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Costs of the ECO: the impact on fuel poverty

A report for eaga CT assessing the way that the costs of ECO could be met by households in order to minimise the impact on fuel poverty

The forthcoming Energy Company Obligation aims to underpin the Green Deal, support the improvement of hard-to-treat homes, and assist in the eradication of fuel poverty. As with previous supplier obligations, the costs will be met through consumer bills. How to ensure that these costs do not exacerbate the problems the policy will attempt to address?

This report puts forward the options available to policy makers to ensure that the Energy Company Obligation (ECO) is funded as equitably as possible. It considers a range of factors but focuses on the impact of the policy upon low income households as a whole, and those low income households with above-average energy consumption.

Summary of Recommendations

Sharing the obligation

Putting the costs of the ECO onto each kWh of electricity and/or gas would help reduce costs for the majority of low income households.
The excessive burden on certain households that comes with the costs being placed on only one fuel can be diluted by retaining a spread of the burden across both electricity and gas. An assessment of energy and climate policies in the round may suggest ECO costs should fall entirely upon the gas bill. However, we do not recommend using ECO costs to address an imbalance caused by other policies, particularly given the uncertain policy environment.
Placing the costs on each kWh of gas and electricity supplied could be achieved in two ways: an equal 50% share of the obligation (and hence costs) between the two fuels, or based on the total sum of kWhs supplied by both fuels. The latter would mean that the obligation would fall to a greater extent upon gas consumption (with a greater number of kWhs supplied), broadly congruent with the measures supported by the policy.
Customer credits could be used to further reduce the burden upon the lowest income deciles, though these can amplify the negative impact upon the low income high consuming households.

Support for low-income, high-users

Consideration needs to be given to those low income households that consume a large amount of energy. We suggest a few options to mitigate the impact:

  • Target ECO support on low income households, particularly those in inefficient properties
  • Consider equity release options for owner-occupiers in large homes
  • Target the Warm Home Discount on those households meeting a disproportionate share of policy costs. This might include energy inefficient homes, large properties, households using electricity for heating, and households that spend a large portion of their time at home (such as the elderly, young families, the unemployed).

Ofgem’s Retail Market Review

In March, Ofgem published their initial proposals for regulating the energy market to ensure a better deal for consumers. As part of their work to improve the transparency of costs, the review included proposals to simplify tariffs: within each region, each supplier would set one “per kWh‟ cost per payment type for a standard tariff. For these tariffs, a standardised charge (potentially either a standing charge or a unit charge) would be set by Ofgem.

With particular relevance to this project, the proposals suggest that the standardised charge would be “designed to cover pass through costs, such as T&D charges and some environmental and social charges”. Whilst the simplification of tariffs would be helpful, it is vital that Ofgem’s proposals do not embed the costs of energy and climate change policies within a standing charge or tier 1 rate, since this would work against the recommendations within this report by creating higher costs for the majority of low income, low consumption households.

Instead, we recommend that Ofgem entrench our recommendations, by ensuring that they do not include within a “per account‟ charge the costs of those policies split between suppliers based on the volume of energy sold. This would help remove the uncertainty that exists at present, over whether energy suppliers pass through their costs in the manner that would be expected.

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