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Session 2001- 02
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Delegated Legislation Committee Debates

Draft Electricity and Gas (Energy Efficiency Obligations) Order 2001

First Standing Committee on Delegated Legislation

Wednesday 5 December 2001

[Mr. Derek Conway in the Chair]

Draft Electricity and Gas (Energy Efficiency

Obligations) Order 2001

4.30 pm

The Minister for the Environment (Mr. Michael Meacher): I beg to move,

    That the Committee has considered the draft Electricity and Gas (Energy Efficiency Obligations) Order 2001.

I welcome you to the Chair, Mr. Conway. I also welcome the hon. Member for Mid-Bedfordshire (Mr. Sayeed)—Mid-Bedfordshire is his constituency, for the information of all Committee members, including those of his own party—who will speak for the Opposition.

The order is an opportunity to make significant progress in the promotion of domestic energy efficiency in Great Britain. Its main aim is to place an obligation on electricity and gas suppliers to achieve energy efficiency targets by encouraging and assisting their domestic consumers to take up energy efficiency measures.

The energy efficiency obligation is commonly known as the energy efficiency commitment, or EEC—it is amazing how such acronyms change over the decades—and will have three important benefits. First, it will cut greenhouse gas emissions by approximately 0.4 million tonnes of carbon a year. That will make a sizeable contribution to the United Kingdom's legally binding Kyoto target to cut such emissions to 12.5 per cent. below 1990 levels by 2008-12, and to its domestic goal to cut emissions of carbon dioxide to 20 per cent. below 1990 levels by 2010.

Secondly, by helping electricity and gas consumers to save energy, the EEC will reduce their fuel bills. Alternatively, consumers may choose to enjoy greater comfort by living in better-heated homes without increased costs. Thirdly, it will help consumers with lower incomes who spend a larger proportion of their incomes on energy. That will contribute to the eradication of fuel poverty. It is a win, win, win situation.

The order sets an overall obligation of 62 fuel-standardised terawatt hours of energy savings on all electricity and gas suppliers. That is a demanding but achievable target, which aims to achieve more than programmes that have run successfully since 1994. The target was set slightly lower than the obligation of 64 TWh that was proposed in the August consultation after further analysis of the technical basis for the obligation in light of responses to the consultation. A target of 62 TWh will provide a clear stimulus to the sustainable development of domestic energy efficiency.

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The cost of meeting the obligation will fall on suppliers. We have set the obligation at such a level that the costs would be no more than £3.60 per customer per annum for gas or electricity, even if they were passed on in full. In other words, there would be a maximum charge to the customer of 90p per quarter. However, suppliers may absorb some costs, and we would expect them to do so, for example, in their marketing budgets.

We consulted widely on the EEC. After an informal consultation in March 2000, we issued the Government's provisional conclusions on the level and format of the EEC in November 2000. Last August, we issued statutory consultation proposals, a draft energy efficiency obligations order and a draft regulatory impact assessment.

The Government will set the level of the overall obligation, and the regulator, Ofgem, will be responsible for administration of the EEC. The order provides the framework for Ofgem to set the energy efficiency targets for individual electricity and gas suppliers and to monitor their progress in achieving them. Ofgem will also be responsible for enforcement. The apportionment of the overall target between individual suppliers will be on the basis of their customer numbers. The order provides for targets to be set by company group rather than by licence holder. In light of consultation, we recognise that a company's purchasing power relates to its size, even if it holds several licences.

The order takes account of the fact that larger companies benefit from economies of scale. Smaller companies should not be disadvantaged as a result, so targets will be progressive. A smaller company will have a lower target in relation to its customer numbers than a larger company. The order also exempts from energy efficiency targets companies with fewer than 15,000 customers, so that new companies will not have to set up EEC schemes at an early stage.

I mentioned that the energy efficiency commitment will contribute to the alleviation of fuel poverty. The order ensures that help will be given to lower income consumers by requiring suppliers to achieve at least 50 per cent. of their energy savings from householders in receipt of income support, disability benefit, working families or disabled persons tax credit.

Ofgem will be responsible for determining whether actions proposed by the suppliers qualify for the purpose of meeting energy efficiency targets and for determining what improvements in energy efficiency should be attributed to those actions. The order makes special provision for energy services. The Government are committed to the development of efficient energy services. Suppliers who carry out energy efficiency improvements under an energy services agreement will be credited with an extra 50 per cent. of energy savings, up to a total of 10 per cent. of their targets. That will incentivise them to provide such agreements. The order provides flexibility to suppliers by allowing them to trade among themselves part, or all, of their energy efficiency targets or energy savings. As with other

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climate change-related activities, if companies are required to achieve the objectives as a result of trading, the process can be market driven.

We want to remain in touch with the development of the energy efficiency commitment for 2002 to 2005. For that reason, Ofgem is required to report annually to the Secretary of State on the progress made by each supplier in achieving targets.

The order offers a balanced approach to achieving environmental and social objectives. It contributes to our range of actions for tackling climate change and to the eradication of fuel poverty. With that in mind, I hope that the Committee will approve the order.

4.38 pm

Mr. Jonathan Sayeed (Mid-Bedfordshire): It is a great pleasure to sit under your esteemed chairmanship, Mr. Conway.

Yesterday, Lord Whitty told the other place that the order has three main benefits, which have been repeated by the Minister today, and are contained in the regulatory impact assessment of 5 November. Those benefits are lowering emissions, saving energy and helping consumers on a low income. Although we support the aims of the order, we have questions about its costs, bureaucracy and complaints of inadequate consultation with interested parties.

