ECO4 Consultation: Briefing on the Government's response

04/04/2022

AgilityEco welcomes the long-awaited publication of the Government’s response to the ECO4 consultation. In this briefing we look at the key points for us and our partners.

Although it’s disappointing that the delays in issuing the response will inevitably cause disruption to ECO activity, especially as the implementing Regulations will not come into force until later in the year, in some ways it is a relief that it is here at all. It was only a few months ago that the media was speculating that ECO4 might be deferred in what would have been a misguided attempt to achieve short term savings on energy bills in response to price rises.

So it is great news that we are going to have ECO4 in much the promised form. A 4-year scheme to 2026 worth £1bn per annum. An increased focus on more substantial improvements to the worst homes. A ‘fabric first’ approach with minimum insulation preconditions when heating measures are being installed. And up to 50% of ECO4 to be delivered through new Flex arrangements which will be really beneficial for our work with suppliers, local authorities and other local organisations.

It is worth looking back at what has happened with regard to the 4 main concerns we had when the consultation was issued last July:

  • First, we were concerned that the proposals were under-ambitious in terms of the number of homes to be improved across the 4 years; only 305,000 homes were to be improved, a low figure even through they would be receiving more substantial upgrades. It is therefore very pleasing to see that BEIS have listened to the views expressed and have a new forecast of 450,000 homes improved. We suspect that the number might have been even higher if it wasn’t for recent increases in costs.

  • Second, we were concerned that the usual lull in activity between schemes might occur especially as suppliers have 4 years to deliver ECO4. This concern is now exacerbated by the delay in issuing the response. It is helpful that BEIS are encouraging suppliers to start work in advance of the Regulations by allowing them to score measures under the familiar ECO3 rules until June, with a few small amendments, most notably for heating measures. During this interim period, the popular dual measure approach will be restricted to broken inefficient heating. It also looks like any electric room heater to storage heater upgrades will need to be accompanied by a qualifying primary insulation measure. While suppliers will also be able to work to the new ECO4 rules, we suspect ECO3 will continue to be the focus as it will not be possible to notify ECO4 measures to Ofgem until the Regulations are in place. We are urging BEIS to further encourage early activity by issuing the draft Regulations and getting them laid before Parliament as soon as possible with Ofgem also quickly publishing their detailed guidance.

  • Our third concern was that the Scottish Government might choose to exercise powers under the Scotland Act and establish their own version of ECO. Doing so would, of course, be their right and our worries were more around the delays and disruption from setting up a new, separate scheme. Here the good news is that what we appear to have is a continuation of a GB-wide scheme for the duration of ECO4.

  • Our final concern was that ECO4 might not be providing enough support for the Private Rental Sector which could lead to a flood of activity in that sector in the mid-2020s if landlords leave meeting the proposed Minimum Energy Efficiency Standards (Band C by 2028) to the last minute – as seems likely! We felt a smoother flow of work could be encouraged by ECO. The Government response leaves the constraints on PRS work largely as proposed and we have yet to see the response to the MEES consultation. We hope that is shortly to follow.

Overall we feel that the plans for ECO4 have moved in the right direction with the main issue being the short term one of how much activity suppliers support in the period up to the summer.

We were also concerned about the plan  for First Time Central Heating only to be allowed for homes that were on grid as at 31 March. This has implications for planned connections under the Fuel Poverty Network Extension Scheme; while we fully expect Ofgem to end FPNES, it will be really important that commitments already made to households under FPNES are honoured and that they receive both a gas connection and FTCH. So it is with some relief that we have separately confirmed with BEIS that FTCH flowing from FPNES connections will continue to be allowed under the interim ECO3 arrangements between 1 April and 30 June. 

We now turn attention to some of the other aspects of the response including both elements that remain unchanged and some areas where new thinking has emerged:

  • As well as the significant increase in the number of homes to be improved, other adjustments to the scale and value of ECO4 are worth reporting. As a result of refined modelling by BEIS, Annual Bill Savings are now expected to reach £224.3m by 2026 rather than the original estimate of £94m, a massive boost for hard up households. With a total spending envelope of £4bn, we expect that the average price per ABS will be in the region of £16 once administration costs are removed. However, we anticipate that each sub-obligation or cap is likely to find its own market clearing price; the Solid Wall Insulation and EFG minima may attract more and measure packages improving D rated homes may attract less.

