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3The new suppler obligation

28.In November 2015, the Government announced in the Spending Review:

The government is implementing a package of measures to reduce the projected cost of green policies on the average annual household energy bill by £30 from 2017. The bulk of these savings will come from reforms to the current ECO scheme. This will be replaced from April 2017 with a new cheaper domestic energy efficiency supplier obligation which will run for 5 years. The new scheme will upgrade the energy efficiency of over 200,000 homes per year, saving those homes up to £300 off their annual energy bill, tackling the root cause of fuel poverty and delivering on the government’s commitment to help 1 million more homes this Parliament.86

Concerns with the proposed supplier obligation

29.In the weeks following the Spending Review, we heard a number of concerns about the announcements regarding the new supplier obligation. These related to the level of funding, the level of ambition, and the projected savings of the new supplier obligation.

Reduction in funding

30.The Spending Review stated that the new domestic energy efficiency supplier obligation would have a value of £640 million per year, which we heard represents a reduction in spending of over £300 million every year in comparison to the estimated annual average delivery costs for ECO between January 2013 and March 2015.87 We heard that this reduced funding would seriously impact the ability of the proposed scheme to tackle fuel poverty (an issue closely linked to homes with poor energy efficiency standards)88 as there was still “a big gap” between the Government’s fuel poverty targets and the level of funding available to meet them.89 Policy Exchange said that the reduced funding “would meet only half of the estimated £1.2 billion per annum required in order to achieve fuel poverty reduction targets”.90 National Energy Action added:

Whilst the new programme is likely to be more focused on vulnerable fuel poor households, it is now likely that fewer households will be helped with energy efficiency measures through levy funded supplier obligations than ever before.91

We raised these concerns with Lord Bourne, Parliamentary Under Secretary of State for DECC, who responded: “obviously we can only operate within the financial envelope of the spending review. [The] £640 million a year is still an awful lot of money. [ … ] It is a significant sum of money, and it needs focusing on the fuel-poor”.92

Reduced targets

31.There are concerns that Government’s new target of insulating 200,000 homes per year up to 2020, which was confirmed in the Spending Review, is not ambitious enough and represents “a further significant reduction in the rate of insulation”.93 We were told that much greater policy ambition was needed if the UK was to meet its carbon goals as well as its fuel poverty goals. Dave Sowden, Chief Executive of the Sustainable Energy Association (an industry body) said:

The Government has been quite clear [ … ] that it wishes to insulate 1 million homes during the course of this Parliament, and it has set out in the Spending Review that the £640 million a year should deliver 200,000 homes per year. That is consistent with the 1 million target. By contrast, the Committee on Climate Change [ … ] said that we needed a further 1.5 million solid walls done in the next decade—the decade that starts in 2020—plus a further 2 million cavity walls [ … ] it is not difficult to do the maths and conclude that the run rate in this Parliament is nowhere near adequate for what needs to be done.94

Predicted savings

32.Within the Spending Review, the Government predicted that from 2017–18 the average annual household energy bill would go down by £30, rising to a £35 reduction in 2020–21, as a result of their “package of measures to reduce the projected cost of green policies”.95 They claimed that the “bulk of these savings” will come from the new supplier obligation.96 However, we heard serious concerns about how this figure was arrived at. We were told the calculations behind the predicted savings needed looking into at more detail.97 Dr Eyre, Director at the UK Energy Research Centre, suggested that the predicted savings would not be a cost-benefit analysis and that it would be “bordering on the dishonest” to present them as such.98 Ben Golding, Deputy Director and Head of Strategy and Finance Team, Home Energy at DECC, told the Committee that there was a complicated process behind how the Department came to the figures:

Inevitably it uses a lot of fairly complex modelling, but it [the predicted savings] is a £30 reduction relative to the counterfactual. The average household will be paying £30 less on their bills than we estimate they would have been were the current set of policies not there.99

