Electricity and Gas (Energy Company Obligation) Order 2012
Lord Marland
That the Grand Committee do report to the House that is has considered the Electricity and Gas (Energy Company Obligation) Order 2012.
Relevant documents: 3rd Report from the Joint Committee on Statutory Instruments, 5th Report from the Secondary Legislation Scrutiny Committee.
The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Lord Marland)
My Lords, there is no rest for the wicked. Judgment has been passed.
One of my department’s key priorities is reducing carbon emissions by tackling energy-inefficient buildings which are needlessly—
Lord Marland
Yes. I am extremely grateful to the Committee for allowing that to happen.
The four statutory instruments, which I am about to explain, before the Committee today go a long way to help achieve this. They establish the legal framework that underpins the Green Deal and energy company obligation policies, and give the industry the green light to bring the Green Deal energy efficiency market into operation.
I will briefly describe the purpose of each of these statutory instruments. First, the Draft Green Deal Framework (Disclosure, Acknowledgment, Redress etc.) Regulations 2012 create an authorisation regime to regulate the conduct of key Green Deal market participants. They also include conditions that must be met when a Green Deal plan is established and how it should be disclosed. Secondly, the Draft Green Deal (Energy Efficiency Improvements) Order 2012 sets out sources of energy and types of microgeneration measures for the purpose of defining “energy efficiency improvements” in the Energy Act 2011. Thirdly, the Draft Green Deal (Qualifying Energy Improvements) Order 2012 sets out the energy efficiency improvements that can be installed under a Green Deal plan.
The Draft Electricity and Gas (Energy Company Obligation) Order 2012 places three obligations on energy suppliers who have more than 250,000 domestic electricity and/or gas customers and have supplied more than the specified level of energy in a relevant period: first, a carbon-saving obligation; secondly, a carbon-saving community obligation; and, thirdly, a home-heating cost-reduction obligation.
The ECO has been designed to work together with the Green Deal as a joint policy to address barriers and market failures in the energy efficiency market. The Government-backed Green Deal programme will help bill payers make energy-saving improvements to their homes. Through the Green Deal, people will be able to pay for some or all of the work done with the savings expected to be made on energy bills. The ECO will require energy suppliers to promote energy efficiency measures to those most in need and for properties that are harder to treat, helping to reduce emissions and make progress on fuel poverty. I am therefore grateful that the Committee allowed these statutory instruments to be debated as a group.
In November we published our draft legislation and consulted on the Green Deal and ECO policy. We received over 600 responses to the consultation and, in light of these, several policy changes were made—in particular, strengthening consumer protection. We want to ensure that robust consumer standards are met, creating a market that balances consumer protection and burdens on businesses. Changes include improved consumer protections such as restrictions on cold calling and new rules requiring Green Deal participants to declare any ties to other Green Deal participants, including fees or commissions payable. We also strengthened protections for lower than average energy users.
In addition we revised the design of ECO. The energy company obligation will commence in October 2012 with energy suppliers required to deliver against their targets by 31 March 2015. There are no interim targets, so it is up to the energy suppliers to decide how and when they start delivering. For the first time, there will be transparency of reporting the actual costs of delivery. We changed ECO to allow more hard-to-treat cavity walls to qualify for support. These changes will help the insulation industry take advantage of the new market opportunities created by Green Deal and ECO.
Lord Dixon-Smith
My Lords, I am very grateful to the Minister for describing together the four orders we have before us. It saves me the trouble of trying to do so, and I would probably make a mess of it. I should say—perhaps we all ought to say this when we speak on this order—that I have a house that is pretty energy-inefficient so, in a sense, it could be argued that I have an interest in the outcome of this debate, but it is not a direct interest of the sort that is normally declarable.
I have a particular interest in speaking on the first two orders on the Minister’s list—the energy company obligations order and the Green Deal (Qualifying Energy Improvements) Order. I should say that I have had a letter from the Glass and Glazing Federation that has steered my remarks. It has a particular concern, which I shall come to. To put this into context, we need to recognise that 23% of all heat lost from buildings goes out through the windows. It is perhaps much more significant that 85% of all houses have windows that are less than grade C quality, which is the medium on the quality scale where grade A is ideal and C is the medium. The reason that the glaziers have been in touch with me is that they have particular concern about double glazing and a part of the energy company obligation. Double glazing is not specifically mentioned in the list of qualifying improvements. That may just be a peccadillo. Replacement glazing and secondary glazing are mentioned. To the extent that double glazing could be replacement glazing, I presume that it is included. I have no doubt that the Minister will tell me that that is so.
