Draft Electricity and Gas (Energy Company Obligation) Order 2022
(Limited Text - Ministerial Extracts only)
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The Chair
Before we start, in view of the weather, Members are advised that they can take their jackets and ties off if they wish.
The Minister for Energy, Clean Growth and Climate Change (Greg Hands)
I beg to move,
That the Committee has considered the draft Electricity and Gas (Energy Company Obligation) Order 2022.
It is a pleasure to serve under your chairmanship, Mr Sharma. This year, we have witnessed an extraordinary and global increase in the cost of energy. The Government recognise that millions of households across the UK need further support with the cost of living this year, which is why we announced additional support worth over £37 billion, including targeted help for those on the lowest incomes.
In that context, the energy company obligation, or ECO, scheme remains key to tackling fuel poverty and helping low-income households with their energy bills. In the sustainable warmth strategy 2021, the Government committed to extending, expanding and reforming the scheme in line with our statutory fuel poverty target. Since 2013, the ECO scheme has ensured much-needed support for low-income households to improve the energy efficiency of their homes. Over the last decade, since it began, it has delivered over 3.5 million energy efficiency and heating measures to around 2.4 million households.
The draft order provides for that expanded and reformed energy company obligation scheme in Great Britain until March 2026, and therefore succeeds the previous energy company obligation order in Great Britain. Its main provisions are, first, the scheme’s extension by four years, to 2026, and expansion from around £640 million to around £1 billion per annum. Secondly, there is an increased focus on support for low income and vulnerable households in the least efficient homes. Thirdly, mandatory minimum energy efficiency improvements will be required. Under the scheme, those in energy performance certificate bands F and G—the least energy efficient homes—will be improved to a minimum band D. B and D and E homes, in turn, will be improved to a minimum band C.
Fourthly, the introduction of a new minimum requirement will see at least 150,000 energy performance certificate band E, F and G private-tenure homes upgraded. Fifthly, the solid wall minimum requirement will ensure that solid wall insulation is installed in at least 90,000 homes. The draft 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 but available under the scheme, 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.
Alan Brown (Kilmarnock and Loudoun) (SNP)
I understand what the Minister says about capping the number of gas boiler replacements, which will transition us away from reliance on fossil fuels, but what happens if that cap is reached? How will costs and alternative solutions be managed for other customers who have broken-down gas boiler systems?
Greg Hands
If I understood the hon. Gentleman’s question correctly, it is about dealing with people who have no choice but to have a new gas boiler, and what the cost of that might be. We recognise that some homes will not be suitable to be upgraded to something like a heat pump. That is one of the reasons that we are putting these measures in place: to ensure that funds are available to help those who need a boiler upgrade. However, we are saying that ensuring that that is available is not the priority of the Government going forward. The priority is to align with our net zero requirements and make sure that people can be upgraded to heat pumps wherever possible.
Alan Brown
What is to prevent companies taking the easy option of the gas boiler replacement to get up to the 20,000 threshold? I am trying to see what checks and measures are in place to make sure that gas boilers are installed only when they are really required and other options have been exhausted.
Greg Hands
It would be a matter for the supplier to make sure that the energy efficiency upgrade is carried out in accordance with the scheme and Government policy. It will ultimately be a matter for the supplier under the ECO4 regulations. The Government will of course speak with suppliers to ensure that they are delivering according to the Government requirements. What we are saying is that we are not encouraging gas boiler upgrades, but that if there is no other available source of heat and a consumer is vulnerable, there should be the possibility of upgrading the gas boiler.
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 that, multiple options are introduced to encourage improved targeting of low-income and vulnerable households that may not be in receipt of benefits. Those flexible eligibility provisions will enable local authorities, energy suppliers, Citizens Advice and the NHS to work together to identify households 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 they are needed most. Installation quality will be governed under the Government-endorsed TrustMark compliance and certification framework. As part of that, the quality of installations, alongside a whole assessment of the property, will continue to rely on independent industry standards, the publicly available specifications PAS 2030 and PAS 2035.
The impacts will be as follows. Thanks to the reforms, we estimate that some 800,000 measures will be installed in around 450,000 homes. Of those 450,000 homes, around 360,000 will be upgraded to EPC bands B and C, removing those households from fuel poverty. We will continue the Government’s excellent record of improving the energy efficiency of people’s homes. The percentage of homes in Great Britain in energy efficiency bands A to C has risen under this Government from 10% to 46% of the total housing stock. That is a quadrupling of the number of homes in the most energy-efficient categories.
Those measures are expected to save £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, given future prices—or prices according to the futures market, I should say. That will provide crucial, long-term help when it is needed most this coming winter. To help deal with what might seem to be a gap between the ECO schemes—between the end of the ECO3 at the end of March this year and the start of the ECO4—the order permits measures installed since 1 April to count toward the suppliers’ obligation target.
