Fourth Standing Committee on Delegated Legislation
Tuesday 7 December 2004
[Mr. Derek Conway in the Chair]
Draft Electricity and Gas (Energy Efficiency Obligations) Order 2004
9.55 am
The Minister for the Environment and Agri-environment (Mr. Elliot Morley): I beg to move,
That the Committee has considered the draft Electricity and Gas (Energy Efficiency Obligations) Order 2004.
May I say how nice it is to see you in the Chair this morning, Mr. Conway? I also extend a welcome to the hon. Member for Salisbury (Mr. Key) in what I believe is his first official outing for the Opposition Front Bench. We have had many useful and sensible discussions on issues such as water and genetically modified foods. I look forward to his contribution.
The order places an obligation on energy and gas suppliers to achieve targets for the promotion of improvements in household energy efficiency in Britain. It sets the basis for the next phase of the energy efficiency commitment and is an important part of the Government's overall energy efficiency plan. We held extensive informal consultations with a wide range of stakeholders on the development of the next phase of the commitment, culminating in the issue of formal consultation proposals in May 2004.
The obligation will run from 1 April 2005 to 31 March 2008 and will build on the success of the current three-year commitment, which ends in March 2005. Suppliers meet their targets by encouraging and assisting household consumers to take up energy efficiency measures. By using energy more efficiently, consumers will reduce their fuel costs and be able to enjoy greater comfort.
The main aim of the EEC is to make a significant contribution in the household sector to the UK's targets under our climate change programme. We estimate that the EEC for 2005-08 will achieve carbon savings of around 0.7 million tonnes of carbon a year in 2010. It will also give particular help to low-income consumers, who spend a larger proportion of their income on energy, by requiring suppliers to achieve at least 50 per cent. of their energy savings from householders in receipt of income or disability benefits, or tax or pension credits. That will also contribute to the alleviation of fuel poverty.
''Fuel Poverty in England: the Government's Plan for Action'' was published on 30 November and sets out our wider approach to tackling fuel poverty in the UK. The order sets an overall obligation on all relevant electricity and gas suppliers of 130 fuel-standardised lifetime-discounted terawatt hours of energy savings. We recognise that that is a challenging target at about twice the level of the current energy efficiency commitment, but I believe that it is
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achievable and will continue to drive the effective promotion of energy efficiency in the key household sector.
The cost of meeting the obligation will fall on suppliers. However, we expect that even if costs were passed on in full to customers, they would be no more than about £9 a year for the three years of the programme. That is about 20p a week. Suppliers may absorb some of the costs themselves. In an increasingly competitive environment, that is highly likely. These costs are balanced by a range of direct and indirect benefits. We expect the average ongoing financial benefit for consumers, in terms of lower energy bills or increased comfort, to be over £15 a year for the lifetime of the measures installed, which could be up to 40 years of benefit in the case of cavity wall insulation, and of course there are wider environmental and social benefits for all consumers.
The regulator, the Office of Gas and Electricity Markets, is responsible for administration of the commitment. 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. Because we do not wish to raise potential barriers to smaller companies entering the market, the order exempts from the obligation companies that have fewer than 50,000 customers.
We are keen to encourage in each sector the development of the best new energy efficient technologies. We also support the development of energy services as a potentially effective means of improving energy efficiency. The order therefore provides incentives for innovative products, such as micro combined heat and power, and for energy service action.
We intend to monitor the continuing development of the EEC. Ofgem is required to report annually to the Secretary of State on suppliers' progress towards achieving their targets. We will also review the progress of the EEC in 2007 before setting the target for the following phase so that we can evaluate the progress that has been achieved. I hope that the Committee will approve the proposal, which offers an excellent means of promoting sustainable energy use in the household sector. It can provide real, practical energy efficiency support to consumers, as well as addressing environmental and social issues. It builds on the first phase and on our experience in that respect, and takes it further forward in respect of increasing the obligation, and therefore increasing the benefits not only in relation to our commitments in respect of climate change but also the benefits to consumers that energy efficiency brings.
