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CORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 966-ii
HOUSE OF COMMONS
TAKEN BEFORE THE
Energy and Climate Change Committee
Green Deal Watching Brief
Tuesday 5 March 2013
Dr Nick Eyre and Dr David Kennedy
Eric Salomon, Simon Stacey and Neil Clitheroe
Peter Broad and Simon Osborn
Evidence heard in Public Questions 91 - 169
USE OF THE TRANSCRIPT
This is a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.
The transcript is an approved formal record of these proceedings. It will be printed in due course.
Taken before the Energy and Climate Change Committee
on Tuesday 5 March 2013
Mr Tim Yeo (Chair)
Dr Phillip Lee
Mr Peter Lilley
Sir Robert Smith
Dr Alan Whitehead
Examination of Witnesses
Witnesses: Dr Nick Eyre, Environmental Change Institute, University of Oxford, and Dr David Kennedy, Chief Executive, Committee on Climate Change, gave evidence.
Q91 Chair: Good afternoon and welcome. You are both familiar to this Committee, so we will not waste any time on introductions. Thank you very much for coming in. We have about 40 minutes for this part of the evidence session.
Given that saving carbon is one of the principal objectives of the Green Deal and the ECO, do you think that DECC’s projections for the carbon savings from the Green Deal and ECO are sufficiently ambitious?
Dr Kennedy: The short answer is no. We have been pretty clear about that. There are three things that the Green Deal and the Energy Company Obligation should be focused on if you are interested in reducing energy consumption. Those are loft insulation, cavity wall insulation and solid-wall insulation. There is a reasonable level of ambition in the Energy Company Obligation for solid-wall insulation, but if you look at DECC’s own projections for what they expect to achieve under the policies as regards loft and cavity wall insulation, they expect to deliver very low levels on both of those. In terms of a number, we have estimated the carbon gap-the difference between what DECC is projecting they will achieve and what they should be aiming to achieve-will rise to about 3 million tonnes of CO2 in 2020. That is a problem not just from a carbon budget perspective. Lofts and cavity walls are key elements of the affordability story. If you do not insulate lofts and cavity walls, then you do not offset the impact of rising electricity prices and you exacerbate affordability impacts of the low-carbon programme.
Dr Eyre: Just to add to that, we have been doing some research on how the goals for the Green Deal and ECO relate to the previous policy framework. Based on the Government’s own projections in the impact assessment of the Green Deal and ECO, each year of activity in the Green Deal and ECO will deliver about 13 million tonnes of carbon dioxide emissions reduction. That is a lifetime measure. Our estimate of what the CERT plus CESP plus Warm Front regime delivered is somewhere in excess of 40 million tonnes of carbon dioxide lifetime, so this framework seems to us to be a three-fold reduction in ambition in carbon emissions reduction.
Dr Kennedy: To take it back from carbon, I have some numbers here. We think-DECC agrees and the Government agrees in its recently published statistics-there are 6 million to 7 million cavity walls left to insulate, of which they project 2.7 million will be insulated under the Green Deal and the Energy Company Obligation. There are 7 million lofts that could benefit from topping up of insulation-if not virgin lofts-and they project that we will insulate about 1.6 million of them. Those are pretty low numbers for delivery relative to potential.
Q92 Chair: Given the failures that you have both referred to, and particularly the comparisons between what is being done now and what was aimed for under the previous energy efficiency policies, is the Government watering down its ambitions, or is there some new emphasis, the purpose of which we are not quite clear about?
Dr Eyre: If I were to be charitable, it is fair to say that at some point-although it is not quite yet, as David’s figures indicate-the scope for the low-cost insulation measures, loft insulation and cavity wall insulation, begins to run out. The main reason that the carbon emissions reduction ambition has gone down is this shift in focus, which David mentioned in his first answer, from loft and cavity to solid-wall insulation. It is essentially proposed to spend about the same amount of money in ECO as in CERT and CESP-suppliers may want to argue it is a bit more, but it is the same order of magnitude-but the cost-effectiveness in carbon savings is much lower, and therefore the carbon savings fall. We need to get the market for these new and more expensive measures up and running quickly, and I think that is the proposed strength of what is being introduced. But I agree: I do not think we need to see the precipitous fall from 0.5 million to 1 million a year down to 100,000 to 200,000 a year that is projected in the impact assessment for the low-cost measures.
Dr Kennedy: The previous Government had an ambition to insulate all lofts and cavity walls, so relative to that, if you look at these projections, clearly you could say there is a lowering of ambition. The response the Government-it is not for me to speak for them-have given me is that they are not setting any ambition for this policy; they are not setting any targets. It is a market-based approach that they are introducing and they are very optimistic about what it will deliver, but they do not want to go any further than that.
Q93 Chair: Should we be trying to distinguish between what the Green Deal does and what ECO does, in terms of the savings?
Dr Eyre: I think the Government is right to look at assessing the two together, because the ECO ambition is fixed; it is an obligation. There will be Green Deal activity outside of ECO. We can speculate about what that might be and that depends on how effective you think a pure market mechanism will be in this area. There are areas of interaction. It is hoped that, essentially, customers’ own money through the Green Deal will help the energy suppliers deliver ECO more cost-effectively than they would do if they had to subsidise every measure completely. That is the way that CERT has worked in the past, so there is some hope that that will be the case, although obviously the different mix of measures means that it is difficult to be certain about how much Green Deal money will help deliver ECO. I think assessing the two together does make sense.
Dr Kennedy: I agree. Certainly for solid walls, which is what we think these two policies together have the best chance of delivering, solid-wall insulation straddles the policies. It has driven the solid-wall insulation market through the Energy Company Obligation but it needs the Green Deal for co-finance. If we do not have co-finance, if we do not have people accepting some of the cost of solid-wall insulation, then the Energy Company Obligation is going to be very expensive to deliver. In the view of the Government it is the Green Deal and not the Energy Company Obligation that will deliver loft and cavity wall insulation. It is the view of my organisation that we can’t be confident that the Green Deal will deliver that, and that this should be put back into the Energy Company Obligation as an extra flexibility in that mechanism. But it does make sense, for us, to look at the Energy Company Obligation and the Green Deal together.
Dr Eyre: I think the Government is giving a mixed message. The headline portrayal of the Green Deal says it will be very effective, but the impact assessment does not reflect that. I suspect there is some difference of opinion between the policy teams and the analyst teams in DECC. You would have to ask them that.
Q94 Mr Lilley: That more or less leads on naturally to my question, which is: aren’t the Green Deal and ECO essentially part of what might be called a political con trick or a political sleight of hand, as I would call it, in three ways?
The Government, first, want to be able to say, "The net effect of all our climate change policies is not to increase your household heating budgets", whereas they are doing that by eliding two things: all of the renewables that do raise it, and these measures that you could have perfectly well without any renewables that produce it. You are merging two things so that one conceals the other.
Secondly, as you have pointed out, originally they made very optimistic projections for the Green Deal and ECO when they were producing their documents to show that it would not have any net effect on households. They have now reduced their estimates of both of these.
Thirdly, they are confusing, or merging, winners and losers. As I understand it, some 65% of households will still be net losers, even on their optimistic forecasts of the outcome of the Green Deal and ECO, and an even higher proportion if it is less successful than they originally attempted. They are merging some people who will gain with others who will lose.
Is all that true?
Dr Eyre: David can speak for the whole climate change programme, but certainly these are measures that save both carbon and money. There is not much doubt about that. Even at the higher end of costs that are being talked about, which is a cost of delivering in ECO of £120 per tonne of CO2, the savings for customers are still bigger than that, so there is not much doubt these are sensible things to do irrespective of climate policy. On the winners and losers point, I think we are moving. The new framework is exacerbating that problem. ECO essentially saves some customers money by a charge on all customers. When a large number of relatively cheap measures were being installed, there were a larger proportion of winners than losers, but as you move to a smaller number of expensive measures that clearly is the tendency. In a sense, we are used to that in the energy industry. Rural customers, who are very expensive to distribute electricity to, do not pay a charge that reflects that. They pay the same charge as everybody else. There has always been some cost-sharing in the sector.
Dr Kennedy: On the narrative, I think you are right. The Government says, "Well, electricity prices will go up. There is energy efficiency improvement potential, which our policies will unlock. That will cancel out and you won’t be any worse off. Actually you will be better off than you otherwise would be if we didn’t have any policies". My organisation has been very careful to split those two out and say, "Let’s be clear. Investment in a portfolio of low-carbon power generation technologies is going to cost people money through their electricity bills both in the residential sector and the commercial and industrial sectors. Let’s be clear about that. We shouldn’t pretend that it is not going to happen". We have put a figure on that. For example, for the typical dual-fuel household, bills will be £100 higher in 2020 relative to now because of the set of low-carbon policies, the Renewables Obligation, Electricity Market Reform, whatever. Then they say there is an opportunity for energy efficiency improvement. In technical terms it is more than £100 for the typical household, but there is a high degree of uncertainty, given the policies we have, as to whether we will be able to address that potential. We have been very clear to split those out.
In terms of the reduced estimates of the Government and whether they are reflected in their energy prices and bills analysis, I imagine they will be. I think that is coming out in the next week or two, so let’s keep an eye out for that. I think you are right about the distributional impact. If we take the Energy Company Obligation, the pot of money there is about £1.6 billion or £1.7 billion a year to spend. A big chunk of that will go to the fuel-poor households. There are several million fuel-poor households among the 25 million households in the country. A lot of the rest of it will go to solid-wall insulation, and the aim is to do 1 million solid-wall insulations out to 2020. So you are looking at probably less than 5 million households benefiting from that pot of money that is levied on 25 million households. There is a clear distributional impact there.
