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									                            Eaga Partnership Ltd

   Response to Economic instruments to improve household energy
       efficiency: consultation document on specific measures.

                                October 2003

Eaga Partnership Ltd – Background
Eaga Partnership welcomes the opportunity to respond to Economic
instruments to improve household energy efficiency – consultation document.

In order to put our comments into context, it may be helpful to briefly outline
Eaga‟s role in the provision of energy efficiency across the United Kingdom
and the Republic of Ireland.

Eaga are an employee-owned Social Enterprise working for Government, the
Utilities and others. We also fund the work of the Eaga Partnership Charitable
Trust who sponsor and finance research into fuel poverty, rural poverty, and
housing and health impacts.

We have been involved in the delivery of energy efficiency and management
programmes throughout the UK over the past twelve years, primarily in our
role as managing agents of the Home Energy Efficiency Scheme (HEES);
over 5 million households have received assistance from Eaga through HEES
and other programmes of work. The HEES programme has now evolved to
include a wider range of energy efficiency measures and has been rebranded
as the Warm Front scheme.

We also work in partnership with Local Authorities and Public Energy
Suppliers providing energy efficiency measures to domestic households under
the Energy Efficiency Commitment.

We have recently launched a £150 million programme with the leading UK
energy supplier, British Gas, to deliver their EEC funding to the Social
Housing Sector.

This national scheme has been branded “here to HELP”, and will provide a
one-stop shop approach to reducing fuel poverty in the most deprived areas
of the UK. This scheme represents a £150 million investment across 500
locations over 3 years. British Gas is contributing £74 million with the
remainder leveraged by Eaga from Local Authorities and Government

Our role in assessing client eligibility and the individual package of measures
required for low income and vulnerable domestic households across the
United Kingdom has provided Eaga with a wealth of experience in the
implementation and delivery of programmes targeted at vulnerable
individuals. We are therefore able to provide worthwhile, practical and
valuable comments regarding economic instruments to improve household
energy efficiency and hope that our contribution will be useful.

  Eaga Partnership Ltd, Eaga House, Archbold Terrace, Jesmond, Newcastle upon
                                Tyne, NE2 1DB
    Economic Instruments to Improve household energy efficiency:
           Consultation document on specific measures

Please find below select comments on specific questions within the

Are these identified market failures correct?
Eaga Partnership agrees with the market failures and barriers identified within
the consultation. However, it is our belief that there is no reason why these
cannot be overcome; in particular we would highlight our proactive work in
relation to information deficiencies and skills shortages, as example of how to
overcome such problems.

Information deficiencies: Eaga‟s work with home assessor‟s has
demonstrated that information deficiencies can be overcome, our home
assessors carry out independent energy advice, this is carried out on a one to
one basis with the clients and there is no linkage with utility use or any
particular utility scheme. The emphasis is on „low or no cost‟ measures which
clients can carry out to save energy in addition to the measures which have
been installed.

Incorrect Price Signals: Eaga agree that incorrect price signals need to be
remedied particularly in relation to the application of 17.5% VAT on energy
efficiency measures, where domestic fuel and power attracts 5% VAT.

Limited access to capital: Despite the modest levels of outlay required for
many energy efficiency improvements the lack of access to capital is a
significant barrier. Eaga Partnership has previously presented a paper to the
Treasury outlining a proposal to use Winter Fuel Payments as „energy
efficiency investments‟, with the approval of householders, in order to
stimulate more investments. We would welcome the opportunity to further
develop this proposal in order to increase capital investment levels in energy
efficiency. This is particularly valuable for those recipients who are not
dependant on the Warm Front programme for heat but use the payments on
other discretionary purchases.

Contractual problems: In order to carry out our Warm Front work, Eaga has
created a Register of private landlords; this allows us to work with the
landlords of eligible tenants. However we believe that the contractual
obligations versus the needs of the fuel poor for energy efficiency needs to be
examined further, it is of concern that we currently have over 8000 eligible
tenants waiting on landlords permission and of these tenants over 2000 are
waiting on central heating or replacement boiler work.

