Energy and Climate Change CommitteeWritten evidence submitted by National Energy Action

Work over the last fifteen months by Parliamentarians, the Department of Energy and Climate Change (DECC) and a range of other Government departments, trade bodies, charities, NGOs and other statutory agencies has focused on designing the Green Deal and the Energy Company Obligation (ECO). NEA, along with many other concerned groups, has worked hard to ensure the policy provides appropriate access, levels of support and direction to ensure that all households (especially those vulnerable on grounds of age, health or severe financial insecurity) have equitable access to affordable warmth and support in reducing their carbon emissions.

NEA would highlight that Government proposals mean that the delivery of domestic energy efficiency and fuel poverty programmes are being “out-sourced” to energy suppliers. Therefore, NEA has argued that these programmes must be subject to both oversight and prescription to ensure equitable delivery to rural and deprived areas and to low-income households more generally. NEA remains concerned that the Department has failed to clarify how it intends to track delivery and intervene if Green Deal and ECO fail to ensure equitable access to, and take up of, energy efficiency measures by financially disadvantaged and vulnerable households.

The purpose of this note is to focus attention on those areas that will need to be monitored (and addressed) if the Green Deal and, more crucially, the ECO are to be made more effective in tackling fuel poverty and this requires a brief consideration of the current fuel poverty landscape:

Government funding for heating and insulation measures for low-income and vulnerable households in England (the Warm Front programme) terminates at the end of March 2013. England will then be the only UK nation providing no direct financial support to enable vulnerable and financially disadvantaged households to improve heating and insulation standards in their homes.

From the start of this year, when Warm Front, the Carbon Emissions Reduction Target and the Community Energy Saving Programme are replaced by the Energy Company Obligation, expenditure on heating and insulation programmes to alleviate fuel poverty will be approximately half of the level in 2010–11.

Scotland, Wales and Northern Ireland have all continued to maintain or even expand, their tax-funded energy efficiency programmes.

Recent analysis by the Hills Review Team confirms that policies to improve the thermal efficiency of the housing stock targeted on low-income households occupying the least energy efficient properties would achieve optimal results in reducing both fuel poverty and carbon emissions

As noted below, there are serious concerns that these issues will only become more acute as domestic consumers face additional cost burdens resulting from continuing high global energy prices and Government proposals for a low-carbon energy industry.

Reduced Scale of Resources to be Directed at Low-Income and Vulnerable Households

The Energy Act provided no detail on the level of resources that would be available to assist low-income and vulnerable consumers post-2012. Without such detail Parliamentarians were unable to determine whether the scale of future programmes did represent, as claimed, a step change in ambition. However, the Government did regularly offer assurances during legislative proceedings that the introduction of the Green Deal and the ECO would significantly increase financial support to combat fuel poverty.

During the consultation period, NEA was unable to accurately assess how much of ECO would be directed to low-income households or the amount the Government would assume would be delivered to low-income and vulnerable groups through Green Deal Finance. Following an announcement by the Deputy Prime Minister in April, and the Government’s response to the formal consultation process, this has been clarified.1

Eligible low-income households will benefit from the Affordable Warmth obligation (worth an estimated £350 million per year), closely targeted on low-income vulnerable households in the private sector and delivering a wide range of heating and insulation measures. In addition, a new Carbon Saving Communities Obligation targeted on financially and materially deprived areas (worth an estimated £190 million per year) will deliver a range of basic energy efficiency measures. Finally, 15% of the Carbon Saving Communities target must be delivered on behalf of low-income vulnerable households in rural communities. In total, from next year, annual expenditure on heating and insulation programmes for fuel-poor households will reduce from approximately £1.1 billion (including Warm Front, the Community Energy Saving Programme and Carbon Emissions Reduction Target priority groups) in 201011 to around £540 million.

Whilst NEA recognise the difficulty of securing additional expenditure for fuel poverty programmes during this CSR period, it is imperative that the relevant Department track the implications of this decision (increased health costs at a local and national level, increased levels of fuel debt, reduced numbers of contactors employed within the energy efficiency industry and the expected increases in fuel poverty levels) and the resulting economic consequences that are likely to ensue.

Consumer Equity

The ECO will be funded through a consumer levy and all consumers will pay regardless of their financial circumstances. From 201213 all Government-mandated programmes to address fuel poverty in England will be funded through levies on consumer bills. In the context of fuel poverty, NEA along with may respected stakeholders, has emphasised that this approach is both regressive and perverse. By spreading the cost across all energy consumers, there is a disproportionate impact on the most financially disadvantaged. Those households that do not take up measures (or are unable to) will see their bills increase; while those taking up measures (including measures subsidised for comparatively affluent households) should see their bills decrease.

Because the scale of ECO funding was not known during the passage of the Energy Act, the impact on disadvantaged energy consumers was equally unclear. Despite Government recognition of the regressive effect of this funding mechanism, and that low-income household are disproportionately penalised, the policy still fails to provide appropriate access and direction to ensure equitable entitlement to benefit from the carbon saving obligation. This means that energy consumers (including poorer households) will subsidise measures for more affluent households to the extent of £760 million per year. There are also serious concerns that this regressive approach to funding social and environmental programmes will continue and increase.

