Briefing on the energy company obligation 2022-2026 consultation

AgilityEco is pleased to see that the Government’s consultation on the design of the Energy Company Obligation for the 4 years from 2022 (ECO4) is now with us. It has a tight turnaround time with responses required by 3 September. We are busily working on our own response but are also keen to assist our partners in responding on this important topic. With that in mind we set out below what we see as some of the key issues raised by the consultation. If you would like to discuss any of them in more detail, please do not hesitate to contact our Policy & Partnerships team.

Plenty of good news!

There are many things about this consultation with which we at AgilityEco are delighted. In headline terms these are:

• The certainty provided by a 4 year scheme.
• The increase in the scheme spend to £1bn a year.
• The continuing focus on low income and vulnerable households.
• The opportunity to make a real difference through the increased emphasis on the worst homes and installing multiple measures in them. This will support the achievement of the Government’s target of fuel poor homes being lifted to a Band C rating by 2030 and the milestone of Band D by 2025.
• The important recognition that a fabric first approach, with homes required to be insulated to minimum standards when heating measures are being installed, is a priority.
• The introduction of a potentially helpful Hard To Treat score uplift where a home requires ancillary work before measures can be installed.
• The further push to improve standards of work through installation of measures in accordance with the latest PAS standards by a PAS-certified installer.
• The potential over the life of the scheme for non-space heating measures, including water heating and battery storage, to be added as eligible measures.

One other positive aspect of the consultation it is worth focusing in on are the new arrangements for Local Authority and Supplier Flex. Energy suppliers will be able to deliver up to 50% of their obligations through LA & Supplier Flex. The consultation identifies some exciting new customer referral routes which we fully intend to utilise when working with our partners. The referrals will help to identify both those in cold homes with health conditions and others who are in fuel poverty but are hard to reach as they are not on means-tested benefits. The arrangements include an option for energy suppliers or local authorities to seek approval for bespoke targeting approaches and we will aim to help partners interested in this to develop those approaches. In addition, suppliers will be able to use their own data to identify households in sustained debt or with Pre-Payment Meters and at risk of self-disconnection.

Areas where we have concerns

There are 4 main areas where we intend to challenge the proposals in the consultation:

• The most important issue is whether the consultation is setting the Obligation target right at around 300k homes improved over the 4 years of the scheme. This figure is determined by the measures mix assumed and the assumptions made on the costs of installations with the available £1bn pa. We are not convinced that BEIS have the measures mix entirely right but the bigger issue is the assumptions on costs. Not the capital costs of installation or search costs which seem to be in the right ballpark. But rather what BEIS have assumed on ‘economic rent’. In broad terms this is the aspect of ECO delivery costs over and above the production costs. It has grown steadily as a proportion of ECO spend over the last few iterations of the scheme to the point where it is now around 44%. We think that is unnecessarily high and are talking to BEIS about some important adjustments to their assumptions which would allow more homes to be improved. To illustrate what is at stake, the ECO3 Final Impact Assessment forecast that 1.195 million homes would be treated over the period of the obligation, some 341,000 pa. The Consultation Stage Impact Assessment for ECO4 assumes 305,000 homes will be treated over its lifetime, that’s just 76,000 pa despite a much bigger annual spend. We recognise that interventions will be more expensive because of the focus on installing multiple measures and bringing some of the worst homes to a much better standard. But an assumption that the intervention per home will cost £13,000 is unrealistically high and will mean that far fewer low income and vulnerable households will be helped than should be the case. It’s a complex area and we would suggest that anyone interested in knowing more makes contact with us.
• As with previous occasions when one ECO scheme comes to an end and a new one begins, those of us operating in the market will have concerns about a lull in activity. Many suppliers will aim to overshoot their ECO3 target in order to avoid the risk of missing it and adopting this strategy will be underpinned by the usual carry over arrangements. So suppliers may be going into ECO4 with a head start on delivery and knowing that they have 4 years to meet their obligations. So there is a real possibility of suppliers taking their foot off the gas in the early part of the new scheme. It is difficult to see how this risk can be designed out of ECO but we will be working with all our partners to get across the message that a much bigger ECO scheme requires a sustained delivery effort right from the start.
• The consultation raises the possibility that the Scottish Government may decide to exercise its legal right to take a share of ECO4 funding and implement its own scheme. It seems most unlikely that they could have their own scheme ready by April 2022. We would urge the Scottish Government to avoid the disruption of introducing a new Scottish scheme when ECO4 is up and running and instead, if they do decide they want their own scheme, to set it up in a planned and orderly fashion at the end of ECO4.
• We wholeheartedly support the Government’s objective that all private sector tenancies should be energy efficiency Band C by 2028. But it is a big task and will need careful planning. As things stand, it seems quite likely that landlords will leave meeting the requirements until close to the deadline with the result that there will be a huge surge in retrofit activity in the private rental sector from 2026. To avoid that we are looking at whether to propose that ECO should have less constraints around support for the private rented sector in order to incentivise landlords to take earlier action thereby smoothing out the profile of work over the next 4-6 years.

