Rule change aims to open door to energy services for homes

Under the energy services concept, energy efficiency would become an integral part of customers' contracts with energy suppliers. Measures can include energy audits, the provision of energy efficient products or insulation, and financial help to replace inefficient appliances - with upfront costs and lower fuel costs being balanced by relatively long-term contracts.

Many observers believe that an existing rule which allows consumers to switch suppliers after 28 days' notice has been a major barrier to developing energy services in the domestic sector. However, others argue that it has been important in promoting liberalisation of the energy market.

As recently as this summer, energy regulator Ofgem insisted that the rule "does not create a significant barrier" to energy services. It pointed out that suppliers can already offer contracts longer than 28 days, provided customers agree to be liable for a termination fee, and claimed that this should give suppliers "reasonable security".

In its recent energy White Paper, the Government announced the establishment of a working group to advise on the creation of an effective market for energy services (ENDS Report 338, pp 26-32 ). The group is jointly chaired by the Industry and Environment Departments and Ofgem, and its membership includes the main energy suppliers and the energy efficiency lobby.

The group will be addressing a number of barriers to energy services, not least the need to stimulate consumer demand. However, its interim report to Ministers focuses on the 28-day rule - and concludes that "it effectively forbids energy services and energy supply from being treated as a single contract."

The group recommended that the 28-day rule be suspended for a trial period of two years to determine whether this would make a difference to supplier engagement and customer take-up.

Trade and Industry Secretary Patricia Hewitt gave the proposal a strong endorsement: "Just as consumers choose to sign up for longer contracts when they buy mobile phones and receive free kit and extra services, we want to see if there is a market for longer contracts in return for lower electricity and gas bills achieved through energy efficiency."

During the pilot phase, suppliers will be permitted to sign up 4% of their customer base to energy services contracts of up to five years, up to a limit of 50,000 customers. If all suppliers took full opportunity, the scheme would cover a million households.

In answer to a parliamentary question in December, Energy Minister Stephen Timms said that the Government expects households under energy services contracts to reduce their energy use by "at least 10-15%".

Ofgem intends to consult on the details and to amend suppliers' licenses in January, enabling the pilot to begin in April. The regulator will oversee the pilot and ensure that customers are protected from poor service and mis-selling. The pilot will be reviewed after 12 months with a wider evaluation of its benefits after 18 months.

However, Ofgem has expressed caution over the prospects for developing energy services for households. It points out that they are also underdeveloped in the industrial and commercial sector, where there is no 28-day rule - and that gas suppliers failed to bring forward energy services for households before the rule was introduced in 2000.

Leading suppliers Centrica, Npower, Powergen and EdF all welcomed the pilot, saying that they are developing energy services packages.

Early activity appears most likely under the energy efficiency commitment, which requires gas and electricity suppliers to meet an energy saving target between April 2002 and March 2005. Up to 10% of individual suppliers' targets can be met from energy services.

Moreover, under the EEC, savings from energy services packages count double towards suppliers' targets. Ofgem believes that this has "concentrated the minds of suppliers".

Ofgem expects energy services to deliver nearly 7% of the overall target for the six major suppliers covered by the EEC. Three suppliers have submitted proposals to Ofgem which would reach the 10% ceiling.

The working group report claims that if energy services take off, the Government's carbon dioxide targets could be met "without greatly increasing the long-term cost of EEC to energy customers".

The pilot could be a particularly timely boost for small-scale combined heat and power (ENDS Reports 319 pp 33-34  and 330, pp 33-34 ). Powergen has just launched its WhisperGen product in collaboration with New Zealand manufacturers Whisper Tech. An initial 400 units are available for customers in Suffolk and Cheshire to buy outright during this winter, but Powergen also intends to bundle the technology with gas and electricity supplies in a single monthly payment.

Centrica has also teamed up with former colleagues in BG Group to promote the rival Microgen CHP unit. It says it is "looking very seriously" at promoting it in an energy services package, but the technology is unlikely to be available until the end of 2004.