10.2 am
Mr. Robert Key (Salisbury) (Con): It is a pleasure to sit under your chairmanship, Mr. Conway, and I thank the Minister for his very kind introduction; it is a great pleasure to be back on the Conservative Front
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Bench. This is a recognition of the fact that my party believes that science needs to be taken a lot more seriously than politicians in general have been taking it in recent times. It marks a commitment to the science community to listen with an open mind to the evidence that it has on which politicians should make judgments affecting the lives of all our people.
We support the proposal. I thank the officials who produced the explanatory memorandum, because in my years as a Minister and in Opposition I have rarely seen such a good example of an explanatory memorandum and what it should achieve. It is a great compliment to the Minister's Department that it has produced such an excellent document.
I shall now carp about what is going on, but I hope to do so constructively. I do not think that the proposal goes far enough to encourage a willing market to grow in response to opportunities that are now available. It does not address deficiencies in the decent homes standard and it fails to introduce energy efficiency fiscal instruments, which is disappointing; we could go much further in addressing the apathy of most people in this country who simply do not see the advantage of investing in energy saving measures and products.
Above all, we must start listening more to the non-governmental organisations and charities, and harness their enthusiasm and expertise in these matters. My door is always open to them. For example, the Energy Saving Trust has made it clear that it welcomes the measure, as we do; it has said that it is familiar with the statutory instrument; it has talked to Ofgem and to us about it; and it is confident that the proposal will work. It is supportive because it delivers energy savings but it is still constructively critical. It thinks that the proposal and the Government's wider energy efficiency policy could be improved. It has pressed for changes that have not yet been taken on board, and believes that the Government's policy on energy efficiency has not kept pace with changes in energy markets since privatisation.
The Energy Saving Trust would say that the problem is that the market in the energy efficiency business for energy and gas suppliers is narrower and more illiquid than it needs to be; and greater benefits in energy efficiency could be delivered if other players entered that market. At present, there are only six major energy retail corporations. Although they can trade obligations among themselves, the market is not really liquid and they do not really trade. The Energy Saving Trust contrasts that with the renewables obligations, which are traded much more broadly. That market is widely considered to be working well.
At present, only the energy companies get the benefits and although energy providers subcontract much of their insulation work, for example, the problem with the energy efficiency obligation is that insulation providers, banks and retailers of electrical goods cannot enter the market directly and obtain certificates from Ofgem. Essentially, they can have only second hand participation in the market, so the energy efficiency obligation fails to incentivise players who could get involved.
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The order is a step in the right direction. The energy efficiency commitment could be improved substantially. For example, one can be on disability benefit but still not in fuel poverty—it depends on disposable income and the efficiency of a person's house. The decent homes standard is too low to get people out of fuel poverty, so all the benefit money is being wasted on unnecessarily high fuel bills as heat is escaping from people's homes.
The Energy Retail Association is concerned about a number of issues. It has pointed out that the Government have reduced the national volume of cavity wall insulations from 2.25 million to 1.79 million, and recently to 1.7 million. However, the association believes that 1.3 million is the maximum achievable. Some 82 per cent. of the energy efficiency commitment target is anticipated to come from insulation products, so it is important to ensure that the sector can deliver.
Appliances schemes are expected to deliver about 1 per cent. of the target, and the removal of the uplift factor has effectively closed down that channel to suppliers. Lighting schemes have become less attractive through the imposition of the heat replacement effect and Ofgem constraints on targeting and verification. Although boilers are still included, they are less attractive, and at this stage the details of the 1 million exception boilers are unknown.
Heating controls are less likely to be delivered unless linked to boiler upgrades. The Energy Retail Association points out that 40 per cent. to 50 per cent. annual growth will be needed in the insulation industry to meet the volume, but DEFRA does not accept that and claims that the required growth is 25 per cent. DEFRA increased the volume of cavity wall insulation from social landlords from 520,000 to 690,000—a one third increase—no doubt to reduce the apparent cost to suppliers due to increasing the priority share from 40 per cent. to 50 per cent. whether achievable or not. That is the problem. Nothing on that scale has been attempted before, and I am not convinced that the industry can really cope.
