Draft Electricity and Gas (Energy Company Obligation) (amendment) Order 2017
(Limited Text - Ministerial Extracts only)
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The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Jesse Norman)
I beg to move,
That the Committee has considered the draft Electricity and Gas (Energy Company Obligation) (Amendment) Order 2017.
It is a pleasure to serve under your chairmanship, Mr Hanson, especially since you are not Geraint Davies, whose name I see on the form. In addition to thanking you, I thank all colleagues who have come at this early hour to assist us with this piece of legislation.
Jesse Norman
If other Members wish to proclaim themselves keen as well, I welcome that.
In the Prime Minister’s first speech of her term in office, she acknowledged the hardships faced by poorer households in Britain—those hard-working families who, in her words
“can just about manage but worry about the costs of living”.
As part of the response to that dilemma, the Government are committed to helping households in fuel poverty or on lower incomes and those living in homes that are expensive to heat. The order is designed to move us further towards that goal.
Michael Fabricant
Regarding the cost of living and the cost of heating people’s homes, I have one question, having briefly looked through the explanatory notes. I wonder whether these tighter regulations, while perhaps helping to save the planet, might increase the cost of installation or operation. Has the Department made any analysis of the effect that the order will have on installation?
Jesse Norman
I am very grateful to my hon. Friend for that intervention, and I congratulate him on making it when my remarks have barely started, such is his eagerness. The Department of course scrutinises the cost of legislation, and the order is designed to allow a transition period precisely to set the suppliers up for the next supplier obligation, which will be introduced in 2018. That should allow time for any costs associated with the changes to be absorbed within the system.
The order will also make an important contribution to the Government’s clean growth plan and to reducing carbon emissions. We are making amendments to the existing Electricity and Gas (Energy Company Obligation) Order 2014, which covers the period from 1 April 2015 to 31 March 2017. The amendments extend the current scheme from 1 April 2017 to 30 September 2018 to enable reforms to be introduced while also allowing the industry time before further improvements are made through a new longer term scheme that will run from 2018 to 2022. Planning ahead to 2022—beyond the life of this Parliament—reflects announcements on funding made in the 2015 spending review. The longer term confirmation of funding is designed to give greater certainty to energy suppliers, installers, local authorities and other energy stakeholders.
The Government are facing up to the enormous energy challenges our country faces over the coming years. With the overhaul of the electricity market and continued investment in renewable technologies, we are making good progress towards ensuring that the UK’s energy is secure, low carbon and affordable. Improving the energy efficiency of the UK’s homes is central to that challenge and to reducing fuel poverty. The energy company obligation scheme helps occupants to keep warm, reduce their energy bills and protect their health and wellbeing by requiring energy suppliers to reduce carbon emissions and energy costs through installing energy efficiency measures in households across Great Britain. The supply chains involved in that endeavour also provide economic benefits across the country.
Since the introduction of the ECO in 2013, the scheme has proved to be a remarkably reliable and cost-effective means of upgrading our housing stock. Altogether, more than 2 million energy efficiency measures had been installed in more than 1.6 million homes by the end of December 2016, with around 1.2 million of those measures going to 900,000 low income and vulnerable households and households in deprived areas. That is a significant investment in addressing energy efficiency and fuel poverty. Thanks to the amendment order we are introducing today, we forecast more than half a million more insulation measures and around 45,000 more heating measures will be delivered through the ECO by 2018.
Ian Murray (Edinburgh South) (Lab)
The Minister has mentioned fuel poverty several times. Will he say what the Government are doing to prevent fuel poverty with regard to energy companies and their double-digit price rises?
Jesse Norman
As the hon. Gentleman will know, the Government made clear in a debate last Thursday and in other remarks that they would bring forward a consumer Green Paper and a response to the Competition and Markets Authority. A specific response on the issues he raises will be addressed in those documents.
The order will reduce the overall spend of the scheme from £860 million a year now to £640 million a year. That has been done to constrain the impact of Government policies on all consumer bills. In making the change we have also sought to ensure that the support offered by the ECO is focused more on those in more need.
Callum McCaig (Aberdeen South) (SNP)
In this and any future scheme, has any consideration been given to putting the burden on to the taxpayer as a whole, as that would be far more progressive and would go some way to reducing fuel poverty? As the Minister will know, those with lower incomes pay more on fuel bills and therefore a bigger share of the contribution to schemes that are meant to reduce fuel poverty.
