Electricity and Gas (Energy Company Obligation) Order 2023
(10 months, 3 weeks ago)
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Lord Callanan
That the Grand Committee do consider the Electricity and Gas (Energy Company Obligation) Order 2023.
Relevant document: 43rd Report from the Secondary Legislation Scrutiny Committee
The Parliamentary Under-Secretary of State, Department for Energy Security and Net Zero (Lord Callanan) (Con)
My Lords, I beg to move that the draft order, which was laid before the House on 24 May, be approved. Since it was introduced in 2013, the energy company obligation—ECO—scheme has ensured that around 2.4 million predominantly low-income households have received much-needed support to improve the energy efficiency of their homes. The Government committed in the Growth Plan 2022 and the energy security plan to place a new obligation on energy suppliers to deliver vital energy efficiency upgrades, helping hundreds of thousands more households to take action to reduce their energy bills by making their homes cheaper to heat.
The order delivers on these commitments by introducing a new energy company obligation, the Great British insulation scheme, to run until March 2026. Alongside establishing the GBI scheme, the order introduces some small additions to the existing ECO4 scheme, providing heating support for certain households which are not currently eligible for these measures.
I turn to the detail of the order. The order establishes the GBI scheme in law as a complement to the existing ECO scheme—ECO4—in Great Britain. Its main provisions are: an additional energy company obligation to run from 2023 to 2026, boosting previously planned energy-efficiency investments by another £1 billion across this period; a focus on the rapid installation of the most cost-effective, single insulation measures; and the extension of support through the ECO schemes to a much wider group of households living in the least energy-efficient homes in the lower council tax bands, who are also now challenged by higher energy bills.
The Great British insulation scheme will boost further the support already available through ECO4 that targets low-income and vulnerable households, those most at risk of being in fuel poverty. Energy suppliers must deliver at least 20% of the new help available through the scheme to these households. This low-income group will include those on means-tested benefits as well as households in the least energy-efficient social housing. Fuel-poor homes in the private rented sector will also benefit, building on the provisions of existing regulations.
Working alongside this low-income minimum, the scheme’s flexible eligibility provisions will offer additional routes to reach those on low incomes or in other ways vulnerable, such as through ill health, but where households 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 help those most vulnerable to the effects of living in a cold home.
As with previous ECO schemes, the obligation will be set based on annual bill savings. This incentivises energy suppliers to target those homes where the savings from energy-efficient measures will be greatest, also installing those measures that will have greatest impact. The scoring approach for this will mirror that used for ECO4, minimising complexity and any bureaucracy for industry.
Installation quality will be governed and assured under TrustMark’s compliance and certification framework. The quality of installations, alongside a whole assessment of the property, will continue to rely on independent industry standards—in this case, the publicly available specifications PAS 2030 and PAS 2035. The order also adds to the circumstances in which some heating measures, particularly solar PV and electric heating, can be available for households within the existing ECO4 scheme.
As a direct result of the boost provided by the GBI scheme, we estimate that around 376,000 measures will be installed in around an additional 315,000 homes. This is expected to save households, on average, £300 to £400 per year. To help to insulate as many homes as possible before next winter, the order permits measures installed since 30 March to count towards the suppliers’ obligation target. This provision was signalled to energy suppliers in the Government’s response to their earlier consultation on scheme design, which was published on that date.
I turn for a moment to that earlier government consultation, which was conducted towards the end of 2022. The scheme design encapsulated in the order we are now considering takes forward the main provisions set out within that consultation. The majority of consultation responses supported the proposals, including as central features the extension of energy efficiency help to the wider household group and a focus on the most cost-effective, single-insulation measures.
Baroness McIntosh of Pickering (Con)
My Lords, I thank my noble friend for introducing the order this afternoon, which I warmly welcome. I declare my interest as honorary president of National Energy Action, based in the north-east, an organisation with which I think my noble friend is very familiar. It welcomes the scheme but has one or two issues that it would like to understand better.