Explanatory notes are important because they permit Members and others to understand a complex legal document and its implications. Such notes are particularly important in statutory instruments, because those frequently amend existing legislation, which is often very complex. It follows that the language of explanatory notes should be as comprehensible and comprehensive as possible. I am sorry to say that these explanatory notes seem to be merely a cut-and-paste job. It would not have been difficult to ensure that the full situation was explained in the notes, including important details as to the cost implications of the energy efficiency initiative. The lack of such details is unhelpful to Parliament.

It might have been helpful if the explanatory notes said, ''The order is designed to encourage gas and electricity suppliers to make energy efficiency measures, such as cavity wall insulation or energy efficient boilers, available to their customers. These measures are offered to customers, often via a contractor, with a discount. The discount is variable and can be targeted to disadvantaged groups such as those on benefits. Each measure attracts an energy efficiency score. A supplier adds up the scores for all those measures supplied to reach an overall score for the year with the aim of reaching a particular target. The order sets out the overall level of the obligation on all suppliers; arrangements for approval by the regulator Ofgem; how targets are apportioned to individual suppliers; and arrangements for approval by the regulator of supplier schemes that will be eligible.'' With a little more detail, that would have been a more comprehensible explanation of the order. I hope that the Minister, who has a reputation for

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helpfulness and frankness, will ensure that his Department provides notes that help Members of Parliament.

In August, the Department for Environment, Food and Rural Affairs produced a consultation paper on the energy efficiency commitment 2002-05, which sets out the provisions that appear in the order. Under the EEC, electricity and gas suppliers will be required to achieve targets for the promotion of energy efficiency improvements for domestic consumers.

The Government proposed that the total EEC obligation on all suppliers should be about 62 TWh—or 1012 W—of fuel-weighted energy benefits. The target has been set on a new basis since the provisional conclusion of consultation carried out in November 2000. Following the consultation and the new basis of calculation, the level of the EEC obligation was raised considerably. The original obligation proposed in November 2000 was 36 TWh. If the figure of 64 TWh, which was originally proposed in the consultation paper, were expressed on that basis, it would be 34 TWh. I should like the Minister to confirm that the obligation has been raised from 34 to 62 TWh on a constant basis.

My party applauds any move to arrange an effective target of carbon savings, but cost is an important concern. That was expressed by those representing the energy supply industry, who feel that although DEFRA originally consulted them, their views have since been sidelined.

In the consultation paper, the Government stated that

    ''it reaffirms its commitment that the cost of the EEC to electricity and gas suppliers should not be more than the equivalent of 90 pence per customer, per quarter, per fuel.''

The Minister repeated that today.

The Electricity Association in particular feels that householders will suffer in terms of price. Although officials from DEFRA stated that they hope that the increase in price will be met to some extent by suppliers, the regulator, Ofgem, seems to believe that local authorities will assist suppliers with expenditure. I leave it to my hon. Friends to determine whether they believe that local authorities will assist in that manner.

The Electricity Association claims that consumers will have to bear the full brunt of the charges. According to the nature of the energy supply industry, they understand that suppliers will not subsidise the additional costs. Those facts give rise to some important questions: who will pay for the energy efficiency targets, and will the Government outline how much they estimate the average householder will be affected by the measures? If the estimate is found to be wrong, what then?

The Government estimate that the average annual financial gain for those in the priority group of lower income consumers who would benefit from measures under the scheme, either in lower energy bills or increased comfort, would rise to around £14 a year by 2005. Government calculations also indicate that the total cost of energy to consumers would be £3.60 per customer per fuel per annum, a figure mentioned by the Minister.

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The DEFRA consultation paper states that that figure is

    ''expected to be reduced considerably as companies use their skills and knowledge of the market to get results for the lowest possible cost.''

Yet Ofgem stated that under current targets, energy costs to consumers are £1.20 per customer per annum per fuel, which means that expenditure will increase threefold. The Electricity Association claims that the Government have been over-generous in their attempt to estimate the effectiveness of energy efficiency measures, and consequently have understated the resultant costs. According to its research, a more exact estimation would be £4.60 per customer per annum per fuel. I accept that those are not high costs but it is important that the figures are right, and are known.

The Association questions the time scale of the programme. The Government's aim is that electricity and gas suppliers should meet targets by the end of March 2005. Suppliers are quick to point out that in previous energy efficiency programmes, deadlines were set, but with flexibility. That often meant that programmes closed two months later than they should, but it allowed the industry time to meet requirements.

The proposal states that the suppliers

    ''shall, with effect from 1st April 2003, be subject to the obligation to achieve, within the period beginning on 1st April 2003 and ending immediately before 1st April 2005''.

I ask the Government to consider allowing a greater flexibility with time scales.

Although I wholeheartedly commend energy-saving initiatives, my consultations with the industry lead me to believe that the Government have not proved their case in respect of the proposed costings and the time scales. Suppliers believe that there is a lack of transparency in the Government's conclusions, and that they have not tried to reach a compromise.

Such initiatives require the co-operation and partnership of the industry. Lord Whitty yesterday expressed his awareness that achieving the targets will not prove an effortless task. If suppliers feel that they have been ignored from the outset, the success of the Government programme, which we want to see, is already in jeopardy. I urge the Government, and the Minister, to heed the industry's criticism.

4.48 pm


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Prepared 5 December 2001