After requesting further details on this from the Department, we received additional information which explained the methodology used to calculate the impact on projected average household energy bills of the new supplier obligation.100 The information stated that the analysis of the impact on bills from the reforms to ECO were “as compared to the previous government’s ambition for a longer-term policy associated with an annual cost to suppliers from 1 April 2017 of around £1.3 billion on average per year (in 2011 prices)”.101 This means that the Government calculated its predicted savings to household energy bills from the introduction of the new supplier obligation by comparing its new plans for April 2017 to December 2022 (estimated £700 million 2020/21 prices) to those previously projected (£1,500 million in 2020/21 prices).  It also stated that no assessment was made of the changes in energy demand (through changes in energy efficiency levels from reforming ECO) within the assessment on the impact of the new supplier obligation on energy bills.102

33.The new supplier obligation will represent a sharp decline in Government ambition. While we recognise it is not unusual to make comparisons to counterfactuals when considering investment plans, we believe that it was somewhat misleading to claim that the new supplier obligation would save households £32 in 2017–18.  These savings can only be measured by comparing new plans to previously planned higher spending which never actually happened, rather than to actual current or past costs.

Targeting hard-to-reach and fuel poor households

34.According to figures published in 2015, 10.4% of households in England were in fuel poverty in 2013, an issue that is inextricably linked to homes with poor energy efficiency standards.103 This was just a 0.5% improvement from 2012. The number of homes predicted to be in fuel poverty in England in 2014 and 2015 remains broadly flat, rising from 2.35 million in 2013 to 2.36 million in 2014, before dropping to 2.34 million in 2015.104 These projections include the predicted impact of energy efficiency delivered by major Government programmes, such as ECO.105 Fuel poverty in England is measured using the Low Income High Costs (LIHC) indicator. Under the LIHC definition, households are considered to be in fuel poverty “if they have required fuel costs that are above average [and] were they to spend that amount, they would be left with a residual income below the official poverty line”.106 In Scotland, Wales and Northern Ireland, a household is defined as fuel poor if it needs to spend over 10% of its income on keeping its home at a reasonable temperature.107 Over 30% of all households are predicted to be in fuel poverty in Scotland, Wales and Northern Ireland respectively, according to latest figures.108

35.The CCC recently outlined how important energy efficiency is to tackling fuel poverty. They said that “if energy efficiency measures can be effectively targeted at the fuel poor then overall numbers in fuel poverty would fall even as costs from supporting low carbon investment increases”.109

36.Lord Bourne told us that the new supplier obligation would be “fuel poverty-centric”. He said: “In this Parliament, we are hoping to link ECO much more specifically to fuel poverty, so that we ultimately have just one measure on ECO, which is a fuel poverty measure, in 2018”.110 He also explained that 2017–18 would be a transitional year between the end of ECO and the introduction of the new supplier obligation.111

37.However, contributors to this inquiry raised major concerns over the use of supplier obligations to tackle fuel poverty and argued that the policy would not be an effective and suitable mechanism to reach the people who need it the most. Two major reasons were given.

A regressive approach

38.The costs of delivering a supplier obligation is passed on to all consumers through their energy bills. We were told that this was a “regressive”112 policy because the scheme potentially increases the costs of the energy bills of those already in low-income or fuel poor homes.113 We heard that this has the perverse effect of actually pushing households into fuel poverty.114 The energy supplier SSE, a company obliged to deliver ECO, said:

Funding policies such as the Energy Company Obligation (ECO) through gas and electricity bills can be regressive and mean that the most vulnerable consumers pay disproportionately more than others; ultimately this could undermine the policy as it risks pushing more people into fuel poverty by adding to energy prices.115

39.We also heard that the nature of the core business of energy suppliers obliged to deliver ECO was not necessarily aligned or compatible with targeting and treating those in need.116 Dr Jan Rosenow, from the Centre on Innovation and Energy Demand at the University of Sussex, suggested that the very idea of using suppliers to assist the fuel poor was questionable because suppliers focussed on low costs:

