Policy background Part 7: Market Reform and Consumer Protection Energy Company Obligation
The Energy Company Obligation (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 using their own in-house installation arms or by contracting with a third party to find eligible households and install measures and are likely to seek to pass these costs onto customer bills.
	Since ECO came into effect, there has been a large increase in the number of suppliers in the market and therefore those obligated under ECO. Currently a potential market distortion exists where some suppliers are obligated, and others are not. This means non-obligated suppliers do not incur these costs as compared to larger, obligated suppliers.
	In the Energy White Paper 22 the Government committed to reducing the participation threshold for ECO, subject to not introducing disproportionate costs for smaller suppliers. If this was to be done currently (with no buy-out available) it could cause financial hardship for those smaller suppliers who are not able to benefit from economies of scale.
	This Act will expand the powers for the ECO scheme to give energy suppliers the option to meet their ECO obligations simply by making a payment to an approved third party for an approved purpose, therefore reflecting the Government’s commitment to establish a fair and competitive market by allowing smaller suppliers to fulfil their ECO obligation in a more cost-effective way.
	Once a buy-out mechanism is established, the intention is that all suppliers will be obligated under ECO, with only a few exemptions for the very smallest suppliers where the cost of administration would be disproportionate, due to their customer numbers and supply volumes being too low. This will address the current issue of potential market distortion without placing undue financial strain on smaller suppliers.