Electricity and Gas (Energy Company Obligation) Order 2022

Lord Callanan Excerpts

Tuesday 12th July 2022 Grand Committee

Moved by

[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.

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It is right that low-income households and vulnerable households, and households on benefits, are the priority, but there are many other households out there that do not currently fall into these categories but are in households that are E, F or G-rated. What are the Government doing, or looking to do, to benefit all households to increase energy efficiency? With that, we support the instrument.

[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.