Ofgem says ministers should “reconsider” the responsibility of energy suppliers for rolling out energy efficiency measures as part of the Energy Companies Obligation (ECO).
The regulator was responding to a call for evidence launched by the government in October on how best to go about “building a market for energy efficiency”.
“In our view, the time has come to reconsider the role of energy suppliers as the primary route in funding and delivering the range of low-carbon support mechanisms, including ECO,” said Ofgem.
The response warned suppliers are incentivised to “minimise the cost of meeting obligations rather than deliver best value”. It said there is an “unhelpful” conflict between the aims of the scheme and energy suppliers’ profit motive to maximise the amount of energy they sell, and that ECO “arguably distorts competition in supply, particularly given the exemption threshold”.
“Alternative models could make greater use of competition for funds, whether through market prices for savings or competitive auctions, and of area-based solutions, probably working with Local Authorities and potentially with network companies,” said Ofgem.
It also raised concerns over barriers to the rollout of innovative energy technologies which would have higher costs over the short term, “potentially delaying delivery of the key aims of lowering fuel poverty and carbon emissions through energy efficiency”.
Ofgem said the benefits of new technologies are likely to be less well known in advance, making the provision of lifetime saving scores difficult, and there is also a risk that untried technologies could actually increase energy usage.
It said suppliers are unlikely to be willing to incur the costs of assessing new technologies without strong incentives to do so. The regulator therefore argued that their delivery would be “better suited to a separate scheme less focussed on delivery targets and value for money”.
“This scheme could also be better designed to reflect the additional support needed to ensure that any new technologies have been sufficiently tested prior to delivery into people’s homes, especially as the scheme is focussed on the vulnerable,” it added.
Back in January, trade association Energy UK released its response to the call for evidence, saying the energy industry has “long been concerned that households and the energy efficiency sector are overly reliant on supplier obligations like ECO.
It said a top-down approach had led to an expectation that “energy efficiency measures should be provided free of charge, undermining the value of energy efficiency to the public”.
“We recognise that financial support with energy efficiency measures, like that provided for via the ECO, will still be required to support those households most in need,” it added.
“Energy UK strongly believes that the fairest and most progressive method of funding such support is through general taxation. Supplier obligations (such as ECO) are financially regressive as the costs are distributed among energy consumers regardless of their ability to pay.”
The industry body declined to comment on Ofgem’s recommendations.
A spokesman for the Energy Networks Association told Utility Week: “ENA members welcomed the recognition that the call for evidence gave to the role that network companies might play in delivering energy efficiency measures.
“Network companies operate in every community across the country and currently enjoy customer satisfaction rates of more than 85 per cent, so they clearly have both the reach and the credibility to fulfil that.”
The spokesman said targetted energy efficiency measures could potentially help reduce demand in certain areas, avoiding the need for network reinforcements and freeing up waiting times for connections.
He continued: “There are a number of different ways that network companies might help deliver energy efficiency measures, including using the price control system which has already shown itself to be an effective way of delivering connections for fuel-poor customers through the Fuel Poor Network Extension Scheme.”
In September, the Institute for Public Policy Research called for government funding for energy efficiency measures to be handed to councils and other local organisations in place of suppliers.