Memorandum submitted by energywatch (EN06)

 

energywatch is the gas and electricity watchdog established by the Utilities Act 2000. We provide free and impartial advice to energy consumers, handling complaints and intervening with energy suppliers on consumers' behalf. In 2007 energywatch handled 750,000 complaints and enquiries and obtained 7.4 millions in compensation and other payments for consumers across Britain.

 

We campaign to improve the welfare of energy consumers by proposing positive changes to the policies and behaviours of energy companies, regulators and government in respect of energy consumers.

 

Background

energywatch welcomes the opportunity to discuss the Energy Bill and give evidence before the Public Bill Committee. Above all we believe the Energy Bill represents a missed opportunity by government to take a power so that it can introduce social tariffs to assist low income and fuel poor consumers should voluntary schemes from energy companies continue to fall short. This is especially true at a time when high prices have undermined their attempts to eradicate fuel poverty in vulnerable homes by 2010. By the government's own admission in the 5th Annual UK Fuel Poverty Progress report, more than a million vulnerable households will still be struggling to pay their fuel bills in 2010.

 

The Bill also fails to make provisions for the introduction of smart meters by mandating their provision within a set timeframe and to facilitate the introduction of feed-in tariffs for small scale renewables in Britain.

 

Context

The average household energy bill stands at 1000 although those on prepayment meters (PPMs) are likely to be paying considerably more. Consumers who pay for both fuels via PPMs could be paying as much as 400 more for their energy than those on an online, direct debit tariff from the same company. Energy consumers have seen unprecedented and unrelenting price rises since 2003 with gas increasing by 82% and electricity increasing by 61%, with a small drop in prices in 2007.

 

In theory, all consumers can take advantage of the competitive energy market and reduce their bills by switching supplier. In practice half of consumers have never switched supplier, 65% of pensioners have never switched supplier, online switching sites remain largely unavailable to the 5.8 million people on PPMs, 2 million people cannot switch because they are in debt to their supplier and hundreds of thousands of Scottish consumers are on radio controlled meters and cannot switch for technical reasons (dynamic teleswitching meters).

 

Switching is not a realistic option for many people who are fuel poor. While switching is an important way for consumers to mitigate the very worst impact of rising bills, energywatch would agree with the comments from the Energy Minister to the BERR select committee on 31 January, that switching is not the universal way for consumers, especially the vulnerable, to benefit from the market.

 

 

 

1. Social Tariffs

The 2001 Fuel Poverty Strategy saw the government commit to maintaining a downward pressure on prices. The benign price environment at the time meant that energy prices served as a part of the solution and made a positive contribution to reductions in fuel poverty. Since 2003 they have been the problem.

 

The 2007 Energy White Paper observed that UK fuel poverty was back at the 4 million household mark - double the 2004 figure and a return to pre-Strategy levels. Price rises have undermined government's notable efforts and investment in eradicating fuel poverty by outstripping income growth and outpacing the rate at which energy efficiency and heating improvements can be installed.

 

What are social tariffs?

Social tariffs represent the most effective way of ensuring that suppliers' most affordable energy rates are for fuel poor households. energywatch believes that they should be offered as part of a package that supplements income maximisation initiatives and energy efficiency programmes. Social tariffs would address a situation whereby the energy market's lowest cost tariffs (internet only direct debit rates) are the preserve of more affluent consumers. Some suppliers have acted positively in this regard, others have not.

 

Social tariffs offered in accordance with minimum standards represent the most effective way of addressing the gap in the government's fuel poverty strategy in terms of action on the cost of energy to fuel poor households. They can be offered in a way that supplements actions on income and energy efficiency. However, in the current situation where some suppliers do a lot and others do very little, statutory minimum standards may be necessary to ensure that all suppliers offer social tariffs in a proportionate manner and on an adequate scale.

 

What's wrong with the voluntary approach?

The Energy White Paper challenged each supplier to offer programmes of assistance to their fuel poor customers and indicated that legislation would be considered, should the programmes of support currently on offer be deemed disproportionate and inadequate.

 

Despite some improvement, a report undertaken for energywatch by Cornwall Energy Associates has highlighted just how disproportionate supplier provision remains. If energy suppliers fulfil the commitments made to government, the industry will invest 0.25% of its estimated turnover in social tariffs and rebates - the initiatives that offer direct assistance with the cost of energy to fuel poor households.

 

If and when individual suppliers' commitments are met this will range from British Gas investing 0.49% of its turnover to a mere 0.079% of turnover for npower and Scottish & Southern Energy. British Gas is committed to making assistance available to 4.7% of its consumer base, while for npower and Scottish & Southern this figure is 0.79% and 0.34% respectively. The commitments made by British Gas will equate to 71% of the total industry assistance offered, while its market share represents just 33%; whereas npower has an 11% market share but has a social package commitment that will represent 4% of the total.

