A Future Obligation on Energy Companies: Summary of responses to the informal consultation

Transcription

1 Westgate House 2a Prebend Street London N1 8PT A Future Obligation on Energy Companies: Summary of responses to the informal consultation Introduction In May 2011 the ACE Research Team published a piece of exploratory research work on the design of the new obligation on energy companies. The paper was the second in a series of papers identifying options for the future of fuel poverty and energy efficiency policy. The purpose of the paper was to begin to investigate how the ECO might be designed to best meet its new objectives to deliver carbon savings, alleviate fuel poverty and promote the installation of solid wall insulation whilst underpinning the Green Deal - cognisant of the need to keep the scheme cost effective and equitably delivered. The paper drew on the outline indications presented in the Energy Bill and considered alternative approaches to scheme design within this context. Focus was given to the ways in which the new thermal efficiency target introduced to enable affordable warmth measures to be delivered into the homes of the fuel poor could be expressed and the impacts of the available currencies for this new target on delivery outcomes. The ambition for the programme was considered along with its ability to deliver simultaneously on the multiple objectives delivery on carbon and fuel poverty targets, promotion of solid wall insulation and underpinning the Green Deal. The paper was intended as a discussion piece to open debate and enquiry in the period preceding the public consultation on the new ECO, along with other elements of the Green Deal, expected in the autumn. This intention in mind ACE welcomed feedback on the paper from a very broad range of individuals and organisations. All feedback and comment was welcomed but it was guided by four questions. Association for the Conservation of Energy Consultation summary 1

2 A very broad range of organisations responded to the paper with some in-depth and lengthy responses. Not all respondents whose comments have been included in the summary confirmed that they would be happy to be named but those who gave permission include: the Chartered Institute for Environmental Health; E.ON; INSTA Group; Rockwool; Consumer Focus; Nick Eyre, ECI, Oxford; Mark Group; UKBCSE; Eoin Lees, Regulatory Assistance Project, Europe; David Adams, Willmott Dixon; CIGA; RWE npower; Gordon Taylor. This paper provides an anonymised summary of the responses. Overview Level of the ECO must not fall below existing levels of expenditure under CERT and CESP, although some respondents called for significantly higher levels. Need to provide assistance to fuel poor. Respondents recognised that tackling fuel poverty is a vitally important component of the ECO and indicated that a significant proportion of the ECO should be focussed on affordable warmth for low income and vulnerable customers, particularly in light of the removal of the Warm Front funding. They also recognised the adverse impact if the obligation is not carefully focussed. Further, respondents called for the responsibility for fuel poverty assistance not to be solely placed with the ECO but for additional support to be available. Very low confidence in Green Deal. Substantial concerns were expressed by the respondents over the landscape for delivery of energy efficiency in An expectation of very slow take up of Green Deal Finance or less optimistically that Green Deal Finance won t work was evident in all but a small number of responses. This places the importance for the delivery of assistance to all households and delivery of all measures, including existing high volume measures like loft and cavity wall insulation, on the ECO. Transition is necessary. Concern that GD and ECO will not deliver the volume of activity that is required to sustain the levels of activity and employment that currently exists in the insulation industry were strongly raised. The obvious threat to the success of the transition into the Green Deal if insulation rates fall was raised. Consultees called for these concerns to be urgently addressed as the uncertainty poses a serious risk to the capability of the supply chains to plan and invest in the necessary capacity to take part in (and lead) the intended transition. Significant fears were expressed that disruption and high transaction costs from a too highly targeted or structured ECO could lead to serious consequences for the existing insulation industry, in particular for the retention of skills and resources necessary to make the shift in to solid wall insulation delivery. CESP was given as an example by a number of respondents of a difficult transition that has resulted in very slow delivery and underachievement. The insulation industry respondents called for more attention to be placed on the transition phase between the CERT Extension and ECO/Green Deal delivery, a phase which could take at a minimum 2-3, 3-4 or 5 years according to various respondents. This group of respondents have individually called for loft and cavity insulation measures not to be excluded from any aspect of the ECO until the transition to a successful solid wall insulation market has been achieved, and for subsidies for solid wall insulation to be available in the Green Association for the Conservation of Energy Consultation summary 2

