Electricity and Gas (Energy Company Obligation) Order 2022
(2 years, 4 months ago)
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Lord Callanan
That the Grand Committee do consider the Electricity and Gas (Energy Company Obligation) Order 2022.
Relevant document: 7th Report from the Secondary Legislation Scrutiny Committee
The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)
My Lords, I beg to move that the draft order be approved.
Since 2013, the energy company obligation scheme has ensured much-needed support to low-income households to improve the energy efficiency of their homes. Since it began, it has delivered around 3.5 million energy efficiency and heating measures to around 2.4 million households. The Government committed in the sustainable warmth strategy 2021 to extend, expand and reform the scheme, to accelerate our efforts to improve the worst-quality homes in line with our fuel poverty strategy and target. This order provides for this expanded and reformed ECO scheme in Great Britain until March 2026.
The order succeeds the previous ECO order in Great Britain. Its main provisions are the scheme’s extension by four years to 2026 and its expansion from around £640 million to around £1 billion per year. There is an increased focus on support for low-income and vulnerable households in the least efficient homes. There will be mandatory minimum energy efficiency improvements required for energy performance certificate bands F and G homes; they have to be improved under the scheme to a minimum band D, and bands D and E homes have to be improved to a minimum band C. The introduction of a new minimum requirement will see at least 150,000 EPC bands E, F and G private tenure homes upgraded.
The solid wall minimum requirement will ensure that solid wall insulation is installed in at least 90,000 homes. This order introduces minimum insulation requirements for all homes receiving any heating measure, subject to certain exceptions, to encourage a fabric-first approach. Broken boiler replacements will continue to be limited under the scheme, with upgrades capped at 20,000 homes to encourage the transition to renewable heating and align with the Government’s long-term plan for reaching net zero. The scheme’s eligibility criteria are reformed, placing greater focus on households on the lowest incomes. Households in receipt of means-tested benefits will continue to be eligible.
The proportion of a supplier’s obligation that can be delivered under the flexible eligibility element of the scheme will increase to 50%. Under this, multiple options are introduced to encourage improved targeting of low-income and vulnerable households that may not be in receipt of benefits. These flexible eligibility provisions will enable local authorities, energy suppliers, Citizens Advice and the NHS to work together to identify households that are vulnerable to the effects of living in a cold home. A new scoring framework will apply to incentivise multiple-measure delivery, along with a series of score uplifts to steer measures and delivery where it is needed the most.
Installation quality will continue to be governed under TrustMark’s compliance and certification framework. As part of this, the quality of installs alongside a whole assessment of the property will continue to rely on independent industry standards, PAS—publicly available specification—2030 and 2035. Thanks to these reforms, we estimate that around 800,000 measures will be installed in around 450,000 homes. Of those, around 360,000 homes will be upgraded to EPC bands B and C, removing those households from fuel poverty. This is expected to save around £300 on average over the lifetime of the measures and up to £1,600 for those living in the least energy-efficient homes. However, those savings could average around £600 next winter, providing crucial long-term help where it is most needed.
To help deal with the gap between ECO schemes, the order permits measures installed since 1 April to count towards the suppliers’ obligation target. These are split into two elements: first, interim delivery, for measures installed between 1 April and 30 June to slightly amended ECO3 rules; and, secondly, early delivery, for measures installed to the new rules. Nearly 33,000 measures have already been installed since 1 April as a result of those provisions.
The Government held a consultation on these reforms last summer and published the government response in April. The majority of consultation responses supported extending and expanding the scheme as well as the proposals for reform. The Government are proceeding with the main proposals, with some key changes in light of the responses received and the final impact assessment. We have increased the EFG minimum requirement from 100,000 to 150,000 private tenure homes, focusing more help to those with the highest energy bills. We are providing extra incentives for the installation of measures in rural off-gas-grid areas in Scotland and Wales to account for the extra costs of delivery. The repair of efficient or inefficient oil and liquefied petroleum gas heating systems will be allowed as a last resort in homes that are off the gas grid and where it is not possible to instal low-carbon heating measures. This will help to ensure that people are not left without a functioning heating system.