Much more important is the issue raised in the Electricity and Gas (Energy Company Obligation) Order where the conditions under which the improvements can be undertaken are set out in Clauses 15, 16, 17 and 18. What has concerned the glaziers is Article 16(5), which says specifically:
“Where a qualifying action or adjoining installation is a glazing measure, a supplier must only calculate the carbon or cost saving which exceeds the saving which that measure would achieve if installed to the minimum standard required by, as applicable, Approved Document L1B”,
and so on. One wonders why glazing is mentioned specifically. Everything else on this comprehensive list, which is very welcome, is okay, but glazing is specifically mentioned. The effect of this in its past interpretation, and it may be that the department is going to place a different interpretation on it, has been that energy-efficient improvements will be counted only from the C rating up, even if a householder changes from a poor single-glazed window to an A-rated double-glazed window. In other words, this is going to hit the 86% of houses that have the lowest-grade windows because their improvement will not count until it reaches grade C, if this wording is correct and if I am correctly informed, and I am quite prepared to admit that I may well be misinformed. If that is the case, this is a significant matter for the glazing industry and indeed for the principle of what we are trying to achieve with the Green Deal. We are going to disadvantage a lot of the less well off households because that is where the vast majority of poor-quality windows will exist.
Will the Minister agree at least to look at this issue? I do not expect him to be able to say that there is an instant answer that he can give me today. In fact, today we are approving these orders because we can do no other, so there is nothing we can do about this issue, which I rather regret; it would have been nice if I had known about it three months ago. We need to think seriously about this issue. According to the Glass and Glazing Federation, it looks as if there is a bit of a chink in the order and it would be better if that did not exist.
Lord Reay
My Lords, the Green Deal seems to be a ferociously complicated and expensive bureaucratic edifice. It has the laudable objective of improving the energy efficiency of existing British homes and other buildings without requiring the taxpayer to fund it. If I understand the impact assessment correctly, the cost of the energy company obligation will be recouped by suppliers from customers’ bills generally, so that is a further cost to the consumer. As for the amount, I saw different references—a reference to a cost of £1.3 billion a year on page 187 of the impact assessment, but a reference to £540 million a year in the letter from the Minister that appears at the back of the report of the Secondary Legislation Scrutiny Committee. I do not know if the Minister might be able to comment on those figures.
The take-up of the scheme is of course unknowable. Much will depend, as the Government point out on page 131 of the impact assessment, on the trust that people learn to put into the scheme. Plenty of things could go wrong to affect or even destroy confidence and trust.
Two of the advantages of the scheme are said to be the saving of the CO2 emissions as a result of less electricity being used, and greater thermal comfort for householders through enabling them, for the same cost, to enjoy high temperatures in the homes. However, each of those objectives is achievable only at the expense of the other.
I will refer to some interesting paragraphs on page 89 on the subject of health. The impact assessment correctly points out that the scope for improving health by alleviating cold living conditions is considerable. However, it goes on to point to the growing concern that the removal of ventilation can increase the incidence of disease. It expects more attention to be focused on this subject in future.
Finally, I will ask the Minister a question on the subject of external cladding. We read recently that another government Minister had declared that he wished to promote this form of energy efficiency. Will my noble friend give an assurance that this will not be done to listed buildings? We do not want beautiful buildings and streets being vandalised into eyesores in the name of energy efficiency. Enough damage is already being done to the countryside by wind turbines, as the Minister well knows.
Lord Whitty
My Lords, I have a number of points; I will try to restrict them to five. The first two follow up on what my noble friend Lady Worthington referred to as “joining up the dots”. The first is very straightforward and relates to the previous item. I do not understand, even at this late stage, why the Government’s programmes for smart meters and the Green Deal are not allied at least in their means of delivery and timing. Householders will be faced with two different initiatives, one compulsory and one voluntary, at the same time. They could easily be combined. I will leave it at that.
My second and most important point concerns how the ECO mechanism and the Green Deal mechanism join up, in particular in relation to tackling fuel poverty. I think that the Minister was being a little economic with the truth earlier when he claimed that this represented an increase in the number of the fuel poor who would benefit from government policy. Figures produced by my former organisation, Consumer Focus, indicate that the total spend on fuel poverty will fall from £1.1 billion to £540 million in 2013. The latter amount will be accounted for largely by the proportion of the ECO that will be geared to addressing fuel poverty.