3 Deal market from day one. This group expressed concern that the shift from heavily subsidised cost effective measures to the promotion of the same measures at full price through the Green Deal is a risk to the delivery of these measures in the able to pay sector. Finally, the differences between government and industry views of the numbers of cavities and lofts left to fill were raised as a serious concern. A need has been identified to quantify and characterise the remaining loft and cavity wall insulation potential and develop a realistic trajectory for delivery of these insulation measures from Integration and other essential drivers. The integration of the ECO with Green Deal Finance as outlined in the paper left the respondents split into two opposing groups, one supporting the concept and requesting further investigation and the other deeply cautious about the idea listing a number of consequences. There was however, a more broad agreement that the ECO or energy efficiency incentives should be integrated with other schemes. Respondents called for a level of ambition and a plan to be laid out by government and the introduction of other drivers of take up. Delivery. Although not directly prompted, a number of respondents commented on the landscape of delivery agents that will be delivering ECO measures, all calling for significant changes in the existing delivery profile. Calls were made for the opening up of the delivery of the obligation to a broad range of players and, further, for separation between the suppliers delivering their obligation and those delivering the measures. Answers to specific questions 1. At what level do you think the overall size and ambition of the ECO should be set? Level of ambition The concern raised in the discussion paper, that the priorities for the ECO cannot all be met concurrently without huge sums of money, was highlighted in the consultation with the acknowledgement that such levels of funding will not be available. Respondents favoured a range of ambition levels for the new ECO, from existing levels of expenditure (under CERT and CESP) to a doubling of the current level of expenditure under CERT. Those who felt that the ambition should not be extended to make up for the cut in Warm Front expenditure felt that 1) the supplier obligation should not replace Warm Front, and a publically funded programme would be preferred from 2013 and 2) the higher budget level might increase the risk of the ECO being deemed as imputed tax and spend. Higher levels of at least 1.7bn per annum and, further, a doubling of the current cost of CERT (per household) were also called for. A number of consultees identified a need for the scale the reflect the additional cost of installing more expensive measures (like SWI) while needing to continue to deliver to a similar number of households and maintain the level of carbon saving. One final respondent called for a revision of the obligation on suppliers in that all energy companies serving or seeking to serve the energy market in the UK be required to show that they are implementing energy saving and energy efficiency at least symmetrically with energy Association for the Conservation of Energy Consultation summary 3

4 supply equivalent to saying that their business model should switch from selling energy to selling energy services. Cost recovery Although not specifically questioned, there was some comment on the way in which the obligation is placed on suppliers and how the funds are recovered from customers. One respondent called for a reform to a per unit cost recovery mechanism whilst others felt that an exploration of either restricting the cost recovery to gas or placing a greater share of the obligation on gas to make the cost recovery more progressive or fairer would be worthwhile. This was caveated by one respondent who felt that this reform should not be used to justify setting a higher ECO target. 2. How and in what proportions do you think the ECO should be split between the objectives of fuel poverty elimination and the subsidy of more expensive measures? Split between thermal efficiency and carbon Respondents who commented on this question recognised that tackling fuel poverty is a vitally important component of the ECO and indicated that a significant proportion of the ECO should be focussed on affordable warmth for low income and vulnerable customers, particularly in light of the removal of the Warm Front funding. They also recognised the adverse impact if the obligation is not carefully focussed. A number of respondents felt very strongly that the ECO should not be seen as the sole funding source for tackling fuel poverty and felt that the ECO would not be sufficient to the task, especially given the method by which it is funded. It was seen as essential that ECO is supplemented by other funding sources, such as re-cycled ETS proceeds. Indeed, one respondent indicated that the ECO should only provide a relatively modest contribution towards the total funds required, with other sources taking more prominence. However, the consultees also called for proposals for the ECO to take account of the practicalities of delivering energy efficiency and continuing to drive carbon savings in the able to pay sector whilst the step change in capacity to deliver more expensive (SW) measures is achieved. A risk was identified in a too tightly focussed ECO (either on target groups or on individual measures) resulting in limited or expensive delivery, and risking a hiatus for some part of the insulation industry and overload in other parts (SWI). CESP was used by a number of respondents as an example of an overcomplicated and limited programme, the design of which impacted on delivery. Consultees also cautioned limiting the delivery of solid wall insulation in particular to eligible consumers (fuel poor) calling for the delivery of this measure to be as flexible as possible. The increased costs of identifying eligible households was given as a reason and the reduced level of assistance subsequently available for the fuel poor was given as a consequence. The risk of supressed market growth as a result of tight targeting was highlighted. Finally, concerns arising from the uncertainty over Green Deal Finance delivery were raised. Focussing the ECO too heavily on the fuel poor may leave minimal tools available for driving deep retrofits as the low hanging fruit run out. Association for the Conservation of Energy Consultation summary 4