Those measures are split into two elements. First, there is interim delivery for measures installed between 1 April and 30 June—so over the last three months—to slightly amended ECO3 rules. Secondly, there is early delivery for measures installed to the new rules. Nearly 33,000 measures have already been installed since 1 April. The fact that there might appear to be an interregnum between the ECO3 and ECO4 schemes is no cause for concern. The 33,000 measures have been introduced in those three months will be accounted for either in the ECO3 scheme for the interim delivery or early delivery under ECO4 in that seamless process.
The Government held a consultation on the reforms last summer and published a response in April. The majority of consultation responses supported extending and expanding the scheme as well as the proposals for reform. Government are proceeding with the main proposals, with some key changes in the light of the response received and the final impact assessment. One change is that we have increased the minimum requirement for bands E, F and G from 100,000 to 150,000 private tenure homes.
More of the least energy-efficient properties must be upgraded, focusing more help on 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, which will be of particular interest to Members representing rural parts of Scotland and Wales. Wales has the largest percentage of homes off the gas grid, and that is the subject of frequent questions to the Department for Business, Energy and Industrial Strategy from my hon. Friends the Members for Brecon and Radnorshire (Fay Jones) and for Montgomeryshire (Craig Williams). They are specific measures in place to help rural homes that are off the gas grid in Scotland and Wales.
England has the separate home upgrade grant, so is covered by an existing scheme. That will account for the extra costs of delivery.
Greg Hands
I know that the hon. Member for Kilmarnock and Loudoun, on behalf of every person in rural Scotland, is about to stand up and welcome the extension for rural homes off the gas grid in Scotland.
Alan Brown
I welcome the uplift and the recognition that Scotland and Wales have more homes off the gas grid. How does that impact on the overall budget allocated to Scotland and Wales? By their very nature, they have a greater need, which is recognised. Has the overall budget envelope increased for Scotland and Wales, or is it still done on a per capita basis?
Greg Hands
The scheme is Great Britain-wide. One of the key responses from the consultation was to ensure that, wherever possible, the rules across Great Britain are made the same. Exceptionally, Northern Ireland has its own electricity market. On the extra incentives for the installation of measures in rural areas off the gas grid, I will find out for the hon. Gentleman if there is a specific budget allocation—[Interruption.] There is no specific budget allocation set per nation. He will see that the policy is designed to help. We recognise that rural Scotland and Wales are off the gas grid and not eligible for the home upgrade grant—there ought to be devolved equivalents in Scotland and Wales for that. That is why we have taken the action that we have.
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 gas grid and where it is not possible to install low-carbon heating measures. That will help to ensure that people are not left without a functioning heating system.
The energy company obligation scheme remains important to support low income and vulnerable households to improve the energy efficiency of their homes and help reduce the energy bills of an estimated 450,000 households. The Government can take great pride that we are providing real help and energy efficiency measures for low-income and vulnerable households, as we have for the last nine years and will for the next four. The order extends and expands the scheme, focusing on the lowest-income households living in the least energy efficient homes. 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 the transition to net zero. I commend the draft order to the Committee.
Greg Hands
This has been a good-natured and well-informed debate. I did not hear any opposition to the scheme, so I welcome the support of the Opposition parties for what the Government are doing. I will try to answer as many questions as I can. The hon. Member for Southampton, Test asked why the obligation is set low, but I disagree that it is set low. A £640 million scheme increased to a £1 billion scheme is a 56% increase—quite an ambitious increase.
The hon. Member for Kilmarnock and Loudoun tried to pick holes and asked about inflation. Well, I have news for him: inflation is not anywhere close to 56%. I remember back in the 1970s that it did get into the high teens and to 20%, but we are not anywhere close to that, thankfully. He asked whether the scheme should be more ambitious. I remind him that ECO is only part of the help available. We have other Government schemes designed to improve the energy efficiency of homes, which is why this Government have such an excellent record on that.
I have to correct what I said earlier. I said that, in 2010, 10% of homes were rated A to C on energy efficiency. I checked my own notes, and it is not 10%, but 14%, so I may have been doing the last Labour Government a slight disservice. It is not, I am afraid to say, a quadrupling of the number of homes well rated under energy efficiency; it is in fact only a tripling, so I apologise. Perhaps I have been giving too much praise for the Government, but I none the less think that a tripling in the last 12 years is a record to be proud of.
The hon. Member for Kilmarnock and Loudoun is right that ECO adds to bills, but those who benefit will of course get reduced bills for many decades, which it is important to understand. It is not a simple redistribution from non-vulnerable bill payers to other bill payers. It assists vulnerable bill payers in energy-inefficient homes to get their homes to be energy-efficient, thereby saving them a considerable amount of resources over many years. We are also providing direct help with the £400 energy bills support scheme and other measures introduced by the Treasury this year.