On a wider note a register allows us to have a record of measures
implemented and therefore SAP information on properties.

  Eaga Partnership Ltd, Eaga House, Archbold Terrace, Jesmond, Newcastle upon
                                Tyne, NE2 1DB
Skills shortfalls: The Energy White Paper (May 2003) also highlights the
issue of skills shortage and recognised Eaga‟s proactive approach in working
with the Gas and Water Industry Training Organisation (Gwinto) to over come
this problem.¹ During 1999-2000, there were 124 registered gas heating
engineers, our work has resulted in over 485 new gas heating installers being
trained, 370 of whom went on to be employed on the Warm Front

To what extent does each apply to particular products/efficiency
Information deficiencies - For example, we regularly have problems where
clients are not eligible for heating measures and don‟t realise the positive
impact upon their heating bills, which measures such as loft insulation and
cavity wall insulation can give.

Incorrect price signals – We would suggest that the differentiation in price
and tax levels leads to confusion in relation to all energy efficiency measures.
High price and tax rates can mislead clients into thinking that certain
measures are higher priced because they are more effective.

Contractual problems - Landlords are often reluctant for measures such as
new central heating to be installed and will often have concerns that such
measures will affect the property.

Skills shortfalls - The shortage of qualified heating engineers to carry out
central heating and boiler measures is already well documented and therefore
we would suggest that skills shortfalls is also particular to new central heating
and boiler repairs and replacements.

Is there evidence a reduced rate would influence consumer behaviour?
It would be expected that a reduced VAT rate would influence consumer
behaviour however, it is difficult to quantify such change due to the multitude
of other factors, which will influence consumer spending, including greater
environmental and energy awareness. However we would suggest that for
the consumer, the most expensive items of energy efficiency measures are,
energy efficient central heating and hot water systems and that a reduced VAT rate
would be beneficial especially amongst those regarded as fuel poor.

It should therefore be ensured that the full benefit of any VAT reductions is passed
onto the consumer in the equivalent benefit of a full price reduction and is
accompanied by explanatory notes detailing why the product is discounted. This will
help raise energy awareness and thus ensure that the consumer is more
environmentally aware.

Which products could be most effectively targeted with reduced rates?
Eaga‟s experience within the energy efficiency sector lead us to believe that
the most effective measure to target reduced VAT rates would be energy
efficient central heating and hot water systems. This would also be recognised as
a „popular‟ tax initiative and incentive.

  Eaga Partnership Ltd, Eaga House, Archbold Terrace, Jesmond, Newcastle upon
                                Tyne, NE2 1DB
Would the incentive of a reduced rate offer value for money in terms of
the environmental benefits?
The Energy White Paper recognises the tensions that exist on this issue –

 “extremely high energy prices would undoubtedly promote energy efficiency
and thereby help to reduce carbon emissions. But they would also have a
negative effect on people on low incomes and on business.”³

Therefore a reduction in VAT may be beneficial to those people on lower
incomes, however paradoxically it may offer little incentive for them to be
more energy efficient and achieve little to make individuals aware of the wider
environmental benefits.

Possibly one way of dealing with this is to offer a tax allowance for companies
who are investing in training home assessors and installers particularly when
this is coupled with independent energy advice. The benefits to the individual
are then matched by the wider benefits to the environment and companies
also have financial incentive to promote such beneficial activities. This would
require regulations for the provision of energy advice.

Is there evidence a reduced rate would be passed on to the final
We would suggest that this would possibly have to be regulated. Our
experience is that many organisations in reality may only pass a portion of the
reduction onto the consumer. For example, under the Warm Front scheme,
landlords cannot increase tenants rates following Warm Front work being
carried out, this is to ensure that those who require the work will not be
penalised as a result. Such steps were deemed necessary in order to avoid
clients being penalised rather than benefiting. We would suggest that some
similar form of regulation would be required in the case of reduced rates for
consumers. This would be a popular tax move, which would also benefit both
the consumer and the environment.

