The future of the Energy Company Obligation (ECO3)

Every year the Energy Institute surveys the UK energy industry and produces a barometer of what they see as the main issues. This year, all respondents, regardless of which area of the energy industry they worked in, saw energy efficiency as the key to a productive economy and to cutting carbon without unnecessary cost. It is seen as a way for the UK to meet its carbon reduction targets and also to achieve the 'green growth' advocated in the Industrial Strategy. So why does the government not support it more?

The Energy Company Obligation

One way the government does support energy efficiency is through the Energy Company Obligation (ECO). This places obligations on larger energy suppliers (supplying over 400 GWh of electricity or 2,000 GWh of gas to over 250,000 domestic customers) to deliver energy efficiency measures to certain domestic properties. Each supplier has an individual carbon saving, or saving on customers' fuel bills, target it must meet, depending on its customer share. It must install energy efficiency measures and calculate the carbon/bill saving of each, using an approved formula, then notify Ofgem each month. Suppliers have to bear the cost of this, but in practice they pass it on to consumers by adding it to their bills.

If a supplier fails to meet its obligations, it can trade with another supplier who has exceeded theirs. There is also an ECO Brokerage auction mechanism where ECO providers can sell 'lots' of ECO obligations to suppliers in exchange for ECO subsidies. Ofgem can impose penalties on suppliers for not meeting their ECO obligations.

The ECO has been in force since 2013 and there were predecessor schemes before that. The current ECO scheme (ECO2t) has been extended to run until 30 September 2018 and BEIS are now looking at extending it for a further four years to 2022 but changing its focus.

Up to now, ECO has placed three separate obligations on suppliers:

  • Carbon Saving Community Obligation (CSCO) – insulation measures and connections to domestic district heating for households in specified low income areas, with 15% of each supplier's obligation having to be used in rural areas.  The CSCO obligation finished in March 2017
  • Home Heating Cost Reduction Obligation (HHCRO, also known as Affordable Warmth) – heating and insulation measures, such as repair/replacement of boilers and electric storage heaters, to those in private housing in receipt of certain means-tested benefits.  From April 2017 local authorities have been able to declare that certain households that are not receiving benefits but are nevertheless fuel poor are eligible for Affordable Warmth measures, and suppliers can achieve up to 10% of their Affordable Warmth obligation by installing measures in such households.  This is known as 'flexible eligibility'
  • Carbon Emission Reduction Obligation (CERO) – wall and roof insulation measures and connections to district heating systems ('primary measures') and other insulation measures like glazing and draught proofing if provided at the same premises ('secondary measures').  This is open to all households regardless of income, but from 2017 15% of the obligation has to be delivered in rural areas

The new ECO3 scheme

The new scheme will be known as ECO3 and will start on 1 October 2018.  It will focus on fuel poor, low income and vulnerable households. The key changes proposed by the Department for Business, Energy and Industrial Strategy (BEIS) in a recent consultation are:

  • Focus the scheme on Affordable Warmth, remove the CERO obligation, and extend eligibility for Affordable Warmth to households receiving child benefit (subject to an income threshold) and disability benefits, meaning around 6.5 million households will be eligible.  The Government may use its powers under the Digital Economy Act (which allows greater data sharing between public authorities and energy suppliers for fuel poverty alleviation) to make it easier for suppliers to identify eligible households
  • Expand the flexible eligibility element so that suppliers can meet up to 25% of their obligations through measures installed in households that local authorities identify, designed to reach households on low incomes but not receiving benefits.
  • Keep the rural delivery obligation, so suppliers have to deliver 15% of their obligation in rural areas
  • Remove support for oil boilers, broaden the definition of first time central heating, limit the replacement of broken heating systems to 35,000 per year, allow inefficient heating systems to be upgraded but only if certain insulation measures are also installed (similar to the CERO primary and secondary measures approach, but classing heating as the secondary measure) – this is to make sure the scheme focuses on the most energy-efficient measures
  • Reduce the minimum requirement for installing solid wall insulation (SWI) from 21,000 installations per annum to 17,000, reflecting the fact that SWI is expensive (£8000 per household) and that the removal of CERO will lead to fewer financial contributions from households
  • Make measures eligible for the Renewable Heat Incentive ineligible for ECO, to avoid cross-subsidies
  • Allow between 10% and 20% of targets to be met through innovation measures.

Innovation measures

The last point is worth looking at in more detail, as it shows that the government is thinking more widely than just helping the fuel poor and reducing emissions, but also using the ECO scheme as a way of encouraging innovation, in line with the Industrial Strategy and the Clean Growth Strategy. As the consultation on ECO3 put it, "ECO has been primarily focused on bringing about large scale deployment of energy efficiency rather than encouraging innovation". This is about to change. BEIS are looking for innovations that result in, amongst other things: the development and deployment of new measures that are not currently part of the scheme; reductions in the cost of improving solid walled homes; devices and controls that improve a consumer's ability to manage their energy use; and new ways of installing existing measures or combinations of measures that reduce cost, improve quality and enhance the overall consumer experience.

BEIS are looking at three ways to encourage innovation:

  • Demonstration actions – measures that have been tested in a laboratory and now need testing in a live environment
  • Innovation score uplifts – where a measure already has a deemed score but the manufacturer can prove it out-performs others in its category, it will get an uplift to the deemed score for a limited period of time, to expand deployment
  • In-situ performance measurements – allowing suppliers to install combinations of measures in homes and encourage a move away from a focus on individual measures towards a 'whole house' approach

Scotland

It is worth mentioning the position with regard to Scotland. The ECO is a GB wide scheme but the Scotland Act 2016 transferred some of the powers to make ECO Orders to Scottish Ministers, who can now decide on the eligibility criteria and the types of measures to be provided in Scotland. If they decide to differ from England and Wales, BEIS propose to apportion the cost of, and an individual supplier's targets under, the scheme between Scotland and England.

Comment

The restriction of the new scheme to Affordable Warmth only and the reduction in the SWI requirement has led to some bad press, but it seems that the government is trying to do the best it can without impacting on consumer bills. ECO3, together with the forthcoming cap on standard energy bill tariffs, should help the fuel poor, as well as continuing the policy drive for energy efficiency. Yet with the energy industry unanimous that energy efficiency improvements are the obvious way to tackle carbon emissions and reduce energy consumption, it is a shame the government is not doing more. 

Hopefully the increased focus on innovation, and the possibility of measuring a home's actual thermal output in future, will enable suppliers to think creatively about how to solve the problem of making homes more energy efficient at the least cost with the maximum impact.

Key contacts

Richard Goodfellow

Richard Goodfellow

Partner, Head of Infrastructure, Projects & Energy Group
United Kingdom

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Paul Dight

Paul Dight

Partner, Energy and Utilities
United Kingdom

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