The Future of the Energy Company Obligation

Transcription

1 Westgate House 2a Prebend Street London N1 8PT The Future of the Energy Company Obligation Response to the above-titled consultation from the Association for the Conservation of Energy Association for the Conservation of Energy consultation response 1

2 About the Association for the Conservation of Energy The Association for the Conservation of Energy aims to reduce overall energy demand to ensure a secure and sustainable energy future. Through our lobbying, campaigning and research we help to achieve sensible and consistent policy, legislation and targets. ACE works to raise a positive awareness of energy conservation and encourage increased investment in all energy-saving measures. We welcome the opportunity to respond to this consultation, and would like to point out that we are responding to the latest available, 63 question version of the consultation document. The first version of the consultation document contained one additional question Question 10 which was subsequently removed. In our response, we answer that question as well, so there are two Questions 10 here. The missing question has been answered in a differently formatted box to make it easier to identify. Should you have any questions regarding this response, please contact Pedro Guertler, Head of Research, at pedro@ukace.org. Association for the Conservation of Energy consultation response 2

3 1 Preamble / overview The Government s proposals to reduce the cost of the ECO by 30-35, principally by altering CERO to March 2015, have underestimated the extent of the bill saving it will result in compared to business as usual. We estimate the energy companies rebates and bill reductions in relation to ECO to average this would be the optimal saving on the costs of delivering the ECO. However, we estimate the reduction in required CERO activity in 2014/15 alone to amount to a saving of This represents a windfall to suppliers of at least 9.55 per household and at least 245 million on aggregate. This is set to happen because very little of the original 2015 CERO target of 20.9 MtCO 2 remains to be delivered: just 6% as indicated by the dark blue slice in the pie-chart below. Figure 1: Composition of original CERO target of 20.9 MtCO 2 under changes proposed in the consultation Under business as usual, a further 11.4 MtCO 2 would have had to be delivered from this April to March This has become 1.3 MtCO 2 a nearly 90% cut. Both scenarios, expressed in terms of the historical and likely future mix of measures 1 to deliver these carbon savings, are illustrated by the first and third columns respectively in the annotated chart below. Following next to no delivery to March 2015, to deliver CERO post-march 2015, delivery would have to be ramped up again five-fold (as indicated by the fourth column in Figure 2. 1 Constrained by statistics on CERO delivery to date, DECC s Assessment of Impacts, and the proposed solid wall minimum. Association for the Conservation of Energy consultation response 3

4 Figure 2: Number and type of measures delivered under different circumstances, with focus on current proposals likely outcome We have been, and remain deeply opposed to the ECO cuts (see our answer to Q1). However, given that they are happening, the imperative for CERO changes must be to: Avoid any windfall to suppliers in 2014/15, but still ensure the saving in pass-through cost onto household bills is consistent with the intention to save Avoid a near-full hiatus in activity to March 2015 which will harm consumers, undermine Government credibility and damage the CERO supply chain Avoid a dramatic ramp-up in activity to deliver post March 2015 Ensure as smooth a level of delivery as possible across the three years to March 2017 This can be achieved by incentivising more delivery in 2014/15, by: [A full description of the optimisations proposed below is provided in Appendix I.] Not implementing proposals for additional carry-over, with the added advantage of: o Not setting a precedent for changing carry-over rules post-hoc (avoiding a further increase in uncertainty); o Not delaying the emergence of clarity regarding the level of carry-over by a year (avoiding more uncertainty). o See response to Q39 and Q40 Improving the levelisation mechanism by: o Increasing the uplift threshold to 57%, commensurate with aggregate delivery against Phase I plus II targets by the end of March; o Changing the uplift factor to 1.67 (and, on a related note, changing the 1.1 penalty for missing the March 2015 target to the same as pledged by DECC in December); Association for the Conservation of Energy consultation response 4

5 o Turning the mechanism to a carbon neutral bonus-malus scheme, which has the added benefit of sending the right signals to obligated companies. o See responses to Q35-37 Further smoothing delivery by: o Allowing capped over-delivery (up to 0.8 MtCO 2) against our optimised March 2015 CERO targets to receive a significant uplift which can be counted towards the April 2015 to March 2017 CERO target o See response to Q7 Strengthening the solid wall minimum: o Our analysis reveals there is scope to increase the solid wall minimum to at least 125,000 properties / 5 MtCO 2. The minimum should be expressed as, and set in terms of, both properties and carbon, to avoid perverse outcomes. o We recommend on this basis that an interim target for SWI be set at 70,000 for March 2015, to avoid the risk of see-sawing and ensure a sustainable trajectory for the development of the SWI industry. o See responses to Q7 and Q26 Taken together, the proposals above change the composition of Figure 1 as follows 4.5 MtCO 2 remain to be delivered: Figure 3: Composition of original CERO target of 20.9 MtCO 2 under our proposed optimisation package The effect on the delivery profile is shown in Figure 4. This assumes that energy suppliers take advantage of our proposed uplift for up to 0.8 MtCO 2 of delivery over the remaining 4.5 MtCO 2 required by March The result is a consistent delivery profile, and a consistent optimal saving of in pass-through costs in each of the three years to March Association for the Conservation of Energy consultation response 5

6 Figure 4: Number and type of measures delivered with our optimisations, assuming uplift for over-delivery against March 2015 target is taken advantage of Over the three years to March 2017, our proposals mean that 16 MtCO 2 are delivered through actual measures. This is 2.3 MtCO 2 more than under DECC s proposals for CERO. This gives the 540 million of public money over the period a greater chance of success in maintaining carbon-saving parity with business as usual. Association for the Conservation of Energy consultation response 6

7 2 Level and nature of targets 2.1 Carbon Emissions Reduction Obligation Q1: Do you agree that the 2015 CERO target should be reduced by 33 per cent from 20.9 MtCO 2 to 14 MtCO 2? No. ACE and many others have consistently argued that cutting Britain s only national energy efficiency programme designed to reduce household energy bills and carbon emissions in the long term to achieve a modest one-off energy bill reduction is completely perverse. Besides, the proposals in this consultation amount to a cut far deeper than 33%. Smoke and mirrors are being deployed to disguise a cut of nearly 50%. In 2014/15, compared to business as usual, the reduction in carbon saved is close to 90%. Most obligated energy companies have astutely set the Government s agenda by capitalising on the political furore over the energy price freeze pledge made by Ed Miliband and the Labour Party. With remarkable consistency of message, energy companies have argued that the main contributor to price increases last year was the cost of environmental levies. The Government has been successfully held to ransom by a combination of a) companies such as EDF, who announced a smaller price rise than competitors in anticipation of cuts to ECO; and b) a misguided perception of weakness in the polls on this issue, successfully whipped up and capitalised upon by energy companies to deflect negative public opinion from themselves and on to the Energy Company Obligation. The result is: A very modest one-year rebate to households, easily swallowed up by a future round of gas and electricity price increases at the expense of permanent energy bill reductions for at least 264,000 households in this year alone (compared to business as usual); A regressive double-dividend for those 50% of British households who have to date received energy efficiency improvements, and higher bills for longer for everyone else; A terrible precedent of announcing pre-determined chops and changes to a programme: o Less than one year in; o Just as it was beginning to settle and run smoothly; o Absent any comprehensive, transparent data on what it actually costs (official data suggest it was roughly as much as anticipated). An ever-widening gap between the carbon savings required from the residential sector under the Climate Change Act, and the carbon savings that will be delivered: o We recognise that new public money is being made available over the next three years to maintain overall carbon neutrality but with the use thereof not being consulted upon as well, this ECO consultation is effectively being conducted in the dark. Rag-doll treatment of the energy efficiency supply chain, which: took heavy losses following the awful transition from CERT and CESP to ECO and Green Deal; made very difficult decisions to successfully restructure, invest in and adapt to in the new delivery landscape; only to have this painfully recovered confidence even more thoroughly undermined with attendant negative effects on investment and employment. Powerfully undermined Government credibility some energy companies are now calling for the whole of the ECO to be scrapped. The precedent set by the Autumn Statement suggests that Association for the Conservation of Energy consultation response 7