  Eaga Partnership Ltd, Eaga House, Archbold Terrace, Jesmond, Newcastle upon
                                Tyne, NE2 1DB
Which types of household would be the main beneficiaries of a reduced
Since reduced levels of VAT already apply to measures installed by a
contractor and funded by grants it would be expected that the households that
would benefit most would be those in the „able to pay‟ sector rather than the
fuel poor, who should be covered by existing schemes.

However, in making such changes an opportunity to improve the situation with
regard to the fuel poor also exists. This is due to the confusion over where
and when VAT is applicable which affects schemes designed to combat fuel
poverty. The wording used in literature relating to a reduction of VAT to 5% for
measures installed through grant schemes has been interpreted differently
across the industry. For example, a situation exists where a supplier of
equipment on one of the fuel poverty schemes we manage, still charges
17.5% VAT, yet the installers apply a 5% rate to cover the installation. This is
largely due to their interpretation of the wording that errs on the side of
caution to prevent hefty future VAT bills. This situation highlights the need for
effective communication of changes and clarity in communication to prevent
such situations arising in the future.

If this level of confusion exists at company level, then what hope for the
consumer? Clarity and communication is required in order to ensure that all
households will have access to the benefits of any reduced rate.

Would a change in price differentials between efficient and inefficient
products be effective in prompting the desired behavioural changes?
It would be expected that any price differentials would result in higher take-up
of energy efficient products if the benefits of uptake and changes in payback
time were communicated clearly and consistently. Such an impact would be
greatly affected by how the general public are both educated about and
perceive the medium to longer-term financial benefits. Consideration should
be given to funding an associated research programme focusing on both
policy and communication effectiveness in relation to changes in consumer

Experience has shown that energy efficiency trade-ins have successfully
changed consumer behaviour (and subsequently supply activity) in the
electrical appliance markets (refrigeration and home laundry particularly).

  Eaga Partnership Ltd, Eaga House, Archbold Terrace, Jesmond, Newcastle upon
                                Tyne, NE2 1DB
 To what extent would a change in consumer behaviour be more likely to
be achieved by a combination of lower prices for efficient products with
higher prices for inefficient ones, rather than either of these alone?
We would suggest that such pricing systems should not be done in such a
way, which increases the hardship of the fuel poor. To artificially increase
such costs would be an unfair system, which would present unfair hardships
on such groups.

However Eaga Partnership recognises the „polluter pays‟ principle behind this
and supports a move towards the internalisation of environmental costs.

Is insufficient awareness of the benefits of efficient appliances a
significant barrier, and what mechanisms and agents could be best used
to overcome this?
Eaga believe that insufficient awareness of the benefits of energy efficiency
products is the greatest barrier to uptake. We would suggest that future
energy efficiency schemes should include an appliance check and/or an
allowance to replace the most inefficient appliances in fuel poor homes.
Another mechanisms to overcome barriers would also be to include clearer
and more visible labelling and publicity and marketing of the benefits for such
products – especially the medium to long-term financial benefits of efficient

How might any adverse consequences of product charges be
A mechanism to offset product charges and change consumer attitude
towards energy use is to promote the Energy Services approach. Several
barriers to the development of „true‟ Energy Services currently exist e.g. the
28 day rule, and these need to be addressed.

Is there a case for specifically targeting private sector dwellings?
In managing Warm Front and other government energy efficiency schemes
Eaga have had to overcome some of the specific issues as regards the
private rented sector. There is no incentive for landlords to install energy
efficiency measures, even where they are provided free of charge also due to
the short-term nature of most leases there is no incentive on the tenant to
install them. One concern that Eaga has is that tenants must be protected
from rent increases related to such installations and therefore we would
suggest that there is a case for specifically targeting private sector dwellings.

