APPENDIX 1: DRAFT GREEN DEAL FRAMEWORK
(DISCLOSURE, ACKNOWLEDGMENT, REDRESS ETC.) REGULATIONS 2012 AND
THREE RELATED INSTRUMENTS: CORRESPONDENCE
Letter from Richard Lloyd, Executive Director of
Which? to Lord Goodlad
Dear Lord Goodlad,
As the Chairman of the Select Committee on the Merits
of Statutory Instruments, I wish to raise with you the significant
concerns we have regarding the Secondary Legislation laid before
Parliament last week establishing the legal framework for the
Green Deal and Energy Company Obligation.
Although we support the Government's ambition to
increase uptake of energy efficiency measures, we are concerned
that the Green Deal legislation will not deliver the policy objectives
sought.
Without widespread consumer demand, the Green Deal
will not achieve its objectives of improving homes, reducing energy
bills, reducing carbon emissions and reducing fuel poverty. The
Government's expectation is that consumers will make the effort
to understand and trust a complex and novel financial product
that charges interest and delivers only a small net saving for
a package of energy efficiency measures. However, since millions
of consumers have not taken up offers of free or heavily subsidised
loft or cavity wall insulation under the existing energy company
obligation, CERT (Carbon Emissions Reduction Target), we believe
that they will be unlikely to enter into such an agreement funded
via a loan.
Our specific concerns with the Secondary Legislation
are outlined below. We believe that each of these elements of
the legislation will undermine consumer confidence in the product
and therefore ensure that the Government will not achieve its
policy objectives:
· Green Deal savings and loans are not
tailored to people's actual energy use: We believe that the
assessment process, the principles for which are set out in Part
5, Chapter 1 of the Green Deal Framework (Disclosure, Acknowledgement,
Redress etc.) Regulations 2012 will not ensure that consumers
can have a reasonable expectation of the savings estimates predicted,
and therefore will undermine the 'Golden Rule' that is central
to the Green Deal achieving its objectives. The secondary legislation
sets out that assumptions for the likely savings from a typical
household living in that property will be used to define likely
savings (Regulation 27 (2) and 3)), rather than estimates relating
specifically to the homeowner's circumstances and energy usage.
Although consumers will be presented with a personalised assessment
of their energy usage, Green Deal providers are not required to
link this to the size of Green Deal loan that could be offered.
· Green Deal loans could stop people
from switching: We are also concerned at the potential for
these Regulations to present a material barrier to consumers wishing
to switch energy supplier. Although Part 5, Chapter 2, Paragraph
34 dictates that the Green Deal must not prevent a bill payer
from changing gas or electricity supplier, there is no way of
guaranteeing this currently. There may be small energy suppliers
who do not opt in to the Green Deal payment mechanism, meaning
that consumers with a Green Deal wishing to switch to said supplier
may be prevented from doing so.
· Green Deal plans will be sold as 'fixed'
but will in fact increase year on year: Although we welcome
the fact that Green Deal plans will only be offered on fixed interest
rate deals, the effect of Part 5, Chapter 2, Paragraph 33, which
allows instalments to be increased by up to 2% each year, is such
a heavy caveat to Paragraph 32 (fixed interest rate) that we consider
that the latter is largely meaningless. This could further dissuade
consumers from taking out Green Deal plans, thereby undermining
the policy objectives.
· Warranties for the Green Deal will
not offer suitable protection: We have concerns that the Government's
proposals for guarantees have been significantly watered down
(Regulation 35 and Schedule 3). Where originally the proposal
was to have coverage for the entirety of the Green Deal loan,
this has now been reduced to five years (with the exception of
wall insulation). This is a particular concern for boilers, since
it could lead to a situation where the occupant is paying for
a measure that is not functioning (and in the case of future occupants,
one that they didn't choose to purchase).
· The Energy Company Obligation is not
equitable and cost-effective: Finally we have significant
concerns over the proposals set out in the Electricity and Gas
(Energy Company Obligation) Order 2012, also laid before Parliament
last week. We do not consider that it is equitable or cost effective
for the majority of the ECO funding, drawn from consumers bills,
to be applied to sizeable subsidy for solid wall insulation, much
of which is likely to be for able-to-pay homes. To achieve the
Government's aims of tackling fuel poverty more funding should
be applied to these households. Furthermore, a higher proportion
of the ECO should be made available for low-cost, high-impact
measures such as loft and cavity wall insulation to achieve the
objective of reducing energy bills and carbon emissions. Without
such a change, the Government's impact assessment predicts a significant
fall in the number of loft and cavity wall insulation installations.
· Furthermore with regard to the ECO, we
believe that it is imperative that energy companies are required
not only to report on the costs of delivering their obligations
(Part 5, Paragraph 23) but also on the costs passed through to
consumers in their bills. This will enable the regulator (Ofgem)
to determine if measures are being installed cost-effectively.
