ECO reform – its impact on improving the use of energy in buildings and tackling fuel poverty

Author: 13/02/2014

At the end of last year, the Government found itself on the back foot following Ed Miliband’s promise to freeze household energy bills if Labour were to win the next general election. In the face of a parliamentary furore and intense pressure from some of the major media, the Coalition homed in on the ‘green levies’ element of domestic fuel bills and corresponding changes to the Energy Company Obligation (ECO).

In the run-up to the Autumn Statement the Government announced that the money available for energy efficiency over the three years beginning in 2014-15 would be reduced to £540 million, with £450 million of this money (£150 million each year) aimed at households and private landlords.

The main changes to ECO were:

  • Extending the ECO scheme to March 2017 with the new targets continuing at 2015 levels.
  • Reducing the Carbon Emissions Reduction Obligation (CERO) target by 33%.
  • Enabling energy suppliers to carry forward any over-delivery against their 2015 targets and count them against their 2017 targets.
  • Enabling energy suppliers to carry forward any over-performance from the predecessor schemes - Carbon Emissions Reduction Target (CERT) and Community Energy Saving Programme (CESP) both of which ceased at the end of 2012 - and count it against their new ECO targets.
  • Allowing companies which had delivered substantial early progress against their current CERO target to benefit from an uplift in scores for the measures delivered.
  • A reduction in the number of solid wall installations to 100,000 over three years, down from the previous 80,000 per annum.
  • A movers’ stamp duty rebate of at least £1,000, to be spent on energy-saving measures. This figure could be as high as £4,000 for expensive measures such as solid wall insulation.
  • Investment in the private rented sector to help landlords meet the minimum EPC standard (E rating) that will be required from April 2018.
  • £90 million (over three years) to help improve the energy efficiency of public sector buildings, including schools and hospitals.

Tackling fuel poverty

Our aim at the National Energy Foundation is to improve the use of energy in buildings. We work to stimulate action through inspiration and information, and connecting up supply and demand. Additionally, we work with local authorities, social landlords and others in practical projects to tackle fuel poverty.

Last December, the Foundation was one of more than 50 of the UK’s leading companies, organisations and professional institutes operating in the built environment which signed an open letter warning the Prime Minister not to scale back the ‘green levies’ on energy bills, especially the ECO scheme. It was encouraging that some of the specific points made in the letter were heeded in the proposed ECO reforms, but the letter’s main thrust was ignored. We maintained that a scaling back of ECO would have the perverse effect of increasing energy bills for fuel poor consumers – especially as half of those households in fuel poverty live in properties with solid walls - and it would cost the industry jobs.

Impact on the industry

Despite the Government’s claim that treating solid wall properties was still a key focus for ECO, and that this is where there’s a lot of potential for improving energy efficiency in the UK’s housing, many in the insulation sector, for example, had their concerns. It was argued that, with 7 million solid walls, 5 million cavity walls and 7 million lofts needing to be insulated, there should be a ramping up of both energy efficiency installations and their pace of delivery – not a slow-down.

Both customers and suppliers were also concerned that the Government changes would result in projects that had already been agreed being either put on hold or cancelled altogether. In fact, we’ve already started to see this happen. British Gas recently abandoned a scheme to insulate around 1,900 homes in Clifton, Nottingham, blaming the Government’s changes to ECO for the fact that it could no longer fund some of its projects. In the social housing sector, a recent survey of 47 English housing associations by ‘Inside Housing’ and the consultancy Sustainable Homes revealed that 70% of landlords believed that their retrofit plans will be either ‘dramatically’ or ‘significantly’ hit by the ECO changes. Over the last few weeks, we at the National Energy Foundation have encountered several specific instances of major refurbishment programmes, that were conceived to be part-funded by ECO, being abandoned or put on hold after the ECO carbon price previously offered by obligated suppliers was withdrawn prior to final contracts being signed. I must stress, however, that we have not come across any examples of obligated suppliers reneging on prices already written into signed contracts.

It’s also worrying that uncertainty and frustration is mounting along the supply chain. Having encouraged thousands of small businesses to invest in developing skills and services in areas such as solid wall insulation little more than a year ago, the Government is now accused of pulling the rug from underneath those firms that took up the challenge. These businesses feel aggrieved after having spent precious time and money on a commercial dead-end. A long-term fear is that there will be a wave of bankruptcies with thousands of jobs being lost, not just temporarily but permanently.

So, who are the winners and losers and what future for energy use in buildings and tackling fuel poverty?

  • The changes to ECO shaved about £50 off the average household dual-fuel energy bill – but this was after the price increases of last November so households are still worse off than they were a few months ago.  Additionally, those not paying by direct debit – typically the less well-off - are less likely to see the full benefit of this saving.
  • The energy companies now have softer, easier and cheaper ECO targets. This will inevitably impact negatively on the pace and potential extent of building energy improvements.
  • The environment will suffer from more pollution than would otherwise have been the case, and the UK will move more slowly to its national CO2 targets.
  • The retrofit and refurbishment industry has lost jobs and skills, and its trust in the Government’s ability to provide workable solutions has taken a knock.
  • Having taken the sting out of the November price increases, there’s now less of an incentive for the British public to think seriously about changing their behaviour and installing energy efficiency measures to improve the use of energy in their homes.
  • Many of those who most need energy efficiency measures will now have to wait longer for them. As there’s a link between leaky and badly heated houses, fuel poverty and winter deaths, the inevitable conclusion is that more people will die than might have been the case.

Big price to pay

All in all, £50 was a small saving on an average dual-fuel bill of around £1,300 - but it’s turning out to be a big price to pay. In contrast, the ECO mechanism for discharging obligations coupled with the short-sighted relaxation of targets we saw at the end of last year, will hinder the UK’s progress to its carbon emissions targets, the lifetime reduction of energy bills for the occupants of every improved property, the nation’s attempts to tackle fuel poverty and the growth of a potentially thriving business sector in energy efficient home improvements.

Is it naïve of me to ponder that the current system, which relies on the energy companies directly funding works to improve energy efficiency, may not be the best way to implement the massive energy efficiency improvement drive we need in the UK?  Perhaps a system based on separating the collection of the ECO contribution from obligated companies from the implementation of energy efficiency improvements would simplify the process for all concerned and focus the delivery of improved energy performance of buildings? I would be surprised if it didn’t also go a long way to reducing legal and administrative costs implicit in the current process.