In addition to the inadequate level of funding for fuel poverty programmes, there is concern that financially disadvantaged households may be directed towards a Green Deal Finance Arrangement—a mechanism that the Government concedes is not appropriate for such households. Energy Minister, Greg Barker, made this point explicit from the outset: “As I said in my opening remarks, we are considering completely rewriting the nature of the supplier obligation post-2012 to ensure that it reaches those parts, particularly in relation to the fuel poor, where the vanilla green deal will not work”.2 Despite these assurances NEA is extremely concerned at the prospect that the majority of low-income and vulnerable households will only be able to access the benefits of energy efficiency through a funding mechanism that is both untested and inappropriate to their circumstances (the market-based Green Deal Finance Mechanism).

There is an urgent need for the Government to monitor how ECO funding and entitlement is being signposted at the assessment stage. NEA would also welcome clarification on how the Government intends to monitor take-up of Green Deal arrangements in the private rented sector. We are concerned that landlords may discharge their legal duty to provide a dwelling free from a Category 1 Excess Cold Hazard under the Housing Health and Safety Rating System by initiating a Green Deal arrangement that would impose a financial burden on future (possibly low-income) tenants.

ECO leakage in Carbon Saving Target

During the passage of the Energy Act, NEA emphasised the risk of allowing the new ECO to be used to defray the cost of Green Deal measures in hard-to-treat properties. NEA expressed concerns that this limited resource could disproportionately serve as a “crutch” for the Green Deal Finance Mechanism where the cost of measures and the comparatively modest financial savings meant that the “Golden Rule” principle could not be met. This, NEA argued, would represent an unacceptable situation where disadvantaged households were subsidising comparatively affluent households whilst, possibly, themselves being excluded from any assistance. NEA was extremely concerned that the legislation allowed for a potentially open-ended disbursement of ECO resources to able-to-pay households.

The Government response to the Green Deal and ECO consultation noted that higher bill savings resulting from interventions in larger properties means more cost-effective carbon saving for energy companies seeking to meet the ECO targets and that, as such, occupants of these properties were likely to benefit from higher subsidies. In addition, energy suppliers will be able to deliver both solid wall insulation and non-standard cavity wall insulation under the ECO Carbon Saving obligation. Where energy suppliers are delivering either of these measures they will also be able to score further accompanying measures which reduce heat loss from a property, such as loft insulation, glazing and draughtproofing (adding to concerns about inequitable disbursement of this limited funding).

NEA believes that environmental imperatives and social equity can be assured through a programme of energy efficiency improvements to dwellings occupied by financially disadvantaged households. For example, extensive solid wall insulation in social sector housing would reduce fuel poverty, deliver large-scale installation of an embryonic technology and thereby achieve economies of scale while refining and developing the necessary technical skills and expertise. This approach might also result in “niche” energy efficiency technologies becoming mainstream and sufficiently cost-effective (Golden Rule compliant) to become a conventional offering under the Green Deal. There are currently no indications that the Government will prioritise such work on behalf of low-income and vulnerable households. Yet this approach would make a significant contribution towards meeting both social and environmental objectives.3

NEA believes that there is a strong case for highlighting this issue and determining in a regular way, through rigorous monitoring, how successful the programme is in supporting financially disadvantaged households in hard-to-treat housing as opposed to subsidising much more affluent households.

Delegation of responsibility to energy suppliers

Despite improved reporting requirements, and a general recognition that energy efficiency and fuel poverty programmes delivered by energy suppliers should be subject to oversight and direction to ensure proportionate benefit to rural and deprived areas, energy suppliers (or their contractors/agents) will still have discretion to determine the extent of support they will provide to households and the measures they choose to install. Measures can be delivered in “any order” on the basis that there are “natural incentives” for energy suppliers to deliver the most cost-effective measures first, and not to deliver a number of measures at one time. NEA has strongly argued that the shift of responsibility for delivering energy efficiency and fuel poverty programmes to energy suppliers must be managed through a prescriptive approach. There is a strong rationale for believing that the current approach will give rise to a number of market failures unless addressed and resolved through pro-active monitoring and analysis.

Work undertaken in individual properties under the Affordable Warmth element of ECO should seek to maximise the energy efficiency (and hence affordability) outcomes through adoption of the whole-house approach ie implementation of a full, whole-house package of energy efficiency measures. As well as tracking the extent to which fuel-poor households receive multiple measures, the Department of Energy and Climate Change should also undertake an in-depth analysis and subsequent consultation on the implications for low-income and vulnerable households of exclusive delivery of energy efficiency and fuel poverty programmes through energy suppliers. As well as illustrating any benefits, this analysis should investigate the risks, the distributional impact of additional costs to the energy consumer (compared with Exchequer-funded schemes) and any uncertainties presented by this approach. The Government should also undertake an analysis of the costs of introducing subsidised whole-house energy audits for all low-income households who sit outside of the Affordable Warmth eligibility criteria but are currently within the CERT Priority Group.

