EEH0069

Written evidence submitted by E.ON

 

Executive Summary

 

 

 

 

 

 

 


 

About E.ON

E.ON is one of the largest energy companies in the world focussed on clean growth. We have over 70,000 employees across 15 European countries, more than 54 million customers and operate c1.5 million km of energy networks. 

What we do reflects the key emerging trends of the decentralised, digital and renewable new energy world – smart energy networks, innovative customer solutions, renewable energy and, at the heart of it all, our customers.

Support for the UK target to reach net zero is fundamental to E.ON’s strategy. We have been investing in and building renewable energy projects since the 1990s and, in the last decade alone, we have invested more than £2.5 billion into renewable energy in the UK.  We no longer operate any large-scale fossil fuel power stations and, since June 2019, we have supplied 100% renewable electricity to all our residential customers. 

E.ON aims to change people's lives for the better by taking the expertise we have gained in helping to decarbonise power generation and using it to support the decarbonisation of heating and transport. Our focus is on personalised and sustainable customer solutions. 

 

Questions

  1. Are the Government’s targets on residential energy efficiency still appropriate to achieve its ambition to reach net zero emissions by 2050?

 

We believe that the Government’s residential energy efficiency targets (below) are still appropriate for putting the UK on the path to net zero by 2050.

Nevertheless, it is essential to make the targets actionable and enforceable.  Current policy is failing to drive uptake of energy efficiency measures in existing homes.  Indeed, installation rates have fallen dramatically over recent years, with loft and wall insulations being just 5% of peak levels in 2012[1].  The main driver for residential energy efficiency measures today is the Energy Company Obligation (ECO).  However, the current scheme, ECO 3, is narrowly targeted with strict eligibility restrictions; the primary objective is to reduce fuel poverty, with carbon savings secondary.  Meeting the 2050 net zero ambition will require a broader set of policies that cover all houses in the country and not just the very limited set covered by ECO 3.  (See question 5)

In respect of the PRS, the regulations need to have a trajectory which shows a clear tightening of the standards out to 2030, consistent with the target.  We also urge the Government to support the Domestic Premises (Energy Performance) Bill which has been introduced in the House of Lords by Lord Foster of Bath which would put onto statute the requirement for all homes to reach EPC C by 2035.   More broadly, we strongly support the idea of making energy efficiency a national infrastructure priority and for this to directly lead to new policy measures being implemented which increase installation rates from 9,000 to 21,000 per week. 

It is largely accepted that making all our buildings as energy efficient as possible is the first step towards decarbonising heat.  Without this, it will be impossible to deliver net zero, so the 2020s must be the decade where energy efficiency is given the necessary priority, starting with it being a central pillar of a Green Economic Recovery.  (See question 3).

 

    1. What are the potential risks and opportunities of bringing forward the Government’s energy efficiency target?

 

Rather than bringing forward the targets, it would be better to ensure that the existing targets can be achieved through a more ambitious regulatory and fiscal policy framework.  It is clear that the current suite of policies is insufficient to deliver the existing targets, and hence why our focus would be on implementing additional measures to turn the ideas set out in the Clean Growth Strategy into action.

There is an immediate opportunity for energy efficiency to be part of a Green Economic Recovery package to address the impact that COVID-19 has had on the economy, as we set out in our response to question 4.  The industry is ready to respond to such a stimulus package which will create jobs and help reduce energy bills, putting more money back into the pocket of households which can be spent on supporting the local economy.  There are also clear benefits to the health system associated with making homes warmer, particularly as we head into the next winter when a vaccine for COVID-19 is unlikely to be available.

 

    1. Should Government targets for energy efficiency be legislated for, and if so, what difference would this make?

 

Yes. Legislation would provide much needed certainty and stability for the industry, requiring the Government to develop the necessary policies to achieve the targets.  It would also provide the drive needed for home owners and landlords to act and to factor energy efficiency improvements into their broader decision-making, in the knowledge of clear, long-term regulatory standards.  The relatively low take up of measures by private households, other than the natural replacement of boilers will not, under the current approach, achieve the scale needed to meet the 2030 or 2050 targets.

Also see response to question 5.

 

  1. How effective is the EPC rating at measuring energy efficiency? Are there any alternative methodologies that could be used? What are the challenges for rural areas?

 

EPCs are a way of identifying the energy efficiency performance of a building and are generally widely understood, at a high level.  However, there are two key issues:

a)      the role of EPCs has expanded beyond their original purpose and they are now used when, sometimes, more detailed analysis would be better.

b)      the general public are largely unaware of the information that is held within an EPC and it is a low priority for most renters and homebuyers.

