Eco-nomics?

Will Eco prove to be a snip at £1.3 billion a year, as Decc reckons, or will it end up double that? Mathew Beech reports

How much the Energy Company Obligation (Eco) and its sister scheme the Green Deal will cost already hard-pressed consumers is a matter of fierce debate, as is the affect they will have on the reputations of suppliers who will have to raise their bills to help finance them.

The Department of Energy and Climate Change (Decc) predicted in its impact assessment of Eco - way back in June last year - a price tag of £1.3 billion a year. Decc stands by the number, saying it "has seen no evidence to date in the analysis from energy companies or independent reports that would change our estimate".

However, the industry is quick to point out that there are a number of uncertainties that will affect the cost of the rollout of the energy efficiency and carbon saving schemes. In its impact assessment, Decc even admits as much: "There is uncertainty over the costs to energy suppliers of meeting the obligations and the consequent bill impacts."

Commissioned by Energy UK, a Nera report in November put the figure at £2.3 billion. Other estimates have been as high as £3 billion a year.

Now, six months after Eco came into force, there is still no idea as to just how much it will cost energy companies - and their consumers. "Nobody really knows what the cost is going to be," says Jan Rosenow, a senior consultant with Ricardo-AEA. "There is an interesting range of uncertainty in the Decc assessment, from only a few million pounds up to a few billion."

Nick Eyre, a senior research fellow at Oxford University's Environmental Change Institute, supports Rosenow but says the suppliers have a history of delivering below government estimates. We "need to be careful that they [suppliers] may not simply be crying wolf," he warns. However he adds: "The nature of Eco, with new and relatively expensive measures, is that nobody is very sure how much it will cost to deliver them and so there is a risk the cost will be substantially higher than £1.3 billion."

What we do know so far about the cost of Eco is the cost of carbon abatement following the first Eco brokerage auctions. The auctions are a means for energy companies to sell parts of their obligations - such as carbon saving - to contractors who are then obliged to install the relevant measures - such as solid wall ­insulation.

The cost of carbon abatement in the first Eco auctions was more than £100/tonne, above the £82/tonne that Decc estimated in its impact assessment. This is an "element of concern" for the industry, according to Lawrence Slade, the chief operating officer at Energy UK. He says it hints that the £1.3 billion estimate could be optimistic, though he concedes that the higher-than-predicted cost may be because the scheme is new and has yet to settle down.

Darren Braham, chief financial officer at First ­Utility, says that once the higher brokerage costs have been incorporated, Eco will cost closer to £1.7 billion a year. This is of real concern to First Utility, which has recently crossed the 250,000 customer threshold and consequently come under the Eco net.

The main concern - not only for First Utility, but across the industry - is the cost of installing energy efficiency and carbon-saving measures. Braham explains: "What's being bid for [in the Eco auctions] are the less expensive measures." This means that as Eco progresses, the cheaper measures will have been completed so the costs will continue to rise.

Peter Broad, policy manager at Consumer Futures, is also aware that lots of the "low hanging fruit" in the form of insulation has already been grabbed. "The proportion of consumers who can receive measures has gone down as most suppliers met their Carbon Emissions Reduction Target (Cert) and Community Energy Saving Programme (Cesp) obligations," he says. These programmes, which preceded Eco, majored on cheap cavity wall insulation, leaving Eco to deliver more difficult to treat, more expensive options.

The cost of Eco also relies heavily on the success of the government's flagship energy efficiency scheme - the Green Deal. It is hoped that a strong take-up of the Green Deal will help bring down the costs of installing various energy efficiency measures, and help reduce the costs on suppliers by part-subsidising some of the more expensive measures - such as solid wall insulation - which fall outside of the "golden rule", meaning the energy bill savings do not cover the full repayment of the measure.

Once again, Decc is "uncertain" about the take-up of measures through Green Deal finance, and while climate change minister Greg Barker has been upbeat about the number of assessments that have been completed so far, the industry would like to see this increase further.

Jan Rosenow says the success of the Green Deal will affect Eco in two ways. First, there is the "part-funding" of measures, which reduces the outlay energy suppliers face as they share the costs with the householder of the more expensive measures. Second, the more energy efficiency measures are completed, the cheaper the price of buying and installing them - due to economies of scale and a greater experience.

So the success of the Eco and the cost to suppliers and consumers depends in part at least on how willing the public is to go green. Both that, and the resulting cost of Eco, remain unknown.

The three elements of Eco

The Carbon Saving Obligation

- 20.9 million life-time tonnes of carbon dioxide.

· Solid wall insulation and hard-to-treat cavity wall insulation are the primary measures the government expects to deliver this target.

The Carbon Saving Community Obligation

- 6.8 million life-time tonnes of carbon dioxide.

· Focus on providing insulation measures and connections to district heating systems to consumers in areas of low income.

· At least 15 per cent of each supplier's obligation must be achieved by promoting measures to low income and vulnerable households living in rural areas.

The Affordable Warmth Obligation

- £4.2 billion of life-time cost savings.

· This requires suppliers to provide measures that improve the ability of low income and vulnerable households to affordably heat their homes, including the replacement or repair of a qualifying boiler.

This article first appeared in Utility Week's print edition of 14th June 2013.

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Author: Paul Newton,
Channel: Policy & Regulation
Tags: Energy Efficiency

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