Draft Green Deal Framework Regulations etc - Secondary Legislation Scrutiny Committee Contents


Letter from Richard Lloyd, Executive Director of Which? to Lord Goodlad

Dear Lord Goodlad,

As the Chairman of the Select Committee on the Merits of Statutory Instruments, I wish to raise with you the significant concerns we have regarding the Secondary Legislation laid before Parliament last week establishing the legal framework for the Green Deal and Energy Company Obligation.

Although we support the Government's ambition to increase uptake of energy efficiency measures, we are concerned that the Green Deal legislation will not deliver the policy objectives sought.

Without widespread consumer demand, the Green Deal will not achieve its objectives of improving homes, reducing energy bills, reducing carbon emissions and reducing fuel poverty. The Government's expectation is that consumers will make the effort to understand and trust a complex and novel financial product that charges interest and delivers only a small net saving for a package of energy efficiency measures. However, since millions of consumers have not taken up offers of free or heavily subsidised loft or cavity wall insulation under the existing energy company obligation, CERT (Carbon Emissions Reduction Target), we believe that they will be unlikely to enter into such an agreement funded via a loan.

Our specific concerns with the Secondary Legislation are outlined below. We believe that each of these elements of the legislation will undermine consumer confidence in the product and therefore ensure that the Government will not achieve its policy objectives:

·  Green Deal savings and loans are not tailored to people's actual energy use: We believe that the assessment process, the principles for which are set out in Part 5, Chapter 1 of the Green Deal Framework (Disclosure, Acknowledgement, Redress etc.) Regulations 2012 will not ensure that consumers can have a reasonable expectation of the savings estimates predicted, and therefore will undermine the 'Golden Rule' that is central to the Green Deal achieving its objectives. The secondary legislation sets out that assumptions for the likely savings from a typical household living in that property will be used to define likely savings (Regulation 27 (2) and 3)), rather than estimates relating specifically to the homeowner's circumstances and energy usage. Although consumers will be presented with a personalised assessment of their energy usage, Green Deal providers are not required to link this to the size of Green Deal loan that could be offered.

·  Green Deal loans could stop people from switching: We are also concerned at the potential for these Regulations to present a material barrier to consumers wishing to switch energy supplier. Although Part 5, Chapter 2, Paragraph 34 dictates that the Green Deal must not prevent a bill payer from changing gas or electricity supplier, there is no way of guaranteeing this currently. There may be small energy suppliers who do not opt in to the Green Deal payment mechanism, meaning that consumers with a Green Deal wishing to switch to said supplier may be prevented from doing so.

·  Green Deal plans will be sold as 'fixed' but will in fact increase year on year: Although we welcome the fact that Green Deal plans will only be offered on fixed interest rate deals, the effect of Part 5, Chapter 2, Paragraph 33, which allows instalments to be increased by up to 2% each year, is such a heavy caveat to Paragraph 32 (fixed interest rate) that we consider that the latter is largely meaningless. This could further dissuade consumers from taking out Green Deal plans, thereby undermining the policy objectives.

·  Warranties for the Green Deal will not offer suitable protection: We have concerns that the Government's proposals for guarantees have been significantly watered down (Regulation 35 and Schedule 3). Where originally the proposal was to have coverage for the entirety of the Green Deal loan, this has now been reduced to five years (with the exception of wall insulation). This is a particular concern for boilers, since it could lead to a situation where the occupant is paying for a measure that is not functioning (and in the case of future occupants, one that they didn't choose to purchase).

·  The Energy Company Obligation is not equitable and cost-effective: Finally we have significant concerns over the proposals set out in the Electricity and Gas (Energy Company Obligation) Order 2012, also laid before Parliament last week. We do not consider that it is equitable or cost effective for the majority of the ECO funding, drawn from consumers bills, to be applied to sizeable subsidy for solid wall insulation, much of which is likely to be for able-to-pay homes. To achieve the Government's aims of tackling fuel poverty more funding should be applied to these households. Furthermore, a higher proportion of the ECO should be made available for low-cost, high-impact measures such as loft and cavity wall insulation to achieve the objective of reducing energy bills and carbon emissions. Without such a change, the Government's impact assessment predicts a significant fall in the number of loft and cavity wall insulation installations.

·  Furthermore with regard to the ECO, we believe that it is imperative that energy companies are required not only to report on the costs of delivering their obligations (Part 5, Paragraph 23) but also on the costs passed through to consumers in their bills. This will enable the regulator (Ofgem) to determine if measures are being installed cost-effectively.