Growing role of EPCs

EPCs are increasingly being relied upon to support energy efficiency funding schemes, for example to verify eligibility for ECO3 or to underpin the deemed scoring methodology (where the RDSAP software behind EPCs is used).  Whilst the software works well for basic insulation and heating, it is less able to accommodate innovative measures such as hybrid heating systems, energy storage (electric or thermal), and sophisticated controls.

The RDSAP software uses simple heat loss equations applied to temperature differences (weather data) with a few correction factors to take into account system efficiencies. These are all ‘static’ equations.  The software does not model buildings ‘dynamically’ to take account of heat flows or complex interactions between different pieces of kit such as solar PV, boilers, heat pumps and thermal stores.   In addition, new innovations like hybrid boilers are not properly represented as it is expensive and time-consuming for manufacturers to get new products added to the SAP products database[2]. 

If EPCs are to continue being relied upon in this way, there must be investment in the software to ensure it is fit for purpose and improvement to the process of including new products in the database. 

Two further issues are worth noting which could be addressed to improve the way that EPCs are used to assess the energy efficiency of buildings:

Access to information from the NEED database would help installers verify whether works had been carried out on a property in the past, avoiding the need to scrutinise EPCs.

Public awareness and reliance on EPCs

Most homebuyers and renters today place little value on energy efficiency since other factors like location, outside space, and proximity to schools are more important when choosing a property.  Although energy efficiency does have an impact on energy bills, this is small relative to the overall value of the property transaction.    This is also the case for most landlords given that the regulations are currently set at the relatively low level of EPC E.  For properties already meeting this standard, no action will be required to improve the energy efficiency rating prior to letting out the property.  Whilst tenants may be more interested in energy efficiency by virtue of the impact on energy bills, it is likely that the strongest factors to influence rental decisions are similar to those for home buyers.  In addition, high demand for rental properties compared to supply may reduce a tenant’s ability to be discerning about energy efficiency. 

Despite these issues, the EPC framework can be a key lever for changing behaviour if it is directly linked to specific types of policy intervention, as we set out in our response to question 5. 

 

  1. How will lack of progress on residential energy efficiency impact the decarbonisation of heat and the associated costs of this?

 

Minimising the amount of heat required to deliver the level of comfort expected by households should be the starting point for any decarbonisation strategy.  Research by the UK Energy Research Centre (UKERC) found that cost-effective investments in residential energy efficiency and efficient low carbon heating, equivalent to getting all homes up to the Band C target, could reduce energy demand by 25%.[3] 

A recent report by Aurora Energy Research[4] reiterated that “extensive rollout of energy efficiency to allow for effective heat electrification” is required in all scenarios to net zero. A lack of progress in this area during the 2020s will result in this essential investment being back-loaded to the 2030s and 2040s, at precisely the same time that a major ramp-up of new low carbon heating installations will be taking place. This could have a material impact on the cost of delivery as well as keeping levels of imported gas higher than they would have been had millions of homes been insulated earlier.

More than 23 million homes will need to install new low-carbon heating solutions by 2050 and, over the same period, at least 85 per cent of homes will need to become more thermally efficient, being rated at EPC Class A or B.  The Committee on Climate Change have recommended that at least 2.5 million domestic heat pumps should be installed by 2030 in support of this transition.  In most cases, failing to insulate properties BEFORE designing and installing a low carbon heating system will lead to over-sizing, energy inefficiency and higher running costs for the homeowner. 

A lack of progress on energy efficiency will therefore act as a barrier to the roll-out of heat pumps, putting at risk the delivery of the fourth and fifth carbon budgets which were set under the previous 2008 Climate Change Act.  Whilst heat networks will also play a vital role in the decarbonisation of heat, representing up to 20% of demand by 2050, hydrogen is not a realistic scalable option for the first half of the 2020s.  Progress on heat decarbonisation during the 2020s is therefore likely to be severely limited if we continue to underinvest in energy efficiency.

 

  1. How can the Government frame a COVID-19 stimulus strategy around improved energy efficiency of homes?

 

The impact of COVID-19 on the UK economy and jobs is threatening to be huge.  According to analysis conducted by McKinsey[5], 7.6 million jobs are considered at risk (24% of the total UK workforce).  A HM Treasury comparison of independent forecasts suggests that UK GDP will shrink in 2020 by around 9%[6].  Other surveys suggest an even higher impact with the Bank of England forecasting a 14% reduction in GDP.  Most striking is the impact this will have on already low-income areas, with nearly 50% of all jobs at risk for occupations earning less than £10 an hour.