8 it is very possible they will have their way. Despite fully understanding the purpose and benefits of energy efficiency programmes, there has been no backbone and no firmness of principle on the Government s part. Q2: Should the new CERO target be applied to Phases 1, 2 and 3, or to Phase 3 only? Please provide justification for your answer. It should apply to all three Phases, however, it should not affect the threshold used for uplifts under the proposed levelisation mechanism. That threshold must be based on a percentage of carbon savings achieved against the original Phase 1 plus 2 target. Q3: Do you agree that underachievement against the CERO target at 31 March 2015 should be able to be carried forward at a penalty rate of 1.1 times the amount of shortfall? Leaving aside the fact that the penalty rate is unlikely to be applied, as next to nothing needs to be done to meet the CERO target to March 2015, the 1.1 rate sends out a very weak signal. It also sends out the wrong signal, as uplifts under the levelisation mechanism proposed to apply to over-performance against a very low benchmark at a rate of This contradicts DECC s pledge last December to: In addition, there will be incentives for quick delivery, which would save people money sooner [refers to 1.75 uplifts under the levelisation mechanism]. Energy companies that fall short of their new 2015 delivery targets will have their 2017 target increased by the same multiple. (DECC, 2013, our emphasis 2 ) As an opportunity to shore up a little credibility, the penalty rate should be set at the same level as whatever the uplifts under the levelisation mechanism will be. We recommend a factor for both at 1.67 see answers to Q Affordable Warmth and Carbon Saving Communities Obligation Q4: Do you agree that CSCO and Affordable Warmth targets should remain unchanged for 2015? Yes. 2.3 Carry Forward of Excess Actions from 2015 Q5: Do you agree that all excess activity under CERO, CSCO and Affordable Warmth should be compliant with rules put in place for these sub obligations from 1 April 2015? Yes. This ensures that if there is over-delivery, this over-delivery becomes part of preparing the ground for efficient operations under the new rules from 1 April Q6: Do you have a view on whether, and what proportion, of over-delivery against 2015 CERO, CSCO and Affordable Warmth targets should be permitted to count towards 2017 targets? To ensure a reasonably consistent delivery profile and mitigate a see-sawing in activity levels, overdelivery against all three 2015 targets should be permitted to count towards their 2017 counterparts. The proportions allowable must vary from target to target, based on a realistic assessment for each of how much activity is required to meet targets in the year to March 2015, compared to the annual average level of activity required to deliver the 2017 targets over two years: CERO: under current proposals, only a negligible amount of activity remains necessary to meet the March 2015 CERO target. In this consultation response, we put forward proposals to require 2 Association for the Conservation of Energy consultation response 8

9 as well as incentivise a greater level of CERO delivery to March 2015 which are compatible with the consultation s overall intention of reducing the cost of the ECO. Given the likely level of delivery to March 2014, we estimate that only 1.3 MtCO 2 (6%) of the original 20.9 MtCO 2 CERO target remain to be delivered, which would lead to a disastrous hiatus in CERO activity. Our proposals summarised in the introduction to this consultation response and provided in full in Appendix I increase this to 4.5 MtCO 2 by altering the levelisation mechanism (see Q35-37) and leaving the rules for carry-over from CERT and CESP unaltered. Carry-forward of over-delivery against 4.5 MtCO 2 should be capped at an additional 0.8 MtCO 2, although this level of carryforward could be incentivised (i.e. uplifted) to facilitate further smoothing of the delivery profile. This is compatible with DECC s principles as a) delivery in 2014/15 is expected to be compliant with the new rules for CERO and b) it can be achieved while still ensuring the ECO saving on pass-through costs is CSCO: in the year to March 2015, under proposals as they stand, CSCO is likely to be the only game in town in terms of actual delivery, with a large proportion of the target yet to be delivered. With the post-march 2015 target being a pro-rata extension, and in the interests of achieving a smooth delivery profile, carry forward of any over-delivery should be the most limited of the three sub-obligations. Affordable Warmth: very little additional activity is required to meet 2015 targets. To avoid a complete hiatus in delivery, especially over the coming winter, Affordable Warmth must be afforded the highest proportion of over-delivery allowable as carry forward (where compliant with its new rules). Q7: Do you have views on how such a cap mechanism could be calculated and then implemented? Do you have a view on how such a cap could work alongside the proposed SWI minimum threshold, and whether there are distinct implications for any of the three sub obligations? Caps for carry forward need to be worked out for each of the three sub-obligations (with some of the distinct implications referred to in response to Q6 above). In general, carry forward should be permitted at a level which, if fully utilised, would not bring about too big a difference between the delivery profile in the year to March 2015 and the year from April Regarding compatibility with the solid wall minimum, under current proposals, CERO activity is likely to be negligible in the year to March 2015, delivering at most 6,000 solid walls 3. DECC estimates 11,000 solid walls to be delivered under CSCO in the same period. That is just 17,000 solid walls, compared to 43,000 in the first 15 months of the scheme and a likely average of 31,000 (DECC s assessment) to 33,500 (our assessment) in each of the last two years of the scheme. Table 1: Estimated solid wall delivery to March 2017 CERO (our assessment) CERO (DECC assessment) CSCO (DECC) Total (ACE) Total (DECC) Delivery Jan 2013 to Mar ,000 24,000 3,000 43,000 27,000 Delivery Apr 2014 to Mar ,000 18,000 11,000 17,000 29,000 Average annual delivery Apr 2015 to Mar ,000 22,500 8,500 33,500 31,000 Total 96,000 87,000 31, , ,000 3 Our assessment differs because we view DECC s Assessment of Impacts as having significantly underestimated delivery in the first three months of this year, which leads to an additional underestimate in the amount of levelisation mechanism uplift under current proposals. Association for the Conservation of Energy consultation response 9

10 DECC s and our overall estimate of the total number of solid walls delivered from January 2013 to March 2017 is similar (118,000 compared to 127,000). As can be seen in Table 1, the main difference is that we predict there to be in the dip in 2014/15 compared to the previous 15 months, with a resultant need to ramp up significantly from 2015/16, which entails a significant risk of back-loading of solid wall activity in the two year period to March Thus, the best way for a capped carry forward mechanism to work alongside the proposed SWI minimum threshold, whilst ensuring a reasonably consistent delivery profile, is to set an interim target for solid wall delivery (with all three sub-obligations allowed to contribute to it) for March 2015 which could simultaneously function as the cap for carbon carry-forward from that particular measure. The evidence provided above suggests that an interim target set as a carbon equivalent of 70,000 solid walled properties insulated that is 2.8 MtCO 2 would ensure consistency of delivery and sustain momentum, provided carry-forward of over-delivery against this target is not permitted. Additional, more detailed analysis relating to the proposed SWI minimum and an interim target is provided in response to Q Transfer of Obligation Activity Q8: Do you have views on whether the rules relating to transfer of activity can be improved or simplified? No. 2.5 The Energy Company Obligation to 2017 Q9: Do you agree that the ECO scheme should be extended from March to March ? Yes, it should be extended, but for longer. It should have been set for a period significantly longer from the outset, to match the rhetoric and send out clear long-term signals for investment. At this juncture, there is a renewed opportunity to set it to the end of 2022, whilst restoring the level of ambition to at least pre-autumn Statement levels from 1 April 2017 (coinciding with the end of the new incentives package of 540 million over three years). Association for the Conservation of Energy consultation response 10