As the noble Lord, Lord Reay, said, all consumers will pay for the ECO. It is more or less a poll tax and therefore regressive on those who cannot afford to pay. The offset will be geared through measures such as the warm homes discount, and will include the gearing of some aspects of the Green Deal to the fuel poor. It is not clear that the fuel poor will benefit, in particular those who are tenants either of private or social landlords. Because of turnover and the nature of the tenants, it is unlikely that many will sign up to the Green Deal. Therefore, it would be much more efficient to deliver it via the landlord. Questions of inherited obligations would begin to disappear, and so forth.
It is not clear that in net terms the Green Deal can be delivered easily to individual households in tenanted property. It is not clear how obligations such as the forward payment could be delivered, and it is not clear how the relationship between the landlord and tenant could facilitate the take-up of the Green Deal—the payback from which will take a number of years. My central problem is that a significant element of those who are in fuel poverty will be unconvinced, if they are in their own property, of the need to take up the Green Deal. If they are in tenanted property, they will be unable on an individual basis to take up the most cost-effective ways of achieving Green Deal benefits.
Lord Teverson
My Lords, this is the first document that we have debated in the House that refers to the carbon-saving communities obligation. I want to welcome that because it plugs a hole. The Government have listened and put that in. It is important that that has happened.
I do not want to take over the Minister’s task, but I say to the noble Lord, Lord Reay, that energy efficiency is costly now, but we are paying the cost of the lousy house constructions of the 1950s, 1960s and 1970s. Someone has to pay for that, and unfortunately it has come to us, our generation, to do it. Is that the right thing to do? Absolutely everything that I have ever read, seen or had numbers on has said that energy efficiency is a far more cost-effective way of reducing energy demand or decarbonising than all the other technologies that we tend to talk about. It is completely obvious that it is better to save than to spend to save later. That is why the Green Deal and this area of the ECO are important.
The noble Lord, Lord Whitty, made a number of points on which I agree, and there are a lot of question marks about how things will roll out, but I get the impression from the Government’s mood changes, which are welcome, that the Green Deal is such a large, important, new and innovative programme that it is impossible to nail down all the details right away. We are going to have to go through a learning curve as we implement it. We obviously have to get a number of bits of it tied down, but I am sure that over the first one, two or three years, the programme will change in detail because some of it will not work and some of it will. That is why I welcome the fact that there is not a big-bang launch of the Green Deal but an introduction that tries to learn from the initial experience of rolling it out.
I know that this is a DCLG issue, but I should be interested if the Minister can tell us how the 2016 deadline on, effectively, zero-carbon houses is going. I know there are a number of challenges around achieving that, but I would dearly love to understand whether we are now approaching that optimistically so that in future we do not have the problem that we inherited from those post-war decades of bad house construction.
My list of specific questions for the Minister is even shorter than the list of the noble Lord, Lord Whitty. We want to get a lot of people out there to take advantage of the affordable warmth part of the energy company obligation. What plans do we have to make sure that those people are aware of this scheme and get it to work if they are not approached by their energy supplier? That is always a problem with these issues.
The noble Lord, Lord Whitty, made a point on the rented sector. I am not as pessimistic about the rented sector because the scheme is written with the debt applying to the meter, so there is every incentive for even a short-term tenant to get the Green Deal if they want because they do not have to pay it back later on if they move on in a few months’ time. It still requires them to be motivated to do it, to be told that they can and to be able to understand that. I would be interested to understand the Government’s point on that at the minute. This will require working with local authorities to roll this out street by street, neighbourhood by neighbourhood, and village by village.
Lastly, there is a small issue around warranties. The warranty conditions under the Green Deal are pretty good now. I would like to understand from the Minister whether we are going to have an equivalent warranty position on the affordable warmth programme.
Lord Grantchester
I thank the Minister for his explanation of the orders. From our side, we are pleased to continue our support for the Green Deal. Any demand-reduction and energy-efficiency improvements are vital for meeting greenhouse gas emissions targets, energy security and climate change mitigation. It has been reassuring that the coalition Government have continued along the pathway set by our previous Labour Administration, but it has been frustrating that progress has been slow at times. While recognising the imperative that measures must be fully budgeted, it has been frustrating that schemes have oscillated wildly, as happened with the feed-in tariffs fiasco, undermining confidence and jeopardising investment.