Q95 Mr Lilley: One final question; on solid-wall insulation, I seem to recall seeing, a few months ago, a report that the German Government-I think under a Freedom of Information request-had had to reveal studies they had done on the effectiveness of solid-wall insulation. These studies showed it was remarkably ineffective, which is why they had been reluctant to publicise it. Are you aware of these studies? If so, can you point me back to them, because I have not been able to find them ahead of this meeting? If not, I will have to keep on looking.
Dr Kennedy: Can we follow up on that with you? Certainly the estimates of the effectiveness of solid-wall insulation have been changed over the last few years here. There has been a lot of analysis, there has been evidence collected, and the Government has become a lot more pessimistic than it was about solid-wall insulation. I still regard it as something that is cost-effective to do. The costs per tonne of emissions reduced are less than the projected carbon price. It is still a sensible thing to do as part of your carbon strategy. I think it is fair to say that there is a high degree of uncertainty over how effective solid-wall insulation will be, although from what we can tell it is a sensible thing to do in the medium term as part of your broader carbon strategy.
Q96 Mr Lilley: But you have not seen these German studies?
Dr Eyre: I am not familiar with a study to that effect. I would be surprised if that were the case because, as in this country, emissions from the household sector in Germany have been falling fairly substantially over the last seven or eight years. They do not have many walls with cavities so my guess is that that has been done largely through solid-wall insulation.
Q97 Sir Robert Smith: We are looking at monitoring the Green Deal and the ECO, so what do you think is the best way of tracking the carbon savings of the two policies?
Dr Eyre: I think ultimately that can be done through combining the two existing large data sets, the home energy efficiency database that essentially tracks each measure that is installed in each house-that is why it is a large database-and the national energy efficiency data framework that is essentially a database of fuel bills. If you cross-correlate those and compare the houses in which measures have been taken to those where they have not, that should be able to give you a pretty good estimate of the energy savings that are delivered. The problem of doing that is it is a substantial exercise and it will take some time, so we will probably be past the end of the current ECO commitment anyway before there is reliable data out of that.
I think that we need to track measures activity from the word go, and I also think that it would be very helpful to have research at a more detailed level, more of a case-study level, on the actual performance of some of the more complex measures that are undertaken. One thing we have learnt in energy efficiency research is that the outcomes are very rarely equivalent to the ex ante assumptions. Unless you work out why that is, it is difficult to know how to respond. I think there is monitoring of effectiveness in terms of total energy, total carbon; but also more qualitative monitoring of what is going on and what is making a difference.
Dr Kennedy: In terms of the key measures, again I think there are 30-plus measures that are eligible for the Green Deal. If you are interested in emissions reductions and reductions in energy consumption, you will be focusing on solid-wall insulation, loft insulation and cavity wall insulation; not just the number of houses that you are putting those into, but also the cost is crucial. That is something we need to monitor. If you look back, we do not have good information about the costs associated with the various forms, of the supplier obligations of CERT, for example. I think there is a real concern that the cost of the Energy Company Obligation going forward could escalate because you have to pay people a lot of money to agree to have solid-wall insulation. We need to understand what is happening in that respect and possibly put safeguards in as well to protect against it.
Q98 Sir Robert Smith: DECC are planning to use the estimated savings as the calculation to start with. Would there be more realistic data available from the start?
Dr Kennedy: They have looked at all of the evidence available across the range of measures, and I think they have a good take on the available evidence, but, as Nick says, there is more to do in terms of getting a handle on what the real reductions are in energy consumption associated with particular measures. Solid wall is one example, and there are others.
Q99 Sir Robert Smith: Is there feedback already from the rebound effect of people taking the saving in more comfort, rather than just taking the saving in reducing their energy bills?
Dr Eyre: Yes. I think we are pretty much on top of that now through the cross-correlation of databases that I talked about earlier. The assumptions that are being fed into the savings for Green Deal and ECO, for example for cavity wall insulation, are that it will save, I think, 2.8 MWh a year per house insulated, whereas in CERT the ex ante assumption was 3.5 MWh a year, and that has now been reduced on the basis of the evidence. I think that is an area in which the Government has made very significant progress over the last few years.
Q100 Dr Whitehead: Could I clarify the question of targets or not targets? David, you mentioned the fact that no targets at all have been set. Is that right: there are none for Green Deal and ECO achievements; for monitoring purposes; no targets whatsoever?
Dr Kennedy: That is true. If you want to achieve something it is sensible to say, "This is what we want to achieve". That is your target, and then you judge your success against it. The Government has been very clear in saying they are not setting targets for these policies.
Q101 Dr Whitehead: It says in the Carbon Plan, "Government’s current policy package will depend on the final design of the Green Deal and Energy Company Obligation. In the light of public consultations it is likely to result in all practicable cavity walls and lofts having been insulated by 2020 together with up to 1.5 million solid walls also being insulated". Do you think that is a target?
Dr Kennedy: Does it sound like a target to you? I don’t think so, no. There is a lot of leeway in that.
Q102 Dr Whitehead: Is it an outline target? I struggle as to how one monitors-
Dr Kennedy: The way that we will monitor, in our organisation, is to say that there are 6 million-odd lofts that we should be trying to insulate and a similar number of cavity walls, and to ask how we are doing against that. That will be the target; that will be how we will report back to Parliament, whether or not the Government has set its own target.
Dr Eyre: I would suggest there are three ways to look at the overall deliverable. One is the one I outlined earlier. We can look at what has been done in the past; we know how successful that has been. It will be interesting to see how what happens in future compares to that. The second is against the impact assessment. Whether that is a target or not-I don’t do theology, I am inclined to say. The third is a new one, but I think the Committee should be aware of it. There are targets under article 7 of the new Energy Efficiency Directive for energy efficiency improvement. My fear is that this downgrading of ambition means that we are not on track to deliver those targets, but that is a guess at this stage. I am not aware of the Government having produced any documentation on it.
Q103 Dr Whitehead: As far as the Green Deal is concerned, that of course is calculated in terms of its doability, in terms of the Golden Rule. The Golden Rule itself is based on what energy saving can be calculated using SAP, or RdSAP to be precise. Do you think that is a reliable measure of estimating whether something is inside or outside the Golden Rule?
Dr Eyre: It is not intended to be. It is a misuse of SAP or RdSAP to expect it to project what will happen in each individual house. At the overall housing stock level it may well be rather a good predictor of what changes the adoption of particular measures will make, but the variation between houses and between years in the same house is very large, and this is to do with people. It is people that run the buildings that ultimately use the energy. There is no way that a model of the building that does not take into account people-and that is what SAP and RdSAP are and have to be-will ever be a good predictor of the actual energy performance of individual buildings.
Q104 Dr Whitehead: Right, but that is being used, however, as the predicate for in principle looking at whether something is likely to be inside or outside the Golden Rule. Are you saying that is inherently something that should not be done?
Dr Eyre: The Golden Rule does not seem a very sensible rule to me. It seems to be responsible for a lot of what I think is wrong with the Green Deal, but simply expecting it to do what it is not designed to do is not a good idea.
Q105 Dr Whitehead: Do you think, on that basis, there might be a danger of people thinking they are saving money as a result of being inside the Golden Rule, and it turns out that they are not inside the Golden Rule and therefore they do not save money?
Dr Eyre: I think it is a bit exaggerated. Not many people would think that if they get their house insulated and then turn up the thermostat so it is five degrees hotter, they will have a lower energy bill. I don’t think people are that stupid. But that is the case-there is no way that the Green Deal provider can guarantee that the energy bill will change in a particular way, because it depends on the way the building is used.
Q106 Dr Whitehead: Are there other ways in which meeting the Golden Rule could be brought about? What might be the best way of doing that if RdSAP is not?
Dr Eyre: If the Golden Rule is designed to make sure that only cost-effective energy efficiency is supported, and that seems to be the intention, then that should be what is measured, and the Golden Rule will, as I read it, be successful in ensuring that energy services are cheaper. That is what we can say by insulating a building: that energy services will be cheaper. We can’t say whether the occupants of the building will want more or fewer energy services.
Q107 Dr Whitehead: No, but the Golden Rule, as I understand it, is it is a golden rule by elimination. If something appears to be outside the Golden Rule-i.e., the amount of money that is being put in through the Green Deal is greater than what you will supposedly save over a period of time-then you do not proceed. If the belief is that you do save more than you put in, then you do proceed.
Dr Eyre: That is right, and that is what I think is the problem with the design of the whole package, in that it means that the cheap measures are meant to be done within the Green Deal and all the expensive measures get lumped into the Energy Company Obligation, with the issues that we discussed with respect to Mr Lilley’s question.
Dr Kennedy: I don’t think you would be too worried about people doing cavity wall insulation and not getting paid back. Clearly it is cost-effective, and the same for loft insulation. The point is: are they going to borrow Green Deal money in order to insulate lofts and cavity walls? You wouldn’t have thought so. The financial aspects of loft and cavity wall insulation are not the main barrier. There is a whole range of non-financial barriers, and the Green Deal, as far as we are concerned, is not well designed to address those.
Q108 Dr Whitehead: If it is within the Green Deal, then you should not be applying the Golden Rule?
Dr Eyre: I think the Golden Rule will stop a lot of good projects being covered by Green Deal finance, because it is making the mistake that major refurbishments are done for energy efficiency reasons. They are not. Most major refurbishments are done because people want a better bathroom or a better kitchen or a loft conversion or an extension. Those cost thousands of pounds, and those sorts of projects are never going to be covered in their entirety by Green Deal finance because of the Golden Rule. If you look at the way that policy works in, say, the German loan scheme, they allow much larger lending but with provisions to require energy efficiency improvement through that. They are looking to support energy efficiency as part of a refurbishment, rather than to get energy efficiency refurbishments done. People do not really do energy efficiency refurbishment.