In conclusion, the energy company obligation scheme remains important in supporting low-income and vulnerable households to improve the energy efficiency of their homes and to help reduce the energy bills of an estimated 450,000 households. The scheme remains a key contributor to meeting our fuel poverty and carbon reduction goals and is consistent with the heat and buildings strategy and, of course, our transition to net zero. I commend this order to the Committee.
Baroness McIntosh of Pickering (Con)
My Lords, I thank my noble friend for bringing forward the order. I understand that there has been quite a delay, as the legislation was due to have legal effect on 1 April. I wonder why there was a delay, but I am delighted to see the order before us this afternoon. I remind the Committee of my interest as president of National Energy Action, which briefed me in advance.
First, I welcome the fact that the spending envelope is going to be much greater than previously. I understand that it has been increased from £660 million to £1 billion a year, which is quite a sizeable increase and makes the scheme much more ambitious. As my noble friend said, it is a fabric-first, multi-measure approach to upgrading homes. The scheme is better targeted and allows local authority suppliers and others to qualify households into it. I regret that, as I understand it, during the delay from 1 April until when this finally comes into effect—my noble friend can tell us when exactly—25,000 households could have benefited, so it is important that we get the statute adopted as soon as possible.
I would like to raise a couple of concerns. The practice of allowing households to make financial contributions towards the measures continues but, if a household is in extreme fuel poverty, how is it expected to find the resources to contribute, given that we are soon to be living in the worst fuel poverty that I can remember? I pay tribute to Martin Lewis, who I think has done consumers and households a great service generally in guiding people towards the schemes and explaining how all of us can save money as October approaches. Perhaps this is not the best day to be discussing this, given the temperatures today.
I would like to clarify why the scheme does not set an adequate minimum of solid wall properties to be treated. I wonder if there was a particular reason for this. The figures that I have are that over 90% homes with solid walls still need to be insulated to meet fuel poverty commitments, at the same time as delivering net zero. We are probably talking about a million fuel- poor households living in solid wall properties with no insulation—some of the worst-insulated houses not just in Britain but probably in the northern hemisphere.
There is a gap in the provision of energy advice that perhaps has not been met by the scheme. How does my noble friend expect to reach the fuel poverty targets at the same time as delivering net zero if we do not have a more comprehensive network of advice provision? While the proposed defined roles of retrofit adviser, retrofit assessor and retrofit co-ordinator will ensure that households are advised initially of the options, we need to ensure that homes are assessed properly and that there is a proper plan for improvement and evaluation. Is there a case that the advice should go further and include information on other available energy schemes and support?
At the moment, it is not entirely clear whether advice is accessible. I seek assurances from my noble friend that any information comes in multiple formats, because not everyone has access to the internet, not everyone has English as a first language, and there are obviously a variety of disabilities to deal with.
With those few concerns, which I hope my noble friend will address, I give a warm welcome to the instrument before us.
Lord Whitty (Lab)
My Lords, the noble Baroness, Lady McIntosh, has anticipated me, which is completely understandable since I am a vice-president of the same organisation, but I would like to put this in a slightly broader context.
The other day, when we were having an exchange at Questions, the Minister admonished me for apparently disparaging the ECO scheme. My point is not that the scheme is not desirable. It is a means of delivery that has proved its worth in certain respects. Certainly, the energy companies have now developed systems that identify where they could intervene with their own customers. However, inevitably, by relying entirely on the ECO scheme to deliver energy efficiency provisions, people get missed out. I have always argued that putting the responsibility on the companies as the main means of delivery means that there will always be gaps, because the companies will prioritise in relation to their own consumers. What we really need, have needed for some time and, in the current circumstances, need even more is a scheme that helps absolutely everybody who is fuel poor or likely to be made fuel poor, of which there are now more because of the current energy crisis.
Energy efficiency measures meet a lot of the Government’s and the country’s objectives of saving energy, moving away from fossil fuels, working towards net-zero targets, and off-setting the energy dimension of the cost of living crisis. We therefore need to strengthen them. I assure the Minister that I approve of the direction in which these regulations move, because they broaden the way you can bring people in. They increase the schemes and the comprehensiveness by looking at multi-measures in a way that past interventions frequently have not. This means that schemes can be addressed that do not rely on mini-interventions but look at the total fabric of the house and the systems by which it is currently heated. The detailed measures on the upgrading of the ratings are also important, and the broadening of the people who can refer into the scheme, particularly via the health service dimension, is also much to be welcomed.
