Electricity and Gas (Energy Efficiency Obligations) Order 2004

– in the House of Lords at 12:58 pm on 21st December 2004.

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Photo of Lord Whitty Lord Whitty Parliamentary Under-Secretary, Department for Environment, Food and Rural Affairs, Parliamentary Under-Secretary (Department for Environment, Food and Rural Affairs) (Food, Farming and Sustainable Energy)

My Lords, I beg to move that the draft order be approved. It places an obligation on energy and gas suppliers to achieve targets for the promotion of improvements in household energy efficiency. Suppliers meet those targets by encouraging and assisting their household consumers to take up energy efficiency measures. Through the more efficient use of energy, consumers will be able to reduce fuel costs or enjoy greater comfort without increased costs.

The order sets the basis for the next phase of the energy efficiency commitment (EEC) and is an important part of the general approach to the Government's energy efficiency targets, set out in the energy efficiency action plan. The obligation will run from 2005 to 2008 and will build on the current, successful three-year commitment, which ends in March next year.

We have held extensive informal consultations with a wide range of stakeholders, and a formal consultation document was issued in May. The main aim of the next stage of the EEC is to make a significant contribution to the targets under our climate-change programme. We estimate that the EEC for 2005–08 will achieve carbon savings of around 0.7 million tonnes of carbon a year by 2010, the first target year. It will also give particular help to low-income consumers, who spend a larger proportion of their income on energy, by requiring suppliers to achieve at least 50 per cent of their energy savings in households in receipt of income support, disability benefits or tax or pension credits. That will also have the added benefit of contributing to the alleviation of fuel poverty, which is part of a wider action plan issued in November.

The order sets out an overall obligation on electricity and gas suppliers of 130 fuel-standardised lifetime-discounted terawatt hours of energy savings. It is a challenging target, at about twice the level of the current EEC, but it is achievable and will help to achieve our wider targets.

We recognise the problem of overcoming householder apathy and creating demand for energy efficient products. We are considering ways to promote stronger consumer demand, including campaigns by key players such as the Energy Saving Trust. We have recently given the trust an extra £3 million to promote energy efficiency.

The cost of meeting the obligation will fall on suppliers rather than consumers. However, we expect that, even if they were to pass costs on in full to their customers, they would amount to no more than an average of around £9 a year for the three years of the programme—about 20p a week. In any case, suppliers may absorb some of the costs themselves. Those costs are outweighed by a range of direct and indirect benefits. We expect the average ongoing financial benefit for consumers, in their bills, to be over £15 a year for the lifetime of the measures, which in some cases could be up to 40 years. In addition, there are wider environmental and social benefits.

Ofgem is responsible for the administration of the commitment. The order provides the framework for Ofgem to set the targets. Ofgem will also be responsible for enforcement. The apportionment of the overall target between individual suppliers will be on the basis of their customer numbers. As we do not wish to raise barriers to smaller suppliers entering the market, the order exempts those with fewer than 50,000 customers.

We are keen to encourage in each sector the development of the best new energy efficient technologies. We also support the development of energy services as a potentially effective means of improving energy efficiency. The order, therefore, provides incentives for innovative products, such as micro-CHP and energy service action. The order also gives further flexibility to suppliers by allowing them to trade with each other all or part of their energy efficiency targets.

We intend to monitor the continuing development of the EEC. Ofgem is required to report annually, and we are committed to extending the commitment beyond this phase, from 2008 to 2011. We will review the target before then. I hope that the House will accept the importance and desirability of the order and vote to support it.

Moved, That the draft order laid before the House on 10 November be approved [34th Report from the Joint Committee, Session 2003–04].—(Lord Whitty.)

Photo of Lord Dixon-Smith Lord Dixon-Smith Shadow Minister, Environment and Transport

My Lords, again, this set of regulations is welcome, as is anything that works towards better energy efficiency or economy. I must admit that I still have some difficulty with them. Unless one is an expert, these seven pages are couched in such terms that they are incomprehensible. We should attempt to write this sort of regulation in language that ordinary people can read and understand, although I accept that for the aficionados there is inevitably a complexity when dealing with a subject of this sort.

To a degree, the Minister has already responded to my next problem, which was to decide whether the regulations were directed at energy efficiency or more at attempting to find solutions to fuel poverty. There is no doubt that the specification, shall we say, that has been drawn up is being biased within the general community. That is fair enough. I accept that fuel poverty is a particular problem for a large group of people. Anything that alleviates it is desirable. Coming from a Government who resisted attempts in the Housing Bill to raise the fuel efficiency of buildings, it is good to see a conversion.

I have a technical problem, which no doubt the Minister will be able to explain, with the words "fuel-standardised" on the first page of the regulations. We say that a fuel-standardised sum is the amount of actual saving multiplied by different factors depending on the particular fuel that is the source of the energy.

My first problem arises where the source of the energy is electricity. In my experience, which is somewhat limited, electricity has to be generated. I have never heard of electricity generating electricity—I think that the only free electricity floating around is lightning. So I am rather fascinated about why that is included as a source of energy in the first place. No doubt the Minister will be able to explain that.