I am glad the hon. Member for Southampton, Test praised the co-operation with the private sector, housing associations, the NHS and local authorities. It is a whole-of-Government effort to improve the energy efficiency of our homes. He said there was an estimated £4 on bills a month, but the hon. Member for Kilmarnock and Loudoun was correct: the estimate is £37 per annum—about £3 a month. I have said that it is not the only scheme available. We have £6.6 billion deployed over the course of this Parliament on energy efficiency schemes, including the £450 million boiler upgrade scheme, the social housing decarbonisation fund, the home upgrade grant, which I have already mentioned, and the public sector decarbonisation scheme, as well as the VAT reductions announced by the previous Chancellor earlier this year.
Lloyd Russell-Moyle
Is not part of the problem the myriad schemes that the Minister has outlined? For the normal person in the street, who lives in a shared house where part of it is owned by a person in poverty, another part is owned by someone else and another part is rented, it becomes so difficult for people to match these schemes up and get them in line at the right time, particularly when the Government do not issue guidelines on how the money should be spent for months on end. Is it not better for the Minister to go away and think of a universal scheme to start to tackle those problems, rather than this piecemeal effect?
Greg Hands
The hon. Member raises an important point, but an energy consumer does not have to have an encyclopaedic knowledge of the available schemes. The important thing is that the Government provide that assistance, in some cases via energy suppliers, local authorities or social housing providers. If he wants to write to me to suggest which schemes he might seek to abolish in favour of putting it all in one scheme, I would happily receive such a representation.
The hon. Member for Southampton, Test said the solid wall insulation minimal requirement should be higher. ECO4 will focus on the least energy-efficient properties and, as I mentioned earlier, we have introduced a requirement for a minimum of 150,000 band E, F and G private tenure homes to be treated. Most of those will be solid-walled homes and we estimate that around 75% of total scheme spending will go towards improving them to band D or better. We believe the current solid wall minimum strikes the right balance between giving certainty to the supply chain and giving them the flexibility to treat homes in the most important way. The hon. Member for Brighton, Kemptown sought a street-by-street approach—an area-based scheme. We expect area-based schemes to happen as installers involved in ECO also deliver under the home upgrade grant, the social housing decarbonisation fund and the local authority delivery scheme. We already know of installers planning to work in that way.
The hon. Member for Southampton, Test asked why the scheme was delayed. It is worth stating that ECO4 is the most significant reform since the scheme began nine years ago. We have had to ensure that it is fit for purpose until March 2026—it is important to get that right. This has presented new challenges in policy design, modelling and legal drafting. As I have already mentioned, however, nearly 33,000 measures have been installed since 1 April and registered with TrustMark. We expect that number to rise by several thousand because, obviously, there is a time lag between installation and registration. That is not a bad rate. This is a scheme of 450,000 households over four years, so that is roughly 110,000 per annum, so the fact that in three months, 33,000 measures have been installed shows there has been no discernible impact on delivery from the change from ECO3 to ECO4.
The hon. Member read us a long chronology of parliamentary questions and the different points he has made. I will never forget in my first year in Parliament when I asked a point of order to the Speaker. I read out a long chronology relating to a then Labour Minister, who had failed to provide an answer. The then Speaker—the glorious late Michael Martin—replied to me with just one word, “Persevere.” That was all he said to me. I will not urge the hon. Member to persevere. I say to him that at the end of that long chronology, he was not actually able to demonstrate that there had been any deficiency, that anybody had been damaged or that any measures had not been delivered as a result of ECO4 coming in three months after the scheduled end of ECO3. We covered it due to the extension of ECO3 and the bringing forward of measures in ECO4. That has been solved, and the hon. Member should join us in celebrating those 33,000 measures that have been installed just in the last three months.
Moreover, by allowing suppliers to overdeliver against their ECO3 targets—referred to as carryover—at least 40,000 extra measures were delivered earlier than they otherwise would have been. We have engaged with energy suppliers, and the hon. Member for Kilmarnock and Loudoun asked about the supply chain.
Dr Whitehead
If the Minister thought all along that because of all the various issues and complexities of this particular scheme, it would take longer than originally anticipated and there would be a gap in schemes, why did he not say so at the time? Why did he give me a series of replies to my questions, which said anything but that being the case?
Greg Hands
Sometimes, when we are making a reform, it is not always obvious where that reform process will lead. Let us bear in mind that there was a big consultation and we wanted to hear from suppliers and consumer groups, so we obviously wanted to look closely at the responses to the consultation. I have already mentioned the consultation in response to the point of the hon. Member for Kilmarnock and Loudoun; we want a GB-wide scheme. It was right and proper to wait for the responses to the consultation before laying out our reform measures.
