Electricity and Gas (Energy Companies Obligation) (Amendment) (No. 2) Order 2014

Thursday 27th November 2014 Grand Committee

Motion to Consider

14:15

Moved by

[Baroness Verma]

That the Grand Committee do consider the Electricity and Gas (Energy Companies Obligation) (Amendment) (No. 2) Order 2014.

Relevant documents: 8th Report from the Joint Committee on Statutory Instruments, 9th Report from the Secondary Legislation Scrutiny Committee

[The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma) (Con)]

My Lords, I am pleased to open this debate on the two draft orders before us. We are proposing amendments to the existing ECO order which covers the period to March 2015, and a new ECO order which introduces a new period for the scheme, extending the obligation to March 2017.

The Government have faced up to the enormous energy challenges our country faces over the coming years. With the overhaul of the electricity market and record investment in renewable technologies, we are well on the way to making sure that the UK’s energy is secure, low carbon and affordable, and improving the energy efficiency of the UK’s homes is central to this challenge. Through the Energy Company Obligation scheme and the Green Deal, we are making homes warmer, more energy efficient and cheaper to heat. Since the introduction of ECO and the Green Deal framework we have made tremendous progress towards our target of 1 million homes making one or more permanent energy efficiency improvements by March 2015.

Altogether, around 995,000 energy efficiency measures had been installed in more than 819,000 homes by the end of September. The vast majority of households benefiting have received support from ECO, with more than 585,000 measures going towards around 482,000 low income and vulnerable households, and households in deprived areas. Under the Affordable Warmth scheme, we had delivered just under 380,000 measures into around 304,000 households by the end of September. This work has delivered £4.2 billion-worth of notional lifetime bill savings and is a significant investment in addressing fuel poverty. Thanks to the new ECO order we are introducing today, more than 400,000 further insulation measures and around 250,000 more heating measures are due to be delivered through ECO by 2017. This will provide long-term certainty for the industry and enable it to deliver as effectively as possible.

I recognise that the changes we are making to the existing ECO order are significant. Nevertheless, the policy will continue to drive large-scale investment in energy efficiency across the country. Going forward, it will be targeted more at those who need it most: those who are, or are at risk of, becoming fuel poor. These changes were proposed in December 2013 as part of a package of measures introduced by the Government to reduce energy bills by an average of £50. The changes to ECO alone will reduce energy bills by around £35, which energy companies have confirmed they are on track to deliver.

The vast majority of customers pay for the ECO as part of their energy bills. We all know that energy bills have been rising in recent years, which is why it is right and fair to review the impact that this policy has had on household costs. We are continually monitoring the scheme to make sure that we strike the right balance between the long-term benefits of energy efficiency and the more immediate impacts on consumer bills. This is so that we can continue to offer help to those in need while ensuring a sustainable scheme that delivers value for money for everyone else.

I am proud to say that, thanks to the impact of government energy policies, household energy bills are on average £90 lower this year than they would have been otherwise, as the costs of supporting home-grown, low-carbon energy sources are, on average, more than offset by savings from the Government’s energy efficiency policies. An average household dual fuel bill in 2014 costs £1,369, compared to a projected £1,459 if Government policies, including ECO, did not exist to support cleaner energy, to ensure security of supply this winter, to help vulnerable households and to promote energy efficiency.

To reduce the cost of delivering ECO, the amendment order will reduce the 2015 target for the carbon emissions reduction obligation by 33%. These orders extend the eligible primary measures for the carbon emissions reduction obligation to include loft insulation, cavity wall insulation and district heating systems where these measures are installed from 1 April 2014 onwards. We recognise that some energy companies will have delivered more than others and will have done so by investing in more expensive measures. Therefore, we intend to provide a carbon uplift for those companies to ensure that they are not penalised for acting early. However, alongside some scaling back intended to lower overall costs, we are also introducing a minimum target for solid wall insulation, which will guarantee for the first time that a substantial number of solid walled properties—around 100,000—will be treated under ECO to March 2017. We have done this to ensure that we continue to support people living in cold, hard-to-treat homes, as well as to deliver carbon savings.

In addition to this, we allocated an additional £450 million in support of household energy efficiency over three years. As part of this, we have provided further support for energy efficiency measures, including solid wall insulation, through the Green Deal home improvement fund. The success of the Green Deal home improvement fund demonstrates that consumers will take up energy-saving technologies where costs and disruption have previously resulted in low take-up rates if incentives are sufficiently attractive. I am pleased that the Government will soon announce a second release of the Green Deal home improvement fund as part of making a further £100 million available to household energy efficiency.