I ask my noble friend about the background to how the scheme has been introduced, because it could lead to unfairness in how the money is distributed. In particular, a potential flaw is that the targeting of the scheme is quite loose: it is not tight enough sufficiently to help fuel-poor households, which he said is the purpose of the order. For the majority of the scheme, households are assumed to make a financial contribution to the cost of the measures, which may effectively make a large proportion of the scheme inaccessible to the lowest-income households, which cannot afford to make such contributions. The way in which the policy is funded is therefore potentially unfair. Coupled with the rather loose targeting, this means that low-income households may effectively subsidise higher-income householders’ home upgrade.
I give my noble friend an illustration. The UK Government are assuming that £80 million will be provided in customer contributions over three years to support funding of the scheme. That is based on the assumption that uptake is not disproportionately affected by the level of contribution required. The assumption apparently originated from research based on a survey of 1,000 owner occupiers who fell within the general eligibility criteria. I put it to my noble friend that that may not be representative of low-income households, which I understood was the purpose we are trying to achieve with the order before us.
Similarly, research quoted in the impact assessment assumes that three-quarters of home owners will be willing to contribute towards insulation measures, with almost half willing to contribute £500 or more. Once again, I put it to my noble friend that it is extremely likely that households unwilling or unable to contribute fall into the category of the most financially vulnerable, and therefore in most need of the support given by the scheme.
Those two examples point to the potential for this not being what the Government intended. On vulnerable households, I think my noble friend described the purpose as extending support to households in the least energy-efficient and lowest income bands. I would like to query my understanding. Could the targeting have been better and could we have directed the funding more clearly to those in that bracket?
I warmly welcome the fact that support is being extended to off-grid rural households in Scotland and Wales. Can my noble friend assure me that the grant to English homes in that bracket for the home upgrade funding that he referred to will be as high as for those in Scotland and Wales?
Lord Lennie (Lab)
My Lords, this has nothing to do with the instrument, but I begin by congratulating the noble Lord, Lord Callanan, on his efforts to recruit Sadio Mané to play for Newcastle United when he was recently in Senegal. As a fellow Newcastle United season ticket holder, I can pass on the warm thanks of all fans of Newcastle United. I suppose more unites us than divides us when it comes to being “Howay the lads” fans.
The draft order proposes a Great British insulation scheme, which would require licensed gas and electricity suppliers to promote the installation of energy-efficiency measures, such as loft or cavity wall insulation, across Great Britain. The Department for Energy Security and Net Zero explains that while ECO4 aims to deliver full-house retrofits for low-income and vulnerable households, the new scheme seeks to encourage rapid installation of the most cost-effective, mainly single insulation, measures and to extend support to a much wider group of households in the least efficient and lower council tax banded homes. These are worthy aims.
The department expects the scheme, as the Minister said, to provide around 376,000 insulation measures in 315,000 homes by the end of March 2026, which coincides with the ECO4 scheme’s end date. The department also says that Ofgem, which will administer the scheme, will be required to submit monthly reports on progress to the Secretary of State on suppliers’ performance. What will the Government do if performance is not on target overall? Are there any plans to push beyond the initial target, if performance suggests that this could be possible? Will Ofgem report on the income distribution of household delivery?
Those suppliers required to participate in the ECO4 scheme are also required to participate in the Great British insulation scheme, so the same domestic gas and electricity supply data is being used as under the ECO4 scheme. Were there any issues with the use of this data? If so, have they been addressed and overcome?
Unlike the ECO4 scheme, a minimum level of delivery of the obligation will be set for each of the three phases of the Great British insulation scheme. It requires each obligated supplier to achieve at least 90% of its home heating cost reduction obligation and low-income minimum requirement for phases A and B through measures completed before the end of each phase, with the total obligation required to be met by 31 March 2026. Suppliers will have performance requirements across each phase of the scheme—a new development from ECO4. This is of course a good thing, but how will the performance in each phase be monitored and enforced?
The instrument also sets a low-income minimum requirement. This will ensure a minimum level of support through the scheme for those on the lowest incomes and the most vulnerable—the low-income group, as it is known—while allowing the remaining support to be targeted at a much larger pool of people now challenged by higher energy bills, in other words the general group. There is no upper limit on the amount of a supplier’s home heating cost reduction obligation that can be met through the measures delivered to the low-income group.
