Energy Company Obligation – ECO3

Mitch Gee, INCA Executive Chairman

The Executive Chairman’s response to the ECO3 Consultation released by the Department for Business, Energy and Industrial Strategy.

2018 – 2022

Background and overview:

As an industry, we welcome a policy committed to helping the fuel poor. That said, we would prefer one in which energy efficiency and housing regeneration are closely aligned. Helping the fuel poor can be done at the same time as improving energy efficiency and regenerating run-down housing estates. As it is, we have an ECO commitment in which energy suppliers are burdened with providing a social service. It is the case that the government should deliver on this social responsibility. This consultation sets out what is effectively a tax on our energy bills, and has the biggest impact on those at the bottom of the socio-economic ladder. This economic model is designed to deliver energy efficiency at the lowest price but with an ill-prepared regulatory framework. As a result, the industry becomes flooded with opportunistic contractors and material suppliers to feed on ECO, with little interest in supporting a long term sustainable solution.

INCA members are now living with the legacy of earlier government funding. We must endure increased regulation, competition, reduced volumes and margins, and tidying up the mess left behind by rogue contractors and suppliers. Although we don’t hide from the fact that some of the problems are of our own making, the result is large sums of money spent in designing and managing the system to ensure quality is delivered. This would not have been needed if we had increased spending on housing regeneration and energy efficiency in the public sector instead of relying on energy suppliers to deliver it.

ECO is with us to stay, at least until 2022 and probably until 2028. Unfortunately trying to maintain ECO at £640 million a year and treat a million households, makes it difficult to fit EWI into the model.

Drivers:

One of the key drivers for ECO is the Government’s Clean Growth Strategy. This sets out a requirement to treat as many houses as possible to reach EPC band B and C where it is practical, cost effective and affordable, by 2035. To achieve this it is likely that a large proportion of the seven million plus untreated solid wall homes will need to be targeted. This is a somewhat woolly distant target with no quantities attached. A more tangible target is the commitment to improve the energy efficiency rating of fuel poor homes to EPS C band by 2030. With almost 50% of the fuel poor living in solid wall homes, this should be a strong driver for the external wall insulation market. To ensure high standards of installation quality and customer service, it is proposed that the changes set out by Each Home Counts are adopted.

The ECO3 consultation states that funding will be focused on affordable warmth, ensuring that the beneficiaries of the scheme will be low income and vulnerable households. The proposal is that the CERO obligation will be removed, leaving about 6.5 million households eligible. 15% of the obligation will have to be delivered in rural areas, and the solid wall minima will be reduced to 17,000 a year. At this rate it will take over 400 years to treat all the solid wall homes. By this time, we will probably not be living in houses, Doncaster Rovers will be top of the premiership and there will still be a sale on at DFS.

Key policy in the Consultation:

The Clean Growth Strategy announced that government would extend support for home energy efficiency to 2028 at least at the current level of ECO funding.

Energy suppliers will be allowed to carryover an unlimited amount of Affordable Warmth delivery and up to 20% of CERO delivery to the future scheme in an attempt out to smooth out the peaks and troughs.

The proposed Affordable Warmth target is £7.735 billion in notional lifetime bill savings to be achieved by March 2022. There will be a rural minimum of 15% and a disappointing equivalent of 60,000 solid walled homes over the life time of the policy. This amounts to less than 1% of the solid walled homes.

The current Affordable Warmth eligibility provides for private tenure household in receipt of certain means tested benefit. Private tenure households identified by local authorities as living on a low income and vulnerable to the cold, or in fuel poverty, and social tenure households living in properties with EPC rating of E F or G.

ECO has historically focused on private sector housing. For the transition scheme, support was extended to social housing properties with an EPC rating of EFG. Over the period April to September 2017, 11% of all measures have been delivered to social tenure households and it is proposed to retain the current criterion. My perspective is that we should persuade the government to include those class D properties. This will allow more solid wall properties to become eligible and make the targets easier to achieve.

A real opportunity for volume of external wall insulation is the flexible eligibility for local authorities. Currently it allows suppliers to meet up to 10% of their ECO affordable warmth targets by working alongside participating local authorities, which will allow non-fuel poor households to be eligible for solid wall insulation exclusively, where this forms part of the project that delivers solid wall insulation to fuel poor or low income and vulnerable households. This will be set to continue and, should evidence demonstrate that flexibility eligibility is resulting in the intended outcomes, it is proposed that the suppliers can meet up to 25% of their ECO3 targets through the flexible eligibility element. This is a significant increase from the current 10%.