Furthermore, our changes to ECO do not involve any reduction in the level of support for low-income and vulnerable households. As noble Lords will know, the Government are putting in place a new energy efficiency-based fuel poverty target for England. Parliament is currently considering the proposed legislation. Extending support under the ECO Affordable Warmth scheme ensures continued long-term investment in energy efficiency in fuel-poor homes. It is considered the most sustainable way of tackling fuel poverty and reducing the cost of keeping warm. Reflecting that reducing fuel poverty is a priority, the orders we are considering retain dedicated Affordable Warmth activity under ECO at the original level of investment. Thanks to our new order, we are giving certainty to industry by extending activity on the same scale to March 2017.

We have also sought to make ECO easier and cheaper to deliver in low-income communities and rural areas. We are therefore extending the carbon-saving community obligation part of ECO to cover the bottom 25% of areas on the index of multiple deprivation, meaning more households in low-income areas have access to ECO funding, and we are simplifying the eligibility requirements for installing measures in rural areas. These changes will apply for measures installed since 1 April 2014 and have already resulted in a significant increase in the number of measures delivered to hard-to-reach rural homes.

The new order extends the ECO scheme to 2017, with new carbon and Affordable Warmth targets to be met over the period April 2015 to March 2017. This will ensure that ECO continues to deliver energy-efficiency measures in households for an additional two years. It will give certainty to industry and, together with the impacts of the amending order, we expect it to result in interventions for an additional 620,000 households.

The order makes some adjustments to the ECO Affordable Warmth scheme. We are rebalancing delivery towards non-gas fuelled households, which are more likely to be in fuel poverty, by introducing an uplift to be applied to insulation and qualifying boilers in non-gas fuelled households; and bringing in a new eligibility measure—a qualifying electric storage heater—which will incentivise delivery to electrically heated homes by giving these measures a different score than they would previously have received. This will now be calculated in a similar way to the score for a qualifying boiler.

ECO has delivered 267,000 new boilers in low-income and vulnerable households. This is a significant achievement. For the future, we are incentivising a more balanced profile of delivery, by setting the score for measures in such a way that will mean insulation measures will be more likely to be promoted than they were previously. We are also introducing additional customer protections by requiring that a warranty covering the installation of new boilers is provided free of charge to the customer.

In conclusion, the amendments to the current ECO order will bring much needed reductions to energy bills at a time of rising energy costs, while protecting energy-efficiency funding for vulnerable and low-income households. I commend these orders to the Committee.

[Lord Whitty (Lab)]

My Lords, I thank the Minister for explaining these extremely complex changes, and for doing so despite a short-term disability in terms of delivery. It is probably sensible that she indicates that she will write to me on any points she wishes to take up because we have another set of regulations to get through before we finish on energy today.

I also thank the Minister’s officials because they have produced Explanatory Notes and an impact assessment that are extremely complex. However, some of that raises rather more questions than it answers. The Minister has done her best to present this as an advance in tackling energy efficiency but my assessment is that in some ways it is a retreat. It is obviously part of the broader approach of government to the multifarious challenges of energy policy but most commentators would say that the energy-efficiency dimension of it is faltering.

Let us look at a bit of history. When they came in, the Government inherited a number of different schemes from the previous Government: Warm Front, CERT and CESP in England and the equivalent taxpayer-funded Warm Front schemes in Scotland, Wales and Northern Ireland, which are still running. None of those schemes was perfect, although when I was a Minister Warm Front actually delivered 250,000 interventions per annum, which is considerably more ambitious than the aggregate of all the schemes to which the Minister referred.

The intention of the Government was that the ECO, funded by consumers rather than taxpayers, would replace all those schemes in one way or another, at less cost. It would be more consolidated, more stable and more geared to the physical and social challenges implicit in dealing with energy efficiency and fuel poverty. It has fallen well short of that so far. Some minor improvements have been made and are being made today in terms of the coverage, techniques and technologies for which ECO can pay—but on balance it is going backwards. That is partly because the Government’s very good first intention when they introduced the concept of the ECO was that this framework would last for 10 years. It was said that it would run to 2023 in broadly these terms. However, after two years we have some pretty major changes and some significant underperformance.

14:30

As the Minister explained today, the ambition has now been reduced on a number of fronts. There is a reduced ambition in relation to carbon. She referred to the 33% reduction. There is in my estimation a reduced focus on the output of the ECO on fuel poverty and a reduced focus, at least in the short term, on what are known to be the least energy efficient forms of housing, which house many of those most in need, principally in the private rented sector.

