and therefore decrease their use of energy. Similarly, it is right that those who can afford it should pay for appropriate insulation as is necessary, as they will see the benefit in a reduction in their fuel bills and the country and society as a whole will see a benefit in the reduction in carbon use. These measures are designed to encourage those who find it less easy to afford to make those changes.

As the Minister knows, in the UK, particularly in commercial buildings and increasingly in private buildings, we have a problem that landlords and tenants have very different goals in this area, so unfortunately it does not always work out that way. However, I do not want to interrupt him further.

I totally agree that landlords and tenants have different views on this. Landlords can benefit from these measures. If the noble Lord would like, I will write to him in greater detail on that point. We would also like to see landlords with old houses make the investment that is right in those houses where they can do so.

I shall deal with some of the more detailed questions that were put to me, particularly by the noble Lord, Lord Teverson, and my noble friend Lady McIntosh. I hope that in the process I will also deal with some of the queries of the noble Lord, Lord Grantchester.

My noble friend talked about energy from waste and the possible advantages that the Danes are getting from us exporting some waste. My noble friend will remember that when I served in Defra I had an interest in waste. She will also know that there are sometimes difficulties in getting planning consent for energy from waste plants. I will write to her in greater detail on that, as it goes slightly beyond my brief at the moment. I also note that she mentioned the firm DONG in Denmark—I think it has now changed its name to something else that I cannot pronounce: Ørsted. I have recently seen some of its windmills off Barrow, which is now the largest wind farm in Europe, providing, I think, a very large increase in renewables from that source.

I agree with what my noble friend said about more homes being retrofitted. The new innovation routes could allow multiple measures to be installed in homes. That approach would need to be sponsored by us to demonstrate that it could be cost-effective. That information would need to be provided to Ofgem, the scheme administrator, to ensure that it met the relevant standards. If I can give her some further detail on that and on potential figures for those new district heating connections, I will write to her in due course.

The noble Lord, Lord Teverson, was concerned about the end of the old scheme and the start of the new. I assure him that early delivery means that the measures which meet the new scheme’s rules, and which are delivered before Parliament agrees these regulations, will count towards the supplier’s obligations. We will have a seamless transformation of these matters. I also assure the noble Lord that there will be the appropriate audit he seeks. Ofgem requires measures to be installed to specific standards and 5% of the measures are checked by Ofgem under the scheme’s technical monitoring checks. I hope that 5% will be sufficient for the noble Lord to consider that it provides the appropriate audit and checks.

The noble Lord asked about the housing stock that is not covered by the ECO scheme. We are reviewing the fuel poverty strategy and will make an assessment of how best to meet the fuel poverty targets. As I made clear, the clean growth strategy has set aspirations to decarbonise all sectors of the UK economy. The buildings mission aims to at least halve the energy use of new buildings by 2030, as well as halving the cost of renovating existing buildings to a standard similar to new buildings. I repeat that new buildings are covered by current building regulations, and therefore any new buildings will be appropriately insulated. However, we want to get old buildings up to the same standard as new buildings while increasing quality and safety.

The noble Lord had other queries. He quoted from paragraph 7.20 that there was some interest from the public and said that he wished to see more. We would all like to see more interest from the public—that is true of a great many schemes throughout government, way beyond this one. I assure the noble Lord that a number of members of the public responded to the consultation. They obviously had an interest in energy issues, energy efficiency and fuel poverty. The majority of the responses were supportive of consultation, as I set out in my opening remarks. I hope that as a result of this debate—should people be taking much interest in it—and other measures, others throughout the country will take an interest in this, and that those firms involved in the scheme will do their bit to contact the public and let them know what is available, particularly for those with low-cost housing.

As I said, I welcome the generally positive tone taken by the noble Lord, Lord Teverson, and my noble friend. I hope that in due course the noble Lord, Lord Grantchester, will come round to that view and accept that this will go a long way towards meeting the problems of fuel poverty, will help to decarbonise and will help to meet the targets that we hope to—and will—meet by 2030 and beyond. I commend the regulations to the Committee.

Motion agreed.