Energy suppliers usually target those properties where they can achieve the highest amount of savings for the smallest amount of money. That is not the fuel poverty sector [ … ] I don’t think energy companies are the best actors to deliver on fuel poverty.117

40.Other witnesses agreed that there was an incentive on suppliers to deliver measures as cheaply as possible.118 We heard that this incentive had resulted in suppliers focusing on consumers who are “able or willing to contribute towards costs”, whilst the most vulnerable consumers with the greatest needs were often left with no guarantee of assistance.119 This has been a particular concern for those consumers in rural households off the gas grid, because it is cheaper for suppliers to focus on urban areas and homes heated by gas.120 Holly Jago, Corporate Affairs Manager at Calor Gas, said that “there has been a persistent underdelivery of energy efficiency measures into rural areas [ … ] not least because of the way that schemes like ECO have been designed”.121

41.Richard Twinn, Policy Adviser at the UK Green Building Council, emphasised that using a supplier obligation to treat those in fuel poor households was very uncommon. He said that “we are the only country in Europe that uses a supplier obligation to try to tackle fuel poverty. Suppliers are not in the best position to do that”.122 The Centre on Innovation and Energy Demand, University of Sussex added that “evidence suggests that energy efficiency obligations are not very suitable to deliver energy efficiency improvements to fuel poor households”.123 Peter Broad, Policy Manager at Citizens Advice told us that “there is a question about whether these policies, ostensibly targeting fuel poverty, are getting to the people who most need it”124 and the Energy and Utilities Alliance told us that because revenue for suppliers is generated by selling energy, they are “naturally disinclined” to undertake schemes such as ECO.125

42.However, the Secretary of State for Energy and Climate Change, the Rt Hon Amber Rudd MP, suggested in January 2016 that the supplier obligation was one of the best ways to address fuel poverty.126 Lord Bourne explained that, despite looking at other possibilities, the Department had still came to the decision that it made sense for the new supplier obligation to focus on fuel poverty, adding that the supplier obligation was the “best mechanism” through which to tackle fuel poverty. 127

Data issues

43.We heard that access to appropriate data was crucial for energy suppliers who deliver ECO to effectively target those in fuel poverty, as well as rural and low-income households.128 However, those who have to deliver the scheme have not been able to access the right data to effectively target low-income, fuel poor and rural households. Energy UK explained that the absence of this data to suppliers made it problematic for energy companies to “effectively and efficiently [ … ] identify households in need of support”.129 British Gas added:

To properly target assistance at the fuel poor, a bespoke approach is required which a supplier obligation cannot offer without significant data sharing.130

44.Resourcematics, a company that advises on energy information, told us that access to the Home Energy Efficiency Database (which contains some information on property characteristics, heating systems and insulation installed)131 was highly restricted and that energy suppliers and the supply chain had no access to the data it contained.132 Ben Golding, Deputy Director, DECC said:

The challenge comes from needing to be able to work with energy suppliers with data that does potentially identify individual households, so that they can say of their customers or those they target, “Is this particular household likely to be fuel-poor and therefore eligible for measures?” To enable targeting accurately, you need to get right down to that household-level information. For that we need additional legal powers.133

This lack of available data has meant that the identification and targeting of those in most need of energy efficiency measures has become a difficult and costly process.134 Rockwool UK, the UK branch of a global supplier of insulation products, said:

It has [ … ] proven extremely difficult and costly to identify those households which are eligible for measures under ECO, especially the fuel poor, because government data has largely been based on modelled estimates rather than actual households.135

45.The lack of data has particularly affected how effectively energy suppliers have been able to target low-income and fuel poor households in rural locations. Calor Gas told us that the Government “does not currently capture” the information that would allow suppliers to differentiate between ECO delivery to “rural off-gas grid, rural on-gas grid and urban off-gas grid households”.136 This is concerning because, as the Government’s own statistics show, off-gas grid properties, which are far more common in rural locations, are also much more likely to be in fuel poverty than those on the gas network.137

46.The importance of tackling fuel poverty cannot be overstated. However, we have serious concerns that the Government’s decision to use the new supplier obligation to do so may be misguided. The evidence we have received clearly indicates that this is the wrong approach. A scheme which places some of the costs of its delivery on the very households it is designed to help is inherently regressive. Commercial energy suppliers are not best placed to deliver fuel poverty action. Moreover, access to and sharing of individual household data is currently not possible and would probably require primary legislation.