Q109 Dr Whitehead: But in terms of monitoring, what you appear to be suggesting is that this looks like almost a built-in creep towards ECO in terms of the reality of things that might be done conceivably under Green Deal. In order to stay something like within the Golden Rule, a very conservative interpretation of what the Green Deal can provide would be undertaken, and then everything else that might conceivably be outside creeps towards ECO.
Dr Eyre: That is what I expect. I would expect most assessments to say, "You can do loft insulation and cavity wall insulation within the Green Deal, so you can borrow a few hundred pounds". Like David, I don’t think that’s the problem.
Dr Kennedy: If you have to say where you are confident the action will be, it probably will be in the Energy Company Obligation and not in the Green Deal. The Green Deal will be there as a co-financing mechanism for solid-wall insulation in the Energy Company Obligation. The Golden Rule is screening out things, by the way. I do not think it is the Golden Rule that will stop you doing loft and cavity wall insulation under the Green Deal. There is a whole range of other factors. The screening-out in the Golden Rule that we have identified as being problematic is heat pumps, which are a major part of a low-carbon future, and I think there is only limited finance available for heat pumps, which are expensive in terms of upfront costs. So, you worry that people who might invest in heat pumps, if there was more finance available under the Green Deal, will not do that.
Q110 Sir Robert Smith: Are you saying on a straight payback position, even though they are capital-intensive, to save money, heat pumps do not pay for themselves over a-
Dr Kennedy: They do not pay for themselves, and that is why we have the Renewable Heat Incentive that has to cover the cost differential with the gas boilers.
Q111 Sir Robert Smith: Could the RHI be built into the Golden Rule?
Dr Kennedy: No.
Dr Eyre: No. FITs and Renewable Heat Incentives are outside the Golden Rule. The issue is again this marginal cost versus total cost. The marginal cost of a more expensive heating system may well be cost-effective. That does not mean the total cost is financeable under Green Deal finance within the scope of the Golden Rule.
Dr Kennedy: Heat pumps will obviously have to pay themselves back, because otherwise nobody would invest in them. The reason they can pay themselves back is because of the Renewable Heat Incentive, and that is not allowed for when you calculate the Golden Rule, so you are short of upfront finance.
Q112 Ian Lavery: We had a briefing this morning on smart-meters, which was interesting and intriguing to say the least. As you are aware, smart-meters are to be rolled out to homes and businesses by 2020. They are going to hold lots and lots of data, for everything. How do you envisage the data in these meters contributing to monitoring the effect of the DECC programmes such as the Green Deal and the ECO?
Dr Eyre: The current problem is there is a mismatch in time scales. If you are asking if it will make these sorts of programmes much easier to evaluate after 2019, the answer is yes, but the level of penetration of smart-meters at the beginning of the programmes we are talking about here will be inadequate to be a good monitoring tool. I have wondered whether it would be possible within ECO to require the suppliers to install a smart-meter when they install ECO measures. You might want to ask the suppliers what the feasibility and cost of that would be. I genuinely do not know. But I do not see that that could be made to work for the Green Deal, because Green Deal providers are not the people who are responsible for energy meters and billing. The Green Deal will have to be monitored and evaluated without assuming that everyone has a smart-meter.
Dr Kennedy: On a related point on the timing, once people have smart-meters, presumably that will encourage them to look at the scope for improving energy efficiency. It could boost demand for stuff that might happen under the Green Deal, but it is a bit late, again, if we wait until the end of the decade. Having not done some of the key measures we should be doing over the next years, we will have a problem from a carbon budget and an affordability perspective. So, the smart-meters are not going to boost the market, and we need other things to fulfil that role.
Q113 Ian Lavery: What plans does your committee have for monitoring the Green Deal and the ECO?
Dr Kennedy: We have a comprehensive framework of indicators that covers all of the sectors. For the building sector, the key indicators for us are loft insulation, cavity wall insulation, solid-wall insulation and boiler replacement. We will continue to track those against the targets that we have. These are not the Government’s targets but our targets, and I have said that they are 6 million to 7 million cavity walls insulated by 2020, 7 million lofts insulated to 2020 and in excess of 1 million solid walls. We translate those 2020 targets into annual insulations and annual boiler replacements, we assess progress against that and we report each year to Parliament on that basis.
Q114 Ian Lavery: So you publish the detail annually?
Dr Kennedy: Yes. We have done for the last three years and will continue to.
Q115 Ian Lavery: What specifically will you be measuring?
Dr Kennedy: Those things; they are the key things we measure. How many lofts have been insulated, how many cavity walls have been insulated, how many solid walls have been insulated, and how many boilers have been replaced? We can translate that into emissions reductions as well, which we do-so, energy consumption reductions and emissions reductions using the best evidence available, albeit we have said that there is some uncertainty around that evidence. But we look at all those different levels, measures, energy consumption and carbon emissions related to that energy consumption.
Q116 Christopher Pincher: Dr Kennedy, you said that ECO is where the action is.
Dr Kennedy: Is likely to be.
Christopher Pincher: It is likely to be where the action is and the Government has fairly modest ambition for the Green Deal component. I think you said of the 7 million lofts in scope, the Government’s ambition is to insulate or top up 1.6 million of them.
Dr Kennedy: That is their analysis. They are very careful to say it is not their ambition. It is what their analysis says that the policy will deliver. They then say they are very optimistic, hinting that they will be insulating more lofts than that, but their analysis does not support that optimism.
Q117 Christopher Pincher: They have an optimistic analysis that 1.6 million lofts will be insulated?
Dr Kennedy: For them, the analysis is pessimistic relative to their expectations of what the policy will deliver.
Q118 Christopher Pincher: Is your view that it is a rather modest ambition-and I will use that term-to expect that 1.6 million lofts will be insulated or topped up?
Dr Kennedy: Absolutely, yes. If we think, there are up to 7 million lofts where it makes sense to top up the insulation, and the projection is that 1.6 million of those will be insulated in practice-that is a shortfall of 5.6 million-then there is a lot of energy efficiency improvement potential that you are not addressing. We have said we should look again at the design of the policies and strengthen incentives so that we have much higher rates of projected uptake.
Q119 Christopher Pincher: Given the incentives and given the Government’s analysis, do you think the 1.6 million projection, and the other solid-wall and cavity wall insulation analysis optimistic projections that you have identified are likely to be met or are they likely to-
Dr Kennedy: We think those very low levels are credible analysis, yes. We think the incentives in the policy are not very strong for insulation of lofts and cavity walls in particular, and that is what the analysis reflects. That is why we have recommended that the Government should look again. It should look at complementary measures to strengthen incentives. Those could be fiscal measures, so stamp duty differentiation depending on energy efficiency performance of a house, local council tax differentiation, possible regulation that goes beyond the private rented sector or possible regulations related to building regulations. There is a whole set of things that can be done. Financial incentives in the form of cashback that can be given to people are something the Government has pursued. But those other things are still there to be seriously considered and, in our view, should be seriously considered to address all of this potential that is missing at the moment; and that I have called the carbon gap, but you could also call it the affordability gap.
Q120 Christopher Pincher: Given that the analysis is modest and given it is possible that even that modest analysis will not be met, do you think there is a very strong possibility, therefore, that the costs of ECO are going to spiral for the consumer to whom those costs will eventually be passed on, but who is not going to benefit from the Green Deal because the take-up is going to be very, very modest?
Dr Kennedy: I think that is a separate point. There is a risk that the solid-wall insulation cost will be higher than DECC has envisaged and assumed in its analysis. The question is: how much do you have to pay people in order to have solid-wall insulation? They have assumed that you will pay them a certain amount and then people will be happy to borrow money as well to get the solid-wall insulation. If you have to pay them significantly more, that will start to show up in much higher ECO costs-there are analyses that put some numbers on this-that will have impacts via energy bills and affordability impact. I think there is a risk there.
In order to address that risk, I do not think you can say, "We don’t know how much people will need to be paid at the moment to have solid-wall insulation", but in order to address that I think there are two things you can do. You can make the mechanism more flexible by opening it up to loft and cavity wall insulation, which are lower-cost measures. The second thing you can do is you can say, "There is a maximum amount that can be paid for solid-wall insulation under this policy". So you would put some kind of cap, some kind of buyout mechanism, into the Energy Company Obligation as a safeguard to make sure that the costs do not escalate. That would be sensible to do.
Q121 Christopher Pincher: Do you think it is possible to quantify the risk of costs spiralling and what the costs of ECO might be?
Dr Kennedy: I have said there are analyses that do that. For example, there was a NERA analysis that was published in the last few months that gives estimates of the costs. I can’t tell you what they are off the top of my head, but I can certainly send you the reference for that.
Q122 Christopher Pincher: When you looked at it, did you agree with it?
Dr Kennedy: I agreed that there is a risk. Again, you can’t say at the moment. It is uncertain. We know how much solid-wall insulation costs to an extent, but there is uncertainty there. How much does it cost to put solid-wall insulation in a particular house? What kind of houses are we going to be able to put solid-wall insulation in? Who will accept it? Then the next level of uncertainty is: how much do you have to pay them in order to agree to have it, given the inconvenience that solid-wall insulation entails? You have all of those sources of uncertainty, so all you can say is we don’t know how much the costs of solid-wall insulation are going to be, but they may well be higher than the Government has assumed. That would be a problem from an affordability perspective. It would be a problem from a value-for-money perspective, because if you are paying people thousands of pounds to have solid-wall insulation, you can’t justify it as part of your carbon policy. First of all we need to track what the costs are, but, as I say, we need flexibilities and safeguards to feel confident that this is a coherent and sensible package.
Dr Eyre: The basic thrust of the NERA analysis was that the Government is relying on what is called stated preference techniques, i.e. asking people what they will be prepared to pay, rather than looking at what is observed in the market. That is probably all you can do in such an undeveloped market as solid-wall insulation. But all our experience is that that will tend to overestimate people’s keenness to spend their own money on a particular measure.
