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Electricity and Gas (Energy Company Obligation) (Amendment) Order 2017

My Lords, I am pleased to open the debate on this draft order. The ECO order exercises powers set out in the Gas Act 1986 and the Electricity Act 1989 which allow obligations to be placed on energy suppliers in Great Britain.

In the Prime Minister’s first speech of her term in office, she recognised the hardships faced by poorer households in Britain—hard-working families, who,

“can just about manage but … worry about the cost of living”.

As part of the response to that dilemma, the Government are committed to helping households in fuel poverty or on lower incomes living in homes which are expensive to heat. That is why these regulations are before the Committee today. They will also make an important contribution to the Government’s clean growth plan and to reducing carbon emissions.

We are making amendments to the existing ECO order, which covers the period from 1 April 2015 to 31 March 2017. The amendments extend the current scheme from 1 April 2017 to 30 September 2018 to enable reforms to be introduced, while also allowing industry time before further improvements are made through a new longer-term scheme from 2018 to 2022. Planning ahead to 2022, beyond the life of this Parliament, reflects announcements on funding made in the 2015 spending review. This longer-term confirmation of funding is designed to give greater certainty to energy suppliers, installers, local authorities and other energy stakeholders.

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This Government are facing up to the enormous energy challenges our country faces over the coming years. With the overhaul of the electricity market and continued investment in renewable technologies, we are well on the way to making sure that the UK’s energy is secure, low carbon and affordable. Improving the energy efficiency of the UK’s homes is central to this challenge and to addressing fuel poverty.

The energy company obligation scheme helps occupants keep warm, reduce their energy bills and protect their health and well-being. It does this by obligating energy suppliers to reduce carbon emissions and energy costs through installing energy-efficiency measures in households across Great Britain. The supply chains involved in this endeavour also provide economic benefits across the country. Since the introduction of the ECO in 2013, the scheme has proved remarkably reliable and cost-effective in upgrading our housing stock. Altogether, more than 2 million energy-efficiency measures had been installed in more than 1.6 million homes by the end of December 2016, with around 1.2 million of those measures going to 900,000 low-income and vulnerable households or households in deprived areas. This is a significant investment in addressing energy efficiency and fuel poverty. Thanks to the amendment order we are introducing today, we forecast that over half a million more insulation measures and around 45,000 more heating measures will be delivered through the ECO by 2018.

The changes implemented by the order before the Committee were consulted on in the summer of 2016. The consultation received 236 formal responses, which were broadly supportive of the proposals. The government response was published at the end of January 2017. The order will reduce the overall spend of the scheme from £860 million per annum currently to £640 million per annum. This is done to constrain the impact of government policies on all consumer bills. Although the ECO provides the recipients of energy-efficiency measures with long-term bill savings, it is important to recognise that the upfront costs of the measures installed are spread across all bill payers. As such, it is right that we have sought to ensure that the ECO support is focused more on those most in need, while reducing the overall cost from around £34 per bill currently to £25 per bill from April onwards. At the same time, it will still allow around 545,000 homes to be improved across the 18 months of the extension.

We have increased the period of the obligation extension from 12 months in the consultation to 18 months. This is in response to the views of stakeholders and is designed to make the transition as smooth as possible. It will avoid costs associated with industry implementing changes within constrained timelines, and will allow lessons from the operation of the extended period to be fed into the design of the longer-term scheme from 2018.

The separate carbon-saving community obligation element of the ECO, part of which currently delivers energy-efficiency improvements in rural areas, will be brought to an end for reasons of simplification, but there will be a safeguard guaranteeing a minimum level of rural delivery under the remaining carbon reduction obligation.

The affordable warmth element of the scheme, which places the greatest focus on targeting low-income and fuel-poor households, is increased from 34% to 70% of the overall estimated spend. This means that the carbon emissions reduction obligation element, which allows delivery to any home for carbon-saving purposes, will be decreased to approximately 30% of the overall spend. Changes are also being introduced to better target the affordable warmth obligation towards low-income and fuel-poor households.

First, income thresholds will be used to determine eligibility under affordable warmth. The process will be simple, while recognising differences in household size. Secondly, eligibility for the affordable warmth element has also been extended to allow the installation of particular measures to social housing occupants in the least efficient homes—those with an EPC band of E, F or G. Thirdly, a new voluntary provision will allow local authorities to use their local knowledge to determine eligible fuel-poor or vulnerable households for up to 10% of a supplier’s affordable warmth obligation. In particular, they will have opportunities to help people with health problems living in cold homes.

Fourthly, mains gas boiler replacements delivered under affordable warmth have been limited to the equivalent of approximately 25,000 per year. Our analysis suggests that other measures, such as insulation and first-time central heating, are more beneficial and cost effective. We will also require a minimum delivery of the more expensive solid wall insulation, equivalent to 21,000 homes a year, to protect the development of that sector and improve some of the least efficient homes. A key focus of the changes made by this order has been simplification to reduce the administrative burdens and complexities associated with the scheme. This may allow more measures to be delivered under a given amount of supplier spend.

These are important changes to the existing ECO order but they will continue to drive large-scale investment in energy efficiency across the country. Support will be targeted more at those who need it most: those living in fuel poverty, or on lower incomes and struggling with bills. The order will promote measures that bring reductions to energy bills, simplify scheme delivery, and better target energy-efficiency funding to vulnerable and low-income households. I commend this draft order to the Committee.