Jesse Norman
The purpose of the proposal is to shift the scheme towards those in fuel poverty. It sits alongside the warm home discount scheme, which was also aimed at those people. The independent Hills review, which looked at supplier obligations a few years ago, concluded that the supplier obligation was the best means and most cost-effective way to reduce fuel poverty.
In introducing the order today, we are forecasting that more than half a million more installation measures and around 45,000 more heating measures will be delivered through the ECO by 2018. The changes implemented by the order were consulted on in summer 2016. The consultation received 236 formal responses that were broadly supportive of the proposals and the Government response was published at the end of January this year.
The order makes clear that we have increased the period of the obligation extension from 12 months in the consultation to 18 months. That is in response to the views of stakeholders and is designed to make the transition as smooth as possible. It will avoid costs associated with industry implementing changes within constrained timelines, and will allow lessons from the operation of the extended period to be fed into the design of the longer term scheme from 2018.
The separate carbon-saving community obligation element of the ECO, part of which currently delivers energy efficiency improvements in rural areas, will be brought to an end for reasons of simplification, but there will still be a safeguard guaranteeing a minimum level of rural delivery under the remaining carbon reduction obligation. The affordable warmth element of the scheme, which places the greatest focus on targeting low-income and fuel-poor households, is increased from 34% to 70% of the overall estimated spend. That means that the carbon emissions reduction obligation element, which allows delivery to any home for carbon-saving purposes, will be decreased to approximately 30% of the overall spend.
Changes are also being introduced to target better the affordable warmth obligation towards low-income and fuel-poor households. First, the use of income thresholds will be deployed to determine eligibility under affordable warmth; the process will be simple but will recognise differences in household size. Secondly, eligibility for the affordable warmth element has also been extended to allow the installation of particular measures to social housing occupants in the least efficient homes, that is those in an energy performance certificate band of E, F or G. Thirdly, a new voluntary provision will allow local authorities to use their local knowledge to determine eligible fuel-poor or vulnerable households for up to 10% of a supplier’s affordable warmth obligation. In particular, they will have opportunities to help people with health problems living in cold homes. Fourthly, mains gas boiler replacements delivered under affordable warmth have been limited to the equivalent of approximately 25,000 a year. Our analysis suggests that other measures, such as insulation and first-time central heating, are more beneficial and cost effective. We will also require a minimum level of the more expensive solid wall insulation, equivalent to 21,000 homes a year, to protect the development of that sector and improve some of the least efficient homes. A key focus of the changes made by the order is simplification to reduce administrative burdens and complexities associated with the scheme, which may allow more measures to be delivered within a given amount of supplier spend.
These are important changes to the existing ECO order. They will continue to drive large-scale investment in energy efficiency across the country. Support will be targeted more at those who need it most, those living in fuel poverty and those on lower incomes who are struggling with bills. The order will promote measures that reduce energy bills, and it will simplify scheme delivery and better target energy efficiency funding to vulnerable and low-income households. I commend the draft order to the Committee.
Jesse Norman
I thank both the hon. Member for Southampton, Test and my hon. Friend the Member for Reigate for their useful and interesting speeches. First, I shall pick up my hon. Friend’s comments about the general picture, then return to the shadow Minister’s specific comments about the draft order.
There are many reasons to bemoan the Conservatives’ failure to win the 2005 general election, but my hon. Friend gives a cogent personal reason—our energy policy might well have been very different and, in some respects, improved. Nevertheless, I take issue with a couple of things that he said. I do not think there has been any hiding away of costs. Whatever we think of the policy design, the costs are pretty explicit and public, and have been extensively debated and consulted on, so I do not think they are hidden.
Crispin Blunt
On that narrow point, are the subsidies provided by the Government to encourage the creation of wind farms all over the place an intelligent or economically efficient way of contributing to our climate reduction goals?
Jesse Norman
There are two points to make on that. First, the way to think about all these things is as part of a wider energy mix that is designed to solve the trilemma of security, affordability and decarbonisation. On the contribution of offshore wind, for example, it is true that there is some question as to its total cost when including intermittency. It is also true that, had it not been for the substantial Government investment in this area, we would not have the situation in which costs for this technology are falling faster and further than anyone would have anticipated.
Callum McCaig
On intermittency, I understand—and I put a question to the Minister’s colleague at Energy questions last week—that the Government are refusing to publish a report that they commissioned to look at that very thing. If there are questions on the cost of intermittency, publishing that report would greatly help us to have that debate in an informed manner. Will the Minister look at publishing the report by Frontier Economics on the full cost of electricity generation?