11 [Missing question] Q10: Do you agree that new targets should be set for the subsequent period to March 2017 on the principle that the target is at the original level of ambition for ECO? This question was removed from the consultation document on the DECC website a few days after it was originally published. Cuts to ECO to achieve a bill-saving for households were proposed by Government on the basis that: a) The ECO would be restored to its original level ambition post March 2017 b) Which is why 540 million of public expenditure has been allocated over the same three year period to make up for the shortfall in carbon savings and ensure that the overall package of cuts to ECO and new public money maintains the original level of carbon savings envisaged. The removal of the question begs another: who has been writing the consultation document? SSE have already signalled they are pressing for a complete removal of the ECO* something that is not compatible with the intention to restore it to its original level of ambition post March The management of the ECO s development since the autumn of last year (be it DECC, Treasury or energy companies) has been characterised by spinelessness, duplicity and underhand tactics. It is time that DECC asserted itself and did not let its plans for achieving statutory carbon budgets be rubbished by vested interests. Of course the original level of ambition for ECO, which has been accounted for by DECC in carbon budgets up to 2022, must be at least restored, and strengthened. Numbering consistent with the consultation document currently on the website resumes from this point forward. * See Q10: Do you have a view on the modelling approach taken to set the 2017 targets, and are there other approaches the Government should consider? If so, please provide justification for your answer. No. The pro-rata extension principle is appropriate. However, we refer to our response to Q1 with respect to the cutting of the 2015 CERO target. Q11: Do you agree that the 2017 CERO target should be set at 12.4 MtCO 2? Although we agree with the pro-rata extension principle, we do not agree with the level of target, for the reasons provided in response to Q1. The CERO is being cut on the premise that its delivery was costing more than expected, even though the Government has failed to provide any clear and transparent evidence for this. Moreover, the latest evidence from ECO brokerage is that the cost of delivery, even prior to affording lower cost measures primary status, has been falling. Q12: Do you agree that the 2017 CSCO target should be set at 6 MtCO 2? Yes. Q13: Do you agree that the 2017 Affordable Warmth target should be set at 3.8 billion of lifetime notional bill savings? Yes. Although it is highly regrettable that the new fuel poverty strategy for England has not yet been published. It would have been very valuable for it to inform the direction of the Affordable Warmth programme over the next three years. Association for the Conservation of Energy consultation response 11

12 3 Incentive Schemes and Mitigating Proposed Reductions to Carbon Savings Q14: Do you agree therefore that work carried out to fulfil obligations under ECO should be additional to work funded under the incentive package? If yes, do you have suggestions on how this additionality could be ensured? Yes, in the strongest possible terms. It is regrettable that this consultation precedes any real evidence on what the incentives package is able to deliver in terms of carbon savings. Carbon neutrality must be ensured alongside carbon additionality. Over the three years to March 2017, our proposals for optimising CERO, would mean that 16 MtCO 2 are delivered through actual measures. This is 2.3 MtCO 2 more than under DECC s proposals for CERO. This gives the 540 of public money over the period a greater chance of success in maintaining carbon-saving parity with business as usual. To ensure additionality, we recommend that customers in receipt of the new incentives sign a statement which prevents them from accessing ECO funding. Ofgem must play the central role in monitoring and enforcing this. Association for the Conservation of Energy consultation response 12

13 4 Carbon Emissions Reduction Obligation Q15: Do you agree that all forms of cavity wall insulation, including standard easy to treat cavities installed from this April, should be eligible as a primary measure under CERO? Yes. We have always advocated this alongside the introduction of a solid wall minimum. Q16: Do you agree that loft insulation which is installed from April 2014 should be eligible as a primary measure under CERO? Yes. Q17: Do you think it would be appropriate to make provision to ensure that low income and vulnerable households benefit from the delivery of loft and easy to treat cavity wall insulation under the 2017 CERO target? Please provide views on any appropriate mechanism by which to do this. No. It would add complexity and cost. Moreover, it would be perverse to make this provision relating to low cost cavities and lofts without doing so for solid wall insulation as well. All households pay for CERO via their energy bills and while the incidence of fuel poverty (under both definitions) is higher in more expensive to treat solid-walled properties (see Table 2 and Table 3 below for England figures at the start of this year) the Government s distributional concerns with regard to CERO extend only to the lowest-cost measures. Put bluntly: this means subsidising high-cost measures for the able to pay, while subsidising only low-cost measures for those unable to pay. Table 2: Incidence of low income high costs (LIHC) fuel poverty in properties with different wall types, England 2014 estimate In cavitywalled In non-cavity-walled properties Total properties In fuel poverty 1,380,000 1,080,000 2,460,000 Not in fuel poverty 13,830,000 5,630,000 19,460,000 Total 15,210,000 6,710,000 21,920,000 Incidence of fuel poverty 9.1% 16.1% 11.2% Table 3: Incidence of 10% fuel poverty in properties with different wall types, England 2014 estimate In cavitywalled In non-cavity-walled properties Total properties In fuel poverty 2,970,000 1,850,000 4,820,000 Not in fuel poverty 12,240,000 4,860,000 17,100,000 Total 15,210,000 6,710,000 21,920,000 Incidence of fuel poverty 19.5% 27.6% 22.0% It is more appropriate to ensure that households supported under CSCO and especially Affordable Warmth are supported with full packages of measures, including loft and cavity wall insulation. This entails more expenditure per household supported (and thus fewer households supported under Affordable Warmth): it is thus necessary to either increase the total level of spending sought by the Government under Affordable Warmth, and/or to reinstate a publicly-funded fuel poverty programme in England. This would combine well with ECO support, as evidenced by the combination of CERT and Warm Front funding in support of low income and vulnerable households in the past. Association for the Conservation of Energy consultation response 13

14 Q18: Do you agree that heat networks (district heating schemes) should also become eligible primary measures under CERO from 1 April 2014? Yes. However, heat network projects are complex and need a long time to even reach a state of investment-readiness. It is therefore unlikely for the ECO to mobilise heat networks in any significant way within a short three year timescale. This reinforces the case for extending the ECO to the end of 2022 (see answer to Q9, which would provide clear signals for the longer term investment that heat networks require). Association for the Conservation of Energy consultation response 14

15 5 Carbon Saving Community Obligation Q19: Do you agree with the proposal to extend the number of eligible areas under CSCO from the lowest 15 per cent of areas, as identified using the Index of Multiple Deprivation, to the lowest 25 per cent of areas for measures delivered from 1 April 2014? Yes. The opportunity should be taken to consider how this extension could support a more fertile environment for area-based schemes. Q20: Do you agree with the proposal to change the criteria for measures installed under the CSCO rural sub target so that, measures delivered from 1 April 2014 can count towards the sub target if they are installed at any domestic property located in the poorest 25 per cent of rural areas, as well as to households living in rural areas that are in the Affordable Warmth Group. Yes. This should in principle work well with the proposals to incentivise more support for non-gas fuelled households in the Affordable Warmth Group. Association for the Conservation of Energy consultation response 15

16 6 Affordable Warmth Q21: Do you agree that an uplift should apply to the notional lifetime bill savings of non-gas fuelled households? Please provide views on the form and level of the uplifts as suggested above. We agree that delivery of measures to non-gas fuelled households under Affordable Warmth needs to be incentivised more strongly. The skew towards gas is all the more undesirable because fuel poverty is disproportionately concentrated in non-gas fuelled households. Table 4: Incidence of low income high costs (LIHC) fuel poverty in properties heated by gas or not by gas Gas-fuelled Non-gas-fuelled Total In fuel poverty 1,950, ,000 2,460,000 Not in fuel poverty 16,490,000 2,970,000 19,460,000 Total 18,440,000 3,480,000 21,920,000 Incidence of fuel poverty 10.6% 14.7% 12.6% Table 5: Incidence of 10% fuel poverty in properties heated by gas or not by gas, England 2014 estimate Gas-fuelled Non-gas-fuelled Total In fuel poverty 3,720,000 1,100,000 4,820,000 Not in fuel poverty 14,720,000 2,380,000 17,100,000 Total 18,440,000 3,480,000 21,920,000 Incidence of fuel poverty 20.2% 31.6% 22.0% While we recognise that options other than uplifts for incentivising improvements in non-gas fuelled households may be more complex to administer, we generally oppose uplifts as a mechanism if neater solutions exist for incentivisation. In the long-run, uplifts may require constant revision, depending on relative prices of fuels and other factors. Viewed in this context, other ways to incentivise delivery to non-gas fuelled households become more attractive, especially if as there is a good evidence base to inform other methods see our answer to Q22. Q22: Are there other practical and effective means of incentivising delivery to non-gas fuelled households? In particular we are interested in views on a minimum level of delivery and changing the baseline heating technology for the replacement of qualifying boilers. It is worth exploring the housing survey data to inform the choice of baseline heating technology assumptions for the replacement of qualifying boilers. We have analysed the latest English Housing Survey dataset to ascertain what the most common (if any) secondary heating systems were for each main heating system. For example, there is a strong evidence base to justify the assumption of a gasfuelled baseline heating technology in the case of a gas-fuelled qualifying boiler, as Table 6 shows. It prove to be straightforward to construct a matrix of baseline heating technology assumptions which can sufficiently incentivise delivery to non-gas fuelled households. Table 6: Most common secondary heating systems in properties with gas-fuelled primary systems, English Housing Survey 2011 Main heating system type Most common secondary heating system (if any) Fuel used for secondary heating gas combi ( ) gas fire mains gas gas combi condensing (2006+) none n/a gas fire electric room heaters standard tariff gas fire - back boiler gas fire mains gas gas standard ( ) gas fire mains gas Association for the Conservation of Energy consultation response 16