One way in which this could be overcome would be through an expansion of
Warm Front with a broader qualification for the private rented sector to target
more fuel poor. Or, possibly an expansion of EEC whereby there is a specific
percentage commitment of all monies spent to be within the private sector.

  Eaga Partnership Ltd, Eaga House, Archbold Terrace, Jesmond, Newcastle upon
                                Tyne, NE2 1DB
Are there any other measures, which could be used to encourage
private landlords to improve the energy efficiency of their properties,
particularly where the tenants are low-income groups/fuel poor?
Several area based social landlord schemes to promote the installation of
energy efficiency measures exist. Most are small scale and are funded by
local authorities. Further action needs to be taken in the form of a “domestic
business tax allowance” allowing private landlords to claim investment in
energy-saving materials against taxes on profits.

With the development of Private Landlord Registration Schemes under local
authority guidance (e.g. Gateshead Private Landlord Registration Scheme),
we would recommend that local authorities place an onus on the private
landlords who register with these schemes to ensure that their properties
meet the energy targets, which have been laid down in the proposed Home
Information Pack.

How could economic instruments best target fuel poverty?
The proposed reduction in VAT, will not have a real effect on the fuel poor,
due to their inability to afford the capital costs involved. Energy Services and
the removal of the barriers relating to this would help to mitigate capital costs.

It would also be tenable to explore expanding the provision of Enhanced
Capital Allowances (ECA‟s) so that social landlords can take advantage of the
benefits already given to those who pay Corporation Tax. It currently seems
inequitable that the public sector pay the Climate Change Levy (a portion of
which is recycled to fund ECA‟s) yet cannot gain access to the recycled
benefits. At the very least, companies who provide eligible equipment and
services to the public sector should be able to claim the tax benefits and
reflect such a reduction in the overall cost of delivery.

In relation to the effect of economic instruments on fuel poverty it is felt that a
particularly timely issue needs to be highlighted.

In an ideal world, if we followed the „polluter pays‟ principle and environmental
costs were „internalised‟ then the domestic consumer would be taxed
according to individual emissions levels, hence forcing a shift toward the
purchase of relatively lower cost solutions such as investing in either
abatement technologies to reduce emissions, or the purchase of green power.

The Government is right to rule out taxing the domestic use of energy at
present due to the potential negative impact of introducing such a tax on the
numbers of fuel poor in the UK. However, it needs to be recognised that the
consumer will indirectly‟ be taxed on its emissions (without having the option
of exercising consumer choice) via increases in fuel costs relating to the
introduction of the EU Emissions Trading Scheme (EU ETS).

  Eaga Partnership Ltd, Eaga House, Archbold Terrace, Jesmond, Newcastle upon
                                Tyne, NE2 1DB
The EU ETS, is the first mandatory cap and trade scheme for CO2 emissions
and will be introduced in 2005. The burden placed on generators to meet its
cap, either through investment in abatement technologies, or, through the
purchase of allowances in the marketplace, will inevitably result in an increase
in wholesale energy prices, a portion of which will be passed on to the
consumer. Early indications show that forward trades of 2005 electricity are
up £4/MWh already, with a likely increase of 6% in the price of domestic
energy expected (This figure is exclusive of any business as usual rises due
to inflation and other factors such as security of supply issues).

Industry estimates suggest that an 8% rise in real term electricity prices can
be expected by 2010. Add to this a predicted increase of around 6% due to
the introduction of the EU ETS and this becomes a significant increase. Early
calculations show that such a rise in prices would result in a 20% increase in
the % of households in Fuel Poverty by 2010. The table below shows the
predicted impact of such an increase on fuel poverty numbers in England.