As the noble Baroness said, there are some gaps. The biggest, which is not a gap but an inadequacy, is the failure to set a really strong target for solid wall insulation. The danger is that we do not have the companies and contractors to do that, because the regulations do not imply sufficient jobs and there is not the training for installers that is needed to deliver the aspirations. In terms of where we are on home energy efficiency, that is probably the biggest single inadequacy of delivery so far and it needs to be addressed.
I echo the noble Baroness’s point about advice, because a lot of the fuel poor, or those who are increasingly in danger of becoming fuel poor, do not have adequate advice in this area. The kind of advice they need overlaps with the advice needed by people in the hitherto so-called “able to pay” category. The failure of the successive schemes to deliver effective support for the “able to pay” sector really underlines the need to upgrade the whole of the advice in this area. The information is still inadequate and difficult to access for both the fuel poor and those who perhaps can still make a contribution themselves, and in some cases pay for the whole lot themselves.
In general, I think this order is in the right direction for the delivery of the ECO scheme but needs to be put into a broader context. That broader context becomes more difficult, because in the next few years we are about to decide what the main form of home heating in this country will be. Individual householders and landlords have to face decisions on insultation, whatever the form of heating. It is not yet clear whether we will still have something approaching the gas network or whether gas will be replaced by a hydrogen blend or by hydrogen. The number of properties is not clear. Many properties do not qualify or are not appropriate for heat pumps in their present form. There will be some difficult decisions on how they address that. Most households would prefer to know what the totality of their movement is, whether they are fuel poor or in the “able to pay” sector. They would like to know that they can perhaps insulate up front and then change to a different form of heating, or at least that they will not have to change everything in their house twice and that, whether they go under the ECO or a scheme where they pay themselves, they will not then have to adapt all their appliances and network again in two, three, four or five years because we have changed the form of heating.
We need a more strategic approach to this, but I assure the Minister that, as far as it goes, I am in favour of what he is proposing to us today.
Lord Grantchester (Lab)
I thank the Minister for introducing this order and for writing to draw my attention to it, especially to how it is lowering consumer bills. The ECO scheme has been among the favourites for Conservative Governments to target. It is certainly to be encouraged that they focus on energy efficiency measures to upgrade homes and on targeted support, thus reducing heating costs for low-income and vulnerable households and those at risk of fuel poverty across Great Britain, but not Northern Ireland.
Although it is true that the number of homes with a band C EPC increased to 46% in 2021, it cannot be claimed that that was all due to the ECO scheme. Nevertheless, it is part of a flurry of measures, this one supporting 450,000 homes to be able to save on average £290 a year.
In his letter, the Minister wrote that savings in the least energy-efficient homes could average £600 this winter, which would be wonderful. Can he explain this figure? How many households would be in this number, and how many would reach that magical threshold of band C? Would this alarm many households, in that they might now become liable to higher bands of council tax?
One of the intricacies of ECO3 was that households switching from larger to smaller suppliers to save on their bills could take themselves to companies below the threshold and thus be outwith the obligation for improvement measures. Many of these customers have now found themselves with bankrupt companies. Under SoLR, on which I have questioned the Minister previously, they will have been redistributed to larger suppliers within the obligation. Can the Minister explain the effect of ECO4 on this? Will the threshold be a cliff edge or a reducing threshold while maintaining worthwhile energy efficiency measures?
One of the consequences of reducing thresholds was that energy companies found it cheaper to pay a resulting fine than to offer ECO schemes. Could any increased penalty be liable to push a vulnerable company into bankruptcy and all the consequences of SoLR? With the scheme continuing with household contributions, will energy companies target only those who can make a contribution and ignore those with the lowest incomes?
Lord Teverson (LD)
My Lords, there have been a few changes in the Government over the past week and it is excellent to see the Minister still here. I took the opportunity to look up his responsibilities, because there has been a bit of a shuffle in BEIS and I was even more delighted to see that he has responsibility specifically for energy efficiency—I think he had it before; the climate change side has moved slightly. I am delighted that energy efficiency remains with the ministerial purview of this House.
