Governments globally are grappling with difficult decisions about green energy policies: maintain green initiatives or remove the strains on economic growth? It is interesting to look across the globe for examples of how different Governments are reacting.
In recent months, the UK has opted to “tweak” its green levies to save households an anticipated average of £50 per year. This has been a highly political issue, with domestic gas and electricity costs becoming a major factor in the increased cost of living in the UK. In particular, the government said it would adjust the Energy Company Obligation scheme (ECO) to give large energy suppliers an extra two years to hit targets and relax some of the scheme’s targets by 33%, subject to the outcome of a consultation by the Department of Energy & Climate Change (DECC).
So, what is the proposed change? First, it is helpful to recall ECO’s original targets and objectives. Effective 1 January 2013, the ECO obliges gas and electricity suppliers to improve the energy efficiency of domestic customers’ buildings by meeting three targets:
- Carbon emissions reduction obligation (CERO) – targeted saving of 20.9 million lifetime tonnes of CO2. Suppliers must focus on hard-to-treat homes, e.g. solid wall insulation and hard-to-treat cavity wall insulation (Article 12, UK ECO Order 2012);
- Carbon saving community obligation (CSCO) – targeted saving of 6.8 million lifetime tonnes of CO2. Suppliers must focus on the provision of insulation measures and connections to district heating systems to domestic energy users that live within an area of low income (Article 13, UK ECO Order 2012); and
- Home heating cost reduction obligation (Affordable Warmth (AW)) – targeted saving of £4.2 billion of costs. Suppliers must provide measures to help low income and vulnerable households afford heat, e.g. by replacing or repairing a qualifying boiler (Article 15, UK ECO Order 2012).
In early 2014, the ECO consultation will propose the following diluted scheme, to try to reduce the burden on fuel costs:
- Reducing the CERO target by 33%. The CSCO and AW targets for 2015 will remain the same.
- Extending the ECO beyond 2015 to March 2017. The CERO, CSCO and AW targets will be set at 2015 levels giving energy suppliers more time in which to reach their targets.
- Extending the CSCO element of ECO from the 15% to the 25% lowest income areas and simplifying the qualifying criteria.
This leaves a question about those suppliers who have already invested hard in hitting their targets, just to have these reduced, impacting on their relative competitiveness versus other suppliers.
The proposals will attempt to protect suppliers that have met their targets in three ways: (i) suppliers can carry forward any over-delivery against 2015 targets to count towards their 2017 targets; (ii) suppliers can carry forward their over-performance under the predecessor schemes CERT and CESP; and (iii) suppliers that have delivered substantial early progress against their current CERO target will also benefit from an uplift in scores for the measures delivered (plus, energy suppliers that fall short of their new 2015 targets will have their 2017 targets increased by the same multiple).
Normally, the UK’s big six energy companies are very astute to spot any regulatory change that impacts on them more onerously than on their close competitors. It remains to be seen how each will react to the finalised proposals, and the answer will largely depend on the outcome of the consultation.
The Energy Act 2011 is available at this link.