Outcome of the ECO3 consultation is published

19/07/2018

The eagerly awaited Government Response to the ECO3 consultation, governing the future of ECO from October 2018 to March 2022, was published today (19th July 2018). First of all, hats off to the officials at BEIS for sticking to their timetable for getting this published, despite the undoubted difficulties of parliamentary process at the present time. We understand that the regulations have been laid into parliament today, but with the forthcoming summer recess and party conference season, the legislation is unlikely to be passed into law before October at best. In the meantime, we understand that Government has taken a number of steps to ensure the market continues without a hiatus, including working with Ofgem to expedite the publication of deemed scores and supplier guidelines, and a series of workshops to be held shortly.
 
Here are our key take-aways from the final consultation outcome, and a few further points of detail below. You can read our initial briefing on the ECO3 Consultation itself here.

KEY OUTCOMES:
  • ECO3 Target: The overall target for ECO3 has been increased by 7% to £8.235bn lifetime bill savings. We, and many other parties, presented evidence to Government that their calculations were too conservative on the cost of lifetime savings (LTS), such that a higher target could be accommodated within the £640m “spending cap”, and it is great to see a more stretching target being set. Note that there will be no “interim targets” – a supplier will comply with ECO3 as long as they have met their total obligation by March 2022.
  • Affordable Warmth Only: As expected, ECO3 will now be 100% focused on the “Affordable Warmth” (AW) sector, and no ECO funding will be available for measures delivered to “able to pay” households, with the exception of in-fill rules for solid wall insulation and district heating projects. The eligibility criteria for AW will be relaxed (including the removal of almost all income caps) such that 6.6m households will be eligible.
  • LA Flex Extended: In addition, 25% of the obligation will be available through the Local Authority Flexible Eligibility (LA Flex) mechanism, which is great news for our many council partners across the country. Note that there will be a (to be defined) uplift to ECO3 scores for F and G rated (owner occupied) properties funded through LA Flex. Note also that BEIS will issue new guidance on LA Flex before October.
  • Smaller Suppliers: The “supplier threshold” will reduce from 250,000 energy accounts to 200,000 accounts in April 2019 and 150,000 in April 2020. This means a number of smaller suppliers that are currently below the obligation threshold, will become obligated. However, a new, slightly modified “taper mechanism” will also be introduced, the effect of which will be a decrease in the share of ECO3 borne by smaller suppliers.
  • ECO Innovation: The ECO innovation mechanism will be in place right from the start of ECO3, through “Demonstration Actions” (scale trials of innovation measures being installed and monitored with the costs being approved by Ofgem and then recovered though ECO3) and “Score Uplifts” (innovation measures approved for an uplift to the standard ECO3 scores). The size of ECO3 innovation was right at the bottom of the consultation range, with a cap of 10% of each supplier’s obligation coming from innovation measures. We think this is good news – it is better to see how the innovation mechanism works in practice before committing to 20%. Note also that although only E, F and G rated social housing will qualify for ECO3 measures, and no social housing will qualify for heating measures, D rated social housing (in addition to E, F and G) will qualify for innovation measures. This may create opportunities for Demonstration Actions in social housing (over 40% of social housing is D rated).
  • Solid Wall Insulation Minimum: The SWI Minimum remains at a very disappointing 17,000 homes. Moreover, a combination of other insulation and renewable heating measures that delivers equivalent savings can be used instead of insulation. We had suggested a “fabric first” approach whereby (for such a low target) only SWI insulation measures would qualify.
  • First-time Central Heating: This will now qualify as a measure even when the heating source being replaced is electric storage heating. This is welcome news to our partners in Warm Homes Fund Greater Manchester and Warm Homes Fund South of England, as matched funding via ECO is now confirmed.
  • F&G Rated Private Rented Sector (PRS): In an interesting development, and outside of the questions in the consultation, ECO will not now be available for measures installed into F or G rated PRS properties (other than expensive measures such as SWI). This is on the grounds that the landlord will separately be required to reach the minimum energy efficiency standard (MEES) which require the landlord to make improvements to reach at least band E. However, this does create a “circular argument” at the moment, as a PRS landlord will be able to get an exemption from the MEES where a measure isn’t available at zero cost to them (and Green Deal would be prohibitively expensive for a cheap measure like loft or cavity insulation). Let’s hope this is solved by a swift conclusion to the consultation on the removal of the “no cost to the landlord” principle and implementation of the proposed requirement on landlords to make improvements up to a cost of £2,500.
OTHER THINGS TO NOTE:
  • Child Benefit: This has been included as a qualifying benefit, but alongside income thresholds, with “self-declaration” by the household of the income level being considered sufficient. Government has asked Ofgem to adopt a system that, “to the fullest extent possible, minimises any potential for abuse and/or fraud”.
  • Rural Sub-Obligation: The rural safeguard will be maintained, such that 15% of all measures must be installed in rural areas.
  • Ground Source Heat Pumps: RHI and ECO can now both can be claimed, for GSHP only, but this will not be allowed on any other renewable measures attracting RHI.
  • Oil Boilers: In a surprise change from the consultation, oil boilers will retain a foothold in ECO3. However, as they will only be eligible within the “Broken Boiler Cap”, we expect the number of oil boilers installed in practice to be very few as broken gas boilers can typically be replaced at a lower ECO funding rate than oil.
  • Inefficient Heating Systems: The proposed inclusion of (relatively low) funding for inefficient heating systems (outside of the Broken Boiler Cap) alongside an insulation measure remains. However loft insulation will no longer qualify as an accompanying insulation measure.
  • In-fill Mechanism Extended: This mechanism, which enables a certain number of non-AW households to receive SWI measures as part of an area-based scheme will be extended to District Heating. This is available for private tenure households only.
  • Scotland: In the event that Scottish Government decides to take devolved responsibility for ECO in Scotland, the apportionment of ECO to Scotland will be based on three-year average supply volumes, resulting in a significantly lower share of ECO funding going to Scotland than at present.
  • One Month Reporting Rule: The proposal to extend the measure reporting period to two months has been dropped.
  • Quality Mark and Revised PAS: The Government intends to adopt the “Each Home Counts” Quality Mark and revised PAS standards, but with a “clear and sufficient transition period” from them being available.
  • Customer Contributions: Some respondents suggested that there should be an outright prohibition of customer contributions under ECO. This has been rejected by Government on the basis that it is a matter between an installer and a householder.

The final paragraph of the whole consultation is worth quoting verbatim, as it reaffirms Government’s long-term commitment to home energy efficiency funding: “The Clean Growth Strategy also stated that we will consider the best form of support for home energy efficiency beyond 2022, recognising the need to save carbon and upgrade all fuel poor homes to Band C by 2030. There will be support for home energy efficiency to 2028 at least at the current level of ECO funding.”

For further information and advice on ECO3 , please contact us.