Key to any effective post COVID-19 stimulus strategy will be how quick investment reaches the supply chain, how soon jobs start to be created and when the Government starts to see a return on its investment.  Energy efficiency as a sector is well placed to meet these requirements.  Upgrades are quick to get off the ground, particularly if deployed through existing mechanisms such as the healthy ageing programme and warm homes fund. In a recent blog post following the International Energy Agency’s publication of its Sustainable Recovery Plan[7], Michael Liebreich[8] describes energy efficiency as “the Swiss Army Knife of stimulus spending”.  As well as providing jobs and income for large numbers of people, it would also “reduce the longer-term risk of climate damage and deliver a range of co-benefits, from improved air quality to enhanced skills and reduced economic exposure to fuel price volatility.”

Currently, around 70% of homes (or 19 million) in the UK have an EPC rating below C[9].  Bringing all homes up to an EPC C by 2035 would sustain more than 150,000 skilled and semi-skilled workers across the UK[10].  The Energy Efficiency Infrastructure Group (EEIG) reports that over 40,000 jobs would be supported in the first two years alone[11].  Significantly, these are jobs created throughout the supply chain, from the manufacturing of insulation, which is predominantly UK-based, all the way through to local installers with the largest beneficiaries being Small and Medium Enterprises (SMEs).  Government-backed training programmes could offer routes to work in growing low-carbon industries which would help reduce unemployment and support the transition to net-zero.

Any post-COVID-19 stimulus package should also deliver a reasonable return.  E3G estimate that for every £1 invested by the Government in domestic energy efficiency, GDP could be increased by £3.20 and tax take by £1.27[12].  There is also the additional positive of energy efficiency lowering energy bills, meaning consumers have more money to spend on goods and services in the wider economy.  UKERC estimate that cost effective improvements in our homes could give each house an average saving of £270 per year[13].

Energy efficiency is a national need; however, its response should be harnessed locally.  Unlike investment in new nuclear power stations which are tied to a single locality, jobs in the energy efficiency sector are needed throughout the regions of the UK.  Indeed, any energy efficiency strategy should be leveraged to target the regions that have been most affected by both COVID-19 and generational job loss, as well as those whose homes are in the biggest need for improvement.  The social benefits of improved energy efficiency directly relate to the COVID-19 pandemic, as poor energy efficiency linked to fuel poverty contributes to respiratory health issues.

The EEIG have identified the regional benefits from policies designed to upgrade all homes to EPC C by 2030.

 

  1. Is the £5 million Green Home Finance Innovation Fund enough to stimulate the market for and drive action from the banks to encourage owner occupiers to improve the energy efficiency of their homes?

 

    1. What policy and/or regulation could supplement it?

 

Financial products, such as green mortgages and low interest rate loans, will play an important role in the policy toolkit.  However, we do not believe that actions on this alone will be sufficient to create demand.  Rather, these initiatives respond to demand and act as enablers to help home owners finance energy efficiency measures.  Other policies are needed which create the consumer demand first, which lenders will respond to by developing suitable financial products.  These will be needed since the cost of many energy efficiency and low carbon measures are beyond the reach of many lower and middle-income households who, whilst not necessarily being fuel poor, may have limited disposable income. 

Policies to create demand for energy efficiency should cover all parts of the residential sector so that there is a coordinated approach to improving the energy efficiency of the housing stock across the UK.   This may help to support cost-effective regional approaches which blend vulnerable and able to pay sectors.

The minimum energy efficiency standard (MEES) regulations should be strengthened so that landlords can only let properties which meet at least an EPC D level by 2024 and EPC C by 2030.  However there also needs to be a greater focus on the owner occupied market. 

In the short term, there is a role for targeted tax incentives to complement low cost finance products to help home owners and landlords to improve the comfort of their homes.   We believe that the level of support should be designed to reduce the upfront cost of measures by around 20%.  Options for achieving this include:

Incentives designed around Stamp Duty and Council Tax would create a tangible link with property value, embedding a value for energy efficiency in the property market.  This would make people more likely to consider energy efficiency as part of the home-buying process.  It could influence behaviours, either by incentivising sellers to improve the property before putting it on the market or by encouraging buyers to invest in energy efficiency improvements after buying a new property in order to recover the additional Stamp Duty paid. Landlords should also be able to claim tax relief on their capital investment through the reinstatement of the Landlord Energy Savings Allowance.

