Draft Electricity and Gas (Energy Company Obligation) Order 2022

Alan Brown Excerpts

Monday 18th July 2022 General Committees

[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.

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[Alan Brown]

rose—

[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.

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[Alan Brown]

It is a pleasure to serve under your chairmanship, Mr Sharma. Like the shadow Minister, the hon. Member for Southampton, Test, I broadly welcome ECO4. With that welcome however, and as is my wont, I do have a few “buts”. Picking up on the shadow Minister’s theme, what has been the reason for the delay in the Government in bringing this forward? They knew years in advance that ECO3 was going to finish. The design of the ECO4 scheme was welcomed by industry, so why was it not brought forward quicker?

Paragraph 3.1 of the explanatory memorandum confirms how critical the timeframe now is: the instrument comes into force the day after it is made. That shows that it is a good job that there are not going to be any votes forced that could cause further delay. However, what discussions did the Minister have with retail energy companies about the impact on supply chains of the delay of ECO4 and paired regulations coming forward? It was absolutely critical that legislation come in pre-recess—that is now being done—but my understanding is that supply chains and the ability of companies to place orders were starting to be impacted. Hopefully the Minister can address that.

Looking ahead at the ECO4 period, what are the Government doing to ensure that companies fulfil their renewable obligation payments? At a previous Business, Energy and Industrial Strategy Committee evidence session about retail energy companies starting to collapse, the Secretary of State said that it is known that some companies go bust when their renewable obligations levies were due to be paid. Since that tacit admission that the Government accepted that some companies would default in their RO payments, what has been done to ensure that that does not happen and that the payments are protected, and will the Minister respond to calls for the payments to be more regular so that the money comes forward?

Can the Minister advise what the value of the RO defaults for ECO3 was, and how many homes missed out as a consequence? On that basis, have the Government made any allowances for defaults in ECO4, and how will that be managed if companies go bust owing to the renewable obligations? What discussions has he had with the Treasury about match funding the welcome £1 billion commitment from ECO4? Industry and charities have been saying that now is the time for greater investment. If the Treasury match funded the £1 billion, think how much more could be done over the next period. Has the Minister considered that, or had any discussions with the Treasury on that basis?

The impact assessment gives a net present social value of £810 million. For business net present value, there is a huge negative figure of minus £3.8 billion. Can the Minister explain how that negative NPV came about? If it is to do with the benefits from the scheme, that would justify further investing more money. Paragraph 36 of the impact assessment states that 1.2 million “eligible private tenure homes” that are rated E, F or G in their energy performance certification will be eligible for the scheme. Given that paragraph 7.6, as the Minister confirmed, committed to 150,000 homes to be upgraded, what is the plan for the remaining 1 million-plus homes that will be left with an E, F or G rating in their energy performance certification?

The Government’s overall target is for all homes to be EPC band C by 2030, yet homes can be exempted where it is not practical, cost-effective or affordable. What does that exemption mean in real terms? That was something else the Secretary of State could not justify to me. How that exemption is assessed and monitored is critical to how many homes are ultimately upgraded to EPC band C.

Paragraph 3.2 of the explanatory notes confirms that energy suppliers have until March 2026 to deliver the outcomes, so obviously this is a four-year programme. What steps will be taken to ensure and assess that the programmes are on track right through that period? What steps will be taken to ensure that companies are not allowed to back end and therefore risk missing the 2026 deadlines for delivery?

Paragraph 7.2 of the explanatory notes states that:

“Market failures…are known to reduce the take up of cost-effective energy efficiency measures.”

I have to say, it is not market failure that has had an impact, but the Government’s failed policies. We had the failure of the green deal scheme, which included the Home Energy and Lifestyle Management Systems mis-selling scandal. When will the Department for Business, Energy and Industrial Strategy resolve the appeals backlog for the HELMS green deal mis-selling scandal? Why are more green deal plans not being cancelled outright? In recent times, we have had the failure of the green homes improvement voucher scheme. While we welcome ECO4, there need to be more rounded, coherent Government policies to go along with that. The UK Government should treat energy efficiency as a national infrastructure project, in the way the Scottish Government do.

While we welcome the increase in the budget to £1 billion, paragraph 7.4 of the explanatory memorandum confirms that that is based on 2021 prices. What recent assessment has been made of the impact of current inflation on that? We know that it is more difficult to get materials; the costs of materials have increased as well as labour costs. What assessment has been made of the validity of the £1 billion now and the impact that inflation is having on that?

I would like to put on the record that I welcome the confirmation in paragraph 7.5 about disability benefits eligibility and the fact that households in receipt of such benefits will still be eligible for upgrades in ECO4.

Paragraph 7.13 rules out biofuels. Can the Minister clarify why we would rule out biofuels? They could provide a useful transition between outright fossil fuel and getting to complete renewable energies. I cannot really get my head around that, so hopefully the Minister can explain it.

As I said in my intervention, I welcome the uplift for off-gas grid homes in Scotland and Wales. However, again, I would press the Minister on the fact that that needs to feed through in budgets and considerations in the wider spending envelope. Paragraph 7.24 also sets out an innovation uplift, which again is welcome. What measures will be put in place to assess the long-term performance of any measures installed that are deemed to be innovative? By virtue of the very term “innovation”, that will refer to technology that does not have a long, proven track record. What will be done to ensure that those new measures installed under the innovation uplift actually do what is required in the long term?

Paragraph 7.24 also highlights building fabric issues such as dampness, cracks and different faults that can be remedied and repaired. What will be done to ensure that it is not an easy uplift measure for companies to take advantage of? What will be done to ensure that it does not let private and social landlords off the hook in their responsibilities regarding the upkeep of the fabric of the buildings?

Paragraph 7.26 talks about incentivising delivery on time, but what does that look like? Does “on time” mean for the entire programme, for a sub-programme or for individual measures that are installed?

Turning back to the impact assessment, paragraph 49 states that the modelling is based on the English housing survey. What has been done to get a more representative understanding of the housing stock right across the UK, instead of trying just to extrapolate from an English survey of houses?

The shadow Minister asked about the impact on bills. From reading paragraph 94 of the impact assessment, it seems to me that the impact will be £37 per annum on duel fuel customers to pay for ECO4. Is that correct? How sustainable is it for bill payers to pay £37 with bills continuing to increase without putting more people into fuel poverty?

On the measures to address solid walls, I say to the Minister that we need to work with industry to find a solution for solid-wall homes, tenements and flats in the likes of Glasgow and Edinburgh, because they are particularly difficult to upgrade. That really needs a whole-building approach, or, as was suggested in an earlier intervention, a street by street approach. We really need to look at that and look to the future to be able to address these.

It is getting more difficult now to upgrade houses cost-effectively because the low-hanging fruit, as it were, has already been picked. What work has been done to identify the overall cost of upgrading the remaining stock? What work has been done to have a real forward look-ahead to meet the 2030 target?

I am sure everybody will be delighted that I am now going to sit down—and wipe the sweat from my face as well.

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[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.