Fuel Poor Households in England – Income inclusive of Housing Benefit
and ISMI (income not inclusive of Housing Benefit and ISMI)

                       Estimated         Estimated increase           Estimated new fuel
                       Fuel Poor          as a result of 14%               poor total
                        in 2001         increase in electricity
 Total Fuel Poor  1,700,000                    340,000                      2,040,000
                 (2,300,000)                  (460,000)                    (2,760,000)
 Vulnerable Fuel 1,400,000                     280,000                      1,680,000
 Poor            (2,000,000)                  (400,000)                    (2,400,000)

 Fuel Poor in 1,300,000                         260,000                     1,560,000
 Private Sector (1,500,000)                    (300,000)                   (1,800,000)

      Source of fuel poverty figures: UK Fuel Poverty Strategy – 1st annual Progress Report

Obviously, the above calculations are crude, in that they are dependent upon
a range of factors that influence numbers in fuel poverty. Other issues such as
real term changes in household income and the impact and success of
existing energy efficiency programmes with the aim of reducing fuel poverty
need to be taken into account. What is clear though from these early
calculations is that the impact will be significant and that the impact on the
private sector is substantial.

The situation highlights a need to direct further funding toward both improving
energy efficiency and maximising the overall solution provided to an individual
household at the point of intervention, particularly if the government target of
eradicating fuel poverty by 2010 is to be achieved.

  Eaga Partnership Ltd, Eaga House, Archbold Terrace, Jesmond, Newcastle upon
                                Tyne, NE2 1DB
Whilst energy efficiency in the social sector benefits from the added value in
terms of investment from numerous sources and requirements (EEC, SHP
Contributions, Decent Homes, Part L Building Regulations etc.) the private
sector is reliant on Warm Front and any fiscal incentives offered by either
utilities or government incentives. With this in mind it is felt that some form of
„recognition‟ should be given to CO2 saved either to the individual
householder or under Warm Front to the scheme as a whole, by the
installation of energy efficiency measures at a household level.

Could a package of measures be designed to deliver both energy
efficiency and fuel poverty benefits?
We would suggest that both the current Warm Front and EEC programmes
scheme when managed appropriately go a long way to addressing the needs
of the fuel poor whilst delivering energy efficiency savings. Eaga have
integrated over £20 million worth of utility funding to expand and enhance the
Warm Front programme.

  Eaga Partnership Ltd, Eaga House, Archbold Terrace, Jesmond, Newcastle upon
                                Tyne, NE2 1DB
Comments on General Questions within the consultation.
1. What do you believe would be the priority products for the economic
instruments described in this paper?
Eaga‟s experience of this market lead us to the conclusion that the greatest
impetus to the energy efficiency market would be by lowering VAT on
condensing boilers for the reasons outlined previously.

2. How effective do you believe the measures would be on energy use?
Would they effectively tackle the market failures and associated
environmental problems?
These measures alone would not have a vast effect on energy use and in
aiding the UK to meet their Climate Change Targets unless they are
integrated and complement other measures, some of which have been
outlined earlier. However, as it is our belief that these measures would have
the greatest impact on the „able to pay‟ market energy savings would be
higher per measure than is delivered through other fuel poverty focused
schemes where a „comfort factor‟ is applied and a portion of the savings are
removed as they are deemed to be taken in comfort. For example, stimulating
a change of boiler before it fails will bring forward savings and open the way
for other energy savings measures, especially as most boiler replacements
also lead to other work e.g.TRVs. Therefore such measures would have a
quantifiable effect on energy use in the „able to pay‟ sector.

3. What would be the distributional effects, particularly impacts on low-
income sectors and on those in fuel poverty?
As stated above it is not believed that these measures will have a quantifiable
effect on the issue of fuel poverty with Government schemes such as Warm
Front and an extension of EEC being of greater impetus. Therefore, it is our
belief that these measures will not have a great effect on the numbers held in
fuel poverty. However, there are obvious benefits in terms of both improving
the energy efficiency of the housing stock and educating economic agents.
However we would propose a mechanism for delivering affordable, long term,
low rate finance possibly supported by Government funding aimed at helping
those people who are in „the middle‟ e.g. between the benefit entitled fuel poor
and the able to pay market.

