Mat Hope wrote for Carbon Brief about some of the difficulties that energy supply companies are having to meet their obligations. The costs to consumers could be higher than initially estimated. This has important lessons for all of Europe as they start to develop and implement their own obligation schemes. This blog follows an article in the Financial Times by Pilita Clark that raised concerns about the costs of the energy company obligations, at a time when energy bills are really starting to hurt the general public.
Companies spend millions looking for energy efficiency scheme participants
The government’s Green Deal was meant to encourage an energy efficiency boom, but take up has so far been slow. Now another energy saving policy is running into trouble as suppliers spend millions looking for customers to participate in the scheme. The Financial Times reported on May 6th the Energy Companies Obligation (ECO) could add as much as £100 to household energy bills.
How much does the ECO cost?
The ECO requires energy suppliers to provide energy saving services – such as installing loft or cavity wall insulation – with a particular focus on lower income households. Like other green measures, the services are funded by a surcharge on household energy bills. But the government and industry disagree on just how much the ECO will add.
The Department of Energy and Climate Change (DECC) expects energy efficiency improvements worth about £1.3 billion a year to take place under the ECO. If the full cost is passed on to the consumer, it works out at about £53 per household.
But industry association Energy UK claims the figure is too low – with the additional cost more likely to be around £69 per household. Research it commissioned from economic consultants NERA suggests DECC may have underestimated the cost of finding people to take advantage of the energy efficiency scheme, and been overly optimistic about how many installations might be needed to meet emissions targets.
NERA reckons the cost could be even higher – about £94 per household – if people pull out of the deal once they realise how much hassle the installations might be.
Search costs, installation numbers and seeing it through
NERA says DECC overlooked a number of issues in its calculations which mean the ECO could actually cost more than the government expects.
NERA calculates that DECC could have underestimated the total cost of the ECO by as much as £95 million per year by failing to account for how hard it is to find eligible households.
Energy suppliers are legally required to provide services under the ECO, but the number of households that qualify for the support is actually quite small. This means companies have to spend a lot of money searching out potential recipients and getting them to agree to the measures. NERA says this search can cost suppliers between £100 and £500 per household, depending on the type of home improvement – a cost DECC doesn’t include in its calculation.
Chief Operating Officer of Energy UK, Lawrence Slade, says that while energy suppliers don’t have much information about which homes fall within the ECO criteria, government departments do. He says the additional cost of the ECO could be easily cut if companies and government find a way to easily share information.
NERA also suggests DECC may have overestimated how much the measures reduce emissions – meaning more installations would be needed to meet the ECO emissions reduction target, adding more to household bills.
The table below shows that for each of the measures covered by the ECO, DECC’s estimate of how much carbon dioxide could be saved from reduced energy use in a three bedroom semi-detached house is higher than the industry’s conservative estimate:
|(Tonnes of carbon dioxide)||DECC estimate||Low industry estimate||High industry estimate|
|Solid wall insulation||39.85||10.43||62.39|
|Cavity wall insulation||20.21||15.10||45.07|
Source: Data from NERA: The Costs of the Energy Company Obligation, table by Carbon Brief
Once the cost of the anticipated additional installations is factored in, NERA estimates the ECO could add about £69 to household bills.
There is one more thing DECC failed to consider, says NERA – whether or not people actually go through with the home improvements once they’ve thought about how much hassle they could be. It says suppliers will have to make the energy efficiency measures even cheaper if they want households to see the improvements through.
Once these costs are included, the ECO could add about £94 to household bills.
But this is an area where there are significant unknowns. Slade says there is still a lot of uncertainty about how much the ECO will eventually add to bills, and says “no one can honestly say – hand on heart – come March 21st 2014 whether the ECO will cost £1.3 billion or £2.3 billion”.
A DECC spokesperson tells us estimates “vary widely and are constantly changing” but so far it has “seen no evidence to date in the analysis from energy companies or independent reports that would change our estimate that ECO costs will be around £1.3bn a year”. DECC says it will keep the cost estimate “under close review”, however, as companies continue to identify willing households and work out how to deliver this latest complex energy saving scheme at the lowest cost to the consumer.