Having said that, from memory the NERA estimate was that ECO would cost £1.7 billion rather than £1.3 billion a year, so I am not sure whether that is spiralling or not. I suppose it depends on your definition of spiralling. The real way to control costs in ECO would be to allow some loft and cavity wall insulation in the carbon-saving obligation bit of ECO. The fundamental problem that David has pointed out is that we are moving from a regime where suppliers have been offering very large subsidies for these measures-I am sure they will tell you in a few minutes how difficult it has been to do even with large subsidies-to a regime where people are asked to do this at an unsubsidised interest rate. It is difficult to believe that will not produce a big dip in the attractiveness of those measures.
Dr Kennedy: The other thing we have talked about is the distributional aspects. If you open up the Energy Company Obligation to loft and cavity wall insulation-we think there is potential for many millions in both of these-then the Energy Company Obligation will benefit a much larger number of households than if there is a very narrow focus on solid-wall insulation.
Q123 Christopher Pincher: I think you have made that plug about three times, so it has been heard. Can I ask you very quickly, because I know time is pressing, about the affordable warmth element of ECO and its ability to tackle fuel poverty? DECC is suggesting that the net reduction of those suffering fuel poverty will be between 125,000 and 250,000 households by 2023. Given that the number of people in fuel poverty went up to something like 2.8 million between 2004 and 2010 and, although it dipped a little, it is likely to go up some more, do you think that that is a very modest number and do you think that it is unlikely, therefore, that the affordable warmth element is going to effectively tackle fuel poverty?
Dr Eyre: I do not have any reasons to doubt the analysis. Whether you think that is Government doing everything that is reasonably practical to eliminate fuel poverty by 2016 depends on how you interpret that phrase, I suppose.
Dr Kennedy: There are two aspects of this. One is that the Energy Company Obligation now, following the Hills Review, is designed in a way that says, "We are going to take this much money from the fuel poor in order to fund the Energy Company Obligation. There will be that much money that goes back again". So, in that sense, it does not take money away from the fuel poor, but it does redistribute within the fuel poor, certainly if you are looking at near time frames. If you are taking money off all of the fuel poor and you are improving the energy performance of a few of the fuel poor each year, then there is a distributional impact there that works itself through as long as you have this policy being implemented for many years. It does not work itself through in the next year, two, three years; it takes five, 10, 15 years for all other fuel-poor households to benefit.
Q124 Sir Robert Smith: You have mentioned quite often the need to top up people’s loft insulation. I can think of two things. One is people are going to think, "I have had my loft done, therefore I have ticked the box", and suddenly we are coming along and saying, "Oh well, we did not do enough last time. Can we do some more?" How recently would people who have had their loft done still need it to be topped up, and how easy is it to ascertain that people need that top-up and to get them to initiate the contact to get that top-up?
Dr Eyre: Anybody who has had their loft done before the last two or so obligation periods, say the last 10 years, might benefit from top-up, but they are probably not the people we are really looking at. I would doubt the assumption behind the last part of your question, that it is an information problem. People often know that their loft needs topping up, but the thought of going up the loft ladder and taking everything out is just too much to contemplate. It is the serious practicalities of energy efficiency rather than the cost-effectiveness that is the problem. We need imaginative schemes that look at how lofts can be insulated when people move, when people clear lofts out. We need to work with the grain of the market there.
Q125 Dr Whitehead: As far as ECO is concerned and the question of the extent to which costs, as Christopher has mentioned, might run away and therefore the total number of treatments might thereby reduce, if one assumes that there is a budget for ECO-
Dr Eyre: That is not the way it works. It is an obligation. It is a fixed-obligation variable cost.
Dr Whitehead: Yes, but it is an obligation against an assumed budget of £1.3 billion per year.
Dr Eyre: No.
Dr Kennedy: There is an assumed budget, but if you have a carbon target that you have given to the companies for the Energy Company Obligation, they will deliver their target and they will escalate the costs, and that is the risk.
Dr Whitehead: Precisely, yes.
Dr Kennedy: You might want some flexibility in the target rather than all the flexibility being in the costs.
Q126 Dr Whitehead: What is the meaning of the budget under those circumstances, bearing in mind that ECO is not capped as opposed to, say, FITs or RO?
Dr Eyre: It is a best guess. Well, it is a guess. Different people might take a view on whether it is the best guess or not.
Dr Kennedy: There is a political view that the pot for the Energy Company Obligation should be no more than is the case for CERT, but there is no confidence around that we will be able to do the measures that are built into the target for the Energy Company Obligation within that pot of money.
Q127 Dr Whitehead: Assuming that those companies that can meet their obligation may be at a slightly runaway cost, the defensibility-if we can put it that way-of a £1.3 billion budget, which is what was announced originally as far as what ECO overall in all its different elements would come to, looks to be rather ephemeral. Is that right?
Dr Eyre: The whole idea of a budget for ECO, as for all the other obligations, is a bit misleading. You can ask your next witnesses to what extent they pass costs through. My guess is that they do not set tariffs with any reference at all to particular elements of costs such as obligations. The notion of there being a budget is not very helpful. It is an obligation. It will cost them what it costs them. They will pass through what they can.
Dr Kennedy: I do not think it is like the Levy Control Framework where there is a clear amount, a pot of money, and if you have exhausted it, you can’t sign any more contracts. The way this is designed is if you have not delivered your target, you will carry on trying to deliver it, and if that escalates the cost, that is what will happen. You have to be careful of that, though, because if you escalate them too much, you are pushing up against both affordability and value-for-money concepts.
Q128 Dr Whitehead: Except that ECO is, in the impact assessments, defined as putative tax and spend and therefore is identical in nature to various other things that are putative tax and spend that have been put within the Levy Control Framework.
Dr Kennedy: I am not arguing it should be in the Levy Control Framework, but I am arguing that you have to recognise the risk of cost escalation and have a story to tell about how you are managing that risk.
Q129 Dr Whitehead: I was just making the possible link: would a method of controlling that be to place it in the Levy Control Framework? Not that I would advocate that, but that appears to be a monitoring route, bearing in mind that the budget appears to have no actual meaning in terms of the route of the obligation.
Dr Kennedy: I do not think you want it crowding out investment in the portfolio of low-carbon technologies for power generation, which is what could happen. There are different ways of doing it, but I think it is sensible to have some kind of safeguard so that you do not escalate the cost and cause an affordability problem.
Dr Eyre: It would require a very different level of cost reporting from that which has gone on in earlier Energy Company Obligations in this area. There would be difficulties in defining what the eligible costs are. Are the costs marketing incentives? What exactly are the costs that are being measured?
Q130 Dr Whitehead: Since in reality we do not know what the obligation is going to produce in terms of costs to the consumer as a result of the processes we have just discussed, that in itself could be an issue, as opposed to the alleged budget.
Dr Kennedy: It is very important to understand what the costs are of this programme and to monitor them closely, and to make sure that it continues to be sensible to aim for the ambition that is set for the Energy Company Obligation. When I have said there is no ambition, there is no ambition for the Green Deal. There is a carbon ambition for the Energy Company Obligation.
Chair: Thank you very much indeed. We have to pass on to the next witnesses.
Examination of Witnesses
Witnesses: Eric Salomon, Energy Field Services Director, EDF Energy, Simon Stacey, Managing Director of Energy Services, RWE npower, and Neil Clitheroe, Chief Executive Officer, ScottishPower Retail and Generation, gave evidence.
Q131 Chair: Good afternoon. Thank you very much for coming in. We are running slightly behind time, so I will not go through formal introductions. We do know who you are, and I guess you probably know who we are. Some of you have suggested that the costs of ECO could spiral if there is lower than expected take-up of the Green Deal. Why do you think that would happen?
Neil Clitheroe: The ECO obligations are made up of three different components, and the one that links to the Green Deal is the carbon reduction obligation. The target set for that is 20.9 million tonnes of carbon, and the estimated cost to deliver that from DECC is £1.37 billion. But what DECC have included in the impact assessment is that the companies will provide £780 million of that and customers will provide £500 million of funding for that through Green Deal, through customer contributions-whatever mechanism. The key question is whether customers will provide that amount of money. If they do not provide that amount of money-they only provide £100 million-then the companies have to make up the difference because we have a legal obligation to hit the carbon target. We do not have a cost obligation; we have a legal obligation to hit the carbon target, and that is how the two are intertwined.
Simon Stacey: I agree with that. It is instructive to look at NERA’s impact assessment as well; all that Neil said, I think, is in that. In addition, there are a number of costs that we, as an industry, are incurring in being set up for Green Deal that are not in the impact assessment, which we believe will feed through in the systems to be set up and identifying the customers that will want Green Deal. Most customers today do not instinctively know what Green Deal is. There was a survey done just before Christmas, and 98% of the people did not know what it was. Therefore, it is going to be very hard to persuade people to part with their hard-earned cash, at a time when economic pressures are high, to invest in what is a fairly difficult technology. Solid-wall, which is predominantly what the carbon emission reduction targets are around, is quite intrusive. It is quite a difficult technology to fit into customers’ homes. So I think for all of those reasons, npower, certainly, are very concerned about the impact of ECO on our customers’ bills.
Eric Salomon: Clearly ECO and Green Deal from an EDF Energy point of view are the absolute right thing to do, no doubt about it. The nice thing with Green Deal is that we will engage with customers. Unlike CERT and CESP where customers are a bit passive, Green Deal will offer them the opportunity to engage. I think that is a challenge. That is our challenge as an industry, to maximise the customer engagement. About the £1.3 billion per annum, I think we should take that as an aspiration. I do not think it is a budget, because at the end of the day we have to meet our obligations and most of the costs will be on the customer bill, so again it is our duty to minimise this impact on the customer bill. It is right to say that we are concerned as well that these costs might be more expensive than £1.3 billion, because we have already started. The best thing to do is certainly not to look who was right or who was wrong but to monitor what we are currently doing. We have reporting in place, we reported the cost back at the end of February for the very first time, and I think it is now our job to monitor the level of take-up, the type of measure and the potential costs of ECO.