When readjusting payments in the future, it cannot be stressed enough that adjustments must be smooth and based on accurate and meaningful calculations. I begin with the energy company obligations—ECO. Since the passing of the Energy Act last year, it is recognised that there will necessarily be a period of consultation and drafting. It is recognised that the Government have responded positively, and the noble Lord, Lord Teverson, was correct to draw attention to this in his remarks.
The proposals strengthen key areas such as consumer protection, strengthen protections for lower-than-average energy users and those in rural areas, and adopt Labour’s proposals to include hard-to-treat cavity wall insulation. However, there is concern that following the Minister’s department’s downgrades the schemes will not achieve the targets necessary. The Government have been high on hyperbole and claims, to quote the Minister in the other place,
“to improve 14 million homes by 2020 and a further 12 million by 2030”.
Now that we have the final impact assessment, these claims can be assessed in detail. The actual figures are much less stunning.
The department’s figures for loft insulations suggest that they will fall from about 900,000 this year to just 150,000 next year, a decrease of some 80%. Cavity wall insulations will drop from 700,000 to 400,000 in 2013. Solid-wall insulations will remain the same as this year. These downgrades will have significant consequences for the industry, for the country’s ability to meet climate-change targets and, most importantly, for the many hard-pressed households struggling with everyday energy bills.
As to the Government’s consultations and dialogue with industry, there are several detailed points on which I will press the Minister. The industry has signalled that it is keen to work with government, and has made significant progress. My noble friend Lord Whitty has already spoken to points raised by the Combined Heat and Power Association on district heating. The ECO is intended to work in tandem with the Green Deal policy to enhance further the installation of cost-effective energy efficiency improvement measures, especially measures not fully financeable through the Green Deal alone—for example, through solid-wall insulations. A supplier may support a measure under the ECO. However, it is not clear what is the process under which the ECO may be triggered and join up with the Green Deal, and how the hierarchy of providers, assessors and the bill payers will have clarity of responsibility. Once again, my noble friend Lord Whitty has highlighted this issue, especially the difficulties of fuel poverty.
We are keen to see the Green Deal be a success. However, there are continual concerns raised as each proposal is announced. It is not only Labour that is raising concerns. A coalition of 16 organisations, including Consumer Focus, SSE and the WWF, recently issued a paper, which stated:
“The Green Deal and ECO, as they currently stand, are nowhere near sufficient to meet the challenge of eliminating fuel poverty and ensuring affordability for all”.
Low take-up will seriously impact the British installation industry. It has been claimed that the Green Deal will create 250,000 jobs. Now, in the impact assessment, the department has downgraded its estimates again. The Minister in the other place has put the figure at a mere 34,000 jobs created by 2050. Under the department’s worst-case scenario, only 12,000 jobs may be created by then. Every new job is to be celebrated at a time when the Government’s economic policies are making many people redundant or out of work. Does the Minister have an update today on how many jobs will be created by the Green Deal next year and up to 2015?
Lord Marland
My Lords, I am extremely grateful for the contributions. It is worth saying that we have taken the Green Deal through this House. It has been rigorously stress-tested. A number of changes that we have made are entirely due to contributions from Ministers.
Lord Marland
Not Ministers yet, but they could be in time. Actually, I am thinking of the noble Lord, Lord Teverson, who is so good at replying to the questions that I am asked, I might ask him to sign up. I meant to say that the changes were due to the contributions of noble Lords. What we have set before the Committee is merely a tightening of the belt and a response. Let us be fair; noble Lords all know that they are just going through the motions and asking questions that will continue to tighten up and improve an extremely well put together Bill, because they helped to put it together.
I shall deal with specifics and ignore some of the political air traffic because it is not a political issue. My noble friend Lord Dixon-Smith made a very good point on behalf of the double-glazing industry. Her ladyship is obviously very concerned. The noble Lord declared his interest that he is, to date, not double-glazed, and he has probably been put up to it by her ladyship rather than the industry. We are pretty clear that double glazing qualifies under these provisions and we have to differentiate between home improvements and energy-saving issues. People who qualify should have better standards that are the minimum standards in the building regulations. I hope that that satisfies my noble friend’s questions. Perhaps he will be kind enough to let me take up his offer to allow me to write to him on his technical questions about grade C because the issue is technical and I am known for, and have admitted to, my lack of detailed knowledge of these band areas. It would be better to have it in black and white from experts.