Katherine Fletcher (South Ribble) (Con)
I promise to be brief. Part of the technical consultation that the Minister has alluded to for solid walls is really important. Is there a major gain in preventing the latent heat of evaporation by putting a PVA coating on the outside of walls? Do we have to lose space from inside homes that may already be small to provide initial internal insulation? Does he agree that it was important to take time to ensure that the industry and different providers could work out how to get the most bang for their buck to move it forward?
Greg Hands
I am not sure whether the hon. Gentleman is making an intervention on my hon. Friend’s intervention, but my hon. Friend makes a good point about the strong measures that we are taking on solid wall insulation, which are important to get right—the most important thing. I do not think that anybody could point to any damage that has been caused by this; we have continued to deliver a huge number of measures in those three months. We should look at the new scheme and welcome the additional measures that we are taking to help vulnerable households.
The hon. Member for Kilmarnock and Loudoun asked about the solar process; it is a matter for Ofgem to ensure that ECO is protected in that. Obligations are calculated annually and suppliers must fulfil their obligation. Any supplier that went bust would lose the obligation. So far, only very small—or relatively small—suppliers have gone bust. The larger suppliers have continued to fulfil their obligation under ECO3.
The hon. Gentleman also asked about discussions with the Treasury. As you will know, Mr Sharma, it is always difficult to disclose matters relating to a discussion with the Treasury, so I will pass on that.
The hon. Gentleman asked about the negative NPV of £3.8 million; I will have to write to him on the exact details of that. On the 1 million homes that would be left in bands E, F and G after these schemes, we recognise that this scheme will not improve every home in the country. To help with that effort, we have additional schemes in place that I have already mentioned. Of course, some homes will not be able to be upgraded to band C or above, or it would not be cost-efficient to do so, but hopefully that will be a very small number.
Alan Brown
The Minister spoke about solar and how the renewables obligation will be protected. Does he know how the renewables obligation will work for Bulb Energy, which is obviously in a special administration regime but still supplying a large number of customers? Will it be eligible to pay RO and will that just be an additional burden that is picked up with the administration costs?
Greg Hands
The hon. Gentleman asks a reasonable question. Obviously, that will be a matter for the Bulb Energy administrators. I am happy to write to him with more detail on how they might look at that in terms of ECO4.
Greg Hands
Of course, there are separate administrators for different parts of the company. I am happy to write to the hon. Member for Kilmarnock and Loudoun about how the administrators might approach that issue in relation to ECO4.
The hon. Gentleman asks about the back end and risk delivery, which has not happened before with ECO1, 2 and 3. Obviously, however, Ofgem monitors that closely to make sure that there is no risk of suppliers back-ending their obligations. To the best of my knowledge, we have not had that problem in the previous three schemes.
On a budget by nations, I think I am right in saying that Scotland, along with the north of England, has benefited the most of the nations or regions of the United Kingdom from the previous ECO1, 2 and 3 schemes. It has very much been, to date, a scheme where disproportionately Scotland and the north of England have benefited. I know that the hon. Member likes to create grievances here on behalf of Scotland. He is even having a pre-emptive grievance. The scheme has not even started and he is already ratcheting up the grievance policy. I have to say that from my experience of the previous ECO1, 2 and 3 schemes, Scotland has been very well served, as has the north of England. I think we should continue to celebrate that. The hon. Member asked about a biofuels exclusion. There is competition for biofuels, and they may be better used elsewhere, but we also do not want to maintain low-income homes on volatile fuels wherever possible.
The Government recognise that millions of households across the UK may need further support with the cost of living and the extraordinary increase in the cost of energy, which we have witnessed this year. That is why the Government have announced additional support this year worth over £37 billion, including targeted support for those on the lowest incomes. The Government remain committed to helping low-income, vulnerable households to reduce their fuel bills and heat their homes. Improving the energy efficiency of our homes is the best long-term solution to achieve this. Tackling fuel poverty is an essential for our transition to net zero. That is why we are spending £6.6 billion over the course of this Parliament and expanding the previous ECO3 system into a much larger ECO4 scheme, targeted particularly at the more vulnerable and those living in the least energy-efficient homes.
The Government have an excellent record in improving the energy efficiency of homes in this country—from 14%, the level we inherited from the last Government, to 46% today. That still means that 54% of homes in the United Kingdom are rated below band C for energy efficiency. That does not give any cause for complacency. I think we can see with the action taken by this Government that we have improved the energy efficiency of homes gradually and considerably over the last 12 years, and we will continue to do so with ECO4. Therefore, I commend this draft order to the Committee.
Question put and agreed to.
Resolved,
That the Committee has considered the Draft Electricity and Gas (Energy Company Obligation) Order 2022.