Q132 Chair: Do you share the concerns that DECC may have overestimated the willingness of large homes to participate? Do you think this is going to have an effect on delivering the ECO programme?
Eric Salomon: I think we will deliver the ECO programme, no doubt about it. The only question is: at what cost? Is that value for money? We saw that for CERT and CESP it was challenging, but we did it. Again, if we want to gain the trust back of our customers, we need to minimise the impact. So the real question is how we will deliver that, rather than if. It is all about the measure mix. The previous panel talked about including more loft and cavity insulation. We also believe it would be a reasonable thing to do. Even if, obviously, the market begins to be saturated, we have to work on the measure mix.
Neil Clitheroe: There are mechanisms, even within say a solid-wall estimate, for being able to keep that cost lower. For example, doing solid-wall on a tower block, doing solid-wall on a housing association, a wide number of properties at once, can bring the cost down. Doing individual solid-wall in individual houses obviously costs more, and then you get into the aesthetics of some of the larger houses, some of the Victorian houses, and the impossibility at times of putting solid wall on that because you just change the whole appearance of the house, so you would have to use other measures for that such as internal solid walls. There are different levels of properties that you can address to try to deliver the obligation at lowest cost. Obviously you will catch up with yourself. The more you do, the more you have to eat into those different parts of the housing stock.
Q133 Chair: Do you think that DECC may have underestimated the cost of ECO?
Neil Clitheroe: Our belief is yes. On affordable warmth, we think that the costs are quite accurate in line with DECC’s estimate, and on the community obligation we think that is quite accurate as well. The key bit is the carbon obligation and whether this 43% of the moneys will be contributed by customers. In CERT, ignoring last year when there was a huge free insulation effort, the numbers historically were about 20% customer contribution. Under CESP I think the numbers were about 10% customer contribution. So if you are at those types of levels, which are the historic levels over the last five years, then you are relying on the underlying cost of the measures coming down to compensate for that. That is why the estimates we have looked at are in the range of £1.7 billion to £1.8 billion, rather than the £1.3 billion. Some of the numbers that are higher than that I think are questionable. We think that around that £1.7 billion to £1.8 billion, for the £1.3 billion, is a sensible estimate today, which we will then need to monitor closely over the next year or two years.
Simon Stacey: From an npower perspective, our range is very akin to the NERA range you heard from the earlier witnesses. I think they said about £1.7 billion. The actual range is £1.7 billion to £2.35 billion, and the npower number would be within that range, for the reasons that you have heard from Neil. So I do think they have underestimated the costs, and I do think they have underestimated the need to create more awareness in the UK around Green Deal and to make it attractive for consumers. We do not believe there is enough built into the costs for the awareness of the Green Deal, and to allow us successfully to generate leads in a cost-effective way.
Q134 Ian Lavery: NERA suggested that ECO could end up adding about £94 or even more to consumers’ bills. Do you think this is an accurate estimate of the likely cost of ECO to the consumers?
Eric Salomon: This could happen; this is in the range of what I call the possible. It will not be a good outcome, but it is not completely unrealistic. At the heart of this assumption it is, of course, a customer contribution. If the customer contribution is huge, obviously the cost of ECO will go down and will probably be below £60. If the customer contribution is not really high, it goes up, probably approaching £100. The other big uncertainty as far as EDF Energy is concerned is the type of measure and the type of properties. When you look at the DECC assessment, there are a lot of what we call best-case scenarios, and of course we may find some of these properties in the proportion of the assessment; maybe not-that is clearly one of our doubts.
Q135 Ian Lavery: Is that the general opinion, £94 to £100?
Neil Clitheroe: I think there is a key point to recognise, and it is an obvious point, that there are two sides to the bill. There is the tariff side driven by the input costs, of which ECO is one, alongside wholesale costs, distribution costs and so on, but the other side is obviously consumption and the number of units that consumers are using. What we have seen over the last three years in the CERT and CESP is a fall in consumption of users across the UK from the 2009-2010 levels for gas, 16,000 KWh, down to 13,500 to 14,000 KWh today. So, that produces a saving across all those households in the UK that offsets the money has been invested in energy efficiency. That said, there is an obvious longer-term return from energy efficiency. You spend the money now-and a solid wall might cost you £8,000 to install-and you save £150 in energy for the next 25 years. So there is an investment to get that return in the end into the consumption levels. But if you keep repeating that investment year in, year out, and ScottishPower has been very supportive of these schemes for the last nine years, then consumption will drop. The input costs will go up slightly, but the consumption is dropping to offset some of that.
Q136 Ian Lavery: There are a number of organisations, like Focus and Which?, that have recommended that the ECO costs should be passed on according to units of energy used and not on a flat rate per customer basis. How will you be passing on the costs of ECO to your customers?
Simon Stacey: There are pros and cons of both methods, either the unit rate or a flat rate. Clearly with a unit rate, if you have a warmer or colder winter, then you can end up over or under-recovering your costs, so in a colder winter you potentially over-recover your costs. With a flat rate you do recover your costs, but then potentially those who are the lowest consumers would be disadvantaged by that. So, there are pros and cons of both. Clearly we are looking at that all of the time to find out what is the most appropriate rate for npower.
Eric Salomon: Clearly our main challenge is to reduce this impact and also to be transparent about it. I believe we could improve the bill by, for example, telling the customers about that, because I am pretty sure that if we were to ask all our customers, they may not know that they might potentially pay £53 for ECO - if we can achieve that number of course. So, the transparency element regarding Green Deal and ECO is absolutely key, and also later on in the process, if the customers have a Green Deal measure installed, do they really know about the bill impact? There might be a misunderstanding by believing that the bill will go down. The tariff might change and the bill might not go down. The message will be, "Yes, but it would be better than if you hadn’t any Green Deal", and just communicating that message is a challenge.
I think collectively we really have to make an effort around this trust element, otherwise we will be the one the customers will call and say, "Well, I cannot trust you, you told me this, and my bill hasn’t gone down". So, we need to make a real effort in telling people what will happen. We discussed earlier the rebound effect; that is clearly at the heart of our concern. The other concern we have is the split between the gas and electricity bill. The Green Deal charge will be on the electricity bill, and customers will call and say, "I don’t see any decrease". "Well, you need to look at your gas consumption." That in itself creates a massive trust issue that will be linked to the customer bill. The customers will not have any trust if they do not really understand what happened, regardless of the additional charge on the bill. For us, trust is absolutely key, regardless of the amount we charge.
Q137 Ian Lavery: You mentioned transparency, which is extremely important, and the need for the consumer to understand what they have paid. Will your bills or your annual statements show every consumer, exactly how much they have contributed towards your ECO costs and how it has been calculated? That obviously might be different to-
Eric Salomon: Yes, that might be different even if with the RMR there will be some sort of improvement and regulation for everybody. So, of course, regarding the Green Deal we will detail that, but I am talking about a wider communication that could include the cost of ECO, for example, and not only the Green Deal cost, so that we have full transparency and collectively we really know the cost of the programme.
Q138 Ian Lavery: Will your annual statements show how much consumers individually have contributed towards your ECO and how it was calculated? That was the original question.
Eric Salomon: Yes.
Ian Lavery: It will?
Eric Salomon: We will if we can, because, again, this is a highly regulated area and there is a very clear ruling about what we can put in the annual statement or not, but as far as we are concerned, yes, we will push for the maximum transparency.
Simon Stacey: I think from an npower perspective, clearly we want to be transparent; we want to make sure our consumers understand their energy. You mentioned Smart in the earlier session. That will certainly help consumers engage and understand their energy. Equally, we do a lot of work with our customers to find out what they like and what they don’t like. One thing that they are not that bothered about-the feedback we get-is the components of the bill, so that is something we need to take into account. I think the other thing that is difficult is that the current accounting requirements for ECO are very complicated and they need to be done on a cash basis, which potentially means your ECO costs could go up one year, then down, then back up. That I think is going to create a lot of confusion for customers because they simply will not understand what is going on. Therefore, as part of a process to make sure that the customers understand what is going on, we need to work out what the right data are to provide them with.
Q139 Ian Lavery: Are you saying that this transparency will be too confusing, so you would prefer not to tell them?
Simon Stacey: Potentially it could be too confusing so it is about finding the right way to communicate the costs to them. I think the important thing, and the thing that we are focused on, is making sure that we minimise costs for our customers. The one thing they tell us all the time is they are focused on cost and they are focused on the control of their bill. Therefore, our overriding objective is to minimise the cost, hence it is important that we have clarity around ECO and what the cost of that might be. That is our overriding objective: how we best communicate that to them. We talk to our customers and find out what works for them and what they want to understand.
Neil Clitheroe: We put it on our bill as a breakdown that shows the wholesale energy cost, delivery cost-the cost of things like ROCs and feed-in tariffs are grouped together at the moment-and operating costs in terms of billing, metering and so on. That is all within every bill. On that bill you could break it down even further into individual-line items for ECO, for feed-in tariffs. That detail exists on our website but not on our bill at the moment.
Q140 Sir Robert Smith: You mentioned that the Green Deal is on the electricity bill, even if the saving is on the gas bill-if you are lucky enough to be on the gas main. How would the ECO costs appear between electricity and gas bills?
Eric Salomon: For the time being they are not completely reflected, so they are just part of our cost base, and they are, as far as we are concerned, split between the two.
Simon Stacey: I think that would be the same for the industry. We are obliged to pass costs through on a cost-reflective basis, and therefore it would be the same for us.
Q141 Mr Lilley: With CERT, what proportion of your costs arose from finding people who would be willing to participate in the programme, and what such costs do you anticipate with ECO and the Green Deal? I have been told by a normally reliable colleague that up to 75% of the cost on CERT was the cost of persuading people to participate?
