Time to move on from ECO

Earlier this month the government published a consultation on proposed changes to the Energy Companies Obligation (ECO) scheme. These changes were originally announced in December as a way of defusing the “green taxes” debate (i.e to produce headlines of reducing everyone’s energy bills by £50) and I wrote at the time that we were missing an opportunity fundamentally to reform the energy efficiency market.

I stand by everything I wrote then, when I set out several positive and constructive ideas for managing this market better. As the Department of Energy and Climate Change (DECC) are asking for comments on their proposals, however, and this topic formed the basis for a lively and stimulating seminar at Ecobuild recently, it’s worth reviewing some of the reasons ECO is such a problematic scheme.

The government’s proposals for ECO are flawed and dangerous. This is not just because they are destroying jobs and companies today and keeping people in fuel poverty who deserve better homes and lower energy bills; but more significantly because they are perpetuating a market structure that is inefficient and inhibits innovation, enterprise and growth.

ECO is a £1bn+ intervention into a market for building refurbishment worth about £10bn a year to the UK economy, and which is the focus of activity and livelihood for several tens of thousands of small construction firms and their staff. Because of this, it needs handling with care, because getting it wrong doesn’t only create £1bn of inefficient economic activity (which customers pay for) it also risks inhibiting growth of £9bn of otherwise perfectly sensible economic activity in the construction sector (which the whole UK economy pays for).

ECO is inefficient because it’s controlled by the large utility companies who have least interest in delivering it and regard it as a burden and cost. Hence DECC’s proposals refer repeatedly to “reducing the costs of compliance”. However, construction companies and entrepreneurs do not regard the building refurbishment and energy efficiency market as a burden and cost; they regard it as an economic opportunity worth £10bn a year and one which should be worth £20bn a year. This fundamental difference of perspective is not appreciated by DECC at all.

ECO is inefficient because it’s controlled by the large utility companies who have least interest in delivering it and regard it as a burden and cost

The government’s current proposals essentially fall into three categories: concessions to reduce pressure on utilities to deliver efficiently; ceding more power to the utilities to prevent innovative construction firms and communities disrupting their markets; and a few small concessions to the fuel poverty lobby.

The bulk of the proposed changes cover extensions to deadlines; reductions in targets to install more challenging measures; and allowing failures to meet targets to be carried forward between periods. In other words, DECC is giving up trying to drive cost reduction through the utilities – the message is, “If you start to feel the going is getting tough and any innovation or change is required from you, don’t worry, we’ll change the rules to make sure you don’t have to bring costs down or change your business model in any way.”

The government may as well say, “Let’s keep the UK energy efficiency market as backward and globally uncompetitive as possible.”

This approach might be OK, of course, if it was made easier for new entrants to come into this market and challenge the incumbents. But utility control of ECO makes it very difficult for new entrants, because utilities can and do use ECO as an incentive for customers to sign up to their services (especially attractive customers like local authorities and social landlords) and £1bn a year is a lot of marketing budget for the average start up to find to compete with this.

One of my most disappointed observations about the government proposals is that they are extending ECO to cover district heating as a primary measure: the growth of district schemes and community energy is potentially a major disruptive force to drive competitive change in utility markets in the next decade, and to allow the large utilities to use ECO to give themselves an unfair advantage in this market is wrong as well as economically inefficient.

In the context of these criticisms, the proposals to protect Affordable Warmth and to extend and simplify the qualifying criteria for the Carbon Savings Community Obligation make little difference to the construction market, although those in fuel poverty benefitting won’t complain.

The government has taken some positive steps in the last few years towards a more strategic approach to energy efficiency – setting up the Energy Efficiency Deployment Office for example, and providing some funding for innovation and enterprise directly and through the Technology Strategy Board – but until they fundamentally reform ECO and start to listen more strategically to construction they will continue to have contradictory and incoherent policies fighting against each other.

This creates waste, inefficiency and competitive disadvantage which none of us can afford.

Matthew Rhodes is managing director of Encraft