Beyond the ECO
An exploration of options for the future of a domestic Energy Supplier Obligation
Project duration: July 2014 to November 2014
[See bottom of the page for July 2015 update]
After 20 years of successfully imposing domestic energy saving obligations on energy suppliers, Government policy-makers face a series of discontinuities in the scale and nature of opportunities for saving energy in our homes. Over the next few years, these will include:
- The significant constraints on the availability of further low cost housing insulation measures (i.e. cavity walls and under-insulated lofts) to fulfil any energy saving obligation.
- The opportunities unleashed by the roll-out of smart meters to GB homes for: consumer engagement with their energy consumption; demand reduction; electricity demand response; and improvement of suppliers’ understanding of their customers’ energy use patterns, which enable tailored interventions.
- The technological and energy efficiency improvements in appliances and other power-using equipment, in particular LED lighting, which create a range of significant, relatively low cost energy saving opportunities.
Arguably, the current incarnation of the supplier obligation – the Energy Company Obligation (ECO) – fails to respond appropriately to these discontinuities. However, following much criticism and policy changes in late 2013, the ECO is now firmly in place until 2017.
These discontinuities and this policy-making hiatus make this a good time to initiate a re-examination of the rationale for, and design of, the supplier obligation as a policy instrument. To do so, energy supplier SSE commissioned an independent study from the Centre for Sustainable Energy.
Lead author of the report, CSE’s Chief Executive Simon Roberts said: “We need policy to change tack in 2017. Rather than obligate energy suppliers to do increasingly complex housing improvement works, as required by ECO, we should simplify the whole process and get the suppliers focused on (a) what we need them to do and (b) what they are best placed to do. That means cutting energy demand by helping their customers take full advantage their new smart meter and all the low cost opportunities for more efficient energy use in the home.”
Current and past obligations and the rationale behind them
The ‘Beyond the ECO’ study tracks the development of these obligations since 1994 and revisits the original rationale for imposing an energy saving obligation on energy suppliers; that it’s cheaper to save energy than it is to supply it. Energy suppliers were not supporting energy saving at this time, so regulators and government agreed they should be obligated to do so. This study concludes that this rationale remains valid. The report also argues that, because UK energy policy objectives all point to a future needing lower, more flexible energy demand, the supplier obligation policy should align with this and support energy suppliers to become viable businesses in a low energy demand world.
Successive obligations have been highly effective in securing mass public take up of cavity wall and loft insulation and compact fluorescent light bulbs (CFLs). These low cost measures reduced fuel bills on average for customers by more than the obligations added to bills. But in recent years, the obligation has been restricted to increasingly complex and expensive energy saving and heating measures, and with many cheaper ones actually banned. This has increased the burden on consumers and required suppliers to procure complex building improvement works, a significant departure from their core business.
A supplier obligation post 2017
The study reviews a number of options for revising the energy supplier obligation from 2017 to reflect the discontinuities listed above (see table, pages 4-5 of Policy Markers' Summary and pages 8-9 of the full report). The Average Consumer Consumption Reduction Obligation – which would require energy suppliers to reduce average demand of their domestic customers – came out a clear winner.
Simon Roberts concluded: “Compared with alternatives, this approach cuts costs for consumers and focuses energy suppliers on helping their customers manage their energy use. There are plenty more questions to answer with this new policy, but they look more straightforward than those raised by any of the alternatives.
This approach also has the huge advantage that it makes energy suppliers commercially interested in ensuring that government policies to drive the use of smart meters, improve energy saving standards and secure rapid take up of low energy technology are all successful.”
The report additionally highlights the need for a major programme to tackle the heating and insulation improvements needed by fuel poor households, currently funded in England from fuel bills through the ECO. CSE proposes that this is stripped out of the supplier obligation and funded from general taxation because that is a far less regressive funding method and it would provide opportunities for a wider range of agencies (such as local authorities and landlords) to target and deliver these improvements. A more regressive alternative to general taxation, still compatible with the proposed ACCRO supplier obligation, would be for a levy to be raised on fuel bills to fund such a programme but where suppliers were not obligated to deliver it.
Update: In July 2015 we published a short policy briefing ‘Beyond the ECO – and beyond’ explaining how our thinking has developed since Beyond the ECO was published in December 2014 and responding to some of the Frequently Asked Questions about our proposals. The briefing also outlines new proposals from CSE for addressing two policy areas which are (to some extent) addressed by the ECO, but which we explicitly argued should be kept out of a future obligation on energy suppliers: a programme to improve insulation and heating in fuel poor households and stimulating the solid wall insulation market for privately-owned homes. To download the briefing, click here.