Simon Stacey: I think if you look in the round across the CERT programme, which lasted many years, in the early years it was relatively straightforward to identify these customers. I think we, as an industry, all experienced a lot of difficulties in 2012 with identifying super-priority customers in particular, and the lead generation cost there would have been substantial: three or four times the impact assessment, for npower. So it is significant.
Q142 Mr Lilley: Three or four times the impact assessment. What proportion is that?
Simon Stacey: Well, probably not far off your 75%.
Q143 Mr Lilley: What do you anticipate for ECO?
Simon Stacey: I think that is harder to say. It is early days. I think the tight restrictions that we have in some categories, for example things like affordable warmth, mean that the lead generation costs are going to be significant. Therefore, anything we can do to widen the scope of both measures, and of those households that are available for ECO, would help to reduce those lead generation costs.
Q144 Mr Lilley: Is it going to be a third, a half, three quarters?
Simon Stacey: It is hard to-
Neil Clitheroe: It is hard to say. Search costs are between £150 and £250 for affordable warmth, and it depends on the measures that you are installing. If you install a solid-wall, then that is £8,000 against that. If you install loft and cavity insulation, it might only be £400 against that. I think there is another point to make. The party obligation is the community obligation. There are very clear, defined geographies in the whole country, representing 15% of the country. So, while the search costs for affordable warmth might be high, I think DECC have done quite a good job on the community obligation of defining these 15% of areas, saying, "These are the areas; we want you to focus on the measures and go away and do them". We know where those 15% are, and we can just-
Q145 Mr Lilley: But you still have to get permission for them, don’t you?
Neil Clitheroe: Yes, we still have to get permission from the customer, but you aren’t having to find them in terms of the benefits upfront. So there is a benefit in that obligation that DECC have brought out through the consultation that we went through for ECO.
Eric Salomon: I think we need to be careful with last year, because we reached some extremes with SPG, and you are right in saying that 75% might well have been the truth. At that time we spent £300 to acquire one customer to do a loft or a cavity, so the cost of searching the customers was higher than the measure itself, basically. But we need to be careful, because it was an extreme situation at the end of the programme. If you are doing the average, it is certainly around 10% rather than 75%. So, just to put things in perspective-and not necessarily tied to the December SPG numbers-that will be the truth. We are expecting to face exactly the same challenge for ECO, especially around affordable warmth.
Q146 Christopher Pincher: There has been a fair bit of debate about whether take-up targets for the Green Deal should be employed. The Minister, Greg Barker, said in evidence to this Committee that by the early 2020s we will need to have done about 14 million homes, which is a roundabout way of issuing a take-up target. Affinity Sutton says that targets could lead to unscrupulous selling to meet those targets, so they are against setting them. Others say you need a target in order to identify what the likely benefits of the scheme are going to be and what the costs of ECO might be. What are your views on take-up targets?
Eric Salomon: Clearly, we want to maximise the number of Green Deals, so for us it is absolutely key. The Green Deal has the potential to be good for everybody, basically. The customers first; emissions; the bill; and also for us because, let’s face it-I do not know what my two colleagues would say-the higher the Green Deal take-up will be, the lower the ECO costs will be. We have a very precise and challenging target for ECO, and regarding the Green Deal that is basically our opportunity to minimise the impact on the customer bill; so, for us, the more measures, the better.
Simon Stacey: I would agree with all of that. I think the Green Deal represents a great opportunity for the industry to start to improve its image and to engage better with customers and explain to them some options around improving the fabric of their home. So, I think that is a great opportunity. But, equally, I recognise there is a challenge around providing our customers with clear information, and I take your point around the nature of the sale. The Golden Rule in that debate is quite confusing and I could easily see customers being confused into believing that they are going to see significantly lower bills, when in reality their energy savings are just effectively funding the capital investment. Therefore, I think we need to make sure we have a very strong regime around becoming accredited, to make sure that the industry does not get tarred with a brush that other industries perhaps have had around mis-selling.
Neil Clitheroe: I agree, the more the better. It is very hard to predict actual consumer demand when it has only just started in the last few months. The ECO target is about 600,000 households a year to deliver the solid-wall, the hard-to-treat cavities and other installations across the UK, so there is a pretty clear number on that one. It moves a little bit with the RdSAP scores, but it is around that number. But in terms of Green Deal it is quite difficult to forecast the take-up. It will grow in time, and the more companies like ScottishPower push behind it and my colleagues push it, the more it will grow in time. It is happening in other jurisdictions. We have a company in New York that I worked at for a while, and one of the key things they were trying to implement was an on-bill financing mechanism for energy efficiency, using exactly the same basis of trying to get energy efficiency into the energy bill, and paid through that, and to get the carbon benefit from it. So, it is a very strong principle, but it is going to take a while for that curve to grow and for customers to understand it and adopt it.
Q147 Christopher Pincher: Given that you all seem to accept that it is difficult to forecast what the take-up rate will be if left simply to the market, do you think that the Government should set some take-up targets and therefore drive the take-up?
Eric Salomon: We do not believe that, because we already have an obligation, and clearly the Green Deal is an opportunity rather than a target. If you are setting a target, then you have to have a penalty mechanism associated with that if people are not meeting the target, and if we were to do that, we are then at risk to spend more.
Q148 Christopher Pincher: So, what you are saying is that although you support take-up monitoring and you want to see that information provided, you do not want to see take-up targets set, which you then-
Simon Stacey: Not especially. I think there is some value, in particular, in identifying the Green Deal plans that are set and then do not get taken up. I think there is some value in that-in trying to understand why customers are not engaging. I would encourage the Committee to consider that. I think there is certainly value in that, but beyond that I would not necessarily want to see more targets. We have plenty of targets. The things that the Government can do to help concern awareness, having a mature debate about energy and explaining to customers that fundamentally, energy costs are likely to be increasing and therefore it is for us to be wise around consumption. I think those are the sort of things that would be helpful in driving the right sort of behaviours and creating the right climate for us to position Green Deals with our customers.
Q149 Christopher Pincher: Putting artificial targets aside for one moment, and accepting it is important to monitor take-up as opposed to setting targets, what is the best mechanism to collect the data on take-up?
Neil Clitheroe: I think the mechanisms are being put in place now. There is a Green Deal central co-ordinating body database that all Green Deal plans are going into, and then they link into our systems-npower’s systems, EDF’s systems-in terms of the transfer of the moneys on to the bills. There is quite a strong mechanism being put in place to track all of this by DECC, and the data should be available from those systems to provide the overall take-up of Green Deal and the numbers going through it.
Q150 Christopher Pincher: What about drop-out rates from initial inquiry, through to assessment, through to actual financing and installation?
Simon Stacey: That goes back to my point. The customer will originally get an EPC done when they first talk to us. That EPC will then get registered. It will be very interesting to look at the number of EPCs that are registered versus the number of Green Deal plans that ultimately get financed, to try to then understand, especially in the early days, why a customer is not in a position to take up the Green Deal plan. I believe that will help to identify some of the potential flaws with the scheme.
Q151 Christopher Pincher: Mr Stacey, you have said that you expect a considerable drop-out rate, or at least RWE npower has said it. What is "considerable" and what do you mean by it?
Simon Stacey: I think we have a concern that once customers understand the nature of the measures and what is involved, we could easily see a debate in the home such as, "Do we really want to clear the loft? Do we really want to have to move out for two weeks? Let’s not bother because ultimately we are only going to save £100 a year". One of our concerns is, do they understand what a Green Deal is, and is the range of measures wide enough and attractive enough for most people in their homes? At the moment it is restricted to measures that, as I said in some earlier evidence, are reasonably intrusive, and therefore when people understand the actual practicalities of that they may switch off. I think that is our concern.
Q152 Christopher Pincher: Do you think that the key drop-out pinch-point is going to be after the point of assessment and before financing? Is that where it will be?
Simon Stacey: Yes. I think as they understand what the actual measure is and what needs to happen next, they will then ask, "Do we really want to go through this?" That is a concern, and hence we would like to see a wider range of measures being available. Perhaps if you could wrap a set of measures around some solid-wall as well, then, as a package, it becomes more attractive.
Q153 Christopher Pincher: What about the involuntary drop-out component where people apply for an assessment and are told that they are just not in the ball-park for the Green Deal? Do you think that is going to be significant?
Neil Clitheroe: It is really down to the measure, I think, and whether that measure meets the Golden Rule. The evidence from the earlier panel was pretty clear on that. If it is loft and cavities, then the return is pretty quick, and you can see the Golden Rule working fine on that. The more you get into some of the more expensive measures, then you have to finance some of it with the Green Deal and some of it through a direct customer contribution. At that point, customers may decide that, given the financing they need to put in, it is not worth doing and therefore they will drop out on that. That is going to happen for a number of different households with different measures.
Q154 Christopher Pincher: Do you think it is important, therefore, that that involuntary element be monitored, so you can see whether the Green Deal is effectively excluding a large number of people for whom it might be appropriate if it was wider, but they are being excluded because it is a very narrow focus of-
Neil Clitheroe: Simon talked about comparing the number of EPCs that have a Green Deal assessment with the number of Green Deals that go into the central database. I suppose it does capture everything, both voluntary and involuntary, but it does give you everything in terms of the fallout rate, and that will be a key measure in 18 months’ time, when we look at the stats of what has occurred.
Q155 Dr Whitehead: As far as you are concerned, how are you going to internalise that sort of data in terms of how you think the Green Deal is going, or are you reactively hoping that DECC will come up with the goods as far as the detail of monitoring is concerned? Will you be, for example, as Chris has mentioned, making a series of direct correlations between who moves from assessment to actual Green Deal and who thinks they are within the Golden Rule but turns out to be outside it? Who drops out at that point; at what point the ECO might come in to deal with that, and therefore the person looks like they have dropped out from Green Deal but has gone in a different direction, or maybe has gone in a different direction of assistance-how is that sort of detail of what is happening going to be dealt with as far as your companies are concerned? Will you be sharing that information, assuming you do get it?