The Government intend by these changes to refocus the programme and to reduce, or at least control, the cost to consumers. As the Minister repeated today, the average cost to consumers through their bills should be reduced by £35 a year as a result of the changes. Previously I received letters from the Minister which I looked at again to determine where the £35 comes from. I will not go into the full details of that but I was not totally convinced by the figures. The final paragraph of one of the letters sent by the Minister’s officials stated that this was the figure that the companies estimate will be the saving. You cannot work out a priori a figure of £35 from the figures that are given. However, if that is what the companies are saying, it has not been delivered. Four of the big six companies have delivered less of a cut than £35, and those on fixed prices are particularly affected. Part of the problem is that we not only depend on the supply companies to deliver energy efficiency improvements, we also appear to trust the way they calculate their effects and the effect on bills. That may be a mistake in the medium term.

Because we are introducing changes there has also been a bit of a hiatus in delivery. One estimate suggests that 55,000 households have missed out because of the uncertainty about where we were moving. There are certainly anxieties within the insulation industry and the installation industry about how these changes will affect the way in which they deliver and the cost efficiency with which they can deliver. So we have a situation where some uncertainty has been introduced on top of pre-existing uncertainty. It is not entirely clear to me that the Government intend to maintain this framework beyond the two years we are talking about. Perhaps the framework should be changed, as I shall discuss later.

I turn to the proposals themselves and the documentation provided with them. As I say, we have reduced the carbon ambition, as was explained by the Minister and is set out in the impact assessment, which states at page 27 that only 10,000 will be taken out of fuel poverty by 2018 out of 1.8 million or so—depending on the definition you use. As regards the type of housing being addressed, it is well known, and has been for years, that the lowest energy efficiency is found in the private rented sector. As noble Lords will know, the private rented sector is an increasing part of our housing tenure. Roughly 21% or 22% of people now live in the private rented sector. The impact assessment states on page 23 that from 2013 to 2015, only 11% of interventions will be in the private rented sector and only 6% in 2015 to 2017. However, dwellings in the private rented sector continue to pose the greatest problems as far as energy efficiency and fuel poverty are concerned.

Some beneficial changes have been made in terms of the particular problems of rural areas but what has been given with one hand has been taken away with the other. While there is an extension of the technologies which can be employed so that off-grid households within rural or semi-rural areas can be addressed more effectively, the focus on the poorest within those areas has effectively been removed because we now have an objective of rurality as well as of need. That could mean that within rural areas those in the most desperate need may not be given priority.

As to the total number of interventions, page 27 of the impact assessment states that in the period 2013 to 2015 just over 1 million interventions are envisaged. Over the following two years, only 842,000 will be addressed. That is a reduction of nearly 20%. However, because ECO is divided into three parts, in the affordable warmth section which affects certain types of fuel poor housing, it represents a decline of 47% in the number of interventions. The impact assessment shows that the changes that have been made, primarily to reduce consumers’ bills—which no one is objecting to although the form of the Bill is a matter of contention—have led to distortions which have reduced the total impact on carbon and on the focus on the fuel poor and the least energy efficient housing. At the same time, because it has caused some disruption in the industries, the cost per intervention may also have suffered. Certainly there are elements within the installation industry which would suggest that.

There are objectives for landlords within the private rented sector to improve the energy efficiency of their dwellings by 2018 to at least band E. However, with the reduction in the focus on the private rented sector, any help for landlords to meet that target is to be reduced at the point where they begin to focus on needing to do so. So it affects not only the tenants within the private sector but the preparation for tighter requirements on landlords.

Behind all this is the problem that the policy of relying on the ECO and the way it is structured as the sole measure of delivery on energy efficiency in terms of carbon savings, savings on consumers’ bills in general and tackling fuel poverty is flawed. A single measure by itself cannot be sufficient to deal with all of these issues, even though there are at least three different sub-schemes within the ECO. It is flawed also because we rely heavily on the supply companies to deliver it.

The Government have indicated that they would support a more area-based approach. However, these regulations do not facilitate that. A more area-based approach would be more cost efficient and more able to focus on areas of bad housing and low incomes than one which goes house by house or is delivered by the supply companies. There will be different supply companies for different consumers, different households and different streets.

It is also a political problem in that the cost of this has fallen on the general consumer in the form of what is almost a poll tax. Although attacks on government additions to energy bills have tended to focus on the subsidy for green energy, it has also been subsumed in relation to the social redistribution which the ECO levy covers. That makes it difficult to ensure any consumer understanding of the way in which these costs are being paid for and delivered.

I am speaking for the Labour Front Bench today, but the following is one of the bees in my bonnet, if you like. It is probably too late for this now, but if we are going on a house by house basis, the best way to deliver this would have been to associate it with the smart meter programme, as every single house in the country has to be associated with that and we could have prioritised those who were in most income need. However, we are where we are. There are some extensions that I approve of here, but the total ambition is sadly lacking, and we are going a bit backwards, both on the number of interventions and on the carbon outcome, as well as not contributing as effectively as we could to the reduction of fuel poverty.

