The Energy Company Obligation: a pittance that will worsen the finances of the most poor

  A press release today (January 3rd 2011) from the Department of Energy and Climate Change makes the following assertion as part of the Department's response to a campaign on child poverty.[1]

‘we’re also focusing on the causes of fuel poverty – in particular poor household energy efficiency. There’s free and cheap insulation available to low income households now from energy suppliers and the Warm Front scheme, and this will be also be a core feature of the new Green Deal from the end of the year.’

This statement isn’t true. The Green Deal proposals do not have ‘free and cheap insulation’ as a ‘core feature’. The Green Deal is a mechanism for allowing householders to improve the energy performance of their homes and pay back the cost slowly using a loan from electricity companies. Helping get people out of fuel poverty – one of the most important challenges facing the UK – is nothing to do with the Green Deal.

However DECC would be right to say that the alleviation of fuel poverty is indeed a feature of the proposed Energy Company Obligation (ECO) to be introduced in the spring of next year. This mechanism will force the energy companies to spend about £1.3bn a year for the next ten years on subsidising home energy improvements. But only about 25% of this amount, or something around £375m a year, will go towards those with the lowest incomes and greatest risk of fuel poverty.

This may sound a lot. Unfortunately it isn’t. Compare it with today’s position: the government obliges the energy companies to disburse £2.4bn a year through the CERT programme. Rising prices mean that the proposed £1.3bn will achieve less than half of the old figure. Of that £2.4bn, about 40% is spent on vulnerable homeowners, or about three times what will spent under the future ECO plan for helping the fuel poor.

Separately, the government also provides funds today for the Warm Front home insulation scheme. Even after the public expenditure cuts of 2010, Warm Front disburses £100m a year to the most needy for home improvements. This help will cease entirely at the end of the year. Despite what DECC asserts, the only scheme left for directly helping the less well-off improve their homes will be ECO, and it will be a shadow of existing schemes. However one looks at it, the government is reducing its efforts to cut fuel poverty.

The small scale of the new plan can be gauged by comparing the 5 million or so UK homes classed as in fuel poverty and spending 10% or more of their income on energy, with the size of ECO support for home improvements for vulnerable homes. The ECO scheme will be spending the equivalent of about £75 a year per fuel poor household on energy efficiency improvement. ECO is only expected to remove about 450,000 homes from fuel poverty by 2022m, or less than 10% of those classified as in this position. That’s it: a one percent reduction in fuel poverty per year, even under the Department’s own estimates.

It gets worse. On average, the poorest ten per cent of households will actually see a greater proportion of their income being spent on energy in 2020 than today as a result of the government’s new scheme. The Green Deal and ECO are highly regressive, with the bottom decile, excluding those small numbers who get help from ECO, spending a greater fraction of their cash on energy than if the Green Deal and ECO did not exist.  By contrast the top half of the income distribution is expected to see virtually no change.[2]  So even under the government’s own figures, ECO is expected to take more from the poor than it gives back in free or subsidised energy efficiency benefits.

I apologise for writing again about DECC’s Green Deal and ECO plans. I do so because these proposals will both substantially reduce the rate of home energy improvement and redistribute cash from the poor to the rich. DECC must be pushed back from these regressive policies.

[1] Save The Children’s ‘No Child Left in the Cold’.

[2] Please see Figure 27 on page 88 of DECC’s own Impact Assessment.