The low-income minimum requirement is defined by the instrument as 20% of the overall obligation, and that 20% must be delivered using the standard low-income eligibility criteria. Assuming the distribution is equal, 20% of 315,000 homes is 63,000 low-income households. Given that this scheme will be paid for by all customers but that the much larger benefits will be felt only by benefiting households, does a 20% minimum not feel somewhat low? I appreciate that it is only a minimum, but is there any incentive for the participants to deliver above this 20%? How was this amount reached? Do the Government have an estimate for where they expect this to fall across the whole scheme?
The home-heating cost reduction target is set at a level that assumes that households in the general group —as in Article 12 of the order—will collectively contribute £80 million, as the Minister said, towards the cost of installing the insulation measures, which is equivalent to 10% of the £800 million scheme budget earmarked for this group. This reflects that households in the group will generally have higher incomes and be able to contribute. Any contributions will in practice be a matter for agreement between the customer and the installer, reflecting the measure’s type and property issues.
For the purpose of the home-heating cost reduction target, should a participant elect to go beyond the minimum 20% for the low-income group, would the general group be significantly more burdened by the total contribution required? For example, if, across all providers, the general group averages only 40% of the overall makeup, which I understand is unlikely but a possibility, is it correct that this group would then be required to double their joint contribution to the £80 million home-heating cost reduction target, compared to if it made up the maximum of 80%?
Domestic premises cannot receive more than one insulation measure under the Great British insulation scheme. As long as it is installed on the same day as, or after, the insulation measure is completed, owner-occupied premises in the low-income group can also receive heating control measures under the scheme. The heating control measures must be completed within three months of the insulation measure.
The majority of responses to the consultation addressed the fact that private rented sector households are ineligible for heating control measures, or for cavity or loft insulation, if they are in the general group. These measures are excluded as landlords have responsibilities to maintain and improve their housing. Is that a good enough reason? Why is it acceptable for lower-income households to have to choose between unaffordable bills or a lack of heat because they are renting, if their landlord is not adequately improving their property? For clarity, if a participant offers a combination of an insulation measure and heating control measures to either a household in the general group or a non-owner-occupied household in the low-income group, would the cost be expected to be apportioned between the scheme and the payer or would that not be a feasible option?
Another aspect of the instrument is targeted encouragement to support the development of innovative products and installation techniques. This is of course welcome. Has any assessment been made of the potential impact of this encouragement? What counts as an innovative product or installation technique? Perhaps the Minister can enlighten us on that.
The 2021 Sustainable Warmth strategy announced plans for the expansion of ECO to run from 2022 to 2026, with an increase in value from £640 million to £1 billion per year. This obligation is expressed in terms of outcomes, not expenditure. The obligation is for notional annual bill savings of £224 million to be achieved by 31 March 2026. Part 10 of the instrument amends the 2022 order. Most of the changes are made to enable heating measures that are of benefit to ECO4 households in achieving annual cost savings, and reducing their overall energy bill, to be installed in a wider range of circumstances.
Labour’s warm homes plan would upgrade the energy efficiency of about 2 million homes per year. It would upgrade all 19 million homes that need it and help families to save up to £500 on their energy bills. The target of 315,000 homes under this scheme does not really compare. Do the Government accept that this is a drop in the ocean of what is needed? As part of the Labour green prosperity plan, the warm homes plan would give families the grants and loans they need to upgrade the energy efficiency of their homes, cutting their energy bills and emissions. Labour’s national plan would save households £500 a year, cut national gas imports by up to 15% and create over 206,000 full-time equivalent jobs in retrofitting industries.
Lord Callanan (Con)
First, I thank the noble Baroness, Lady McIntosh, and the noble Lord, Lord Lennie, for their contributions. I thank the noble Lord for complimenting my efforts to recruit Sadio Mané—who is a lovely guy, by the way. It is an interesting correlation, thinking about the priorities of most of the population, that if I tweet something on energy efficiency or that I have met someone to do with hydrogen schemes or whatever, I am lucky if I get 700, 1,000 or 2,000 views, but if I bump into a footballer in a hotel and tweet a picture, I get 85,000 views all across Europe. What we need to do is link famous footballers with energy efficiency and then perhaps we will get the message through.