17 Main heating system type Most common secondary heating system (if any) Fuel used for secondary heating gas standard (pre-1998) gas fire mains gas gas standard condensing (2006+) gas fire mains gas gas warm air ( ) gas fire mains gas gas warm air (pre-1998) gas fire mains gas gas warm air condensing (2006+) gas fire mains gas For information, Table 7 shows the most common secondary heating systems and fuels used in homes with non-gas fuelled primary systems. Using the evidence in Table 6 and Table 7 as the baseline heating technology assumption for qualifying boilers may suffice for incentivising more delivery to non-gasfuelled households. Table 7: Most common secondary heating systems in properties with non-gas-fuelled primary systems, EHS 2011 Main heating system type Most common secondary heating system (if any) Fuel used for secondary heating biomass boiler stove wood biomass stove electric room heaters standard tariff biomass stove - back boiler stove wood coal boiler stove smokeless fuel coal stove electric room heaters standard tariff coal stove - back boiler stove smokeless fuel communal none none electric boiler none none electric heaters electric room heaters standard tariff electric storage - modern electric room heaters off-peak tariff electric storage - old electric room heaters off-peak tariff electric underfloor electric room heaters standard tariff electric warm air electric room heaters standard tariff ground source heat pump electric room heaters standard tariff LPG combi ( ) electric room heaters standard tariff LPG combi (pre-1998) electric room heaters standard tariff LPG combi condensing (2006+) electric room heaters standard tariff LPG fire gas fire bottled gas - propane LPG fire - back boiler LPG room heaters bulk LPG LPG standard ( ) open fire smokeless fuel LPG standard (pre-1998) open fire smokeless fuel LPG standard condensing (2006+) stove smokeless fuel oil combi ( ) open fire smokeless fuel oil combi (pre-1998) open fire smokeless fuel oil combi condensing (2006+) stove smokeless fuel oil standard ( ) open fire smokeless fuel oil standard (pre-1998) open fire smokeless fuel oil standard condensing (2006+) open fire smokeless fuel oil warm air open fire smokeless fuel Association for the Conservation of Energy consultation response 17

18 Q23: Do you agree that broken or not functioning efficiently electric storage heaters should be scored on the same basis as that used for qualifying boilers? Do you foresee any unintended consequences of this approach? Yes. Although an uplifted score may be a more appropriate approach, as the evidence from the English Housing Survey suggests that the most common form of secondary heating in homes with storage heating are off-peak electricity fuelled electric room heaters (see Table 7). Q24: Do you have any views to why packages of measures may not be being delivered to Affordable Warmth households? It is clear that much the cheapest way of meeting the Affordable Warmth target is to install single measures (mostly boilers). This is borne out by DECC s Affordable Warmth statistics to the end of January 2014, which show that, out of 273,000 measures installed, 192,000 were boilers, compared with 35,000 loft insulations, 35,000 heating controls and 9,700 cavity wall insulations. With a total of 229,000 households receiving measures, a maximum of only 20% of these households will have received more than one measure. In most cases, boilers are likely to offer the single largest heat cost reduction. As the marginal heat cost reductions obtainable from additional measures fall once a new boiler is installed, it appears to be generally more cost-effective for suppliers to move on to the next household and install another boiler than to install a full package of measures. Q25: Do you have any views on whether incentivising or, where applicable, requiring packages of measures is justified? Do you think there would be any unintended consequences from such a change to the policy and if so, what would they be? With a maximum of 20% of households having received more than one measure to date, it is highly likely that a great many opportunities to install packages of measures which achieve greater heating cost reductions are being missed. Fuel poverty programmes have rightly focused on delivering comprehensive support to low income and vulnerable households, going beyond even packages of energy improvements to offer financial support with bills and checking benefits entitlements. Incentivising or requiring packages of measures, on the basis of the available evidence, and based on precedent, is more than justified. The simplest solution would be to require packages of measures (e.g. loft and cavity wall insulation where a boiler, with heating controls as necessary, is installed). We recognise this reduces number of households that can be supported for 350m per annum, but it is far better in principle for: wholehouse retrofit; compatibility with mandatory minimum energy efficiency standards; likely energy efficiency improvement based target under the forthcoming fuel poverty strategy; more comprehensive support for low income and vulnerable households. Requiring packages of measures is simply the correct basis for scheme, especially if it is to be scaled up in future. Association for the Conservation of Energy consultation response 18

19 7 Solid Wall Insulation Minimum Threshold Q26: Do you agree that there should be a SWI minimum figure equivalent to 100,000 properties insulated with SWI by 31 March 2017? Should this be set as number of properties, or as a carbon equivalent? If the former do you have any views on how this should be set? If the latter, do you have suggestions as to how the target should be calculated? Yes, there should be a SWI minimum but the minimum put forward is too low and would be excessively detrimental to an industry which has invested heavily in scaling up. The target should be set in terms of both the number of properties and carbon. If it is not set as both, then carbon is preferable. Any target should be based on 40 MtCO 2 per solid wall job. Our package of optimisations to DECC s proposals for cutting and changing CERO, summarised in the preamble to this response and provided in full in Appendix I, increases the likely delivery of SWI to March Table 8, which adds to Table 1 (presented in response to Q7) shows that our optimisations to CERO would mean that across CERO and CSCO, the total number of SWI jobs is likely to be 145,000 27,000 more than in DECC s assessment. Table 8: Estimated solid wall delivery to March 2017 CERO (DECC assessment) CERO (our assessment without optimisations) CERO (our optimisation package) CSCO (DECC) Total (DECC) Total (ACE, optimised CERO changes) Difference Delivery Jan 2013 to Mar ,000 40,000 40,000 3,000 27,000 43,000 16,000 Delivery Apr 2014 to Mar ,000 6,000 26,000 11,000 29,000 37,000 8,000 Average annual delivery Apr ,500 25,000 24,000 8,500 31,000 32,500 1,500 to Mar 2017 Total 87,000 96, ,000 31, , ,000 27,000 Given that DECC proposes a SWI minimum of 100,000 against an expectation of 118,000 being delivered, we recommend a higher SWI minimum because our package sees 145,000 SWIs delivered whilst still achieving the reduction in pass-through costs on to household bills of as well as smoothing the delivery of CERO work in the three years to March We think that the SWI minimum can very safely be set at 125,000 properties / 5 MtCO 2, which would go some way to reducing the detrimental impact on the industry of the proposed changes to CERO. In addition, to ensure delivery is smooth over the period and does not result in an attempt by energy suppliers to delivery everything towards the end of the programme (as was seen under CESP), we recommend setting an interim target of 70,000 properties / 2.8 MtCO 2 for the end of March 2015 (see our response to Q7 for additional rationale for an interim SWI target). This compares favourably with our expectation of 80,000 by then under our optimisation package, and reasonably favourable with DECC s (outdated) assumption of 56,000 by the same date. Association for the Conservation of Energy consultation response 19