Neil Clitheroe: For ScottishPower we have a central database control system for all ECO jobs, all Green Deal jobs. Where ScottishPower is a Green Deal provider, we will be assessing what the drop-out rates are for the ones that we do, what the conversion rates are, how efficient our Green Deal assessors are being, how effective they are being, and so on. We will share that data with this Committee, with DECC and with Ofgem, gladly. Obviously, one of the key aims of the Green Deal is not just to have the energy companies delivering energy efficiency but to widen it out to 30, 40 or 50 different providers across the UK. To get a true sense of Green Deal, you need to look at the whole of that market, which is what the measure we were talking about earlier does, rather than just individually what the energy companies do, to get a fuller picture of what is going on in this market.
Q156 Dr Whitehead: Presumably there is a distinction between you monitoring what you are doing as far as Green Deal is concerned in order to assess whether you are good participants, and then monitoring whether the elements of the Green Deal, as we discussed earlier, appear to be workable and therefore might influence policy in terms of changes in those elements. An example might be, which of the approved elements of the Green Deal turn out never to take part in a Green Deal programme?
Simon Stacey: I think it is important to state that from an energy efficiency obligation point of view, our priority is to make sure that we deliver our mandatory obligation, which is ECO. Green Deal is a very good method of, first, doing that and, secondly, engaging with our customers. So, I think that is the position that we would start from.
To the extent that we are seeing Green Deals within npower "fail"-let’s call it that-that would be either because the customer can’t find the finance, or perhaps we have decided we can’t put enough ECO into it because we are able to discharge our ECO obligations through other means. Ultimately, from our overall customer base, our 6.5 million customers, we want to make sure we are doing that as cost-effectively as possible to keep their bills down, coming back to the earlier conversation. That is the equation that we would run through within our organisation to make sure we are getting that right for our customers.
Eric Salomon: As far as EDF Energy is concerned, we do not believe that the traditional reporting is an issue in itself. Of course, it would be very nice if everybody was to share that reporting, but for us it is very much business as usual. You have a conversion rate between initial lead assessment, and assessment versus number of measures installed. Our main concern is the very last step of the process, which is the conception reduction and the saving, because for this one the timing is not monitored at all. That is a key issue as far as we are concerned: an issue that could be played against us in terms of trust, because we will be the one at the end of the system, the one who is sending the bill. We are very keen that it never happens that customers call us and say, "I don’t understand; you misled me", and there is no reporting in place, for the reasons you have been discussing with the previous panel-the rebound effect, the number of people inside a house. All of this is incredibly complex and is not currently addressed. That is an area where we can collectively improve, in our view.
Q157 Dr Whitehead: Will you be, for example, monitoring the number of people who are ringing you up saying, "You are the worst company in the whole world because you misled me"?
Eric Salomon: We intend to conduct audits, to literally equip some houses with sensors, to get a sense of the reality.
Chair: Thank you all very much. That was a very helpful session for us.
Examination of Witnesses
Witnesses: Peter Broad, Policy Manager, Consumer Focus, and Simon Osborn, Principal Policy Adviser, Which?, gave evidence.
Q158 Chair: Good afternoon. Thank you very much for coming in. We are slightly behind time, so I will telescope the introductions. Could I start by asking you what you think the most important indicators of customer satisfaction with the Green Deal will be?
Simon Osborn: I think for us it is partly monitoring take-up, but we agree with the energy companies that it is as important, if not more important, to monitor where consumers have had assessments and then not gone on to take Green Deal finance. It is also important to look at the overall level of take-up, why it is that people have not had assessments at all, because maybe they do not find the Green Deal appealing enough. I think the key areas where we think there should be focus are on the overall consumer satisfaction with the process and with the documentation, whether they find it easy to understand and whether they were happy with the sales and marketing experience. Other areas that we see as important are perhaps checking through mystery shopping whether there has been pressure selling or inappropriate cross-selling and how that ties in with the consumer satisfaction. Another area is trying to get a sense of key Green Deal concepts, for example the transfer to new occupants, so looking at whether in practice Green Deals are being transferred to new occupants or whether the current occupant perhaps is being asked to repay the Green Deal charge early. If that is not working, then that is a core issue of the rationale for the Green Deal.
Peter Broad: Just to pick up on some of the points that Simon made there, one is the accessibility to the Green Deal for people who want to take out a Green Deal but can’t, and that includes low-income consumers. At Consumer Focus we think that there might be a gap between those consumers that are eligible for affordable warmth ECO and those that will pass the credit checks and so on and find the Green Deal, as a finance mechanism, attractive for them. Consumer satisfaction is also about monitoring consumer protection throughout the process, so including mis-selling, shopping around. Also, that the disclosure is done appropriately for consumers who come into the process when they inherit a Green Deal plan, and that the consumer who takes up the initial Green Deal plan and the consumer taking on the Green Deal plan is aware of the risks at that stage in the process.
Q159 Chair: You mentioned mystery shopping. Who should do this?
Simon Osborn: We think that the main responsibility should be on the Green Deal oversight and registration body. We do a lot of mystery shopping ourselves, and indeed we do plan to do some of our own mystery shopping of Green Deal assessors. For us it is critical, and critical for the Green Deal, because it is really the only way to properly assess sales and marketing practices, to pick up on what the salesman says in the home, to pick up on the sales patter, not just what is put down on paper, so it picks up any wild or exaggerated claims made around savings. In our mystery-shopping investigations in the past we have found that companies have tended to exaggerate savings. We think that the oversight registration body should be the one that does that, both of assessors and providers. A specific point of concern for us is that under the current framework the certification bodies are supposedly to mystery-shop assessors but in practice they are only required to do witnessed assessments. That is where the certification body official accompanies the assessor, which could be into the home. Clearly in that situation we think that that is a poor substitute for proper mystery shopping because the assessor is likely to be on their best behaviour. So, we think it is the oversight and registration body that should do it. It is an independent body with statutory responsibilities, unlike certification bodies which, in a sense, are competing for business and for members’ fees.
Peter Broad: I think we would agree with Which? on that point. We have seen in the earlier sessions how concepts like the Golden Rule are very complex and need to be explained to consumers. It is important to mystery-shop to see how that is explained to a consumer in the home and also to assess consumer understanding of those concepts to ensure they are being understood. Mystery shopping is important because assessors will often be tied to Green Deal providers, so, while the Green Deal assessment itself should be impartial, they will not be fully independent. It is important to monitor through mystery shopping for that reason.
Q160 Chair: Should we be making special efforts to monitor the effect of the Green Deal and the ECO on vulnerable groups?
Peter Broad: Yes, I think that is very important. As I mentioned earlier, there will be a gap between those that are eligible for affordable warmth ECO, which is a quite tightly defined group, and those that may be eligible for Green Deal. So there is the accessibility issue; there are issues around debt and disconnection for people with the Green Deal plan. It is the first time where a charge, other than energy supply, has had the same status, in that a consumer can been disconnected for non-payment of a Green Deal charge. So we need to monitor cases where people are getting into debt or being disconnected, related to a Green Deal charge, although, as I said, accessibility for low-income consumers may limit cases where that happens.
Mis-selling is obviously a particular risk for vulnerable consumers. The Green Deal incentives, which provide an upfront incentive for consumers, could distort decision making. We also want to monitor to make sure consumers who are eligible for affordable warmth ECO are not signed up for Green Deal plans, for instance.
Q161 Chair: How can we best monitor what happens when Green Deal charges are being transferred, where the occupier is going to ask for them to be cleared before they move in? You touched on it earlier. What is the best way of doing that?
Simon Osborn: We think that DECC needs to provide clarity on how it is going to do this, but all assessments on Green Deals will be lodged on a register. We would suggest that there be a form of consumer survey of Green Deal customers who have taken them up, and I think it should be possible, through that register, to work out where Green Deal customers have moved or changed address during that period.
Peter Broad: Also, in the past Consumer Focus has done monitoring of consumer reactions to the EPCs, where the consumers had been shown an EPC and had it explained to them-that is, the Energy Performance Certificate-and that will be the way in which the Green Deal charge is communicated to the consumer. We think there could be mystery shopping done to show that that has been done in a clear way, and that the benefits of the Green Deal are explained to the consumer at that stage, so it is not just this charge that is there on the property. Also, transfer needs to be clearly explained to the consumer taking out the Green Deal plan. It needs to be made clear how easy it will be to sell the property with a Green Deal charge.
Q162 Dr Whitehead: Mr Osborn, Which? mentioned in your written evidence to us that you were intending to start looking at Green Deal finance and the relative costs of other forms of finance that could be applied to the same thing. How would you carry out that monitoring research and have you started it already?
Simon Osborn: As yet there are no actual Green Deal plans on the market, but when there are Which? and Which? Money magazine colleagues will be trying to do this. It is complex in that, unlike with a traditional unsecured personal loan where there are fewer terms to take into account. For the Green Deal the interest rate is a key factor, but it is not the only one. For example, the amount of ECO subsidy and the amount of Green Deal cash back are also complicating factors. But I think what we would do is to point out to people the pros and cons of each of the financing options. For example, consumers who have a mortgage and have quite a low loan-to-value ratio might be able to finance energy efficiency improvements in the region of 2%. Nationwide has issued a new additional borrowing top-up mortgage for energy efficiency improvements just recently. For consumers who might want, for example, to finance through credit card, you can do that at 0% up to certain balances and provided you have active balance management. But each method has its pros and cons-for example, through adding to the mortgage, if house prices fall, then that is more of a risk. I think for each of those there are pros and cons.