But that has of course what I would call the strongest multiplier against it, which means that economy is achieved where the source of energy as electricity had the least effect, counting against the amount that has to be saved. That multiplier reduces the saving that is counted in the fuel-standardised context to 0.2 per unit saved. Where the source of the energy is coal, gas or oil, there are lesser multipliers.

Given that a great deal of energy supplied still comes from nuclear, which does not generate carbon dioxide at all, one could have an argument that because there is no carbon dioxide generated, fuel economy is not required except to the extent that we would like to reduce the total capacity of generation. But if we seek long-term environmental benefits and ways to tackle the problems of carbon dioxide emissions and global warming, we would not introduce a multiplier for coal at all. We should offer every possible incentive to shut down coal generation. These factors require further justification. Again, when the Minister responds to this brief debate, will he be able to explain the background to the factors set out on the first page of these regulations? I suspect that he may prefer to write to me in more detail.

I turn now to the inconsistencies of the background policy, in which one finds an immediate nonsense that has not been thought through. The rate of VAT on fuel is 5 per cent, while on insulation it is 17.5 per cent. That is a perverse disincentive. However, I accept that it has nothing to do with these regulations and that we are stepping out of the field of the order before us and into the field of general policy.

Not the least of the difficulties of encouraging householders to take a proper interest in energy saving that the Minister has himself explained is their reluctance to do so under the present circumstances. We shall not solve the problem without going far wider than the specific issues addressed in these regulations. I hope that the Minister will accept that there is a wider context in which these matters have to be addressed. Perhaps he will give me an assurance that the Government are also considering the far more fundamental issues, otherwise it will be difficult to ensure that these regulations are successful. I appreciate that the regulations will work because the incentive is placed on the suppliers, who cannot afford to fail. But the task would be made much easier if the consumer himself were given greater incentives.

Photo of Baroness Miller of Chilthorne Domer Baroness Miller of Chilthorne Domer Shadow Minister, Environment, Food & Rural Affairs

My Lords, I should start by declaring an interest. I have just installed a solar water-heating system on my roof, having benefited from a government grant to cover one-quarter of the cost. I am grateful that we were able to take advantage of such a grant. The system is so incredibly efficient that if the sun is out for only two or three hours, we have ample hot water to meet our needs all day. All noble Lords are welcome to come and have a look at the system and, indeed, to take a bath in our solar heated water.

I, too, warmly welcome the order as it marks an important step in achieving energy efficiency in the home. Unlike the noble Lord, Lord Dixon-Smith, I have benefited from being able to consult my noble friend Lord Ezra. Unfortunately he is unable to be in his place this afternoon, but he translated the order excellently for me. I acknowledge that the Government published accompanying Explanatory Notes, but I found my noble friend's interpretation infinitely more helpful and brief. Indeed, the notes would have benefited from being divided into explanations addressed specifically to the order, followed by background information. At present the notes are helpful but slightly confusing, given that some of them do not relate directly to the order.

Both my noble friend Lord Ezra and I would like to welcome in particular the innovative action to be taken on micro-generation. We are pleased to see that.

I have one or two questions for the Minister. What is the Government's current energy savings target for the domestic sector by 2010? Is it 5 million tonnes of carbon, or 4.2 million tonnes? I ask that because I think both figures have been mentioned. Although my noble friend Lady Maddock has not asked me to speak on her behalf, I know that she would want the point to be made that it is regrettable that the Government resisted an amendment to the Housing Bill which would have introduced a more substantial provision than that contained in the Act.

Although we welcome the order it does not mean that we have not noticed that departments other than the Minister's own, Defra, seem constantly to be watering down efforts to achieve energy efficiency and sustainability.

The measures under the order will, if successful, contribute savings of 0.7 million tonnes of carbon by 2010. Do the Government have any further proposals on how the remainder will be achieved? Is the Minister aware of any further measures that may be introduced in the near future?

I ask the Minister, again, about the issues that we debated at length during the passage of the Energy Bill. He has just referred to an extra £3 million being given to the Energy Saving Trust, but I remind him that the services offered by the trust are not very widespread or well known on the streets of Britain. Indeed, from my own experience of buying a solar water-heating system, I know that it is difficult to access advice about systems, suppliers and installers. I am sure that the Minister will refer me to the DTI website, but not everyone has access to a computer or the ability to use it. Many of those in particular need of advice—for instance, those suffering from fuel poverty—are exactly the people for whom website access is difficult.

I return to my request that far more information on energy saving should be given out in places where people habitually and easily go—for instance, pubs, supermarkets and doctors' surgeries, which I know contain some information on energy saving but not nearly enough. I ask the Minister to consider whether the Energy Saving Trust should look at more innovative ways of reaching the general public.

The Government estimated that fuel poverty affected about 3 million households in 2001. Given that there has been a substantial rise in the price of energy, what is the Minister's estimate of the number of households that are now in fuel poverty? This should, of course, affect the resources that the Government are putting into this area of work.