20 Q27: Do you agree that we should specify SWI lifetimes in legislation for installations accompanied with an appropriate guarantee, and do you have any views on what the specified lifetime should be? Yes. 36 years, and this should remain under review, to a schedule agreed with industry. Q28: Do you have a view on whether lifetime for other measures should also be set in legislation, and if, which measures? Yes, for all measures. Lifetimes used should remain under review, to a schedule agreed with industry. Q29: Do you agree that the SWI minimum threshold should be apportioned according to market share, and if so, should this be calculated on a phased basis? And if so, what principles should apply? Yes. It should be calculated on a phased basis constructed around the principle of an interim target of 70,000 / 2.8 MtCO 2 by March 2015 (see also answers to Q7 and Q26). Q30: Do you agree that secondary measures installed alongside SWI should not be counted towards the proposed SWI minimum threshold? What are the practical implications of this proposal, for instance, brokerage trading? We agree. This requires separate brokerage for the SWI sub-obligation, with attendant implications and requirements for greater information provision in brokerage offers, such as: the ratio of SWI carbon saving to secondary measure carbon saving, as well as number of properties treated. Association for the Conservation of Energy consultation response 20

21 8 Blended ECO and Green Deal Finance Q31: Were we to take legislative action, what would be your preferred option based on those set out above? Do you agree that scoring uplifts is likely to be the optimum approach? No. Uplifts creep must be avoided, as cuts to carbon ambition are already well in excess of what is needed to deliver the cost saving aimed for by DECC, as summarised in the introduction to this consultation response and explained in detail in Appendix I. Moreover, having failed to underpin the Green Deal in its original incarnation, an emaciated CERO is certainly not the appropriate vehicle for attempting (and failing) to prop the Green Deal up further. The legislative approach to take, if any, should be an additional and separate sub-obligation (the Blended Finance Challenge Obligation (BFCO)). Q32: What are your views on a scoring uplift for blended finance and could you provide evidence for your view? See answer to Q31. Q33: Please provide views on whether, and if so, the extent to which Affordable Warmth measures should be part funded by customer contributions and other types of finance. We favour the provision of Affordable Warmth measures free to eligible households and are concerned at indications that under the current system, low income households who cannot afford the often significant customer contributions are effectively disenfranchised from the scheme. Such households tend to be to most in need. We also note that under the current market mechanism encouraged to deliver ECO, in particular the brokerage system, it is extremely difficult to see how customer contributions could be removed from the scheme, or even regulated to prevent excessive charges being required. We believe that much more information is required on this issue to understand the extent and level of customer contributions required. We recommend that a comprehensive assessment be conducted to determine the type and profile of households receiving assistance under Affordable Warmth, the range of and average customer contributions required and the number and profile of the households who do not proceed with the work because they are unable or unwilling to pay the customer contribution. The outcome of this proposed assessment should then be used determine the answer to this question. Q34: Do you believe there is a case to limit customer contributions under Affordable Warmth? Yes, notwithstanding the difficulties set out in response to Q33. Association for the Conservation of Energy consultation response 21

22 9 Recognising Company Performance Q35: Do you agree with the above levelisation proposals for recognising and rewarding early progress, and do they sufficiently address any adverse competitive implications of the other proposed changes to CERO? We understand the case for levelisation with respect to ensuring that individual suppliers to not benefit disproportionately from the introduction of loft insulation and easy-to-treat cavities as primary measures under CERO. We take strong issue with the notion that the levelisation mechanism is rewarding early progress the benchmark for early progress that is being proposed is equivalent to having achieved more than only 19% of the original CERO target at 55% of the way to March Even allowing for a slow start to CERO delivery, this is an incredibly low bar. Under current proposals, five of the large obligated companies are sure to benefit from the levelisation mechanism, with the sixth looking likely to benefit 4. Given that the bar has been set so low, a benefit to all sends out completely the wrong signal. If a benefit to all was intended to ensure that the CERO ambition is reduced sufficiently drastically to achieve the bill saving aimed for, then DECC should have made this plain in the consultation documents. If this has been the true intention, then the levelisation mechanism as proposed is contributing to a greater than required reduction in the CERO ambition: DECC has underestimated the level of CERO carbon savings to March 2014 from the Assessment of Impacts, DECC s assumption is that approximately 5.3 MtCO 2 have been delivered. Under current proposals, this leads to an uplift of 1.0 MtCO 2 (assuming primary carbon savings constitute 94% of CERO progress). DECC s consultation documents pre-date the latest available ECO measures notifications to the end of January Assuming delivery in February and March of this year has been equal to the average of November, December and January 5, then 7.2 MtCO 2, not 5.3 MtCO 2, have been delivered so far. Taking into account suppliers progress to their individual CERO targets, we estimate the levelisation uplift to be 2.0 MtCO 2. After carry-over and the 33% cut, we estimate that only 1.3 MtCO 2 need to be delivered in 2014/15. Based on the above, and as Appendix I lays out in full, the likely CERO delivery cost in 2014/15 is an average of 3 per household. Business as usual CERO delivery would have cost per household (after carry-forward from CERT and CESP already expected). This is a reduction of 41.90, in excess of the saving sought this year. We estimate the suppliers ECO-related rebates and bill reductions this year to average per customer. With the reduction in ECO costs at 41.90, this represents an average windfall from each customer of 9.55; an aggregate windfall to energy suppliers of 245 million. On this basis, and at a delivery cost under the new CERO rules of 60/tCO 2, there is scope for delivering up to an additional 4.0 MtCO 2 in the year to March 2015, which would avoid any windfall. As a result, one component of our optimisations to the CERO changes is make levelisation carbon neutral, by rewarding and penalising energy suppliers depending on how they performed against an uplift threshold: a bonus-malus scheme. This: 4 British Gas is the sixth, at 32% of the way to Phase I and II CERO obligations, and still without measures notified to the end of March See 5 Even this is likely to be an underestimate as December is a slow / short month. Association for the Conservation of Energy consultation response 22

23 o o o Requires 2.0 MtCO 2 more to be delivered in the year to March 2015, which reduces the windfall by approximately half); Has the benefit of sending out a clearer message regarding energy company performance to date, avoiding the precedent of rewarding everyone for a mediocre to poor performance; And goes some way to avoiding a very damaging hiatus in activity under CERO to March In addition to implementing levelisation as a bonus-malus (or uplift- downlift ) mechanism, we propose that the uplift/downlift threshold be set at 57% of Phase I and II of the current CERO obligation. We estimate this to be the aggregate large supplier progress against the Phase I and II targets at the end of March 2014 a logically sound benchmark against which to reward over-performance and penalise under-performance. Furthermore, though less material in a carbon neutral levelisation mechanism, a more precise uplift/downlift factor to use is 1.67 (the ratio of 100/tCO 2 to 60/tCO 2 delivery cost). Taken together, Figure 5 shows the effect of our proposed levelisation mechanism on each of the large obligated companies. Figure 5: Uplifts and downlifts for each of the large obligated suppliers, based on our estimate of delivery by March 2014 Q36: Do you agree that the uplift threshold should be set at 35 per cent (primary measures only) of Phase 1 and 2 of the current CERO obligation? We agree the threshold should only relate to carbon savings achieved by primary measures. We do not agree with the threshold proposed, nor the structure of the mechanism (see answer to Q35). We propose that the uplift/downlift threshold be set at 57% of Phase I and II of the current CERO obligation. We estimate this to be the aggregate large supplier progress against the Phase I and II Association for the Conservation of Energy consultation response 23

