The end is nigh for ECO
Proposed cuts to the energy company obligation have thrown social landlords’ retrofit plans into disarray. Nick Duxbury reveals just how bad the impact is likely to be - and it’s much worse than you thought
When in December last year, the government confirmed plans to slash the carbon reduction element of the £1.3 billion-a-year energy company obligation by a third, the move was met with dismay by social landlords.
The proposed cut was a coup for energy companies that had won a reprieve from ambitious targets to install 60,000 solid-wall insulation measures each year - and instead now have to install just 25,000 a year until March 2017. For landlords, this has left plans for retrofit schemes worth tens of millions of pounds around the country in tatters. Some have had funding pulled entirely by energy companies, and the rest remain in limbo, waiting to find out whether their schemes are still viable.
This hiatus is likely to give way to disillusion as, for the first time, the extent to which energy companies’ appetite for more expensive hard-to-treat measures such as solid-wall insulation has evaporated becomes clear. Social landlords with schemes to reduce fuel poverty hanging in the balance, are starting to hear what energy companies will be willing to offer in the way of deals for solid-wall measures through ECO - and it is extremely worrying.
First, the price energy companies are prepared to pay for carbon savings has plummeted as the amount of solid-wall insulation they are required to install has dropped. Under ECO, money is taken from fuel bills and spent by energy companies on achieving carbon savings through retrofit works. As recently as November, when energy companies were still in a clamour to strike deals with landlords, prices were as high as £140 per tonne of carbon. Now contractors and landlords are reporting that energy companies, which are part way through reviewing their stance on solid-wall measures, are suggesting they will pay closer to £40 per tonne.
Southampton Council is attempting to resuscitate a £30 million ECO deal to retrofit 2,000 social homes. Nick Cross, head of housing services at the council, says: ‘At the moment, we are being told the best we might get is £45 a tonne, which is less than a third of what we had provisionally expected prior to the autumn statement.’
Simon Green, head of sustainability at contractor Lakehouse, has heard even lower prices. ‘The early indications are funding will be significantly lower. We are hearing that the carbon price could be as low as £40 a tonne [for solid-wall measures],’ he says. As a result, Mr Green warns that instead of receiving two-thirds of the cost of works through ECO funding, landlords will now only receive a third through ECO. This, he says, will scupper the majority of projects.
This grim prediction is being borne out in the prices being achieved in the ECO brokerage, an online eBay-style carbon auction. A year ago, the 12 February auction sold carbon emissions reduction obligation lots at £120 a tonne. Even as recently as November, CERO lots sold at £102 a tonne. However, since David Cameron announced plans to ‘roll back green levies’, no lots have met their reserve prices, which in some cases have been set at as low as £42 a tonne.
This carbon price drop is being driven by several factors. Clearly, as a result of cutting the £760 million-a-year CERO by a third (to £509.2 million-a-year) with a minimum annual solid-wall insulation target of 25,000 - not to mention an extension of the targets until the end of March 2017 - energy companies are planning to carry out considerably less expensive works. But this is only half the story.
The government has proposed that energy companies that exceeded their performance goals under the previous carbon emissions reduction target and community energy saving programme, carry over the excess to ECO.
Neil Marshall, chief executive of the National Insulation Association, says that according to energy watchdog Ofgem, this could make up as much as 15 per cent of the original CERO target on top of the 33 per cent cut. Furthermore, the government is also proposing to reward energy companies that have met targets in the first quarter of 2014 by gifting them carbon savings they have not actually achieved, thereby reducing their ECO targets.
Those that have installed above 25 per cent of their targets by the end of March will get a bonus uplift of 1.75 times any savings after that. Companies that install above 35 per of their target will get twice the savings achieved beyond that figure. The proposal is to incentivise energy companies to keep doing deals, but, worryingly, Ofgem data shows that as of November last year, four of the big six energy companies had already exceeded the 25 per cent threshold; E.ON was at 41 per cent already with four months remaining.
As a result, Mr Cross says that only one energy company agreed to meet the council - and it said it was not looking to fund more solid-wall insulation because it has already hit its target.
‘The net effect is that it’s possible over 70 per cent of the original ECO target could be met without doing any additional measures resulting in significantly less activity between now and 2017,’ warns Mr Marshall.
This would mean that instead of £760 million-a-year, there would in fact be £228 million-a-year available for solid-wall works. Overall, the £1.3 billion-a-year ECO will look more like a £768 million-a-year subsidy.
On top of this, the government is proposing to enable CERO to be spent on cheaper measures such as loft and cavity-wall insulation that many landlords have already carried out under the decent homes programme.
Of course, until the government’s impact assessment is published with the consultation in the next two weeks, the full impact is unknown. But given that around half of the people in fuel poverty live in solid-wall properties, whatever the exact figures, the significant cuts outlined pose a major question over how the government and landlords will be able to help the fuel poor in social housing.