Uncertainty on future of ECO storing up trouble for suppliers

A government consultation on the successor programme to the current iteration of the Energy Company Obligation (ECO) is due any moment now. Time is fast running out to put in place the necessary secondary legislation to give effect to the next scheme from 1 October.

We know from the Clean Growth Strategy that government has committed to extend the ECO (in some form) until 2028 at the current level of funding (which according to Budget 2016 is £640mn/yr). We also know that during the development of the present phase of ECO (April 2017 to September 2018) that the government committed to an obligation running from 2018 to 2022 with a greater focus on tackling fuel poverty.

As it stands now though, there is no sight whatsoever on the detail of what the scheme parameters will be for suppliers with an ECO. Since the scheme launch in 2012 the number of mandated suppliers has increased from six to fifteen (with two parties having purchased surplus from other suppliers), but market share for ECO suppliers in total has fallen from 99% to around 91%. Our research suggests an additional four suppliers will have crossed the all important 250,000 customer account mark by the end of 2017. This gives just over six months to prepare for the future obligation, on the basis that the participation threshold levels remain the same (which is far from certain). Newly mandated suppliers have no sight of the type of measures they should be looking to find delivery partners for, or any certainty regarding the length of the scheme.

Despite promises of a scheme running to 2022, recent comments from the regulator show how it is rapidly coming to the view that perhaps the ‘supplier obligation’ model is not in the best interests of consumer or the market. Ofgem’s response to the consultation on National Infrastructure Assessment stated: “This role in market mechanisms creates burden on small suppliers, which could deter new entry. To the extent that new entrants are exempt, it creates an undue benefit, which distorts supply competition”. The sentiment was more explicit in its response to the Building a Market for Energy Efficiency Consultation where “alternative models could make greater use of competition for funds, whether through market prices for savings or competitive auctions, and of area-based solutions, probably working with Local Authorities and potentially with network companies.”

So, what is a newly mandated supplier to do? There is one obvious course of action available and that is to contract with a large ECO supplier to discharge the obligation on their behalf. Given the uncertainty over the short- and long-term future of ECO, this approach is probably sensible, provided the smaller party believes it can get fair terms. The alternative is to make use of the ECO brokerage, which runs fortnightly and offers different sized lots from installers. But liquidity has always been poor, and the number of trades executed is minimal, so some overhaul is needed.

We concur with Ofgem’s line of thinking that household improvements should be able to be delivered more efficiently by local partners. Nigel Cornwall’s initiative to transform local markets, Pixie Energy, is completing a comprehensive mapping exercise of the energy infrastructure and consumption dynamics in East Anglia. This has shown the power of how innovations can be better targeted to areas of high fuel poverty, off-gas, and low energy efficiency. The Pixie Team are shortly to approach local authorities to explore how best they can leverage local networks to use local supply chains to deliver energy efficiency.  We are hopeful that there is still time to implement local initiatives and alternatives to the supplier obligation model for the upcoming phase, even if its only to trial alternative approaches.

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