24 targets at the end of March 2014 a logically sound benchmark against which to reward overperformance and penalise under-performance. Q37: Do you agree that an uplift of 1.75 should be applied to primary measures above the proposed 35 per cent threshold installed by the end of March 2014? No. Implementing levelisation in a carbon neutral way makes the uplift factor immaterial in terms of its effect on carbon savings, so its main determinant should be logic. DECC puts forward an uplift factor of 1.75, based on the relationship between delivering more expensive measures to date (at 100/tCO 2), and a greater share of cheaper measures from now on (at 60/tCO 2). A more precise uplift factor ( 100 divided by 60), and the one we propose, is thus Q38: Do you agree that Government should consider adopting a different approach to the delivery of SWI as part of the levelisation exercise? Should delivery of SWI above the expected delivery profile for individual suppliers at 31 March 2014 be permitted to count towards the 35 per cent levelisation threshold? In light of our proposals for levelisation in answer to questions Q35-37, and our answers pertaining to the SWI minimum in response to Q7 and Q26, we do not see a need for distinct treatment of SWI under the levelisation mechanism. Q39: Do you agree we should amend the legislation to allow the optimum carry forward of excess action from CERT and CESP? Q40: In amending the legislation (as set out above) should we allow the process for notifying and approving excess actions to rerun in its entirety? [Answer is to both Q39 and Q40.] No. Neither. Allowing optimum carry forward from CERT and CESP, as well as a re-run, is surplus to requirements. It results in too large a saving in the costs of CERO delivery. Proposals as they stand would result in a windfall to the large obligated companies of 9.55 per household ( 245 million on aggregate) in 2014/15, over and above the rebates and bill reductions they are providing to customers in relation to the ECO. Aside from reducing the energy company windfall to 6.55 per household ( 165 million on aggregate) and reducing the severity of the hiatus in CERO activity the industry currently faces, not implementing optimum carry forward rules and allowing a rerun: a) Avoids setting the precedent of changing the carry-over rules post-hoc; such a precedent would cause uncertainty and instability for future supplier obligations. b) Avoids further delay in establishing what the level of carry-over from CERT and CESP will be. The proposals put forward would probably mean that the level of carry-over would not be known until well into next year. Association for the Conservation of Energy consultation response 24

25 10 Transfer and re-election of Adjoining Installations, Qualifying Actions, and Excess Actions Q41: Do you agree we should change the rules, as set out above, to: No answer. Align the notification arrangements for Adjoining Installations with the arrangements for Qualifying Actions. Introduce greater clarity on the rules on the re-election and re-elections after transfer of Qualifying Actions, to ensure flexibility and aligning the rules on Excess Actions with these changes. Extending the final date for transfers by one month to align with the final notification date for work completed under ECO. Q42: Are there any further technical changes we could make to the rules on Qualifying and Excess Actions which would add flexibility, but without undermining the scheme objectives? No answer. Association for the Conservation of Energy consultation response 25

26 11 The Customer Experience Q43: Can you provide evidence for the need to strengthen consumer protections under ECO? If so, what do you suggest are the best options for strengthening consumer protection? No. Q44: Do you agree that boiler replacements should require a warranty to cover parts and labour, which should not be invalidated by incorrect installation/commissioning, and that it should provide for the actual repair/replacement rather than compensation? Yes. Q45: Do you have views on what minimum period such a warranty should cover? No. Q46: What are your views on how we should reflect the more stand-alone nature of electric storage heaters within this proposal? We do not think that electric storage heaters should require a warranty to cover parts and labour in the same way as is being proposed for boilers. Q47: Do you believe that there are grounds for concern around the quality or nature of Affordable Warmth installations? If so, how should concerns be addressed? We defer to our Members and other companies in the industry to provide evidence in answer to this question. Q48: Do you believe that additional safeguards are required to ensure the quality of installations under Affordable Warmth, and if so, in what form? See answer to Q47. Q49: Do you believe the current means of checking the requirements of eligibility for a qualifying boiler are appropriate? Do you have any suggestions on how this could be improved? See answer to Q47. Q50: Do you think any changes to the definition or guidance on what constitutes a qualifying boiler, for both repair and replacement, are necessary? If so, what changes would be suitable? See answer to Q47. Q51: What evidence can you provide on the reasons for limited levels of boiler repairs rather than replacements? Though we assume the reasons relate to the heat cost reduction scores and the resultant relative attractiveness of replacements compared to repairs for meeting the Obligation (similar issues might underlie the lack of packages being installed under Affordable Warmth), we defer to our Members and other companies in the industry to provide evidence in answer to this question. Q52: Do you have a view on whether measures funded through ECO from April 2015 should be recommended on the basis of a GDAR? In which case, do you have a view on whether Chartered Surveyors Reports should only be used to recommend measures in exceptional circumstances only? And if so, what should constitute an exceptional circumstance? Association for the Conservation of Energy consultation response 26

27 No, they should not have to be recommended through a GDAR. It would add unnecessary cost, time, complexity and inconvenience at a time when the object of the exercise has been to reduce the costs of ECO delivery. Using Affordable Warmth as a vehicle for leveraging Green Deal finance and incompatible with its objectives. Q53: Do you have other views on improving accuracy of assessments, for example the use of lodged EPCs? The accuracy of assessments needs to improve continually. However, we do not know whether lodged EPCs would achieve this, or merely increase cost. Q54: Where GDAR s are a paid for service when recommending Affordable Warmth measures, we welcome views on where any cost would likely - or indeed should sit. GDARs should not be used to recommend Affordable Warmth measures. Where a household receives a GDAR and is identified as eligible for Affordable Warmth support, it should certainly not have to cover the cost of the GDAR. Q55: Do you have a view on whether measures promoted under ECO from April 2015 should be delivered by an accredited Green Deal installer and/or an installer who is PAS2030 certified? PAS 2030 compliance, accompanied by a robust and independent monitoring system to check the actual quality of installations, is sufficient on its own. The ECO should not serve as a crutch for Green Deal finance. Q56: Do have a view on whether there is value in a demand aggregation service for the carbon elements of the ECO obligation? If so, is ESAS the most appropriate provider of this service? Of course there is. There should be a single national point of contact, in Scotland and the rest of Great Britain respectively, for enhancing customer understanding and effective delivery of all parts of the ECO, and the Green Deal. ESAS would be the most appropriate provider of this service. For customers to have to figure out which of two services to contact for advice would be completely absurd. Q57: Please provide views on the current administrative cost of checking Affordable Warmth Group eligibility and any other actions taken to meet Affordable Warmth Group audit requirements. We do not have a view. Q58: Do you agree that DECC should safeguard the continued existence of the ESAS referrals service for Affordable Warmth? If so, how? Yes. Additional DWP data-matching services accessed by obligated energy companies should come with a requirement to continue taking leads from ESAS. Q59: Please provide views on whether there are wider developments and improvements to the ESAS Affordable Warmth referrals service which DECC should consider. Improvements to the service must be possible, but we do not hold views on this. Association for the Conservation of Energy consultation response 27

28 12 Managing costs and ensuring transparency Q60: In light of the proposed changes to ECO, can you provide new evidence that may warrant a change it the current Government s position on mandating brokerage? Do you believe a case now exists for regulating participation on the brokerage platform, for example, by requiring energy companies to deliver a proportion of their ECO obligation through the platform? Are there other options available to Government to ensure our objectives for a competitive energy efficiency market can be met? The imperatives and benefits from regulating participation in brokerage are two-fold: enabling greater competitiveness, and ensuring cost transparency. However, the system as currently implemented is unable to guarantee quality of the work procured. Regulating participation in brokerage thus requires more sweeping changes to the way it currently operates; changes that may be beyond the scope and timeframe of this consultation and the ECO to March Nevertheless, some of these changes may already prove necessary, for example relating to the treatment of the solid wall minimum within brokerage. Government should engage closely with the supply chain with a view to mandating participation in brokerage at a later stage. Q61: Do you have views on the accounting treatment of the obligation? None specific. The object of the exercise must be to ensure that any the accounting treatment of the ECO facilitates greater cost transparency. A lack of cost transparency to date has made the ECO vulnerable to attack, and invulnerable to proper scrutiny of arguments against it. Q62: Government invites views on what elements of the ECO scheme rules would benefit from simplification, and if so, how this can most effectively be done while still ensuring that the scheme objectives are met and the schemes integrity maintained? Far from requiring GDARs in the ECO, we believe there is scope for simplifying at least the Affordable Warmth part of the ECO by reintroducing deemed scores (expressed in terms of heating cost reductions), similar to those last seen under CERT. On notification and reporting procedures: with shortcomings in delivery cost transparency, it is certainly worth retaining the ability to track performance in a timely and accurate fashion. Association for the Conservation of Energy consultation response 28