Anyway, I turn now to the subject of the day. Improving the energy efficiency of our homes is the best long-term solution to reducing energy bills—I do not think anybody disagrees with that—and the corollary of tackling fuel poverty. That is why the Government have set a new and ambitious target to reduce our final energy demand from buildings and industry by 15% by 2030. The Energy Efficiency Taskforce is meeting at the moment to try to put some policies behind that. We are also committed to making sure that homes are warmer and cheaper to heat by investing £12 billion in various Help to Heat schemes, such as the home upgrade grant and social housing decarbonisation fund.
The Government remain committed to helping low-income and vulnerable households to reduce their fuel bills and heat their homes, with the new Great British insulation scheme being a crucial element of that help for this winter and for years to come.
I start with the contribution from the noble Baroness, Lady McIntosh, who asked a question on the targeting of the scheme and consumer contributions. This scheme mirrors the eligibility of the ECO4 scheme; there is in fact no limit on how many low-income consumers can be treated through the scheme. There is no mandatory requirement for contributions, and we do not assume any contributions for low-income consumers as we recognise that they are most in need.
The new general group is designed to capture a broader pool of households. I am sure that even the noble Baroness will accept that not everyone in fuel poverty is necessarily on benefits. We have a number of other schemes targeting those on lower incomes. This is the first scheme we have done for a while that allows those in the so-called able to pay grouping in the lower council tax band to also be eligible for support. That is the new general group; it is designed to capture a broader pool of households which are more likely to be able to contribute. Encouraging contributions through the scheme makes the scheme more cost-effective and ultimately enables more homes to be treated and more measures to be delivered. I am sure that is something the noble Baroness would support.
Suppliers are encouraged to leverage higher contributions from wealthier households and for more expensive measures, which would possibly be in bigger homes, ensuring that low-income and vulnerable households receive the support they need. As a market-led scheme, it is ultimately down to the installer to negotiate any contribution that the consumer is willing and able to pay, taking account of any property issues and of the measures to be installed.
The noble Lord, Lord Lennie, asked a question about monitoring. As with the existing scheme, Ofgem will work with energy suppliers to monitor progress and ensure compliance—including, if necessary, considering enforcement action should that be judged appropriate. As the independent regulator, it is ultimately a matter for Ofgem to judge the form and extent of any compliance action appropriate to the circumstances; it is only right and proper that it should do that.
Annual targets will initially be tracked using notified measures alongside other information. For the benefit of noble Lords, all measures that are installed are notified and lodged with TrustMark. Once the Ofgem digital system is in place to support it, this is intended to minimise any additional costs and bureaucracy from annual targets while still managing to drive momentum.
We have allowed flexibility through the analysis to allow industry to decide how to gather contributions. There is no firm requirement on how suppliers must do that. To reiterate—I made this point to the noble Baroness, Lady McIntosh—there are no limits on the number of low-income homes that can be treated through the scheme. We have several schemes currently in operation, as I mentioned, which support low-income households. Of course, the original ECO scheme, ECO4—its latest iteration—the home upgrade grant and the social housing decarbonisation fund are all targeted at those on lower incomes. That is why we wanted this scheme to be open to a wider pool of households that are currently ineligible for any government support through existing schemes. As I said to the noble Baroness, suppliers are encouraged to leverage higher contributions from wealthier households for more expensive measures. Additionally, of course, there is no requirement for consumers to contribute, or to contribute a set amount through the scheme. It is market-led, and it is down to the installer to negotiate a contribution that the consumer is able and willing to pay.
For ease and pace of delivery, the GBIS aims to mirror as much of ECO4 as possible, keeping the same eligibility criteria for the low-income group that industry is currently very familiar with. That will help to ensure that the GBIS is able to deliver energy efficiency measures to those households as quickly as possible and provides energy suppliers with an incentive to deliver to that group, which they are already very familiar with.
The noble Lord, Lord Lennie, asked about innovation. We have a technical panel to determine and approve products as innovative through the scheme to ensure that consumers continue to be protected.
Once again, I thank both noble Lords for their contributions and the points they made during the debate. I also recognise the broad agreement that the scheme should continue at this time and should help to provide the critical support to an even greater pool of households that are currently challenged by higher energy bills. I commend this draft order to the Committee.