I do hope that your Committee will consider these concerns. Which? can provide further information and evidence about these issues.

Richard Lloyd

19 June 2012

Letter from Gregory Barker MP, Minister of State at the Department of Energy and Climate Change, to Lord Goodlad

Dear Lord Goodlad,

I understand that you received representations from Which? regarding the Green Deal and Energy Company Obligation affirmative instruments my Department laid. I am grateful for the opportunity to provide a Departmental response to the points raised, and hope this will aid the Committee in its consideration. I will take the points in the order in which they were raised in the original letter, and in some detail, so that you have a complete view.

Green Deal savings and loans, and actual energy use - I believe Which?'s concerns that Green Deal savings are not tailored to people's actual energy use to be unfounded. I can reassure you that I deliberately decided to cap the Green Deal charge at the typical savings level to protect future occupants from inappropriately high energy bills due to the Green Deal Plan. The Green Deal Occupancy Assessment, which specifically considers the occupants in the property and the way they use energy, will be used to adjust the typical savings estimates. I have also introduced a requirement that if a lower than average energy user wishes to take out Green Deal finance, the Green Deal Provider must obtain written acknowledgement that they are aware that, based on their energy use, the Green Deal charge may not be fully offset by their energy savings. Green Deal Providers will be held liable if they do not meet these obligations, and I am sure they will be taken very seriously.

Green Deal loans and switching - Which? was concerned that Green Deal loans could stop people from switching. However, this was a matter I considered in great detail, and I am confident that the ability of customers with Green Deals to switch will not be substantially affected. All suppliers with more than 250,000 customers will be obligated to collect the Green Deal charge whilst those with less than 250,000 can opt in to collecting the charge. I have put in place a levelization mechanism for the electricity suppliers' administration fee which will compensate smaller suppliers for their increased costs per customer for collecting the Green Deal charge, in comparison with larger suppliers. I therefore expect that smaller suppliers will opt in to collecting the Green Deal charge, and I will also be monitoring this over time to ensure there is no adverse on competition within the market.

Green Deal plans and interest rates - Which? raised concerns that Green Deal plans will be sold as fixed but will actually increase year-on-year. This is a misunderstanding. I have deliberately restricted Green Deal providers offering plans to domestic customers to fixed rate deals only. In order to allow Green Deal providers and customers a little more flexibility, Green Deal providers will have the option to uplift the whole charge by 2% a year. This has the benefit of allowing more measures to meet the golden rule and for a greater proportion of these plans to be paid using Green Deal finance. However, if the 2% uplift is agreed and utilised, the instalments related to the plan will still be calculated and fixed at the outset. The repayment profile will be made very clear to the customer before the plan is signed and will be disclosed to future bill payers upon transfer of the property.

Warranties for the Green Deal and customer protection - Which? was concerned that the original warranties proposal had been "watered down". However, following responses to the consultation and our own research, we found that initial proposal of proving warranties for the life of the Green Deal plan was not financially viable or good value for money. The evidence, including a recent report from the Office of Fair Trading, is set out in detail in the government response and impact assessment. Our requirement of a five year warranty for measures under the Green Deal mirrors some of the market and pushes the rest to go further.

The Energy Company Obligation (ECO) - Which? asserted that the ECO is not equitable and cost-effective, but I cannot accept this. The Affordable Warmth and Carbon Saving targets will allow us to deliver support to more fuel poor households, while still delivering considerable carbon savings. The post-consultation introduction of the Carbon Saving Communities target has also increased the amount of ECO that will go towards delivering low-cost insulation measures, such as loft and cavity wall insulation. To meet their Affordable Warmth and CSC targets, we estimate that energy suppliers will need to spend around £540m each year assisting low income households and areas and helping to tackle fuel poverty. This change to ECO, following the consultation, ensures that it will be a cost-effective way of delivering support in an equitable manner to the low income households and communities who need it most, while saving carbon.

I hope this information is useful background to our decisions. I have sought an optimal balance between consumer protection and burdens on the very businesses who will be delivering the Green Deal. I received many views during the consultation, and Which?'s was just one of these. I actively encourage their participation through the Green Deal Consumer Protection Steering Group and their views have always been given a fair hearing. However ,some other consumer protection groups have taken a different position. Ultimately, I believe we have devised a final policy which fairly reflects all the views and evidence we received and delivers an effective legislative framework.

Gregory Barker

21 June 2012

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