The noble Lord, Lord Reay, who is not known as a great fan of the Green Deal, happily repeated that he is not a great fan and quite reasonably asked for an explanation of the figures that we have come up with. The answer is as follows: the £1.3 billion is the total expected cost of all three elements of the ECO, and the £540 million is the expected cost of the elements that are expressly reserved for supporting low-income and vulnerable households. I hope that that clarifies matters. As someone who is passionate about our architecture and our countryside, I quite reasonably expected the noble Lord to ask about external cladding, and I am very happy indeed to confirm that there will be no change in the planning conditions as they stand in relation to any external changes to a house.
I move on to the noble Lord, Lord Whitty. I must say that I mopped my furrowed brow when he said in his letter, “I may not be in London in time for the Moses Room discussions”. What a relief it is that he is with us because his incisive questions are, as always, very difficult for a simple soul like me to deal with. His letter arrived this very morn and is full of a lot of the detail that he has mentioned. I shall be delighted to respond to him in writing, although I shall deal with some of his questions now, just to keep the conversation going.
The noble Lord, Lord Grantchester, amplified the point about joined-up thinking between smart meters and the Green Deal. In an ideal world, we would push everything out together and do it all at the same time but, as we all know, the world is not ideal. There is a defining difference between smart meters, which are an obligation, and the Green Deal, which is a market-led opportunity. We cannot always have opportunities as obligations or vice versa. I am sure that the noble Lord will understand that.
He touched on the very important subject of fuel poverty, which is at the heart of most people’s concerns. Professor Hills has come up with an excellent report. We published his interim report, which found favour with your Lordships. The report looks at the definition of fuel poverty because—making a small political point—it went up exponentially under the previous Government, despite everything that they did. I compliment the previous Government on everything that they did to try to stop fuel poverty but it went up exponentially because, as we all realise, the definition was not the right one. We must get to grips with the definition because in doing so we get to grips with the problem. We will watch this space very carefully as the Green Deal unwinds, Professor Hills’s final report is put in place and we bring everything together.
On the private rented sector, the noble Lord, Lord Teverson, amplified and supported the point made by the noble Lord, Lord Whitty. A great effort was made by your Lordships; in this House, we put in a review for 2016. I do not think any of us wants to waver from that date. We persuaded the other place that it was the right thing to do and we will wait for it.
The noble Lord rightly raised the district heating system, as he did in his letter. Indeed, it was through consultation and the great work of noble Lords here in pointing it out as we took the Bill through the House that we agreed to embrace the district heating system within the current regulations and take it on. As I say, there is a lot of detail in this letter, as you would expect from the noble Lord, given his expertise. I will reply to his letter in full and put that reply in the Library so that everyone can see it.
I say only that I am not known for being economical with the truth. I do not think that the noble Lord meant it in that way; I think he was just arguing over the semantics of the figures. Fuel poverty and the number of people who could be employed vary and are often a matter of estimation and guesswork, albeit based on statistical evidence and forecasting.
The noble Lord, Lord Teverson, to whom I am always grateful, mentioned carbon savings being at the centre of everything that we are trying to do. He is absolutely right: we have inherited a legacy of poor home construction, which is not exclusive to certain areas. This is part of what the Government are about. Trying to reduce demand is absolutely fundamental, as we have discussed. As for getting to zero carbon by 2016, fingers, toes and other parts of the body are crossed. It is a very challenging task and we are committing to it.
The noble Lord mentioned the “affordable warmth” sign, the affordable warmth system and the warranty system. Ofgem is coming up with a load of rules and regulations for the warranties, which will be supplied later. To ensure that those who are entitled to it get it, there will be a referral service. We are setting that up now. People can refer to it, and it will be monitored by our department.
Lord Grantchester
While the Minister reflects on another point, we are trying to get uptake by consumers. I wonder whether he has researched the situation as far as consumers are concerned. I am sure the Government could take steps to make sure that penalty charges are not a feature of the Green Deal plan.
Lord Marland
We want at all costs to avoid penalty charges for a private scheme. It is therefore not really for the Government to indulge in imposing penalties. We are monitoring it, as noble Lords have insisted, and I completely agree. We are going to review the whole thing regularly but, in particular, in 2016. If, for example, in the private rented sector, things are not going as we hoped, we must, where possible, enact to impose penalties.
The thing I am completely stumped on is consequential loss. It needs greater amplification for me to understand the issue, so with the indulgence of noble Lords, perhaps we can do it at a separate time. I hope noble Lords will forgive me because I need to understand the question in more detail in order to give a satisfactory reply.