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.

Related thinking

Home supply and services

Reforming Energy Bills: What’s on the Table?

There has been much speculation in the energy industry over what reforms to household energy bills could potentially be introduced, particularly with Ofgem due to announce its Q3 (July – September) 2024 Default Tariff Cap figures on Friday (24th). With so many areas under review, we’ve put together an overview...

Low carbon generation

Latest developments in the TPI space

We recently published our 2023 Annual TPI report which provides an independent review and analysis of the market for TPIs, and the services provided by them. The report also looks at the current challenges and opportunities for TPIs, such as regulatory changes, competition with suppliers, and diversification of services. 2023...

Regulation and policy

What’s going on with REGOs?

Renewable Energy Guarantees of Origin, more commonly referred to as REGOs, are certificates issued to accredited renewable generators for every MWh of electricity they produce over a year period. The initial intentions of these certificates were to provide suppliers a means to prove the level of renewable generation they received...

Home supply and services

Ofgem strives to improve consumer experiences across both the domestic and non-domestic sectors

Over the last week, a number of anticipated publications were issued by Ofgem that hold the potential to make a significant change to the requirements on both domestic and non-domestic suppliers. The findings of Ofgem’s non-domestic market review were revealed, alongside a policy consultation on the options available to address...

Energy storage and flexibility

Waiting to connect: the problems and solutions for network connection queues (Part 2)

Network connection queues continue to be a notable topic of interest as many generators face significant delays to project development – an issue that is directly conflicting with net zero ambitions and recent focuses on strengthening domestic energy supplies. In Part 1 of our two-part series on connection queues we...

Home supply and services

Addressing consumer harms in the non-domestic market

In recent months, Ofgem has shone a light on areas across both the domestic and non-domestic market where suppliers could improve their practices for customers and go beyond what they are obligated to do in the licence conditions. In a time of significant and extended volatility, the regulator has brought...

Energy storage and flexibility

Waiting to connect: the problems and solutions for network connection queues

The number of grid applications has risen significantly in recent years, resulting in increased pressure on the electricity networks to facilitate new connections. In its Energy Security Strategy, the UK government set out ambitions for 95% of electricity to be sourced from low carbon generation by 2030, and for the...

Energy Market Design

Are prices going to rise in Contracts for Difference Allocation Round 5?

A number of factors may be about to put an end to the trend for falling energy prices in the Contracts For Difference (CfD) scheme. The CfD scheme has provided strong subsidy support whilst also providing consumers robust levels of protection. High investor confidence and steady reductions in capital costs...