Electricity and Gas (Energy Company Obligation) Order 2023

Lord Lennie Excerpts

Tuesday 20th June 2023 Grand Committee

[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.