Jesse Norman
I am happy to look at the hon. Gentleman’s suggestion. On the point I was making to my hon. Friend the Member for Reigate, we are not starting from the position he described. That position has the effect of disguising costs. The reason why we have carbon emissions issues is precisely because of the externalities built into previous models of industrial development. Those substantial costs were not included in the true cost of production of the goods and services concerned. It is simply untrue to suggest, even by implication—I am not suggesting my hon. Friend was suggesting this—that there had been some Elysium or status beforehand in which costs were explicit and are now not; there were costs before that were not explicit and there may be costs now that are not. From a Government standpoint, there is no hiding of costs as regards expenditure by either consumers or the Government.
Let me say a couple of other things. The overall energy market approach my hon. Friend describes was well outlined recently in a report by the House of Lords Economic Affairs Committee, as he may know. It remains an important part of the accountability of Government that we respond to it and are aware of it as an alternative. However, it is worth saying that it would do nothing as such to alleviate the issues of fuel poverty that concern us today. In my judgment, it is not an answer to say that local authorities are somehow a go-to alternative. The truth is that the delivery of those and related measures by local authorities has historically been quite mixed.
On the setting the 10% figure, that was designed, based on the consultation, to allow for a period of experimentation during the transition period, precisely to assess whether that number could be raised in line with the suggestions that have been made. The number involved—even at 10% of £45 million—is not a trivial amount of supplier obligation. I think that is a reasonable and proper justification.
I will say a couple of things about the matters raised by the hon. Member for Southampton, Test. He asked why we were presenting the order so late. I share his concern about that. My preference would be for measures to be presented to Parliament as early as possible. The difficulty has been—in part, this refers to a couple of earlier points—last year’s changes in Government and knock-on effects, which have delayed the process. It is certainly not something that any Government would want to make a habit of, so I take the point.
I have a couple of comments to make in response to what the hon. Gentleman said about a reduction on a reduction: first, the number of homes in fuel poverty has continued to fall since 2010, and it is clear that the measures continue to have a powerful effect. It is also important to bear down on consumers’ bills. If the hon. Gentleman wants to introduce specific costed proposals for restoring the funding that he criticises the Government for reducing, it is incumbent on him to state by how much he would be prepared to put it up, and how much he would be prepared to burden taxpayers or consumers. In addition, we expect, by September 2018, to have met a target of 850,000 homes insulated. That leaves 150,000 by 2020, which is in line with the manifesto commitment made in 2015. The Government believe that they are on track.
As for the fourth carbon budget, the hon. Gentleman was talking about totals—and the challenge for the Government is to meet the fourth carbon budget in total. The support and advice that the Committee on Climate Change offers is always welcome and of interest to us, but the focus is on the total. The hon. Gentleman painted a beguiling picture of towels being tightened and retightened in the bowels of the Department; but I think it is fair to describe the process of aligning all the different carbon saving measures required to meet the budgets as complex and difficult. That is what the clean growth plan, which will be published in due course, will do.
Dr Whitehead
Does the Minister want to add anything to the phrase “in due course” with reference to the clean growth plan?
Jesse Norman
I thank the hon. Gentleman for that tempting invitation, but I can say that “due course” will be due, and a matter of course; so the answer to his question is no.
As to whether there will be a review of the long-term effects of the ECO, we anticipate that there will be a consultation later this year—I can give the Committee some clarity on that—in line with thinking about what the further process will be after 2018-22. I have addressed the issue of the figure of 10% in relation to affordable warmth, which we have discussed.
Among other key elements worth picking out is the question of the proportion of fuel-poor homes in band E, or above, in England, which is expected to be about 92% by the end of the extension. That will be up from 88% three years ago. Again, that underlines the progress that has been made.
This has been an interesting and useful debate and I thank hon. Members for their speeches. As I said, the scheme has helped to deliver more than 2 million energy saving measures to more than 1.6 million households, including 1.2 million measures to 900,000 low-income and vulnerable consumers. At a time of rising energy bills, the Government think that it is right for support to be targeted to those most in need. At the same time, the amendments being made to the existing order should reduce the cost of the scheme to bill payers to about £25 a year from the current level of £34 to £35—and nearly £60 at the time of its launch in 2013.
With the amendment order the ECO is expected to provide 545,000 households with more energy saving measures. We will thereby give a balance of improvements and continuity to consumers and the energy efficiency industry for 18 months, before further change is made through a longer-term scheme, from 2018 to 2022.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Electricity and Gas (Energy Company Obligation) (Amendment) Order 2017.