I noticed an interesting paragraph in the explanatory notes to the order which perhaps answers the query of the noble Lord, Lord Dixon-Smith. It states:

"Energy improvement is defined as the benefit to the household from an energy efficiency measure, either from lower bills, or from increased comfort".

That is a sentiment with which I entirely agree, although it does not need to be "or" and could be "and". It is an important point to bear in mind.

Finally, I should like to put on record how pleased I am at the Ofgem decision last week on transmission price controls for renewable generation. The price controls were last set in 2000. In 2006, prices will reflect the cost of transmission—particularly from distant parts of Scotland—of energy generated through renewable sources. I welcome Ofgem's move on that front.

We welcome the order and hope that the Government will take more action in this very important area of work.

Photo of Lord Whitty Lord Whitty Parliamentary Under-Secretary, Department for Environment, Food and Rural Affairs, Parliamentary Under-Secretary (Department for Environment, Food and Rural Affairs) (Food, Farming and Sustainable Energy)

My Lords, I am again grateful for the general support for the approach taken in the measure. The noble Lord, Lord Dixon-Smith, claimed that the order was incomprehensible, but I think that he made a fairly good fist of understanding it himself. There are some inevitabilities in the phraseology, but this phraseology is to be used by energy professionals and the supply companies. I also take note of the strictures of the noble Baroness on the explanatory notes, which we will look at.

In relation the noble Lord's query about the purpose of this scheme, the prime purpose of the commitment is energy efficiency—or carbon saving, to be more precise—but the way in which that is delivered is skewed to have a social benefit, which is why the 50 per cent provision is there. It therefore makes a secondary contribution to the fuel poverty targets in the same way as measures such as Warm Front, which are primarily directed at fuel poverty, will also make a contribution towards energy efficiency. The number of fuel poor has come down significantly. Off the top of my head, I cannot remember the UK figure, but the number in England has now come down to about 1.2 million. We issued our fuel poverty strategy just a few weeks ago.

The noble Lord, Lord Dixon-Smith, posed rather wider questions about taxation matters—on which I am not allowed to comment, but I take his point—and on the need to educate consumers. The noble Baroness returned to that in relation to the energy efficiency centres and other sources of information. Although I agree that they need a much higher profile, the EST's energy efficiency centres have been very successful and have had a big increase in the numbers of people taking their advice. All areas of advice and means of getting advice to households, particularly vulnerable households, on this front and on other aspects of the fuel poverty and energy efficiency programme are important and we need to step up awareness more generally.

The noble Lord raised an issue relating to the definition of the fuel-standardised coefficients in paragraph 1(ii). We probably need the noble Lord, Lord Ezra, to explain it more simply and it may be that I should respond to the noble Lord's invitation to write, but, essentially, the factors are based on the relative carbon content of each of the sources of energy. That, in turn, is based on the Defra guidelines, which are set out in the company reporting guidance on greenhouse gas emissions. They are the same guidelines that are used elsewhere.

Photo of Lord Dixon-Smith Lord Dixon-Smith Shadow Minister, Environment and Transport

My Lords, how does the Minister explain the carbon content of electricity?

Photo of Lord Whitty Lord Whitty Parliamentary Under-Secretary, Department for Environment, Food and Rural Affairs, Parliamentary Under-Secretary (Department for Environment, Food and Rural Affairs) (Food, Farming and Sustainable Energy)

My Lords, the electricity coefficient is based on the sources of electricity. It therefore takes account of the relative carbon content of nuclear, coal, renewable and oil-based electricity. That is how we end up with that figure. However, I shall write direct to the noble Lord to set it out in more detail.

I congratulate the noble Baroness on her successful solar water investment. I wish that there were more of them. I also welcome her indirect reference to the support of the noble Lord, Lord Ezra, for micro-generation. Regarding the general policy in relation to energy efficiency in the household sector, we have set the 4.2 million figure as the statutory target. The 5 million figure was referred to in the energy White Paper. As explained, it is feasible to achieve the 4.2 million figure on current policies.

Although the overall energy efficiency target is now higher than at the time of the energy White Paper, the household factor is slightly lower. The reason is the one that the noble Baroness put her finger on: a number of people who have very effective energy efficiency measures in their houses will take greater comfort in greater warmth rather than save energy and money. That is the main reason for that reduction.

I think that the noble Baroness was being a bit churlish not to accept that, in the end, we made some substantial amendments to the Bill to which she referred. Clearly, other measures are needed to support these regulations, both in relation to the decisions of consumers and energy efficiency measures in other sectors of the economy. These regulations are a major way in which the interface between the supply companies and the householder can make a significant contribution to energy efficiency and can ensure, whether they are fully aware of it or not, that householders adopt measures that deliver the 0.7 million tonnes of carbon saving that we expect from this measure. The other measures will complement it. Other developments on the regulatory front, with which noble Lords are familiar, will also help, as will programmes such as Warm Front, which are primarily directed at fuel poverty but have an energy efficiency benefit.

I think that I have covered most of the points that have been raised.

On Question, Motion agreed to.