Places obligations on energy suppliers to ensure homes are energy efficient at no (or low) cost to low-income households

Summary

The UK Energy Company Obligation (ECO), a government-led initiative, was launched in 2013 to cut carbon emissions and address fuel poverty across the United Kingdom. This scheme illustrates how policies can ensure that large energy suppliers provide energy efficiency improvements, particularly for low-income and vulnerable households.

Challenge

As part of its broader environmental strategy, the UK government has committed to achieving net-zero carbon emissions by 2050 (UK Gov). A significant component of this target involves reducing emissions from the housing sector, which accounts for approximately one-fifth of the UK's total emissions (Savills). Domestic properties in the UK are up to three times less energy efficient, compared to those in many other European countries. The areas most affected include Wales, Yorkshire, and the West Midlands, regions that also suffer from higher-than-average poverty rates. (Kingfisher). The UK government has set a target to move all fuel-poor homes to average or above-average energy efficiency by 2030. 

The UK sees large disparities in energy affordability. According to official statistics, 13% of households in England are fuel-poor, and this is higher in Scotland (20%), Wales (14%), and Northern Ireland (24%) (UK Department for Energy Security and Net Zero, 2023). The organisation National Energy Action estimates that 6.5 million households are living in fuel poverty– this number is more than double the government’s estimate. The financial burden of necessary energy improvements, such as the installation of air source heat pumps, which can cost between £7,000 and £13,000, is unaffordable for many (The Economist, 2023). This situation presents a substantial equity challenge, low-income consumers are unable to afford efficiency upgrades and so are left with higher energy costs and the risk of fuel poverty.

Policy/Programme Goal + Expected Outcomes

The ECO is the UK government’s policy to reduce fuel poverty through energy efficiency. The program, initiated in 2013 as ECO1, has evolved through multiple phases—ECO2, ECO3, and ECO4. ECO4 is the current phase and will run from 2022 to 2026. Each phase placed a different heating cost reduction requirement on energy suppliers, known as the ‘Home Heating Cost Reduction Obligation’ (HHCRO) – specifically the expected reduction in bills for the households that receive installations over the lifetime of the installation. ECO1 and ECO2 also included specific carbon reduction requirements. ECO operates by mandating large and medium energy suppliers to deliver energy efficiency measures to homes in the UK. Each supplier must achieve a proportion of the total HHCRO based on their share of the domestic energy market. Suppliers are allowed to fund the energy improvements by passing the costs onto customers. However, the impact on low-income households is expected to be mitigated by the larger energy bill savings made by the ECO scheme. Energy suppliers decide which measures to install in households and the proportion they will fund. The ECO builds on the foundations laid by previous schemes such as the Carbon Emissions Reduction Target (CERT) and the Community Energy Saving Programme (CESP).

Households can apply for the programme if the property is EPC band D-G and they meet certain criteria – for example, if the household receives at least one means-tested benefit, if gross annual household income is under £31,000, or if a person in the household has a server or long-term health condition that is adversely affected by living in a cold home (e.g. a cardiovascular condition).

Further equity mechanisms of the ECO include:

• ECO3 included a sub-obligation that at least 15% of the obligation is met by installations for households in rural areas which ensures rural areas are not excluded from the climate transition.
• ECO4 includes a mechanism that allows smaller energy suppliers to apply for a ‘buy-out’ of the scheme to ensure they do not face disproportionate costs

Enabling conditions

Four key conditions supported the implementation of this policy:

1. Phased approach: Each phase is built upon the successes and lessons of the previous phases, with government reviews completed before the introduction of a new phase.
2. Regulatory framework: The ECO scheme is underpinned by governmental policies and regulations that commit energy suppliers to energy efficiency improvements.
3. Collaboration with stakeholders: Critical to ECO's success has been the mandated participation of larger energy suppliers, which ensures that the financial burden of energy efficiency improvements is shared across the industry. To reduce pushback from energy suppliers, ECO4 includes a reporting working group consisting of suppliers and representatives from across the supply chain that meets on a needs basis and an ECO4 quarterly supplier forum.
4. Public awareness and engagement: To ensure that eligible households are aware of the program and can apply, local authorities can sign up to identify and refer eligible households to receive energy efficiency improvements under ECO4.  

Indicators of success

Whilst ECO4 is ongoing, it is estimated that the program will upgrade 450,000 homes, saving on average £300 from energy bills, and preventing 15 Mt of lifetime carbon emissions (UK Gov).

So far 388,000 individual measures have been installed under ECO4 including 34,845 boiler upgrades, 16,541 cavity wall insulation installations, and 19,797 solar PV installations (Ofgem).

Key achievements under previous ECO phases include (House of Commons):

• From 2013 to 2020, 2.7 million measures were delivered in over 2 million low-income households, building on the successes of preceding schemes (CERT and CESP) which delivered 8.5 million heating and insulation measures between 2008-2012).
• Since the launch of the ECO scheme in 2030, there has been an estimated £19.3 billion in lifetime energy bill savings (ECO3 Report).
• ECO1 and ECO2 exceeded their targets for lifetime carbon and cost savings
• ECO1 lifetime carbon savings were 28 million tonnes of CO2.
• ECO1 lifetime cost savings were £6.9 billion (7% above target).

Key Takeaways/Implications

• Shows how the public sector can collaborate with the private sector to respond to distributional issues with mechanisms that go beyond ‘one-off’ grants or subsidies.
• Illustrates how the public sector can support transition efforts without bearing the full burden of financing and whilst protecting disproportionate cost pass-through to consumers.
• Highlights the utility of a phased implementation to evaluate the progress and efficacy of a policy.