  • The majority of the spend will be earmarked for E – G rated homes, ~70% as opposed to 33% the forecasted no of homes treated seems to imply. This is based on the Annual Bill Savings split referenced within the accompanying Impact Assessment.

  • A 10% carry over from ECO3 to ECO4 has been allowed. We were a little surprised that BEIS did not listen to those of us concerned that prices will be based on the ECO3 Impact Assessment rather than more recent data. Carry under has been deemed unnecessary.

  • There will be a pool of eligible households that BEIS estimates to be at least 3.5 million.

  • With regard to caps and minima, the repair and replacement of broken efficient (condensing) boilers both remain subject to 5,000 pa caps. The Solid Wall Insulation minimum across the 4 years has increased slightly to 90,000.

  • BEIS still intends to have a buy-out mechanism to help smaller suppliers when in due course they lower the obligation thresholds. We were very interested to see that it is no longer the thinking that this will be based on BEIS collecting levies but on suppliers being allowed to arrange third party delivery. The response cites Industry Initiatives as a potential model. We think this would be an excellent development and look forward to engaging with the consultation that is to follow.

  • We are pleased to see BEIS retain lodged EPCs as the preferred method to evidence pre and post project ratings, allowing a more tailored mechanism for each project rather than relying on a deemed approach. BEIS acknowledge concerns relating to EPC manipulation and reaffirm their commitment to the Government’s Action Plan to reform the EPC framework in the near future, which should alleviate some of these concerns.  

  • There will be Minimum Requirements for works with all eligible owner occupier homes having an efficiency rating of D-G while private rental homes and social housing will need to be E-G. An F-G home will have to get to D and D-E homes will need to get to C. The minimum number of homes in private tenure to be upgraded is set at 150,000.

  • Partial Project Scores will be applied when the Minimum Requirements are not met and there will be a 20% score deflator. The application of PPS remains tightly controlled including when a householder changes their mind before all the measures are installed. PPS work can only be 12.5% of a supplier’s obligation. We eagerly await a steer from our obligated supplier partners as to how they intend to administer partial projects! We expect pricing for PPS may differ from Full Project Scores.

  • Insulation preconditions that are being introduced for all measure packages that include a heating measure, including heating controls, are largely aligned to ECO3 First Time Central Heating preconditions.

  • We welcome the simplification of the in-fill rules (where ineligible households are included alongside eligible households in a programme of work) and that the PPS deflator will not be applied to them.

  • Proposed heating measures in off-gas properties will be subject to an “off-gas heating hierarchy” in the following order:
    • hydronic heat pump or District Heating Connection (DHC) heat pump
    • solid biomass system or DHC not fuelled by a heat pump
    • replacement of electric heating with efficient electric heating, such as the replacement of electric panel heaters with High Heat Retention (HHR) storage heaters.

  • We were disappointed to see that it is still intended to apply the 35% off-grid uplift only to Scotland and Wales. We feel this will skew the distribution of ECO work. BEIS argue this is being done because of the availability of the Home Upgrade grant in England.

  • Solar PV will be restricted to properties that already have a hydronic heat pump, HHR storage heaters or electric heating which has the equivalent of greater efficiency than a HHR storage heater.  

  • The proposed Hard To Treat uplifts are now to be referred to as Building Fabric Repairs (to differentiate them from earlier HTT terminology). They will have 4 bands and be subject to a maximum of £1500.

  • The three month period for notification of measures to Ofgem remains.

  • The innovation element of ECO has been reformed and now has two forms of uplift.

  • We note that BEIS intends to take a future primary legislation opportunity to change the nature of the obligation on suppliers to a Home Energy Cost Reduction Obligation in order to allow a greater range of measures beyond space heating such as water heating and battery storage.

  • PAS standards will no longer be required through Regulations but rather through the requirement to be Trustmark registered.

Finally, we return to the new Flex arrangements as they will be critical to many people reading this.

The arrangements present some exciting opportunities. We think it is right that Government is tightening the controls over the way in which this part of ECO is used so that only low income households are supported. Statements of Intent by local authorities or devolved administrations will need to be in accordance with the regulations rather than just guidance. We look forward to working with our partners on the four new referral routes: eligibility based on household income up to £31,000; proxy targeting (available to suppliers); NHS referrals; and, bespoke targeting approaches.

For further details, please contact enquiries@agilityeco.co.uk.