29 13 Wider Issues Q63: Government invites views on whether there are improvements that could be made to the ECO scheme on a longer term basis to ensure the scheme can best meet its objectives. We welcome evidence justifying the case for change. We do not think that views on improving the ECO on its own terms can be meaningful without considering the context and wider policy framework within which the ECO operates. The list below is of course far from exhaustive, and lacking in detail. We believe this to be commensurate with the importance DECC is likely to afford responses to this question. Involve all stakeholders as fully in the programme s ongoing development as the obligated energy companies have been. Do not develop ECO in the vacuum of its impact on consumer bills. Produce a proper long-term strategy for reducing carbon emissions from the built environment, based on full stakeholder engagement, and commensurate with Carbon Budgets to at least 2032, and delivering carbon savings both at least cost, and fairly with a view to eliminating fuel poverty. Then place and co-develop the ECO, RHI, Feed-in Tariffs, Building Regulations, Green Deal, smart meter rollout and other programmes and regulations in that context. Regrettably, already: o The ECO is not being developed in the context of the forthcoming fuel poverty strategy, certainly not publicly. o Nor has the new incentives package been publicly consulted upon, despite its design having enormous implications for the current proposed changes to ECO and vice versa. In the context of a proper long-term strategy, assess, consult on and define the role of other instruments, or profound changes to existing ones: o Recycle carbon tax revenues into energy efficiency programmes, as the European Commission recommends. o Hedge the programme risk: such as by re-establishing a publicly-funded fuel poverty programme in England to complement the ECO and consider introducing further separate mechanisms to reduce and streamline the ECO s bewildering array of concurrent objectives, currently comprising at least: Alleviating fuel poverty Reducing carbon emissions Supporting the growth of the solid wall insulation industry (at least prechanges) Delivering on an area-basis Delivering to rural communities Propping up the Green Deal o Extend timeframes and scope of mandatory minimum energy efficiency standards beyond those currently in train for the private-rented sector o Introduce fiscal incentives (stamp duty, council tax) o Provide long-term financial support for community projects o Encourage the development of a plurality of financial products and move away from a singular commitment to Green Deal finance There is a role for an Energy Company Obligation, not least because it is one of the few means by which an energy efficiency programme can be successfully implemented in the medium to long- Association for the Conservation of Energy consultation response 29

30 term (as has been seen in many other OECD countries). However, its structure should not be a foregone conclusion, for example: o Consider the future implementation of the Obligation as a levy this would ensure full cost transparency and open up a wide range of options for deploying funding. o Revisit the question of setting the Obligation as a cap on energy consumption, or a cap on non-traded carbon emissions. o Carefully consider the unintended consequences, both positive and negative, for the energy market and how it interacts with customers Association for the Conservation of Energy consultation response 30

31 Appendix I Optimising CERO changes Adjusting DECC Impact Assessment for likely CERO delivery to March 2014 The pie-chart below outlines the make-up of delivery of the original March 2015 CERO target of 20.9 MtCO 2, as affected by the changes proposed in the consultation. Without the proposed changes, it shows that 45% of the target is very likely to have been met by the end of March of this year. This is comprised of: 11% of the target being met through existing arrangements for carry-over from CERT and CESP; And 34% through delivery under CERO. The latter equivalent to 7.2 MtCO 2, which assumes delivery in February and March to have been the average of delivery rates observed in November, December and January is in excess of DECC s estimate of 5.3 MtCO 2 delivered under CERO to March of this year. Adding in the proposed changes to CERO a 33% reduction in the target, the levelisation mechanism, arrangements for additional carry-over only 6% of the target remains to be delivered over the 12 months from April 2014 to March This is approximately half of DECC s projection of what would be delivered in this 12-month period. The proposed changes reduce the original CERO ambition to March 2015 by 49%. Figure 6 illustrates the constituent parts of the original CERO target as affected by delivery to date and the changes proposed in the consultation. Figure 6: Composition of original CERO target of 20.9 MtCO 2 under changes proposed in the consultation Association for the Conservation of Energy consultation response 31

32 Under business as usual, a further 11.4 MtCO 2 would have had to be delivered from this April to March This has become 1.3 MtCO 2 (indicated by the dark blue slice in Figure 6) a nearly 90% cut. Both scenarios, expressed in terms of the mix of measures to deliver these carbon savings, are illustrated by the first and third columns respectively in the annotated chart below. Figure 7: Number and type of measures delivered under different circumstances, with focus on current proposals likely outcome The first column in Figure 7 shows the original CERO delivery profile and what would need to be delivered to meet the original CERO target (after allowing for carry-over from CERT and CESP 6 ). It comprises a mix of measures dominated by hard-to-treat cavities and solid wall insulation, estimated by DECC to cost 100 per tonne of CO 2 saved. The mix of measures is the same as that seen in CERO to date. On this basis, the average pass-through cost onto each household bill relating to CERO alone 7 would have amounted to for the 12 months to March The inclusion of cheaper measures as CERO primary measures alters the measures mix lofts and easyto-treat cavities will make up a greater proportion of CERO measures delivered, with solid wall insulation and hard-to-treat cavities comprising a smaller proportion. The mix of measures shown in the second through to fifth columns of Figure 7 is consistent with the mix of measures estimated for CERO in Table 22 of DECC s Assessment of Impacts. DECC believes the cost per tonne of carbon saved for these will be similar to that seen under CSCO to date: 60 per tonne of CO 2. Using this measures profile, Figure 7 shows: In the second column, DECC s assumption for the CERO measures delivered in the 12 months to March This is equivalent to a 2.5 MtCO 2 saving, nearly twice as much as required to meet 6 Shown by the purple slice in Figure 6. 7 A small additional saving in the likely pass-through cost of CSCO is also anticipated. Association for the Conservation of Energy consultation response 32

33 the reduced March 2015 CERO ambition. At 60/tCO 2, this represents a pass-through cost of 5.80, a saving of compared to business as usual. In the third column, the likely outcome for the 12 months to March 2015: the mix of measures needed to deliver 1.3 MtCO 2 (equal to the dark blue slice in Figure 6). As mentioned above, this represents a near 90% reduction in activity in the 12 month period compared to what the supply chain had been gearing up for prior to last year s Autumn Statement. This is equivalent to a pass-through cost of 3; a saving of compared to business as usual. In the fourth column, the annual level of activity and mix of measures required to meet the twoyear ECO target from April 2015 to March 2017 (12.4 MtCO 2; 6.2 MtCO 2 each year on average). Under current proposals, and having scaled back activity dramatically in the 12 months to March 2015, the CERO supply chain would need to increase its capacity nearly five-fold again to deliver this. The fifth column shows the annual profile of CERO delivery that is possible if the 1.3 MtCO 2 savings that are needed in the 12 months to March 2015, and the 12.4 MtCO 2 that are needed over the two years after that, were delivered evenly over the whole three year period. The annual pass-through cost would still be lower than under CERO business as usual. As a result of the reduced ambition for CERO the likely outcome is that the average pass-through cost onto each household bill is set to fall from (first column) to 3 (third column) for the 12 months to March This is a reduction in pass-through costs relating to CERO alone of Given that the object of the exercise is to make changes to the ECO commensurate with a saving passed on to consumers by obligated energy companies, the proposals as they stand result in a windfall to energy companies of between 6.90 and The consultation proposals thus overegg an already poorly conceived pudding. Based on energy suppliers announcements and their residential market shares, we estimate the announced bill reductions and rebates relating to the ECO changes to come out at an average of per household. Under current proposals, this represents an average windfall to suppliers of 9.55 in 2014/ million in total. This is wholly unnecessary. It is bad for consumers, further undermines Government s credibility, and is even more damaging to the supply chain than anticipated. The solution is not to ask suppliers to hand more back, but to adjust the proposed changes to CERO to bring the bill saving back into line with what has been pledged. It is a true win-win opportunity: as the fifth column in Figure 7 suggests, there is scope to do this in a way which: a) Still achieves a sufficient saving in the pass-through cost of CERO ( being within the range) b) Avoids a windfall to suppliers c) Results in a far more sustainable outcome for the CERO supply chain over the three years to March To achieve this, have explored how a delivery profile similar to that in the fifth column in Figure 7 i.e. a profile of more delivery could be incentivised for the 12 months to March 2015 by adjusting: the additional carry-over proposals; the levelisation mechanism; and the cut in the March 2015 target. In doing so, we have sought to build upon and enhance the principles used by DECC in the consultation. Association for the Conservation of Energy consultation response 33