Serious consideration must also be given to extending the minimum standard to all properties over the next decade which are linked to key trigger points such as point of sale, modernisation and extension.  We are encouraged by the Scottish Government which consulted last year on introducing an owner occupied standard, from 2024, to bring a property up to an EPC C when defined trigger points are met.  We agree that where the seller is not in a position to invest in upgrading the home, the legal responsibility should pass to the buyer who would then have a set time limit within which to comply. This approach should see the cost of upgrades being factored into the property valuation and, over time, reduce the reliance on direct government financial support. 

New build homes need to be built to tighter standards to mitigate the need for more expensive retrofit in the future.  We support the government’s proposal[14] for a 31% uplift in energy efficiency building regulations standards from 2021 which would future-proof homes for low carbon heating systems. This would also provide a major opportunity to grow the presence of low carbon heating technologies in the new build market, exposing more home buyers to the ‘new normal’ for the future.  Many new build homes are purchased by first time buyers and if their first experience of owning a home is of one that is energy efficient and low carbon, we believe they are more likely to value these aspects and seek them out in future homes.  We believe that the 2025 Future Homes Standard should be as ambitious as possible and to set a target for carbon emissions to be at least 80% lower than today’s requirements. 

 

    1. Which models in other countries have been successful at stimulating demand for energy efficiency within this market?

 

In Germany, the state-owned KfW investment bank has provided low cost loans to homeowners which has been very successful in encouraging investment in energy efficiency. The programme is introduced to homeowners through their own bank, who they already have an established relationship and therefore trust. Furthermore, the programme is set within the context of a supportive policy and regulatory framework which is crucial for stimulating demand.

As referenced by the EEIG in their report[15], for every €1 invested by KfW to incentivise energy efficient renovation, building owners were motivated to borrow and spend €6.  The programme cost the federal government €1.7 billion in 2016, unlocking €8.4 billion from building owners and nearly covering its own cost through the resultant VAT revenue alone (€1.6 billion).  Crucially, higher capital subsidy levels were contingent on renovations achieving higher energy performance standards that are more costly to achieve, thereby requiring building owners to spend more.  We believe this approach can be replicated in the UK market with the right supporting framework that we have set out above.

 

  1. What additional policy interventions are needed for social housing, leaseholders, landlords and tenants?

 

See response to question 5. 

Social housing tends to perform better in terms of energy efficiency than other tenures with providers already having addressed the worst housing through previous ECO schemes.  However, access to ECO 3 for social housing has largely been restricted to EPC band E and below.  As a result, social housing tenants in blocks of flats with a mix of EPCs are at a disadvantage since the existence of flats rated band D or above precludes the whole block from accessing support.  We believe that the proposed Home Upgrade Grant (HUG) scheme should be available to social housing, at least up to band D, to plug the gap in ECO 3 support.  Furthermore, all social housing should be required to achieve at least EPC band C by 2030, in line with PRS homes and the fuel poverty target.

With regard to private landlords, it is crucial that the MEES and EPC regulations are robustly enforced.  This relies on local authorities having the resource and capability to do so.  A report[16] by the Association for the Conservation of Energy (ACE) on tackling fuel poverty in the private rented sector found that some local government Trading Standards teams are not actively enforcing the requirement for rental properties to have EPCs.  However, properties without an EPC do not come under the scope of MEES.  There is a clear risk that this could diminish the effectiveness of the MEES regulations, with a consequent impact on both energy efficiency levels and the households living in private rented accommodation, many of whom are fuel poor.  The Government should provide  local authorities with sufficient funding to manage and enforce compliance.

 

  1. How should the proposed Home Upgrade Grant Scheme be delivered to help the fuel poor? Should the new grant scheme supplement ECO in its current form, or should ECO be redesigned?

 

The targets for the HUG scheme and ECO should be set independently but the schemes must work closely together.  The available funding should be spent as effectively as possible, going towards the physical delivery of measures rather than excessive process and administration.

Home Upgrade Grant (HUG)

We believe that the £2.5 billion committed for HUG in the Conservative manifesto should be front-loaded and the value of the fund doubled to provide an additional £1bn a year for improving the energy efficiency of vulnerable customers, particularly in rural areas, and supporting the delivery of the 2030 fuel poverty target. 

HUG should be available to top up ECO funding where measures cannot be fully funded through ECO, for example solid wall insulation and large heating upgrades such as air-source-heat-pumps. This will have a particular benefit for rural areas where properties tend to need higher cost measures or cannot access ECO3 due to having an oil heating system.  HUG should be accessible to a wider cohort of households than ECO3 so that lower and middle-income households who are not fuel poor but have little disposable income can use it to part-fund energy efficiency upgrades in their homes.