We have some concerns about the reintroduction of SAP to calculate notional bill savings from measures installed. This is due to the complexities surrounding SAP and the risk of inaccuracies in lodged EPCs. We understand why it’s being done but will be looking to Ofgem, in their ECO4 scoring consultation, to find ways to mitigate the risks this presents to suppliers.

Some further detail

And finally, here are some of the more detailed but still important elements to the consultation:

• Buy-out mechanism. It is proposed that a buy-out mechanism is introduced during the scheme to enable suppliers to transfer the responsibility for delivery of all or some of their obligations. This will be of particular benefit to smaller suppliers and at the point the buy-out mechanism comes into force there will be a reduction in the obligation threshold level.
• Carry over and carry under. As well as allowing suppliers to carry forward over delivery of ECO3 to ECO4 up to a cap of 10%, it will also be permitted to add under-delivery into ECO4 but with a penalty attached. We intend to question the proposed approach to calculating the value of any carry over and penalty for carry-under using the average price of ECO3 Phase 4 in the final ECO3 impact assessment, £0.31 per Lifetime Bill Saving (LBS). However, prices have risen considerably in recent quarters, and are likely to remain high until the close of the scheme. This will disincentivise suppliers from carrying forward ECO credits, not penalise them sufficiently for under-delivery and exacerbate the market hiatus. We propose that the base price for carry-over and carry-under be set at the latest BEIS published price for ECO3 credits towards the latter stages of the programme.
• Eligibility – homes. There will be a restriction to D, E, F and G rated homes. F and G homes have to get to D. E and D must get to C.
• Eligibility – households. The reliance on receipt of means-tested benefits for eligibility (outside of LA & Supplier Flex) will continue. Recipients of non-means tested disability benefits will no longer be eligible. At AgilityEco we will want to try and help these households especially where the occupants have health conditions and are susceptible to the cold. As well as LA & Supplier Flex, the Industry Initiatives component of Warm Home Discount offers another potential route.
• Eligibility – measures. These include: a 22k pa minimum for Solid Wall Insulation; exclusion of repair or replacement of oil and LPG heating; a 5k pa cap on the repair of efficient heating systems and the same size cap on replacement; no cap on the replacement of inefficient heating systems; first time central heating will be restricted to on-grid homes and must be installed to operate on low temperature;
• Off-gas grid uplifts. These will apply in Scotland and Wales but not England on the grounds that it has the Homes Upgrade Grant which is heavily focused on off-grid works. That presumes that HUG will continue and be successful which is by no means a given. Even with a robust HUG in place there could still be a disproportionate skew of ECO delivery away from England, driven by installers focusing heavily on off grid retrofits in order to attract the uplift. We will  question whether this inconsistency is helpful.
• Scoring methodology. This is complex as a result of the new expectations that in many cases multiple measures will be installed and the move to scoring based on SAP Band improvements. We will look very carefully at all aspects including the Minimum Requirements for a full score, Partial Project Scores, evidencing and alternative methodologies for scoring new measures.
• Boiler replacements.  We understand the politics around gas boilers and see a big role for heat pumps in new build homes and off-grid homes, but we also foresee medium-term continuing role for support for gas heating for low-income households who are on the grid. This is not out of line with experts such as the Committee on Climate Change who have identified 2035 as the point by which all replacement heating systems should be low carbon. Repair or replacement of gas heating systems is also likely to be an important contributor to cost-effective packages of measures to move homes sufficiently up the SAP ratings to meet the new Minimum Requirements. We would push BEIS to consider the “broken boiler cap” be maintained at or near the level set in ECO3 or allow broken boilers to be replaced as part of a multi-measure package as opposed to restricting this to inefficient (non-condensing) boilers.

If you require further clarification on any of the points raised above, or would like assistance with your own consultation response, please do not hesitate to contact our Policy & Partnerships team. They would be delighted to help!