5 Phasing of the targets or objectives over time There was clear disagreement between respondents on the issue of phasing the priority given to either to the alleviation of fuel poverty or to carbon saving/more expensive measures for the ECO, and the order in which priority should be given. One group of respondents clearly identified the attraction in prioritising fuel poverty alleviation first, identifying the need to get energy efficiency improvements into fuel poor households as quickly as possible to allow the introduction of other policies that Government will need to apply to improve low carbon energy supply and reduced energy consumption. A further point was made that assistance delivered to the fuel poor does save carbon one respondent quoting the finding that Warm Front was evaluated to be Government s third most cost effective carbon reduction programme, despite this not being its primary purpose. The second (slightly smaller) group of respondents were concerned by a proposal that the ECO be tightly focussed on fuel poverty alleviation in the first period. The importance of the ECO s role in delivering the carbon budgets and the need to drive continued delivery of traditional measures, whilst enabling the large shift in the insulation industry to safely build capacity to deliver solid wall insulation was highlighted. Fear that focussing on fuel poverty first would not be workable was expressed, with concerns that the increased costs of delivering in this group would reduce the actual size of the ECO when delivered and reduce its ability to support existing successful measures (like loft and cavity wall insulation). Three respondents also commented on the length of ECO phases and target periods. All called for the long ECO target to be broken into phases and milestones, to avoid peaks and troughs in delivery and to be short enough (3 years was suggested) to allow for declining costs to be factored into future targets to avoid under-stretch. Eligibility criteria/targeting Although not directly referred to in the consultation questions, a number of respondents made comment on the eligibility criteria or targeting of assistance under the ECO. One respondent raised the questions of how should fuel poor households be identified, whose responsibility should it be and how should the task be resources/funded. Two respondents expressed concerns over a too tight priority group, calling for a broadening, or in one suggestion a paradigm shift to treating the house rather than focussing on the occupier at the time. The rapid deployment of measures under CERT was attributed by one respondent to the ease with which customers could be identified. A further respondent reinforced that identifying and targeting eligible households remains one of the most problematic areas for resolution. In contrast a further respondent favoured a more targeted approach indicating that the new super Priority Group is more relevant than previous Priority Groups but still not sufficiently well defined, pointing in particular to householders living in socially rented accommodation who, due to the relatively high standard of housing, are less likely to be in fuel poverty. On the subject of closer targeting, getting as much help as possible to those that need it the most, the issue of households that have low income but are asset rich was raised and an alternative repayment system for a Green Deal Loan was suggested (see the section on integration with green deal finance). Association for the Conservation of Energy Consultation summary 5