To ensure measures are installed in 2020, we believe HUG should allocate resources to existing delivery mechanisms such as through the healthy ageing programme, Electrification of Heat programme and warm homes fund, or expansion of the existing ECO delivery mechanism.  There could also be a role for the five Local Energy Hubs across the country, working with existing supply chain partners and projects, to add value and expand existing schemes.  As the key is around delivery on the ground this summer, it is important that the funding is delivered as close to the installation mechanism as possible as it would not be possible to create a new delivery system given the time constraints. However, in future years, this is something to which the Government may want to give further consideration.

ECO

In the future, eligibility for ECO should be reviewed to maintain the volume of eligible households and ensure that the scheme can operate as effectively as possible.  However, we do recognise that the impact of COVID-19 will potentially bring many more households into the vulnerable group.

Consideration should be given to granting exemptions from the pre-condition requirements in limited circumstances to ensure that residents are not unfairly prevented from receiving a heating upgrade. Examples of how existing pre-conditions can act as a barrier to heating include;

    1. a neighbour refusing cavity wall insulation meaning the minimum energy efficiency level required cannot be met.
    2. access to the loft (to meet insulation requirements) cannot be made without significant alterations to the property which is disruptive for the homeowner and results in works be significantly too expensive to be delivered through ECO.

The current eligibility requirements of ECO 3 are unnecessarily complex which results in significant time, effort and costs being spent just to find and verify eligibility properties and customers.  Future ECO schemes need to be simpler to eliminate unnecessary administration costs. This includes being less restrictive on measure technology type, particularly new innovations, and instead focusing on outcomes. 

It is important that carbon savings are accurately recorded as part of the road to net zero. The current scoring methodology in ECO 3 for broken boilers assumes a counterfactual of the whole house being fully electrically heated.  This means that bill savings are artificially inflated, and any derived carbon benefit would be overstated.  We would a support a change to a more accurate methodology.

 

  1. Are there examples of where energy efficiency policy has fallen between Government Departments? How could cross-departmental coordination be improved?

 

Creating a national energy efficiency programme would bring a number of benefits, including:

However, existing policies have not been sufficiently developed to fully realise these benefits.  A cross-departmental working group, encompassing ECO leaders and others with “coal face” operational experience and knowledge, would help to drive a consistent and coordinated approach. It is important that all relevant departments are part of this, namely BEIS, Department of Health and Social Care, HM Treasury, MHCLG and DEFRA, along with other relevant Government organisations such as Ofgem.  The working group should be tasked with creating a coordinated response which can deliver these broad objectives.

 

E.ON

July 2020

 

 

 

[1] https://www.theccc.org.uk/publication/uk-housing-fit-for-the-future/

[2] SAP Product Characteristics Database which defines the technology types that can be input into SAP calculations.

[3] UKERC, 2020 policy brief - Energy efficiency and decarbonisation of heat (Rosenow et al) 

[4] https://www.auroraer.com/insight/hydrogen-for-a-net-zero-gb/

 

[5] https://www.mckinsey.com/industries/public-sector/our-insights/covid-19-in-the-united-kingdom-assessing-jobs-at-risk-and-the-impact-on-people-and-places#

[6]https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/892791/Forecomp_June_2020.pdf

[7] https://www.iea.org/reports/sustainable-recovery

[8] Liebreich, June 2020, Energy Efficiency Key to Covid Recovery, viewed 30 June 2020, https://about.bnef.com/blog/liebreich-energy-efficiency-key-to-covid-recovery/

[9] Committee on Climate Change (2018). An independent assessment of the UK’s Clean Growth Strategy From ambition to action.

[10] https://www.greenfinanceinstitute.co.uk/wp-content/uploads/2020/05/Financing-energy-efficient-buildings-the-path-to-retrofit-at-scale.pdf

[11] https://www.theeeig.co.uk/news/rebuilding-for-resilience

[12] https://www.e3g.org/docs/Building-the-Future-The-Economic-and-Fiscal-impacts-of-making-homes-energy-efficient.pdf

[13] UKERC, 2020 policy brief - Energy efficiency and decarbonisation of heat (Rosenow et al) 

[14] https://www.gov.uk/government/consultations/the-future-homes-standard-changes-to-part-l-and-part-f-of-the-building-regulations-for-new-dwellings

[15] https://www.theeeig.co.uk/news/rebuilding-for-resilience

[16] www.ukace.org/2018/07/the-warm-arm-of-the-law-tackling-fuel-poverty-in-the-private-rented-sector/