Guidance

Energy Security Bill factsheet: Energy Company Obligation buy-out mechanism

Updated 1 September 2023

We estimate that ECO4 will help upgrade an extra 450,000 homes, cutting on average £300 off their energy bills, preventing 15.08 megatons of carbon emissions over the total lifetime of the measures.   

1. Why are we legislating?

ECO places an obligation on energy suppliers to install energy efficiency and heating measures in England, Scotland and Wales and is focused on providing support primarily to low income and vulnerable households. Suppliers meet their obligation by contracting with a third party to find eligible households and install measures.  

As committed to in the Energy White Paper, we are legislating to enable the removal of obligation thresholds under the scheme without creating significant financial and administrative burden for small suppliers. 

Currently, only suppliers with over 150,000 customer accounts are obligated, which has led to market distortions. Smaller suppliers have been exempt from ECO as their size means the administrative costs of fulfilling their obligations would be disproportionate compared to larger suppliers. However, these thresholds create market distortions as smaller suppliers are able to undercut other suppliers who have to pay ECO costs and recoup these from customer bills. 

This measure will therefore include smaller suppliers in the ECO scheme while ensuring they do not face disproportionate costs through a ‘Buy-Out’ mechanism. This measure will achieve a more equal and fair energy market for suppliers and spread the cost of ECO amongst a greater number of domestic consumers.   

We are legislating to enable the removal of obligation thresholds under the scheme without creating significant financial and administrative burden for small suppliers. 

This measure will achieve a more equal and fair energy market for suppliers and spread the cost of ECO amongst a greater number of domestic consumers.   

2. How the Bill will achieve this

The Bill will provide powers to the Secretary of State to introduce a buy-out mechanism through secondary legislation under the Energy Company Obligation (ECO) scheme. 

The powers from primary legislation would enable the Secretary of State to:  

• Enable suppliers to make a buy-out payment;
• Set the buy-out price;
• Make the criteria for approved third parties and purposes to which a buy-out payment is made;
• Set the procedure to be followed by suppliers to make buy-out payments.

Secondary legislation will establish the details of the mechanism and will be preceded by a separate consultation.  
## Background

The Energy Company Obligation (ECO) scheme is a requirement that the Government has placed on energy suppliers to install energy efficiency and heating measures to people’s homes. Energy suppliers are obligated to deliver the scheme and they recover the costs of delivering the scheme through customers’ energy bills. This scheme is therefore not a grant scheme, but an obligation placed on energy suppliers. It has been in place since January 2013 and has delivered around 3.4 million measures in 2.4 million homes up to the end of February 2022.    

As per the Sustainable Warmth Strategy, Government has committed to a four-year, £4 billion successor scheme, to accelerate our efforts to improve homes to meet fuel poverty targets. ECO4 will be focused on the least energy efficient homes occupied by low income and vulnerable households in Great Britain.  The ECO4 consultation was published last summer, and the Government Response was published in April 2022.   

3. Further information

The following documents are relevant to the measures and can be read at the stated locations:

• ECO4 Consultation (July 2021)
• ECO4 Government Response (April 2022)