Then there is the problem of consumer demand. The Energy Saving Trust recently carried out consumer-based research that confirmed that fiscal incentives would make consumers more likely to invest in energy efficiency measures. The Treasury is being pressed to consider product-related incentives, such as VAT reductions.
The risk currently falls entirely on energy retailers, even though they cannot control delivery. The Energy Retail Association has commissioned an independent study of the domestic manufacturing and insulation sector to assess what is going on and what can be achieved. As I have mentioned, there are a lot of problems with the insulation industry and with fiscal incentives, but the order is a step in the right direction.
What do we mean by fiscal incentives, which I am disappointed not to have seen in the order? On practical issues, such as VAT levels, there are confusing fiscal measures from the Government. The fact that VAT on fuel is 5 per cent. compared with 17.5 per cent. on energy efficient products signals
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confusion. For example, there is 5 per cent. VAT on A¸rated kitchen appliances, but an inefficiency charge imposed on C to G-rated appliances would transform the market for A-rated appliances. If we include A+ and A++ fridges and fridge-freezers, there would be more efficient production in the UK, or, if we are unable to produce such products, importing of products that meet the new standards.
That would be neutral for the Treasury and it is estimated that it would achieve well over 22,000 tonnes of carbon savings a year, saving consumers up to £12.7 million. There are VAT changes on compact fluorescent light bulbs, for example, which could make a big impact. A 50p tax on incandescent bulbs has been suggested. A and B-rated condensing boilers might receive 5 per cent. VAT on installation costs. There are so many ways in which the order is a missed opportunity, so we shall be returning to the matter in future, one way or another.
Can the Minister explain why the Chancellor did not include any comment on the question of stamp duty rebate for energy efficiency work in his pre-Budget statement last week? That was another missed opportunity. I should be interested to know, too, the Government's view on encouraging mortgage lenders to offer green mortgages that encourage borrowers to install energy-efficiency measures identified in an energy audit, such as insulation and efficient heating systems. Given that home owners apparently remortgage on average every two years, promoting mortgages that encourage householders to reduce their carbon emissions would be a helpful move towards achieving some of the Government's energy and carbon savings.
There is also the question of winter fuel payments to encourage the over-60s to install energy-efficiency measures, in order to increase the comfort of their homes and reduce fuel bills. This is big money: it is £1.85 billion each year on the winter fuel payments. However, there is no specific inducement for pensioner households to consider ways of reducing their fuel bills by installing energy-efficiency measures. That is another wasted opportunity. Potentially more widespread should be a rebate from council tax for specified environmental action. Fenland district council, for example, offers council tax rebates for households that install energy-efficiency or renewable energy solutions.
So, there is a lack of fiscal incentive, and current planning and building regulations are not facilitating sustainable homes. There is a perceived lack of investor support, consumer demand and awareness or understanding. In general terms, there is growing pressure for a simplified and enforceable buildings regulatory system, which would require a single thermal efficiency standard, and a degree of renewable energy generation, such as 10 per cent. for new build. The Energy Saving Trust has envisaged near zero emissions in new build by 2012, so considerable carbon savings of 1 million tonnes per annum could be made by 2020.
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In conclusion, I give the Government five out of 10 for trying. Recently in Stockholm, I was aware of far higher standards being taken for granted by the Swedish people. Frankly, they would be shocked by our low standards and by the level of public apathy in this country. My constituents are greening rapidly and so am I. Our debate today will be little read, but this will be an election issue for a growing number of our electors. Rising fuel costs will, no doubt, make energy efficiency measures more attractive to consumers and suppliers alike. We have a very long journey to make, and today we have made a modest start.
10.13 am
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