Memorandum by the Office of Gas and Electricity Markets (Ofgem)
1. Ofgem is committed to making a contribution towards the alleviation of Fuel Poverty. Low incomes, poor housing conditions and energy costs are widely considered to be the main factors that cause fuel poverty. Ofgem has a clear role to play in respect to energy costs and a further role, through work on energy efficiency, in helping to improve housing.
2. In March 2000, Ofgem published a Social Action Plan, which identified actions to help customers in fuel poverty. The second annual review of work undertaken under the Plan was published in March 2002. Under the Plan Ofgem has:
encouraged industry initiatives designed to lower the cost of keeping warm;
identified barriers to disadvantaged customers taking part in the competitive market and undertaken work to remove those barriers;
enchanced the Codes of Practice under which suppliers provide help to vulnerable customers and improved the monitoring of these; and
promoted research into the causes of fuel poverty and taken action where appropriate, to address them.
3. Ofgem has contributed substantially to the development of the Government's Fuel Poverty Strategy, which was published in November 2001.
4. Answers to the specific questions asked by the Committee, where Ofgem can contribute to the inquiry, are set out below:
Why has the number of fuel poor households fallen recently? What is the relative significance of factors such as poor energy efficiency, low-incomes or the cost of fuel?
5. It is estimated that lower fuel prices alone accounted for over half of the 1.5 million households taken out of fuel poverty in England between 1996 and 2000, with the balance due mainly to changes in incomes.
6. This reduction in fuel prices has been achieved through Ofgem's pursuit of competitive electricity and gas markets and effective price regulation of monopoly businesses. For example:
the National Audit Office has estimated that domestic customers have saved £1 billion a year in gas and £750 million a year in electricity since competition opened;
the New Electricity Trading Arrangements (NETA), as a vital link in the competitive chain, is already contributing to markedly lower wholesale electricity priceswhich is in turn coming through to retail prices;
regulation of monopoly businesses, which run the pipes and wires, has resulted in savings to customers of £1.3 billion a year;
overall, the average domestic electricity bill has fallen by 11 per cent and the average domestic gas bill by 18 per cent since the introduction of competition in domestic supply markets.
7. Competition is providing real benefits for all customers. The latest research conducted by MORI for Ofgem into the domestic competitive market found that more customers are switching supplier, across all social groups and payment methods, than in previous surveys. Overall 38 per cent of electricity customers and 37 per cent of gas customers have switched supplier at least once. The survey, carried out between August and September 2001, found that customers with disabilities, customers on low-incomes, and those in socio-economic groups C2DE, are all switching at average or above average levels.
How effective are the industry-led initiatives?
8. One of the most important impacts of Ofgem's Social Action Plan has been the stimulus this has given to electricity and gas suppliers to develop new innovative services and payment methods for the fuel poor. Some of these are based on new approaches to paying. For example, "Staywarm", a scheme operated by TXU, ends traditional measurement of consumption, and instead concentrates on giving certainty through a fixed charge unrelated to usage. Since the annual amount is fixed, customers can leave their heating on during cold periods without the fear of running up increased bills. "Staywarm", which is open to customers over 60, has now been rolled out nationally and approximately 150,000 customers have so far signed up for the scheme.
9. Other initiatives, such as British Gas "Warm-a-life" and Scottish Power's "NEST Makers" schemes involve targeting customers in need of help, through provision of energy efficiency advice, Warm Front grants or suppliers' own energy efficiency programmes and in some cases a free "benefits health check".
How can Government promote the take-up of energy efficiency measures in households whose income is just above the benefit level?
10. Ofgem recognises that this is an important issue. DEFRA has required that suppliers secure 50 per cent of their energy savings under the Energy Efficiency Commitment scheme from the "priority group", defined by statutory instrument as households in receipt of certain benefits or tax credits. Outside of this "proxy", deciding whether a household is fuel poor or not necessitates the collection of information on the house and the heating systems available, and also detailed information on household income. It is difficult to collect good information on incomes, and many customers may be reluctant to provide this. There is also an issue of accuracy, ie if the customer believes they will receive measures if they say they have a low income this may bias their response.
11. However, it is acknowledgedfor example through work associated with Warm Zonesthat there are many customers whose incomes are just above the benefit level who are also in fuel poverty.While it is not practical to expect energy companies to target households whose income is just above benefit level, Ofgem is interested in the extent to which localised approaches to identifying the fuel poor, such as Warm Zones are successful in improving targeting of effort.
How much could better co-ordination between agencies or fiscal measures help?
12. Ofgem believes that effective co-ordination between agencies is a pre-requisite of reaching and assisting customers in fuel poverty. This is something that Ofgem has encouraged under the Social Action Plan. A number of suppliers are involved in the Warm Zone pilots which represent a co-ordinated approach, focusing on tackling fuel poverty in a localised area within 3 years. We are following progress closely.
13. As mentioned above, electricity and gas suppliers are working in partnership with local authorities, health-care workers and charities in order to target resources at customers in fuel poverty. For example, through npower's "Health Through Warmth" scheme, 20,000 nurses and care workers are being trained to help spot people at risk from fuel poverty and refer them on to sources of help.
14. Ofgem believes there is a strong link between fuel poverty and social exclusion. Under the Social Action Plan, National Energy Action, npower and New Economics Foundation have researched the role for credit unions to work in partnership with suppliers. Evidence from this study indicated the potential for an integrated service which addresses the issues of poor housing conditions, low-income, expensive payment methods and exclusion from the benefits of the competitive energy market. As a result, a "Factor Four" service model was designed to integrate four key areas: energy advice; budgeting and money advice; take-up of energy efficiency; and bill payment.
15. Further work is being taken forward by the research partners to secure funding for pilot projects.
16. Also under the Social Action Plan, London Electricity Group has undertaken research into the scope for working in partnership with local authorities, consumer agencies, and local and national charities to help vulnerable customers. It found that such partnerships have the potential to be extremely cost-effective, if managed correctly.
17. In addition, Ofgem has participated in series of events to promote interest among housing providers in the Energy Efficiency Commitment. This included hosting a meeting in July 2001 between suppliers and representatives from the social housing sector to explore the opportunities for collaborative energy efficiency work targeted at disadvantaged households.