Government will “stress test” effect of green measures on energy bills

In an interview with the Financial Times Nick Clegg said that it would be “irrational” not to examine the costs of meeting the Energy Companies Obligation (ECO), a collection of legal obligations on larger energy suppliers to deliver energy efficiency measures to domestic energy users. However, he said that necessary investment in insulation and green technology would either have to be funded through energy bills or higher taxation.

Energy Secretary Ed Davey has already written to the UK’s six largest energy suppliers asking them to publish their ECO compliance costs.  “

The ECO was introduced at the start of this year, replacing the Carbon Emissions Reduction Target and the Community Energy Saving Programme. It is intended to work alongside the Green Deal to provide additional support in the domestic sector, with a particular focus on vulnerable consumer groups and hard-to-treat homes.

The ECO places larger energy suppliers under three separate legal obligations. The Carbon Emissions Reduction Obligation covers energy efficiency measures that cannot be fully funded through the Green Deal, such as solid wall insulation and cavity wall insulation for hard-to-treat homes. The Community Obligation covers insulation measures and connections to domestic district heating systems supplying areas of low income, and the Home Heating Cost Reduction Obligation covers measures which improve the ability of low income and vulnerable households to heat their homes.

The Government has estimated that around £110 billion worth of investment in electricity generation is needed to ensure that consumers continue to benefit from reliable energy supplies at an affordable cost. Around one fifth of the UK’s existing power generating capacity is due to come off-line over the next decade due to aging power plants and more stringent environmental standards, while an increasing amount of the country’s power will be generated from intermittent sources such as wind.

The Energy Bill, which is currently before Parliament, proposes a new system of financial incentives designed to ensure that low-carbon forms of electricity generation can compete fairly in the marketplace, backed with a capacity market aimed at ensuring security of supply. The Bill envisages the creation of new Contracts for Difference (CfDs), which will replace existing subsidies and incentives such as the Renewables Obligation. CfDs will allow investors to receive a guaranteed price for energy generated using low carbon methods, while allowing the system operator to ‘claw back’ money when market prices are high.