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

Lord Whitty Excerpts

Thursday 27th November 2014 Grand Committee

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[Lord Whitty (Lab)]

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

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

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

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