I do hope that your Committee will consider these
concerns. Which? can provide further information and evidence
about these issues.
Richard Lloyd
19 June 2012
Letter from Gregory Barker MP, Minister of State
at the Department of Energy and Climate Change, to Lord Goodlad
Dear Lord Goodlad,
I understand that you received representations from
Which? regarding the Green Deal and Energy Company Obligation
affirmative instruments my Department laid. I am grateful for
the opportunity to provide a Departmental response to the points
raised, and hope this will aid the Committee in its consideration.
I will take the points in the order in which they were raised
in the original letter, and in some detail, so that you have a
complete view.
Green Deal savings and loans, and actual energy
use - I believe Which?'s concerns that
Green Deal savings are not tailored to people's actual energy
use to be unfounded. I can reassure you that I deliberately decided
to cap the Green Deal charge at the typical savings level to protect
future occupants from inappropriately high energy bills due to
the Green Deal Plan. The Green Deal Occupancy Assessment, which
specifically considers the occupants in the property and the way
they use energy, will be used to adjust the typical savings estimates.
I have also introduced a requirement that if a lower than average
energy user wishes to take out Green Deal finance, the Green Deal
Provider must obtain written acknowledgement that they are aware
that, based on their energy use, the Green Deal charge may not
be fully offset by their energy savings. Green Deal Providers
will be held liable if they do not meet these obligations, and
I am sure they will be taken very seriously.
Green Deal loans and switching
- Which? was concerned that Green Deal loans could stop people
from switching. However, this was a matter I considered in great
detail, and I am confident that the ability of customers with
Green Deals to switch will not be substantially affected. All
suppliers with more than 250,000 customers will be obligated to
collect the Green Deal charge whilst those with less than 250,000
can opt in to collecting the charge. I have put in place a levelization
mechanism for the electricity suppliers' administration fee which
will compensate smaller suppliers for their increased costs per
customer for collecting the Green Deal charge, in comparison with
larger suppliers. I therefore expect that smaller suppliers will
opt in to collecting the Green Deal charge, and I will also be
monitoring this over time to ensure there is no adverse on competition
within the market.
Green Deal plans and interest rates
- Which? raised concerns that Green Deal plans will be sold as
fixed but will actually increase year-on-year. This is a misunderstanding.
I have deliberately restricted Green Deal providers offering plans
to domestic customers to fixed rate deals only. In order to allow
Green Deal providers and customers a little more flexibility,
Green Deal providers will have the option to uplift the whole
charge by 2% a year. This has the benefit of allowing more measures
to meet the golden rule and for a greater proportion of these
plans to be paid using Green Deal finance. However, if the 2%
uplift is agreed and utilised, the instalments related to the
plan will still be calculated and fixed at the outset.
The repayment profile will be made very clear to the customer
before the plan is signed and will be disclosed to future bill
payers upon transfer of the property.
Warranties for the Green Deal and customer protection
- Which? was concerned that the original warranties proposal had
been "watered down". However, following responses to
the consultation and our own research, we found that initial proposal
of proving warranties for the life of the Green Deal plan was
not financially viable or good value for money. The evidence,
including a recent report from the Office of Fair Trading, is
set out in detail in the government response and impact assessment.
Our requirement of a five year warranty for measures under the
Green Deal mirrors some of the market and pushes the rest to go
further.
The Energy Company Obligation (ECO)
- Which? asserted that the ECO is not equitable and cost-effective,
but I cannot accept this. The Affordable Warmth and Carbon Saving
targets will allow us to deliver support to more fuel poor households,
while still delivering considerable carbon savings. The post-consultation
introduction of the Carbon Saving Communities target has also
increased the amount of ECO that will go towards delivering low-cost
insulation measures, such as loft and cavity wall insulation.
To meet their Affordable Warmth and CSC targets, we estimate that
energy suppliers will need to spend around £540m each year
assisting low income households and areas and helping to tackle
fuel poverty. This change to ECO, following the consultation,
ensures that it will be a cost-effective way of delivering support
in an equitable manner to the low income households and communities
who need it most, while saving carbon.
I hope this information is useful background to our
decisions. I have sought an optimal balance between consumer protection
and burdens on the very businesses who will be delivering the
Green Deal. I received many views during the consultation, and
Which?'s was just one of these. I actively encourage their participation
through the Green Deal Consumer Protection Steering Group and
their views have always been given a fair hearing. However ,some
other consumer protection groups have taken a different position.
Ultimately, I believe we have devised a final policy which fairly
reflects all the views and evidence we received and delivers an
effective legislative framework.
Gregory Barker
21 June 2012
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