6 One respondent called for further data sharing powers between multiple agencies (which should include Local Authorities, housing providers, suppliers, DWP/Treasury) to be developed in tandem with the development of ECO. Design of the targets There was broad support for the separation of the targets for fuel poverty and carbon, with the interaction between the targets presented as potentially advantageous but needing careful design. One respondent noted the potential competition between the fuel poverty and green deal objectives and as a result favoured a ring fencing of the energy saving targets as tried and tested technique for making sure energy companies deliver Government s objectives. The respondents that commented on this point favoured the complementary targets approach outlined in the paper over the currency exchange as the later provides too much opportunity for gaming by energy companies and makes predicting the market very difficult. The former was likened to the linking of the Warm Front scheme and the EESOP and EEC schemes under which EAGA sold cost effective measures to the energy suppliers and the income (less a small administration fee) were used to further the Warm Front activities. This provides an example of a workable one way transfer approach in which money could flow only into the fuel poverty programme. It was also likened to the complementary targets for new homes minimum energy efficiency and maximum carbon requirements. A number of respondents called for realistic targets to be set for the delivery of solid wall insulation given the very low current rate. Fears were raised that engineering a step change would encourage cowboys and would be neither realistic nor desirable. It is felt that an attempt to prioritise alternative interventions (to the tried and tested insulation measures that are delivered at scale) would substantially undermine the ECO s carbon savings. Rising targets for SWI were called for by some respondents although it should be noted a further respondent cautioned against the addition of more sub-targets that exacerbates the risk to the supply chains. 3. Do you have any opinions or evidence on the most suitable measurement currency for the new thermal efficiency target and any desirable minimum level of achievement? Currency A small number of respondents commented on the most appropriate currency for the thermal efficiency target. Two new currencies were proposed. The first is a requirement for energy companies to reduce primary energy consumption per m 2 in fuel poor households (overall target to sit alongside the carbon target), with a minimum dwelling SAP to be achieved in each fuel poor house that must be reached before the primary energy savings are countable. This primary energy target would have an additional value to overcome the additional costs and support the key principle that every home visited has an offer. The second - the fuel poverty gap - looks at the impact of a measure on the total reduction in the fuel poverty index not just on numbers removed from fuel poverty. Therefore it gives more weight to a reduction in the required fuel expenditure from say 30% to 15% than a reduction from 11% to 9%. Association for the Conservation of Energy Consultation summary 6

7 One respondent favoured a SAP based target (out of those included in the paper) with a minimum level of achievement per house required, or required achievement standard. The third did not feel confident at this stage to definitely state which currency should be used for the two targets (thermal efficiency and more expensive measures) but can see many advantages in the retention of the carbon score given its familiarity to suppliers and the supply chains. A score based on GHG emissions was supported by a further respondent. The familiarity of consumers and other non-specialists with the SAP scale was noted in support of the SAP score whilst the merits of adopting a currency which can be modified in relation to technological changes or advancements without the need to wait for updates to (SAP) software was given in opposition. The benefit of the carbon score in removing a fuel bias was also noted. Per house minimum Of those that responded to the issue of a minimum level of achievement to be required in each home treated, there was support for the requirement to deliver a minimum level of assistance. However, some concerns were raised. One issue raised in the paper around the per house minimum is that its imposition would reduce the number of households receiving assistance, one respondent saw this being mitigated by integrating ECO into a much larger programme of funding sources. Concerns were also raised that minimum levels of improvement, if set at the wrong level, might artificially exclude cost effective insulation measures. 4. What are your thoughts on the integration of the ECO with Green Deal Finance and other existing or proposed schemes? Integration with Green Deal Finance There was support from the majority of respondents for the proposal to integrate ECO with Green Deal Finance for fuel poor households. The respondents felt that there is sufficient attraction in the proposal, enabling the ECO to be more ambitious with lower bill impacts, to warrant further exploration. Although recognising the complicated nature of the integration many of these respondents felt this kind of adaptation is necessary one asking the question if it is reasonable to ask householders to place a 25 year charge on the property how can it be unreasonable to ask the same of an energy company? Those who expanded on the idea considered an intrinsic need for there to be an arrangement between the Green Deal Providers and the ECO supplier, whether bi-laterally or through a trading mechanism. Concerns were raised over the lack of market discipline in the absence of this arrangement what stops the Green Deal Provider increasing prices to exploit the Golden Rule? Two respondents added that there should be a mechanism by which some of the costs should be able to be recovered from fuel poor households. One suggested a system for asset rich but low income households, similar to that used in Kirklees, in which partial repayments can be made until the property is sold at which time the deficit can be paid off (where significant equity exists in the property). A further suggestion was to calculate a much lower golden rule value (say half of the normal estimate of savings) which could be dependent on the current household remaining on a low income. If their status changed or in the event of a new household not on low income, then the normal golden rule of the Green Deal would apply. This type of mechanism was alternatively described by another consultee as a minimum saving rule to protect those that under heat, linked to a higher credit earned by the Eco supplier for particular households linked to the minimum level of subsidy. A need was also expressed for there to be some protection for Association for the Conservation of Energy Consultation summary 7

