A new model for delivery of energy efficiency measures?

February 11, 2015

In January, Policy Exchange published a report Warmer Homes  which looked at fuel poverty and energy efficiency policy. Since its publication, several people have asked me to elaborate my thoughts on the delivery of energy efficiency programmes, in particular on the use of Area Based Approaches (ABA). In the report we concluded that “Area Based Approaches have been shown to be an effective way of targeting the fuel poor”, but also suggest that further thinking is required in terms of their definition and delivery.
It is worth saying first that both of the government’s flagship energy efficiency policies already have an Area Based element – the Carbon Saving Communities Obligation (CSCO) under the Energy Company Obligation, and Green Deal Communities – but neither appears to be entirely satisfactory.

So – how might we develop a better approach? We look at the fuel poor and ‘able to pay’ segments of the market in turn.

Fuel-poor households

The Energy Company Obligation (ECO) is the main scheme delivering energy efficiency measures to fuel poor households. Implementing an Area Based Approach within the supplier-led ECO scheme has been and will continue to be problematic, in our view. ECO places an obligation on suppliers to deliver measures to customers, and then this is overlaid with an obligation to deliver to deprived and rural areas. In any given area there will be multiple active suppliers – hence tagging on an area based approach will most likely be quite messy, leading to overlaps and inefficiencies between suppliers.

The current ECO programme is committed to run until 2017, and it is probably not worth changing the delivery model in this period. However, following the election this year there is the potential for the incoming government to redesign the scheme from 2017 onwards.

Our suggested approach would be as follows:

  • Place an obligation on suppliers to deliver energy efficiency to fuel poor households (including smaller suppliers who are currently exempted from the ECO obligation). They can either choose to deliver measures themselves or pay (into a central pot) to buy themselves out of the obligation.
  • Government should then top up the central pot with additional funds. See our report for suggestions on how this can be achieved – such as the reallocation of savings from the Winter Fuel Payment, use of infrastructure capital, or potentially proactive spending by the Department of Health / NHS.
  • Government would then run a periodic competition (annual or multi year) to allocate these funds. Bidders could include energy suppliers, energy efficiency installation businesses, Local Authorities, Local Economic Partnerships, Social Housing providers, community groups or charities, etc.
  • Bidders would come forward with plans targeting specific areas, specific household groups, or specific technologies. This could include Area Based Approaches on a street by street, local area, or Local Authority basis, depending on circumstances and need, although not all bids will be area-based.
  • Bids would be assessed on merit and the funds allocated accordingly. The assessment criteria could be one or more of the following: cost per kW improvement, cost per tonne of carbon saved, cost per SAP score improvement, or impact on fuel poverty. It would also be possible under this model for bidders to include leveraged funding from other sources.

This approach harnesses the power of a competitive process to identify the most effective solutions to fuel poverty, from the widest possible range of providers. Suppliers can choose whether they wish to deliver directly or not. The most enthusiastic suppliers might even bid into the central pot for additional funds to increase their market share. This approach creates a marketplace of ideas, and fosters innovative delivery solutions.

Able to Pay Households

The Green Deal targets ‘able to pay’ households. It combines energy efficiency assessment reports, with finance packages, and grants through the Green Deal Home Improvement Fund. The Green Deal is a voluntary scheme – households choose whether or not to participate. Although a whopping 445,000 assessment reports have been completed to date, the uptake of finance plans has been low at only 8,200. The reason for poor uptake of finance plans is likely to be twofold: poor communication of the scheme, and the relative unattractiveness of the financial offer (i.e. rates of circa 8% APR).

In late 2013, government announced a new Green Deal Communities scheme, with £80 million of capital funding available for Local Authorities to deliver Green Deal on a street by street or area basis. The thinking behind the scheme was to promote the uptake of Green Deal to as many households as possible within a discrete area. However, the mere existence of Green Deal Communities underlines the poor uptake of the Green Deal more generally. Implementing a community level approach might improve communication, but then so would greater promotion at national level. It does nothing to improve the financial proposition.
In short, it should not be necessary, and probably is not desirable, to deliver to able to pay households using an area based approach.

Instead we would recommend the following:

Improve the Financial Proposition

The Green Deal Finance product needs to be made more attractive. At 8% APR, the current rates appear unattractive compared to other forms of finance such as mortgages (although we accept that compared to unsecured loans they look better). Labour proposes to reduce the rate to 0% – in effect a subsidised loan. This is probably unnecessary and debateable in terms of value for money. But even reducing the rate to 3-5% would make the proposition far more attractive to households compared to alternative sources of finance. It would also increase the amount that the Green Deal Finance Company (GDFC) can lend for a given energy efficiency measure under the “golden rule”. Reducing the rate can be achieved by government guaranteeing GDFC’s debt, and potentially providing a modest grant to GDFC (itself a non-for profit company).

An alternative way to improve the financial offer would be to make the payback more visible to householders. At present the payback on a Green Deal investment comes in the form of an energy saving to the householder, which can be a difficult sell to customers. Government should learn lessons from the small scale Feed in Tariff (FiT) – where an attractive return on investment based on direct payments has led to substantial rollout of solar PV. This model can be transposed to energy efficiency if for example householders receive an energy efficiency FiT for installing measures. Government has already implemented this for large energy customers in the form of the ‘Electricity Demand Reduction Pilot’, but individual householders are not eligible.

Improve Marketing and Route to Market

The marketing and route to market for Green Deal finance plans must also be improved and simplified. Currently the GDFC is prohibited from marketing directly to end consumers – being classed as a debt administrator rather than a lender. Consequently it must offer its product through a network of intermediaries such as energy efficiency installers. This is a very inefficient delivery model – turning engineers and installers into financial salespeople, and duplicating marketing efforts up and down the country.

Rather than improving communication through Green Deal Communities, it would be preferable to allow GDFC to market and sell its product direct to end consumers, and ramp up its marketing activity at national scale to become more visible to householders. Installers would then promote rather than sell GDFC’s product.

In summary, Area Based Approaches probably have a role to play in the fuel poor segment of the market, but not in the able to pay segment. Applying an Area Based Approach to the existing ECO model increases the level of complexity, and may be inefficient. However, we have outlined an alternative approach for delivery post 2017, which could incorporate an Area Based Approach whilst also boosting innovation and competition in delivery. The ‘able to pay’ segment does not need an Area Based Approach – it needs a more effective national approach, and a much improved financial proposition.

Join our mailing list