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Is this the key to finally beating fuel poverty?

ImageA new mechanism to pump prime capital investment will soon emerge. But how does the Energy Company Obligation differ from previous attempts?

The UK government has no plans for public expenditure to stimulate energy efficiency investments in buildings. Full stop. Not even for those five million households now deemed to believing in fuel poverty.

But the UK government does have other ambitious plans. Both to improve the energy performance of the building stock, the cheapest way of saving carbon. And to eliminate fuel poverty during the next five years.

To achieve this, there is a growing political consensus that the easiest way to square the circle is to allow improvements to be made via loans incurred by borrowing against the value of the building. The necessary investments are funded by venture capital. With the capital being repaid with help from the lower fuel bills that then ensue. The scheme will be entitled Green Deal Finance.

The underlying presumption is that Green Deal Finance can only be pertinent for those able to fund such repayments themselves. This need not – indeed must not – be the case.

For the past decade, an ever increasing source of funds to help lubricate the marketplace to realise these objectives has been levied via the energy companies. A whole series of programmes are funded in this way. Currently they go by the names of the Carbon Emission Reduction Target (CERT), and the Community Energy Saving Programme (CESP). Between them, they now provide pump-priming capital of around £1.4bn a year to install energy saving measures.

When the Green Deal programme begins in 18 months time, a new mechanism will be created. Called the Energy Company Obligation. Ministers have already signalled that this will not just be a ‘Son of CERT or CESP’, but an altogether very different concept.

How different? They have yet to pronounce. The answer must be: very different indeed. The ECO must not be what its predecessors were, indeed still are: a mechanism to fund direct capital expenditure upon energy saving measures. After all, that capital is already deemed to be forthcoming from the venture capitalists, funding the entrepreneurs set to deliver the Green Deal finance packages.

Instead, the ECO needs to be the vehicle which provides the funds to meet the repayments on that capital investment. Obviously not for those in a position to pay as they save. But rather for those who may struggle to achieve sufficient fuel bill reductions even after all the Green Deal measures have been installed. Those households where savings are unlikely to exceed repayments in reality.

The definition of a household being in fuel poverty has long been that those present need to spend over 10% of disposable income (after housing benefit) just to keep warm. The operative word here is “need”.

In many cases, a deliberate decision is now being taken to choose between burning fuel and purchasing other necessities. Literally, heating, or eating. Where households have been under-heating as a result, the magnitude of the fuel bill savings will be lower. The household may well need to increase the temperature of the property to a healthy level.

This renders them unlikely to comply with the most fundamental tenet of the Green Deal Finance concept, the Golden Rule. This Rule requires there to be sufficient savings on the household fuel bill to enable the initial capital (plus interest) to be repaid over the loan period. As a result, many of those now struggling to heat their homes could be ineligible for the scheme.

No increase in bills

But what if the ECO scheme itself was to become not the capital provider but the debt-payer? Meeting the annual repayments on behalf of fuel poor households, enabling them to take up a Green Deal package without increasing their bills?

This way, capital costs are borne by Green Deal providers. Energy companies are only liable for repayments.This enables many more properties in fuel poverty to be tackled in the initial years of the financial scheme, without the full capital costs being incurred immediately by the energy companies (or more accurately, by all energy consumers on their fuel bills).

My Association has calculated that all fuel poor households in England could be provided with a Green Deal package at a capital cost of £15.5bn. But this would only leave an ECO requirement for repayments of just over £1bn a year, a far lower figure than CERT/CESP currently costs. (Without taking account of the £1/3 of a billion that government has been providing each year via its – shortly to expire – Warm Front fuel poverty programme).

The O in ECO stands for Obligation. Obviously energy companies will be required to help market the Green Deal Finance.

One considerable advantages of clarifying the different roles of Green Deal providers and energy companies, variously as capital or repayment providers, is that a single process will emerge, rather than competing ECO and Green Deal offers. By removing the competitive advantage for an energy company to be able to outsell a conventional Green Deal provider via judicious ECO subsidies, this should at last bring new players into this field.

Embracing the new ECO funds when fuel poverty-proofing houses should ensure that we do obey the existing statutory requirement to abolish fuel poverty. Because only by eliminating fuel poverty first can we really create a low carbon future that is truly socially equitable.

Let me spell out what would be the end result. It would be that, within this decade, we should have an immeasurably improved building stock. Run-down communities would have been upgraded, thus reducing social and health costs. In the process of making those building improvements, we would have provided tens of thousands of jobs in the construction trade. Above all, we should have rid the UK once and for all of the scourge of fuel poverty. Worth some radicalism, don’t you think?

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