34 Remove additional carry-over proposals The first-best option is not to implement proposals for additional carry-over from CERT and CESP. This ensures more carbon savings need to be delivered to March 2015, which moves in the direction of a smoother delivery profile over the three-year period to March Crucially, not implementing additional carry-over arrangements: c) Avoids setting the precedent of changing the carry-over rules post-hoc; such a precedent would cause uncertainty and instability for future supplier obligations. d) Avoids further delay in establishing what the level of carry-over from CERT and CESP will be. The proposals put forward would probably mean that the level of carry-over would not be known until well into next year. As Figure 8 shows, the effect would be to increase the carbon savings deliverable to March 2015 from 1.3 MtCO 2 to 2.6 MtCO 2 (the dark blue slice). Figure 8: Composition of original CERO target of 20.9 MtCO 2 under changes proposed in the consultation, minus additional carryover As the third column in Figure 9 below shows, this still results in a large reduction in pass-through cost compared to business as usual. The windfall to energy companies is now lower, a more modest but still substantial average of 6.55 per household million in total in the 12 months to March Activity levels would be 80% lower rather than 90% lower, and the ramp-up in activity required for the subsequent two years to March 2017 (fourth column) would require a doubling, not a quintupling, of CERO supply chain capacity. Association for the Conservation of Energy consultation response 34

35 Figure 9: Number and type of measures delivered under different circumstances, with focus on removal of additional carry-over Because the removal of the additional carry-over proposals increases the amount of carbon saving required in the 12 months to March 2015 by 1.3 MtCO 2, the total in the three years to March 2017 increases by the same amount, from 13.7 to 15 MtCO 2. As shown by the fifth column in Figure 9, delivering these 15 MtCO 2 evenly over the three years averaging 5 MtCO 2 per year would still deliver pass-through cost savings each year of compared to BAU. This is broadly in line with the saving sought. However, removal of the additional carry-over carbon savings is insufficient to incentivise a level of delivery equivalent to smooth delivery over the three years to March The next section focuses on how additional delivery in the year to March 2015 can be incentivised further, while: a) Still achieving the envisaged saving; b) And reducing damaging disruption to the supply chain by smoothing delivery. Association for the Conservation of Energy consultation response 35

36 Incentivising additional delivery in 2014/15 and smoothing delivery to 2017 Improving the levelisation mechanism In part the proposed levelisation mechanism is intended to ensure that change to CERO are fair and equitable to energy suppliers. In other words, that those energy companies who have delivered relatively slowly to date to not benefit disproportionately (compared to those who delivered relatively quickly) from the ability to meet their remaining March 2015 target with a lower-cost mix of measures. The Government recognises that it would be inappropriate to reward all obligated companies with an uplift of 1.75 on carbon savings delivered above a set share of their Phase I and II CERO obligations. This proposed share, or threshold, is 35% of the CERO Phase I plus II target. Based on the rate of delivery we have projected to the end of March 2014 (the Phase II target date), we estimate that all of the large obligated suppliers have crossed the threshold, and all stand to gain from the 1.75 uplift on carbon above that threshold. As shown in Figure 6, this reduces the original CERO obligation by 2 MtCO 2. We propose three changes to the levelisation mechanism: 1. That the threshold should not be set at 35% of meeting the Phase I plus II target. This is equivalent to having only met 19% of the original CERO target at 55% of the way to March This is far too low. We propose setting the threshold at the estimated aggregate proportion of the Phase I plus II target met at the end of March. We estimate this to be 58%. 2. DECC puts forward an uplift factor of 1.75, based on the relationship between delivering more expensive measures to date (at 100/tCO 2), and a greater share of cheaper measures from now on (at 60/tCO 2). A more precise uplift factor, and the one we propose, is thus Finally, incorporating the above two points, we propose changing the levelisation mechanism from being purely a bonus system to a bonus-malus mechanism. Companies that did not reach the 58% threshold should have their shortfall in carbon savings increased by a factor of 1.67 (a downlift ). The net effect of a bonus-malus mechanism on this basis is carbon neutral, as shown in Figure 5 below. We believe this mechanism to be fair and equitable. It both rewards over-performance, and penalises under-performance, against a benchmark that the energy companies have collectively set themselves not against a benchmark that has been set arbitrarily. It also eliminates net carbon uplifts which in our assessment are in excess of the intention to save on the average household bill through cuts to CERO. Association for the Conservation of Energy consultation response 36

37 Figure 10: Uplifts and downlifts for each of the large obligated suppliers, based on our estimate of delivery by March 2014 As shown in Figure 11, making the levelisation carbon neutral by implementing it as a bonus-malus mechanism increases the amount of carbon saving that needs to be delivered to March 2015 by a further 2 MtCO 2 to 4.5 MtCO 2 (equivalent to transferring the green slice in Figure 8 to the dark blue slice). Figure 11: Composition of original CERO target of 20.9 MtCO 2 under our proposed optimisation package Association for the Conservation of Energy consultation response 37

38 The CERO cost saving in the year to March 2015, compared to business as usual, falls compared to Figure 9: from to This is shown in the third column of Figure 12 below. Figure 12: Number and type of measures delivered under different circumstances, focus on removal of additional carry-over and improved levelisation mechanism Now, the likely outcome for 2014/15: Still delivers a sufficient saving in pass-through costs; Represents a reduction in carbon savings delivered (compared to business as usual) of 60%, not 90%; And is at three quarters the level of activity needed to deliver the new CERO target in the two years to March 2017 (as opposed to one fifth of that level). To ensure that delivery to this level by March 2015 is firmly incentivised, we propose increasing the penalty factor for not meeting the March 2015 target put forward by DECC at 1.1 to Setting the penalty factor at the same level as that used for uplifts and downlifts in the levelisation mechanism is consistent with DECC s press release announcing ECO proposals last December: In addition, there will be incentives for quick delivery, which would save people money sooner [refers to uplifts under the levelisation mechanism]. Energy companies that fall short of their new 2015 delivery targets will have their 2017 target increased by the same multiple. (DECC, 2013, our emphasis 8 ) 8 Association for the Conservation of Energy consultation response 38

39 Potential for going the extra mile To bring the annual level of CERO delivery in the year to March 2015 even closer to that required over the two subsequent years to March We propose an uplift for any carbon delivered in excess of the 4.5 MtCO 2 shown by the third column in Figure 12. At the limit, to ensure that the saving in passthrough cost compared to business as usual in 2014/15 is no less than (our estimate of the energy suppliers average household rebate / bill reduction), carbon savings delivered in 2014/15 should be no more than 5.3 MtCO 2. This is 0.8 MtCO 2 in excess of the carbon savings set out in Figure 12. Any uplifts granted should only apply up to a maximum of 0.8 MtCO 2 over-delivery against the March 2015 target. Further over-delivery should be carried over to the post March 2015 targets as normal. We do not hold a view on what the appropriate level of uplift for incentivising additional action should be, but have calculated that, at the boundary, an uplift of 2.3, if fully utilised, would result in a level of carbon savings in 2015/16 and 2016/17 which would equal those in 2014/15: 5.3 MtCO 2. This would translate into a level of activity that is consistent across the three year period to March 2017, as illustrated by Figure 13. The result is a consistent delivery profile, and a consistent optimal saving of in pass-through costs in each of the three years to March Figure 13: Number and type of measures delivered under different circumstances, focus on removal of additional carry-over, improved levelisation mechanism includes uplift on over-delivery against March 2015 target to smooth delivery further Solid wall minimum DECC s Assessment of Impacts estimates that 87,000 solid walls will be delivered to 2017 under CERO with an additional 35,000 delivered under CSCO. The SWI minimum put forward is 100,000 properties insulated over the period, or 4 MtCO 2 from solid wall insulation. We believe any minimum should be set in terms of both the number of properties and carbon savings, to avoid perverse incentives. Association for the Conservation of Energy consultation response 39