The Energy Company Obligation (ECO)

1. The Energy Company Obligation (ECO)

2. Contents • What is an energy company obligation? • The priorities and objectives for ECO • A departure from CERT • Outstanding issues and possible solutions

3. Background What is an energy company obligation? • Government sets a outcome and obliges the big six suppliers to deliver that outcome • The outcome must be related to reducing domestic carbon emissions (or with new powers in the Bill the cost of heating) and can be more or less complex, including rules for what can be delivered and which households are eligible • An administrator then ensures the rules are followed – however once the outcome is set, government has no day to day control of the delivery - changes require legislation • Energy suppliers are assumed to fund their obligations through energy price rises with poorest hit hardest by higher energy costs Why use the suppliers to deliver? • Energy suppliers have a direct customer relationship with every household • Liberalised market and economies of scale are thought to keep costs down

4. ECO Priorities HIGH • What • Deliver carbon savings • Support the Vulnerable • Support an equitable Green Deal • Improve historic buildings • Improve wider sustainability • How • Scale up delivery of core technologies on 2050 pathway • Deliver heating systems to the most vulnerable • Support micro-gen • Support water efficiency, recycling, etc LOW

5. Objectives of the ECO • Objectives? • Deliver Carbon Savings • We need to deliver a step change in the rate of improvement of homes and an obligation can provide certainty that we will be on track to realise long term carbon savings • Support the Vulnerable • We need to continue to support thermal improvement, particularly heating systems, for the poorest and most vulnerable after Warm Front has come to an end • Work alongside Green Deal • For the technologies crucial to meeting 2050 carbon objectives (for example solid wall insulation) we need to encourage innovation and investment and drive down the costs. And we need to ensure Green Deal works for all consumers regardless of social circumstances by providing extra support if required • ECO will launch alongside Green Deal in Oct 2012

6. A departure from CERT • Designed from the ground up to work with Green Deal and meet the core objectives • Very restricted list of technologies supported? • Long term obligation (8 years) with interim targets and regular reviews? • Monthly reporting of measures installed and carbon savings, and annual financial reporting on the real costs of delivering ECO? • A clear separation between environmental and social objectives?

7. Policy design ECO: delivering carbon savings & supporting the vulnerable • Carbon target • Supporting Green Deal market for all consumers • Focused on helping create market for key technologies, such as SWI, on the path to 2050 for housing • Affordable Warmth target • Targeting the poorest and most vulnerable households • Focused on delivering heating systems and insulation

8. Issue: Ensuring equitable delivery of support for Green Deal Possible solution? • Set ‘Distributional Safeguard’, i.e. minimum proportion of obligation to be met through delivery to households least likely to benefit otherwise. Issue: We know from CERT that benefits tend to accrue to more affluent consumers unless tool in place to ensure equitable distribution. Prospective Green Deal finance providers have indicated they may market to more affluent postcode areas (i.e. with lower average default risk). This is a problem because: All consumers pay for supplier obligations through energy bills, so Government has duty to ensure equitable distribution of benefits. Poorer households and those living in more deprived postcode areas could lose out from benefits of the Carbon Obligation. Non-directed benefits All other activity can be directed at any households without restriction Distributional safeguard Minimum level of activity targeted at low income households