An area that may wish to be considered further is that of the „near fuel poor‟,
who whilst not able to benefit from existing means tested grants to improve
the energy efficiency of their home, may also not have access to capital to
fund works themselves, therefore making steps such as reductions in VAT are
insufficient. It is in these circumstances where measures such as tax
incentives for private landlords who install energy efficiency measures and
more innovative personal tax rebates need to be considered further.

The effect of widening access to Enhanced Capital Allowance‟s should have a
beneficial impact on those in fuel poverty in the social sector. If such
allowances were given to the public sector then it would free further funds to
enhance capital works programmes focusing on energy efficiency

As previously documented in the section above that deals with specific
questions from page 16 of the consultation the impact of the EU ETS on
energy prices is significant. Whilst, in terms of internalising environmental
costs and stimulating an „able to pay sector‟ drive toward energy efficiency
  Eaga Partnership Ltd, Eaga House, Archbold Terrace, Jesmond, Newcastle upon
                                  Tyne, NE2 1DB
such rises may appear beneficial, steps should be taken to offset any
negative impact of energy price increases on the fuel poor.

4. How effective will the proposed measures be in changing the
behaviour of the supply chain and the end-user? Which measures
would be stronger than others?
Effectiveness will be greatly influenced by how such measures are marketed
to the general public. This process needs to be monitored carefully and
improved accordingly. Monitoring to ensure that the end user sees the full
benefit of any reductions in VAT needs to be implemented as does general
reporting on the cost effectiveness of the delivery of energy savings through
the various measures employed.

5. What kind of policy mix (including options for recycling any net
revenue) would be the most effective in creating incentives to improve
energy efficiency in a way that maximises the impact of tackling fuel
A policy mix must be implemented which is multi-faceted so as to address the
individual barriers and problems associated within the various sectors. These
measures should be directed towards the „able to pay‟ market whilst other
policies such as Government schemes should be expanded so as to reduce
the plight of the fuel poor. It is vital that there is no one expectation of a
single answer but instead each issue has particular policies and schemes
directed towards it.

As previously mentioned, specific consideration to the group of individuals
who can neither be classified as „fuel poor‟ nor „able to pay should be given.
Specific approaches should be taken to ensure that economic incentives to
promote energy efficiency in this „near fuel poor‟ sector are realised.

6. Would the measures result in any distortional effects on UK industry
and how might these be tackled? What would be the impact on
international competitiveness – imports/exports?
Any distortional effects on UK industry should be carefully monitored. It is only
by implementing these proposals and then monitoring the market place that
such distortional effects will be identified and therefore can be overcome.
Therefore the greatest way to ensure that such distortion does not take place
is to monitor and review at set periods so that ameliorating action can be
instigated where necessary.

7. What would be the likely costs of administration (including
compliance and enforcement regimes, monitoring and evaluation) to
both business and Government?
Eaga Partnership has nothing to add to this matter.

  Eaga Partnership Ltd, Eaga House, Archbold Terrace, Jesmond, Newcastle upon
                                Tyne, NE2 1DB
8. How do you believe the measures would sit with other existing
policies and measures including EEC, EU regulations, voluntary
agreements and procurement policy?
There is no reason that these issues cannot be complementary to the various
other strands of Government and European policy as long as they are
successfully integrated.

As previously mentioned, the issue of the impact of energy price increases
emanating from the introduction of the EU ETS needs to be considered. This
will have both a beneficial affect in terms of encouraging the „able to pay‟
sector to improve the energy efficiency of their homes and energy usage
behavioural patterns, but must not be to the detriment of the fuel poor. It may
be necessary to introduce innovative new measures, such as credit for carbon
saved under fuel poverty schemes, to fund further works to offset the
potentially damaging impact of the introduction of the EU ETS.


   1) Energy White Paper: Our energy future – creating a low carbon
      economy, DTI (March 2003), Page 19
   2) Ibid, Page 36
   3) Ibid, Page 15

  Eaga Partnership Ltd, Eaga House, Archbold Terrace, Jesmond, Newcastle upon
                                Tyne, NE2 1DB

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