8 customers from whom GDPs are seeking a contribution so that they are aware of alternative offers. The second group of respondents did not support the idea. Respondents reported a number of concerns about the central proposal. The added complexity and administration costs to the delivery of the scheme, uncertainty of how the measurement currency would be converted were the household to switch supplier and the fact that there is no guarantee that the ECO will continue for a long enough period for this to be viable and credible to lenders were listed as practical barriers. The risks that the liability of the Green Deal Finance on the supplier s accounts would adversely impact on credit worthiness and that the shift from a delivery obligation to a financial obligation would mean the ECO will be viewed as a tax were also raised. Two concerns also focussed on the commercial interest rate offered for Green Deal Finance, firstly that this would impact on the cost effectiveness of the obligation (as paid for by all customers) and secondly that this rate is higher than the public borrowing rate and that rather creating revenue streams for finance companies we should be seeking additional public funding. Three consultees expressly preferred an interaction between ECO and Green Deal in which the full costs and currency are assigned to the supplier/installer at point of delivery but perhaps subsidy is provided through Green Deal. ECO s role in supporting the transition to the Green Deal would be to drive down costs and help to develop the supply chain. This was felt to be less disruptive as more similar to the current model and easier to achieve in the limited time between now and the introduction of Green Deal Finance. Finally concerns were reiterated by three respondents over the transition between CERT extension and ECO-Green Deal Finance and that sufficient time and phasing is provided to enable industry and consumers to adapt without creating a fallow period. There are serious and consistent concerns that Green Deal will not take off very quickly, therefore, the potential for integration between ECO and Green Deal finance will be limited. Integration with other policies There was a strong response from consultees that ECO or energy efficiency incentives in general should be integrated with other schemes, with the RHI and FIT being named in particular. In a broader sense, a comment was made that wider public policies need to be marshalled towards supporting the same policies/outcomes. Respondents called for an ambition to be laid out by Government, along with details of how it will monitor and report on progress. This plan should include milestones (as frequent as quarterly were called for) with penalties and calls to action if further intervention is needed. There were very strong calls in the responses for additional drivers for the Green Deal to be introduced, both to incentivise take up in the able to pay market and to encourage low income and vulnerable customers to access assistance available. The introduction of consequential improvements, EPC actions, standards at sale or purchase, a house MOT with pre-set standards to be met, fiscal drivers such as variable stamp duty, council tax, income tax coding and inheritance tax were all variously called for. Association for the Conservation of Energy Consultation summary 8

9 Delivery Although not directly prompted, a number of respondents commented on the landscape of delivery agents that will be delivering ECO measures, all calling for significant changes in the existing profile. Calls were made for the opening up of the delivery of the obligation to a larger number of companies, with a broad range of players (including mutuals, RSLs, local authorities, social enterprises and private companies) able to access the ECO on an equal basis to the big 6. Going further, the clear separation between suppliers delivering their obligation and those delivering programmes was called for. There was also a call for a more visible process through which the contribution is made by the energy supplier (and the carbon score is bought) that is clear and has a transparent price. One respondent cautioned that although linking ECO delivery to repayments of the Green Deal charge could have some benefit in opening the market for non-energy company Green Deal providers, this would only be for the fuel poor households so does not solve the underlying problem. One final respondent suggested that energy companies should be required to take on a role closer to an ESCO model, working in a delivery framework led by Local Authorities, with Local Authority plans guiding delivery. In this proposed model the individual actions undertaken by householders under the Green Deal, at a high cost of borrowing should be converted to collective actions funded by the low cost borrowing of corporates. Most notably this collective action and area plans enables the inclusion of district heating and large scale CHP complemented by energy efficiency rolled out on an area basis. Association for the Conservation of Energy Consultation summary 9