It does get quite difficult with the ECO subsidy brought in, so for us that is a key element, and the ECO costs in particular. We will be endeavouring to do a comparison, but it is very much going to depend on the consumer and their individual financial circumstances.
Q163 Dr Whitehead: You will be publishing that as a tracker or as a-
Simon Osborn: We already have an online guide, but we will be expanding that with the advice on the different options. The difficulty is that for the individual consumer it is going to depend on what measures they want, what their financial circumstances are, so we may only be able to give advice at the generic level on the pros and cons.
Q164 Dr Whitehead: Set against that is the question-and this is really a question for both of you-of the extent to which looking at a Green Deal investment against the Golden Rule may or may not produce something that does benefit you subsequently. An assessor may come along and say, "Yes, you are definitely within the Golden Rule, and this is the path you should go down and invest in this", and that turns out not to be the case. How worried are you that that is going to be a widespread factor, particularly in terms of the sort of monitoring you are suggesting?
Simon Osborn: It is a worry, and one key reason that it is a worry is because we think that a lot of assessors will be commercially tied or linked to Green Deal providers. Therefore, although they need to conduct the assessment impartially, there is nothing to stop them from doing that and then-and it might be pretty much straight away-one and the same person putting their sales hat on and doing the hard sell around their Green Deal provider’s plan and quote. We think that that is a risk, given that there have been examples of mis-selling in this sector before.
To give a couple of examples, SSE was successfully taken to court by Surrey Trading Standards in 2011 for doorstep mis-selling and fined £1.25 million, and after that each of the big energy suppliers has now suspended doorstep sales. The OFT has recently found some issues in the energy efficiency sector and has opened an investigation, and we have done three mystery-shopping investigations in this sector in the last couple of years. We did one for solar thermal in 2010, and each of these, I should say, was only one house, so it is only a small snapshot. But in that case 10 out of the 14 companies investigated made misleading claims about the savings that could be made, and double glazing giant Everest claimed that savings would be about six times larger than our expert estimated. We looked at solar photovoltaics in 2011. There again, eight out of 12 companies underestimated the time that the system would take to pay for itself, and two companies offered discounts in a way that breached the industry’s consumer code. The final one is, we looked at cavity wall insulation in 2011, and there all eight companies said that our property was suitable for cavity wall insulation, when our expert said that it wasn’t.
We are not saying that you can extrapolate those nationally, and clearly it is good that there is a Green Deal consumer protection framework there, but I think our point would be that it is not enough to have standards on paper. They need to be enforced. They need to be backed up by effective skills and training. We hope that this consumer protection framework will work, but we have seen examples in the past where it has not, and we are particularly worried, given the tied assessor link that I mentioned.
Peter Broad: We would agree with the consumer protection point, coming into markets that do have low levels of existing trust. Regarding the Golden Rule specifically, we think it is a misnomer that it is described as a rule. We think there needs to be clear guidance to consumers about the Golden Rule, and again it is important to monitor how in practice that is put across to consumers and how consumers understand that. It is a question of communication. I think there have been mixed messages about how guaranteed the Golden Rule is, including from Government. We need to be very clear that it is a guideline based on standard occupancy, which is what you require when the loan will transfer from occupier to occupier. We need to make sure there is enforcement throughout the process with the assessment and the installation to ensure that the savings are made. As has been mentioned in the earlier sessions, you are guaranteeing or providing for savings in the cost of energy services, not reductions in your bills. But we do think that the Golden Rule should be monitored on an aggregate level and then fed back into the assessment process so that it can be relied on by consumers.
Simon Osborn: Just to add one point if I may. With the Golden Rule, the amount that can be lent also is based on the typical standardised household usage, rather than the personalised usage. So, although consumers will be given a personalised occupancy assessment, our worry is that either that won’t be explained properly to them or they won’t fully understand it. The amount that can be lent is based on the typical standardised household. We have already heard from Nick Eyre and others how much individual variation there could be, so I think there is a particular risk for low users that they might not fully appreciate that. Although in practice they are asked to give a written acknowledgement, that could be one of many things that is buried in the terms and conditions, perhaps.
Q165 Dr Whitehead: Which? have mentioned the idea of a panel of financial experts to look at value for money in Green Deal. How would that work?
Simon Osborn: What we think is important is that there is some effort to do an assessment of whether the Green Deal is working. That could be through a combination of energy assessors and some financial advisers. We think energy assessors are needed because they can try to make an estimate of whether the savings actually have been made, allowing for adjusting the baseline, for example excluding occupants whose circumstances have changed. We do think that it would be important, given the importance of the policy and that this is a flagship energy policy, to ensure that there is at least some attempt made, using financial advisers, to assess whether consumers are being given the best package for them, not just one that meets the Golden Rule. Are they being advised on the optimum package, the one that is the best value for them?
Q166 Dr Whitehead: Is it really crucial that we get on top of this, because how this market starts will dictate how it is going to grow?
Simon Osborn: We think it is crucial because consumers are going to be wary already of this complex and novel product. There are so many complexities-and I think DECC has tried to put a consumer protection framework in place, but clearly there are things that can go wrong-and to have some form of monitoring to see whether the Golden Rule is being met should reassure everyone. It should be in everyone’s interests, because at least then there is some reassurance that you are getting the savings you were promised, whereas without that consumers are being asked to take it on trust, and trust in this sector and of energy suppliers is fairly low. We find consistently it is among the lowest of all sectors. I think at the moment in our most recent survey-and it changes by month-gas and electricity suppliers were ranked at the bottom, joint with car dealers. So I think we have to take it in that sort of context.
Peter Broad: Just to come in on that, there has been a conflation throughout the process of Green Deal finance with the market for energy efficiency, which in general has been the Government’s flagship scheme, but I think that makes the success of the Green Deal key. If there are problems with confidence in the Green Deal, it will undermine confidence in the market for energy efficiency more widely, when the Green Deal is just one way to pay for energy efficiency measures.
Q167 Ian Lavery: The first two questions are actually on monitoring. If the Green Deal take-up is lower, it has been suggested by both your organisations that costs could actually spiral. How do you think that the costs of the effect of the Green Deal take-up could be monitored?
Peter Broad: I think there are more provisions in the Energy Company Obligation than there have been in previous obligations, like CERT and CESP, for Ofgem to require the suppliers to provide information on the costs of fulfilling those obligations. Under CERT and CESP there was a lack of transparency. Under ECO there will hopefully be more transparency. We want to see that information, which will be provided by Ofgem to DECC, being shared more widely so the policy can be scrutinised. We want there to be a review of the costs of ECO after a year to ensure that they don’t spiral. We also want measures to be put in place to keep those costs down-data-matching to limit the costs of finding customers, for example-and also measures more generally to encourage take-up of energy efficiency, such as incentives that could help deliver the carbon saving obligation.
Simon Osborn: For us the costs of ECO are a very big worry, and I think the issue was well explained in the first session by David Kennedy. We would agree with the Committee on Climate Change that ECO should give some support for loft and cavity wall insulation to ensure it is more effective. I think that under CERT there was no way of telling how much consumers were paying for CERT through their bills, and we strongly urged DECC to ensure that that does not happen again. It is not yet clear what monitoring there will be of ECO costs.
We have been urging DECC for some time to ensure that the energy companies are required to report-it does not have to be publicly but it could be to Ofgem-on the amount that is passed through to consumers’ bills. It has been agreed-DECC have said that the delivery costs of the suppliers will be monitored, but for us that is only half the story. We want to see what costs are passed through to bills, whether it is £1.3 billion or £2.9 billion of ECO, as some estimates have suggested. We are clear that it has to be the costs passed through to bills that have to be monitored. It is a big concern.
Peter Broad: And not just the aggregate costs but the costs per consumer bills, whether they are passed through on a per household basis or an energy consumption basis, which was discussed by the energy suppliers earlier. ECO is already a regressive policy, being funded through bills rather than taxation, and if it is funded on a household basis, rather than a consumption basis, then that will make it more regressive still.
Q168 Ian Lavery: You were both sitting there when the previous panels were on. We have discussed the flat rate per customer, or the units of energy used, and I see that both Which? and Consumer Focus have recommended that the ECO costs should be passed on according to units of energy used and not as a flat rate per customer, so that low users don’t end up paying more than their fair share. How easy will it be to tell how suppliers are coping with these costs?
Peter Broad: At the moment there are no provisions for DECC or Ofgem to require those players to provide that information, and we think those provisions should be put in place. At the moment it is up to suppliers to provide transparency on that, which we believe they should. The policy was changed at the consultation stage so that the overall obligation that a supplier got was based on the units they supply rather than on a per household basis. We think it is in the spirit of the policy that that be passed through to consumers on a bill basis, rather than a household basis.
Simon Osborn: DECC has not said for the moment what. I was reassured to hear one of the energy suppliers say earlier that they will report that transparency if they can.
Ian Lavery: If they can.
Simon Osborn: Under CERT we have no idea how much consumers were paying for the policy. The last assessment was years ago. We just have no idea.
Q169 Chair: We are running out of time. I am sorry to wind up, but just say what you think the three most important indicators of Green Deal progress are.
Peter Broad: For us, I think Green Deal is not as important as take-up of energy efficiency in general, and it worries us that the Government does not have a target for how many cavities, lofts and so on it wants to achieve. A clear target in terms of EPCs for the energy efficiency market is what we would like to see. Apart from that, just monitoring of consumer protection, ECO costs and fuel poverty would be important things for us.
Simon Osborn: I think for us number one would be consumer satisfaction, and that could be measured through a combination of mystery shopping, spot checks on installations, a consumer survey and an expert panel. The second would be whether the core Green Deal concepts are working properly, being transferred to the occupants, and whether the Golden Rule is giving you the savings you were promised. The third would be the costs of ECO being passed through to consumers’ energy bills.
Chair: Sorry we have to abbreviate it a bit, but thank you very much for being patient. It is much appreciated.