47.We recommend that DECC reconsiders its decision to use a supplier obligation to tackle fuel poverty. As a consequence the Government must re-evaluate what the best approach is to tackle fuel poverty. In order to do this, the Department must first publish the evidence which was used to determine that a supplier obligation is, in its own words, the “best mechanism” for tackling fuel poverty. This evidence must be open to public scrutiny.

48.DECC should consult on alternative approaches to tackling the serious and urgent problem of fuel poverty. DECC must give particular attention throughout this consultation to addressing how to tackle fuel poverty for those living in rural fuel poor homes.

49.Accurate, accessible data on property characteristics, energy use and income are the key to tackling fuel poverty. Such data would also help drive a more targeted approach to delivering energy efficiency measures through various policies. We recommend that the Department assess what legislative changes would be needed to improve wide-scale access to- and sharing of data. DECC must provide us with details on what specific changes would need to be made to establish a comprehensive national database to support the delivery of energy efficiency measures. In its response, the Department should set out a timetable for these changes.

Transition to the new supplier obligation

50.In light of this recommendation, we now turn to how to transition to a new supplier obligation in the years ahead. Given concerns about the stop-start nature of recent energy efficiency policies outlined in chapter 2, the transition period between ECO and the new supplier obligation emerged as a key concern to those who deliver the scheme.138 Stakeholders informed us that, going forward, the Department should learn lessons from the difficulty caused by poorly managed transitions.139 The Confederation of British Industry explained that:

Detail on future plans is a priority for industry. This is particularly important as the transition from earlier schemes–the Carbon Emissions Reduction Target (CERT) and the Community Energy Saving Programme (CESP)–to ECO resulted in negative consequences for some parts of the energy efficiency supply chain, including job losses due to uncertain consumer demand.140

51.We were told that any future transition period must permit sufficient time for “engagement, full consultation and governmental response”141 to secure a robust and well managed transition.142 Energy UK said that this must then be followed by “adequate time for supply-chain development [and] systems changes.” British Gas told us that they plan delivery of ECO measures up to two years in advance143 and E.On said that a two year extension of ECO was “more appropriate than the proposed 12 months” to allow a successful transition.144 However, Lord Bourne told us:

I accept the need for certainty and coherence. I would not necessarily say that we have achieved that in all programmes, but with ECO, we have a very clear timeline. The present system is there until 2017; we then have a transitional year, and we are issuing details of how it will operate.145

52.The impending transition period between the Energy Company Obligation and the new supplier obligation must not repeat the mistakes of the badly handled transition from the Community Emissions Reduction Target and the Community Energy Saving Programme to the Energy Company Obligation, which had unintended consequences for industry and the supply chain.

53.In the light of industry concerns regarding a carefully managed transition period, and our earlier recommendation that DECC reconsiders its decision to use a supplier obligation to tackle fuel poverty, we recommend the following:

i)ECO, in its current form, should be extended until March 2018 in order to provide stability to the supply chain while a new supplier obligation is developed.

ii)A transition period should be established between the end of the Energy Company Obligation and the new supplier obligation—this should run from April 2018 to March 2019 as a minimum—with the new obligation commencing no earlier than April 2019;

iii)The Department must immediately launch a consultation on the design of the new supplier obligation to be introduced in 2019.