I also welcome the fact that the Government tabled an amendment on Report to the UK Infrastructure Bank Bill to include energy efficiency specifically as part of the bank’s remit in terms of its investment. I think the whole House very much welcomed that change. They could have done one or two other things, but at least we had that.
On ECO and the prior schemes, I read a report by the Energy & Climate Intelligence Unit—ECIU. I am on its advisory board and it is one of the better of these think tanks. It was interesting that the report reckoned that between 2009 and 2019 some 6 million homes had been improved to band C in energy performance. It estimated that that amounted to a 20% cut in their gas demand, which meant that on an annual basis now those households were saving £1.2 billion. Clearly, that is significant.
Those figures are from 2009 to 2019 and the ECO scheme came in in 2013, but the number of applications dived hugely over the past eight years and only now has started to tick upwards again. It was interesting to read in the Explanatory Memorandum that some 2.4 million homes had made applications to the ECO scheme, but in 2020 we still had 3.5 million homes in energy poverty. Think about that. There were applications for 2.4 million homes but at the end of that process there were still 3.5 million homes in fuel poverty—and that was before the huge price rises in energy that we are now seeing.
The Minister mentioned 450,000 applications and taking them out of fuel poverty. There is no chance of taking homes out of fuel poverty at the moment. We are going to add to that because of the energy prices that there are.
I know this from my own experience. At the beginning of this year I paid a monthly standing order to Octopus Energy of £212. This month I paid £355. That is not my only energy cost, but I admit that, for me, it is not a crisis. But, my goodness, for people outside that is an horrific increase in their energy bills.
I suppose I just want to make the same old argument again that there is so much to be gained from these programmes, as that statistic from the ECIU suggested, but at the moment they are only a pinprick—a drop in the ocean—in terms of what we actually need. Of course, it is easy to say that if we were not starting from where we are now but from before George Osborne as Chancellor of the Exchequer massacred the various energy efficiency schemes’ futures in terms of new homes and those sorts of applications, my goodness we would be in a better position than we are now. We are in a position where the Government are spending £37 billion, I think it is, on putting right the cost of living crisis, much of which is driven by energy costs, yet all of that is just to stand still, and I am not the first person to say that. If only we were managing to put that money into these sorts of schemes, my goodness those fuel poverty numbers would start to come down rather than inevitably skyrocketing, as they will. That is my comment on this. As the noble Lord, Lord Whitty, said, how can one argue that this is an improvement? As I said, it is a drop in the ocean, given what we need to do.
My question follows on from what the noble Lord, Lord Grantchester, said. One of the lessons from the disaster of the green homes grant was that the bit that involved local authorities actually worked. I am interested to understand how our local authorities, which are so much better at understanding their local communities and the issue of fuel poverty, will be tied in to the way the ECO4 scheme is delivered.
Lord McNicol of West Kilbride (Lab)
My Lords, like many others, I thank the Minister for his explanation of what this order achieves: introducing the latest energy company obligation, ECO4, replacing ECO3, which came to an end in March. I start by echoing what the noble Baroness, Lady McIntosh of Pickering, said, about the effects of the delay. Has any assessment or estimate been made of the effects of the delay between 1 April and the new regulations coming in?
As we heard, the order will place a cost-reduction obligation on gas and electricity suppliers that exceed domestic supply thresholds, requiring them to promote the installation of energy efficiency and heating measures to reduce the cost to low-income and vulnerable households. Unlike ECO1 and ECO2, which were centrally funded, I understand that this obligation to fund and finance again falls on the energy companies using their own resources, as was the case with ECO3.
If this understanding is correct, can the Minister confirm what assessment was made of the difference in impact between these two approaches, given that we now have examples of both? Given that energy suppliers will incur these costs, which will need to be recouped, we can expect them to be passed on directly to customers through energy bills. As others have asked, is this really the best approach at this time, given the energy crisis? Will any steps be taken to encourage or even obligate energy companies not to pass costs on to customers who can ill afford them at this time? In reality, if they are passed on, it will be the consumers and customers who will be paying for the upgrades of their own homes.
As the Minister outlined, the objectives of this order are to help alleviate fuel poverty, accelerate progress to meet fuel poverty targets, contribute to carbon reduction, reduce the costs of meeting the renewable energy target and encourage innovation. All of these are welcome, as is the targeting of vulnerable and low-income households. If the target we have heard about of annual bill savings of £224 million is reached, this will make a real difference.