The Government recognises that 44% of fuel poor homes that are occupied by fuel poor households have uninsulated solid walls. Despite this, the proposal is to cut the current SWI minimum from 21,000 to 17,000. The government do not believe they can support the amount of solid wall insulation required with the budget constraints of ECO. They are actually promoting a combination of measures rather than SWI. They believe this could be more appropriate and cost effective to install whilst achieving the same level of bill savings. We, within INCA, do not believe this can be done without ‘smoke and mirrors’. It should also be noted that if Scotland decides to make separate rules in sub targets, this will be reduced to 12,000 properties.

In an attempt to support the provision of larger solid wall insulation schemes which create economies of scale, ECO3 will allow social housing landlords to incorporate ‘in fill’ of solid wall properties in larger schemes, providing there are a sufficient number of affordable warmth eligible or social EFG households in the same area. The proposal is that if 66% of households are in bands E, F or G or meet the Affordable Warmth eligibility criteria, the remaining third do not have to. This will should open up a significant pool of social housing. This is further enhanced by flexible eligibility in which the new scheme will reduce the eligibility requirements from 66% to 50% if the properties are contained in the same building (e.g. flats), or immediately adjacent buildings (e.g. terraces and semi-detached properties).

Scotland still have to decide whether to have different rules. 13% of ECO measures are delivered in Scotland, despite only 8.3% of the population living there.

Innovation:

Innovation features heavily in ECO3. Uplifts will be available if utilities can demonstrate that they are using new innovative technology, and this may represent an opportunity for System Designers if they can provide new, innovative products. This may prove a threat to traditional EWI systems if low cost less effective solutions are developed. That said, they will probably provide poorer energy efficiency benefits and do not provide the regenerative benefits of EWI, but may prove to be very cost effective due to the carbon uplift. As an industry we must resist the introduction of inferior systems which will only require further upgrading properties in the future.

The consultation states that the government would like to see between 10 and 20% of their obligation delivered through innovative products. The hope is that this will gradually transform the energy market. We are concerned that some ‘hair brained’ ideas to treat solid walls do not provide any upgrading to the fabric of the building, which is often desperately needed for solid wall houses. The result may be that the building will likely require further works in the future, impacting on any energy efficiency measure that had been applied. This is about looking for cheap solutions and not the best solutions. It is critical for solid wall homes that not only the energy efficiency is considered but also the building fabric. As the consultation state that these technologies must be ready to go, we must question why they are not already being used. We must also question trialing innovative solution on some of the most vulnerable people in our society. The one positive is that this offers an opportunity for System Holders to provide new innovative solutions, whether these are new highly insulating products or systems that are quicker and easier to fit.

Smart meters:

In the future the government want to move to an energy efficiency market where real life performance is measured. This will be supported by the role out of smart meters. The solid wall insulation industry would support the in-use measurement as we are confident in our technology. That said, we know insulation provides additional comfort, as well as energy savings, and one will impact on the other. Increased comfort would be welcomed in a social programme, but is less attractive if the driver is carbon saving.

Quality Mark:

ECO3 will come with the Each Home Counts Quality Mark and increased regulations. Unfortunately experience tells us that poorly managed schemes resulting in poor quality workmanship, gaming and the install of measures on ill prepared properties has resulted in a raft of regulations developed to try to raise quality standard and protect the consumer. It is difficult to resist the logic even though we know that good installers have been delivering high levels of quality into the sector for over 30 years and will be left with increasing overhead to comply.

PAS is being revised and simplified to remove the transferred design elements and move away from reliance on common minimal technical competence. Focusing on an industry approved minimum qualifications or apprentices together with industry approved accreditation of prior experience and learning APEL.

In summary:

Negatives

  • Reduced minima to 17,000
  • ECO3 looks for more cost effective ways of delivering energy efficiency in solid wall home
  • The ambition stated is to undertake a million measures in the lifetime of the scheme thereby favouring cheaper measures

Positives

  • Target for fuel poor to live in homes with EPC rating C or better by 2030
  • The flexible approach proposed for social housing landlords
  • There is a reduced pool of households in which to find cheap carbon