As I say, the political problem is that consumers do not understand what they need to do in terms of improving the energy efficiency of their housing or why they are paying for what they may regard as other people’s problems with energy efficiency. The problem is that the Government have not managed to deliver a narrative through all these changes and have not really convinced the industry that there is a stable environment in which it can invest for the future and thereby bring down unit costs in terms of future interventions.

This is going to run for two years, and we will see whether even the reduced targets are actually delivered. I hope that they are and that we in fact exceed them—we may well do so if the industry gets it act together, but there are more fundamental problems here. I am not convinced that the ECO as it stands will deliver what needs to be achieved. We need a longer-term framework, and in that sense I cannot fully support these regulations, although there are parts of them, as I say, that I do approve of.

I can only hope that an alternative Government will perhaps rethink this and have a more holistic, cost-effective and long-term strategy for tackling the triple problem of carbon reduction, energy costs and fuel poverty. I am afraid that these regulations as they stand do not take us very far down that road—and in some respects, they go backwards.

[Baroness Verma]

My Lords, I start by thanking the noble Lord, Lord Whitty, although I disagree with absolutely everything that he said. In case I go into a coughing fit, I will just say now, while I am not coughing, that I will write to him if I do not reach some of the answers to the questions that he asked.

In the view of the Government, these measures achieve all the objectives that the noble Lord has highlighted them as not achieving. The noble Lord compared Warm Front in 2010-11 with Affordable Warmth. Warm Front did deliver, but it delivered less for the same amount of money: 80,000 houses from a budget of £366 million, whereas ECO Affordable Warmth is expected to deliver 160,00 households up to 2017, for £350 million a year. You cannot always compare like for like, because we are offering different tools. The same applies to CERT and CESP compared to ECO. We in this Government are looking at measures that are harder to deliver. CERT offered LED lights as part of the bigger drive to increase energy efficiency, but these were short-term fixes. We are trying to offer longer-term measures such as solid wall insulation, replacement of boilers and other measures like that.

I agree with the noble Lord, Lord Whitty, that we need to look at this in the long term. We have some of the most energy-inefficient housing stock in Europe, so rather than address the issue by using short-term fixes, we need to adopt a more holistic approach by considering what measures we can put in place alongside the smart meter programme, which the noble Lord rightly pointed to in his remarks. The foundation phase is currently under way and the rollout will begin to take place from next year. Smart meters will empower individuals to reduce energy costs because they will have more control over their energy consumption. However, the focus has to be on ensuring that low-income and vulnerable households are reached and helped first. The fact that we are extending ECO to 2017 and that 620,000 households will receive at least one measure assures us that we are meeting the needs of those households about which the noble Lord and I are both genuinely concerned.

The noble Lord also asked how we can be sure that the energy companies are going to pass on the full value of the savings to their customers. The companies have confirmed publicly that they will pass on the savings, and we have made it easier for consumers to be able to switch between different companies if they do not deliver. From a base of six companies, I believe that we now have 19 new independent companies on the scene. Choice and competition are now in place, and ultimately it will be competition that drives down costs, alongside companies being more receptive to consumer needs.

The noble Lord talked about uncertainty in the sectors that deliver these measures. Actually, the fact that they know they are going to be working on these ECO measures until 2017 means that they have another two years in which to deliver. Ultimately, as a responsible Government, we have to listen. When people say that they are concerned about energy prices, we have to respond to that. That is why any responsible Government would review what they are doing in order to make sure in particular that those who are finding it hardest to meet the costs are helped the most. The way we have undertaken to put this order in place means that we are doing exactly that.

I do not want to encourage political point scoring here, but at least we have come forward with a constructive approach. The noble Lord’s colleagues in the other place have been talking about energy price freezes. As we know, and as the energy companies are telling us, energy price freezes actually raise prices both before and after the freeze, while keeping the price level for two years. That will not encourage certainty in the sector; it will just make things very uncertain for consumers. We must not protest that these measures do not go far enough, rather we should encourage a review to see how well they are working. The fact is that we are now addressing vulnerable people in rural areas as well as low-income households, which shows that the Government have taken very seriously the points raised by the noble Lord.

The noble Lord also talked about the private rented sector. I think that he is aware that we carried out a consultation which closed on 2 September. We are now going through the responses we received, and once they have been considered, the Government will publish their view. That response will be available to the noble Lord and others. I will have to read Hansard carefully to ensure that I have answered the many questions put by the noble Lord. However, I thank him because I know that we genuinely share a desire to ensure that we address people’s anxieties about high bills in a very responsible and sensible manner. I believe that the order goes some way to achieving that and I commend it to the Committee.

Motion agreed.