86 HM Treasury, Spending Review and Autumn Statement 2015 (November 2015), p 39

89 [Q157] Dr Rosenow

90 BBC News, Campaigners warn over new energy efficiency scheme, accessed 1 March 2016

91 National Energy Action (HEE0113)

92 Q219 [Lord Bourne]

93 Friends of the Earth (HEE0081)

94 Q152 [Dave Sowden]

95 HM Treasury, Spending Review and Autumn Statement 2015 (November 2015), p 39

96 HM Treasury, Spending Review and Autumn Statement 2015 (November 2015), p 39

97 Q166 [Simon Roberts]

98 Q167 [Dr Eyre]

99 Q221 [Ben Golding]

100 Letter from Lord Bourne to Chair of the Energy and Climate Change Committee on Home energy efficiency oral evidence session

101 Letter from Lord Bourne to Chair of the Energy and Climate Change Committee on Home energy efficiency oral evidence session

102 Letter from Lord Bourne to Chair of the Energy and Climate Change Committee on Home energy efficiency oral evidence session

107 House of Commons Library Research Briefing, Fuel Poverty, (February 2016)

108 House of Commons Library Research Briefing, Fuel Poverty, (February 2016)

109 The Committee on Climate Change, The Fifth Carbon Budget, (November 2015), p18

110 Qq188, 205 [Lord Bourne]

111 Q205 [Lord Bourne]

112 Centre On Innovation And Energy Demand, SPRU, University Of Sussex (HEE0012), SSE (HEE0017), Age UK (HEE0019), Providence Policy (HEE0022), Confederation of British Industry (HEE0035), British Gas (HEE0041), Energy UK (HEE0074), ScottishPower Supplies (HEE0091) Q17 [Peter Broad]

113 Confederation of British Industry (HEE0035), Centre On Innovation And Energy Demand, SPRU, University Of Sussex (HEE0012), SSE (HEE0017), AgeUK (HEE0019), Providence Policy (HEE0022), British Gas (HEE0041), Energy UK (HEE0074), ScottishPower Supplies (HEE0091), Q55 [Richard Twinn], E.On (HEE0117), Q64 [Lawrence Slade], Q159 [Dr Rosenow], Q168 [Simon Roberts]

114 Q168 [Simon Roberts], SSE (HEE0017), Providence Policy (HEE0022)

115 SSE (HEE0017)

116 National Housing Federation (HEE0032)

117 Q159 [Dr Rosenow]

118 Citizens Advice (HEE0080), Q3 [Peter Smith]

119 Citizens Advice (HEE0080)

120 Citizens Advice (HEE0080)

121 Q62 [Holly Jago]

122 Q55 [Richard Twinn]

123 Centre on Innovation and Energy Demand, SPRU, University of Sussex (HEE0012)

124 Q17 (Peter Broad)

125 Energy and Utilities Alliance (HEE0028)

126 HC Deb, 7 January 2016, col 432 [Commons Chamber]

127 Q227 & Q218 [Lord Bourne]

128 Energy UK (HEE0074), British Gas (HEE0041), Q75 [Lawrence Slade], Rockwool UK (HEE0048), E.On (HEE0117), British Gas (HEE0115)

129 Energy UK (HEE0074)

130 British Gas (HEE0041)

131 Energy Saving Trust, ‘Introduction to HEED and HEED+,’ accessed 1 March 2016

132 Resourcematics (HEE0062)

133 Q208 [Ben Golding]

134 British Gas (HEE0115)

135 Rockwool UK (HEE0048)

136 Calor Gas Ltd (HEE0014)

138 ScottishPower Supplies (HEE0091), British Gas (HEE0041), Energy UK (HEE0074), Confederation of British Industry (HEE0035), Saint-Gobain (HEE0076), British Gas (HEE0115), E.On (HEE0117)

139 British Gas (HEE0041)

140 Confederation of British Industry (HEE0035)

141 Energy UK (HEE0074)

142 E.On (HEE0117), Energy UK (HEE0074), ScottishPower Supplies (HEE0091)

143 British Gas (HEE0115)

144 E.On (HEE0117)

145 Q214 [Lord Bourne]

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Prepared 10 March 2016