Lord Callanan (Con)
I thank all noble Lords for their contributions to this debate. There is a certain irony in standing here on one of the hottest days of the year, when we are all sweating like billy-o, debating what will happen next winter as people insulate homes, but I am sure we all realise that it is important to get started on this work as soon as possible, and we have done so, as I will set out shortly.
This is all done in the context of what has been an extraordinary increase in the cost of energy, and let me say from the start that the Government recognise that millions of households across the UK may need further support with the cost of living. That is why the Government have announced additional supports this year worth over £37 billion, including a considerable amount of targeted support for those of our fellow citizens who are on the lowest incomes. All domestic electricity customers in Great Britain will receive £400 off their bills from October through the energy bills support scheme. Meanwhile, over 8 million households across the UK in receipt of means-tested benefits will receive £650 as a cost of living payment, and further payments will be made to pensioners and disabled people.
The Government remain committed to helping low-income and vulnerable households to reduce their fuel bills and to heat their homes efficiently. The energy company obligation, or ECO scheme, will be a crucial element of that help this winter and for many years to come. It is not the only element, as I will outline later to the noble Lord, Lord Whitty, and others.
In response to some of the questions that were asked, let me start with my noble friend Baroness McIntosh, who rightly commented on the delays to the scheme. It is worth saying that ECO4, the latest iteration, is the most significant reform since the scheme began, and we have had to make sure that it is fit for purpose right through to March 2026. It is fair to say that this has presented some challenges in policy design, modelling and drafting.
It is important to point out that, while there has been a gap between ECO3 and ECO4, delivery has not stopped, due to the mitigations that we put in place. As I mentioned in my introductory remarks, nearly 33,000 measures have been installed since 1 April and registered with TrustMark, and we expect that number to go up by several thousand, as there is a time lag between the actual installation taking place and it being registered with the registration provider, TrustMark. Moreover, by allowing suppliers, as we did, to overdeliver against their ECO3 targets—referred to in the trade as the “carry-over”—at least 40,000 extra measures were delivered earlier than they would have been otherwise. I accept that these regulations were delayed and are later than I would ideally have liked; nevertheless, delivery has not stopped in the interregnum.
On my noble friend’s point about household contributions, the most recent evaluation of ECO showed that 18% of households made some sort of contribution to the installation of measures. With regard to insulation, that figure was only 12%. Moreover, we have designed ECO4 to fully fund upgrades, so actually we would expect the contribution figure to be even lower than that in ECO4. It is worth saying that banning contributions completely would add some considerable complexity to scheme compliance, and would also remove an essential element of flexibility for customers and for the supply chain. However, I give my noble friend an assurance that we will continue to monitor and keep the matter under review.
On my noble friend’s question on the solid wall insulation minimum, ECO4 will focus on the least energy-efficient properties. As I mentioned, we have introduced a requirement for a minimum of 150,000 E, F and G private tenure homes to be treated, and most of those will be solid-walled homes. We estimate that around 75% of total scheme spending will go to improving them to band D or better. We believe that the current solid wall minimum strikes the right balance between giving on the one hand certainty to those in the supply chain while also giving them the essential flexibility to treat homes in a more appropriate way.
My noble friend also made a good point about energy advice. I can reassure her that we are providing tailored advice and support to homeowners on what they can do to improve their homes. Our simple energy advice service has already had more than 1.7 million users, providing homeowners with personal tailored advice for improving and decarbonising their homes and links to local accredited and trusted installers. Homeowners can also find out about various government schemes, which I shall talk about shortly and for which they may be eligible. We intend shortly to enhance this digitally led service this year, and we are considering a number of options to support tailored retrofit advice in local areas. Our ultimate aim is to create a Government-led, multi-platform, home energy advice journey, supported by tailored local advice. We hope that it will provide a much-improved user experience for all households.