Ability to write-off “inherited” Green Deal Finance charges

Apart from generic disclosure procedures, there is seemingly no provision to enable low-income and vulnerable households to write-off inappropriate “inherited” Green Deal Finance charges assigned to their meter as a result of the actions of a previous occupant or landlord. DECC will create a dedicated Green Deal Ombudsman service rather than integration with the Financial Ombudsman Service and the Energy Ombudsman Service. This is a welcome move, but there remains a need for clarity on whether this body will have the power to write-off inherited charges where, for example, the new occupant of a dwelling meets the Affordable Warmth eligibility criteria.

It is also unclear to what extent the Green Deal Ombudsman will seek to monitor instances of disconnections resulting from default on a Green Deal charge or where existing fuel debt problems have been compounded by a Green Deal charge. One final concern relates to whether the Government will monitor whether interest is paid for arrears (where a property has a Green Deal charge). Despite interest typically being paid for defaults on other financial products such as non-secured personal loans, this has not been common practice in relation to energy debt. It remains to be seen whether finance companies investing capital in Green Deal finance arrangements will maintain such a reasonable approach.

Disclosure and Assessment

DECC has ensured that consumer protection has been strengthened through revised policies on assessor impartiality and cold calling, as well as new “protections” for lower than average energy users. DECC will require that where a lower than average energy user wishes to take out a Green Deal Finance arrangement, the Green Deal Provider must obtain a written acknowledgement of customers’ awareness that, based on their energy use, the Green Deal charge may not be fully offset by their energy savings. DECC has also increased the time limit to 90 days to allow for greater consumer protection, especially for more vulnerable consumers who may not be able to challenge non-disclosure as readily. It is asserted that these generic procedures will be sufficient to enhance consumer protection.

NEA believes these protections are still inadequate. It is clear that the “Golden Rule” will be based on standard heating and occupancy patterns. As a result, although an occupancy assessment will be undertaken, it is clear that this will be very much a secondary consideration. Thus any household that under-consumes or under-occupies potentially faces significant increases in their energy bills if they take out a Green Deal finance arrangement. It is conceivable that such circumstances could lead to default on repayment of the finance arrangement and, ultimately, disconnection from supply.

These issues strengthen the need for further clarity on the issues raised above: (power to write-off inappropriate “inherited” Green Deal Finance charges); how DECC will insist (and monitor) that ECO funding is signposted at the assessment stage (through a mandatory benefit entitlement check); and written acknowledgement that a householder is aware that (based on their energy use) the Green Deal charge may exceed energy cost savings.

Future requirements under a revised Home Energy Conservation Act

There is an additional need to ensure that ECO is structured in such a way as to maximise benefit and minimise cost. NEA believes that the optimal approach must be based on community-scale delivery (whilst not excluding individual households in exceptional need) and with local authorities as key partners.

The Act provided no detail on how the obligation should be delivered or by whom and did not provide clarity on how future requirements under a revised Home Energy Conservation Act would ensure that local authorities are equipped to take a central role in attempts to reduce both domestic carbon emissions and fuel poverty.

NEA responded to an informal consultation on the revised HECA framework. NEA welcomes recognition that: “local authorities can play a significant role by setting themselves related [fuel poverty reduction] ambitions and that they are uniquely placed to assess the needs of their areas and local residents and act as catalysts for change.” We also noted and welcomed the explicit encouragement for Energy Conservation Authorities to: “implement energy efficiency improvements cost-effectively in residential accommodation by using street by street roll out”.

In addition, NEA was encouraged by the emphasis that the Home Energy Conservation Act is much more than a bureaucratic exercise and that it will deliver real change, improvement and practical action: “HECA recognises this [the unique position of local authorities] and requires authorities to use their position to improve the energy efficiency of all residential accommodation (owner-occupied, privately rented and social housing) in their areas.” NEA considered that introducing a “duty” on local authorities indicated a serious commitment to meeting existing statutory obligations contained in the Climate Change Act and the Warm Homes and Energy Conservation Act.

However NEA notes that subsequent guidance is much less robust and introduces seemingly optional and discretionary elements to the reporting process. As such, we were disappointed to see a number of areas where the guidance is much weaker and utilises language implying that Energy Conservation Authorities “may” wish to adopt specific actions. Foremost among related concerns is the suggestion that: “… an ECA may wish to develop a separate Affordable Warmth Strategy. ECAs may also consider the role that local Health and Well Being Boards and local health partners might play in supporting any plans”.

As a minimum, NEA believes that the Department should monitor all Energy Conservation Authorities by requiring them to draw up Affordable Warmth Strategies, and track whether effective engagement with the health sector is included as a crucial element of these Strategies. If, as anticipated, it transpires that this highlights major disparities, ie some local authorities are prioritising these issues in a strategic manner and others are not, the word “may” should be replaced with the term “must”. NEA also noted and disagreed with the “laissez faire” approach to reports. We believe that the Department of Energy and Climate Change should develop an appropriate template for use by all Energy Conservation Authorities to ensure consistency in form and content.

January 2013