I will pick up on the point made by the noble Lord, Lord Whitty, about some people who may be missing out under ECO. Let me make the point yet again that ECO is not the only energy efficiency scheme. It is one element to it—the element funded by supplier bills. As I am often reminding the House, we have a number of other complementary schemes in England and Wales, funded by the Exchequer to the value of about £6.6 billion over this spending review period, including the social housing decarbonisation fund, on which we are about to go out in the next month or two for further bids for another £800 million of spending. There is the home upgrade grant, which specifically targets the poorest performing homes in off-gas-grid areas. Those schemes alone will also upgrade tens of thousands of homes, before we go on to the green homes grant local authority delivery scheme. These are complementary policies. I make the point again to the noble Lord, Lord Whitty, that ECO is not the only scheme; we have a number of different complementary programmes providing energy efficiency improvement in a range of homes in different tenures and areas.
I have mentioned the solid wall insulation minimum that both the noble Baroness, Lady McIntosh, and the noble Lord, Lord Whitty, raised. To add to that point, the additional schemes I have mentioned will also provide solid wall insulation. Again, ECO is not the only mechanism to incentivise what is an essential change for many solid wall homes. Those with cavity walls have often already had cavity wall insulation under the various iterations of the scheme. Solid wall homes are the next challenge we will receive.
There are actually some really exciting developments in solid wall treatments, if noble Lords want to research them. I viewed some external wall insulation in Holbeck, a poor part of Leeds—the area of the noble Baroness, Lady Blake—and saw the difference it made to both the performance of the homes and their external appearance. It really improved the whole look of the street. The finish is so good that it looks identical to either a brick or stone finish and, unless you go up and tap on it, you really cannot tell that it is external wall insulation, so it has that additional benefit. I saw it in County Durham as well. It improves the visual appearance of the street and the homes, as well as providing excellent levels of insulation. The more we can roll out these schemes in the UK and bring their cost down, the more we can make a serious difference to both the appearance of communities and the energy performance of homes.
I agree with the noble Lord, Lord Whitty, about the challenge of decarbonising domestic heating systems. As the noble Lord knows, we set out our approach in the heat and buildings strategy. Notwithstanding the eventual heating system we go for from the various options—it will almost certainly be a combination—we always have a fabric-first approach, which is the ultimate no-regrets option. Whatever heating system you have, if you have more insulation, you will benefit. All homes can be insulated to a level which will make them suitable for whatever heating technology we ultimately opt for. In addition, we also estimate that around 60,000 heat pumps will be installed under ECO4, following the appropriate insulation measures. That complements the heat pumps being installed under the boiler upgrade scheme and the other schemes I have mentioned.
I respectfully disagree with the noble Lord when he says that we do not have a strategic approach. We set it out in the heat and buildings strategy. It is true that ECO alone cannot meet our fuel poverty and net-zero targets. However, as I mentioned, it has been designed in tandem with other schemes so that they can all be delivered together to serve the cross-section of low income and vulnerable households that exist across a multiplicity of different tenures in both cities and rural areas and on and off the gas grid.
Moving on to the questions from the noble Lord, Lord Grantchester, who queried the saving figures cited, the £290 is what we expect the savings to be on average over the lifetime of the measures, which could be up to 42 years. The £600 is how much we expect households to save on average with the coming winter’s energy prices.
On the point the noble Lord raised about obligation thresholds, the Government have committed to significantly reduce thresholds where this can be done without introducing disproportionate costs for the very smallest suppliers. Under the previous scheme, the thresholds were lowered from 250,000 to 150,000 customer accounts and we will also consult on an appropriate buyout mechanism to bring about further reductions in the scheme thresholds in later phases. As I mentioned, the scheme will go through to 2026. The Committee will be pleased to know that we are seeking the primary powers necessary to do this within the upcoming Energy Bill. No doubt we will have further discussions about this when we debate that, starting next week.
Households in receipt of means-tested and disability benefits will of course continue to be eligible under ECO4. The Government are satisfied that those on the lowest incomes and with disabilities which make them vulnerable to cold will still be supported through the ECO4 Flex elements of the scheme.
The gas boiler replacement cap is for only the replacement of efficient boiler and electric storage heaters and is set at 20,000 homes across the scheme. Again, we think the caps are proportional to the ECO3 caps when compared with the number of homes that are expected to be treated under ECO4 and the reforms being made to eligible heating measures. We are of course not capping their replacement with renewable heating systems or district heating connections; nor are we capping inefficient heating system replacements.