 

The voluntary approach also carries an inherent risk of 'backsliding', either where suppliers renege completely on commitments, especially if rising wholesale prices put the bite on voluntary initiatives, or where the best scale back their activities, causing a levelling down rather than the desired levelling up.

 

energywatch believes that the government's challenge has not been met. To ensure proportionate action from all energy suppliers, the government must make it clear to the energy industry that its threat to require social tariffs is a genuine one.

 

The way forward - an enabling power to the Secretary of State and minimum standards for maximum impact

Given the reversal of progress towards eradicating fuel poverty and the limitations and disparities of the current approach to social tariff provision, the government must use the Energy Bill to grant the Secretary of State the necessary powers to require energy supply companies to offer social tariffs in accordance with minimum standards. energywatch believes that any analysis of the current industry provision should trigger the white paper promise to legislate an enabling power for the Secretary of State.

 

The actual minimum standards could then be set out in secondary legislation and would cover:

 

The framework by which the obligation to offer social tariffs will be expressed as a target for each supplier to fulfil. As with the existing Energy Efficiency Commitment, statutory targets guard against market distortion and ensure no supplier is unduly disadvantaged by the obligations, thus ensuring proportionality and, crucially, driving up the number of social tariffs being offered.

Eligibility: Government, in consultation with interested parties, should determine which group(s) will be eligible to receive social tariffs. Once decided upon, the same eligibility criteria must be adopted by all suppliers.

Recruiting eligible consumers: the Department for Work & Pensions and HM Revenue and Customs should be obliged to develop a mechanism whereby their data is utilised to facilitate the successful identification and targeting of eligible consumers (which can be location rather than person specific), or which verifies eligible consumers and enables them to self-present to suppliers.

Price: social tariffs must be the lowest cost tariff rate that a supplier offers and should be available to eligible consumers regardless of payment method. The social tariffs rate should be indexed against suppliers' tariff prices in the open market, thereby reflecting each supplier's overall competitiveness and providing further safeguards against market distortion and the erosion of competitive positions (i.e. NOT a single, 'universal' social tariff being imposed on all suppliers).

Length of entitlement: Minimum criteria relating to the form of social tariffs, should prescribe an entitlement of between 12 and 24 months, following which a reassessment should take place. This would grant the time for energy efficiency and heating measures (through suppliers' own obligations and Warm Front and its equivalents), as well as income maximisation measures, to take effect.

 

Not a single tariff, but a single framework

energywatch believes that minimum standards are necessary to ensure that the industry levels up to the best, not down to the worst. Those companies such as British Gas and EDF Energy, that have made significant commitments to their social tariffs, should be able to maintain and even build on their social tariff offerings, confident in the knowledge that their competitors will be required to match their commitments.

 

Npower, the company which has done or promised the least in regard to social tariff provision, has already written to Ofgem stating that 'At present, government is encouraging the delivery of a social action solution within a voluntary framework. It is doubtful whether this is the most efficient approach and it is also seemingly inconsistent with a market framework.'

 

energywatch does not believe that government needs to require that all suppliers offer exactly the same social tariff product. Instead a requirement to provide a social tariff that meets key criteria and key targets would provide a solution that fits the character of the GB energy market while providing real cost protection for the fuel poor.

 

2. Smart meters

energywatch is concerned that the Energy Bill currently omits any legislative provision for a national smart metering rollout. The consequence of this omission is likely to be an unnecessary delay to the delivery of significant consumer benefits, investment and regulatory uncertainty for industry and consumers.

The prime minister, the business and enterprise secretary and the environment secretary have all indicated support for introduction of smart metering.

Three in every four contacts with energywatch are about problems with billing and metering - smart metering would mean an end to estimated and bogus bills. There is unprecedented support across industry, consumer organisations, green groups and regulators for smarter metering to be mandated through the current legislation.

energywatch believes that the Energy Bill should provide an enabling framework that provides suitable legal authority for the entirety of a national rollout but does not predetermine or impose any particular implementation route, technical solution, or market structure.

The government appears to believe that modifications inserted into gas and electricity supply licences using regulations made under section 2(2) of the European Communities Act 1972, pursuant to the provisions of Article 13 of EC Directive 2006/32 (the Energy Services Directive) can be used to introduce smart metering. However, the directive has severe limitations and energywatch believes that using primary legislation is lower risk and will provide clear parliamentary legitimacy for what will need to be an enormous house-to-house programme of visits.

We believe that:

A national co-ordinated dual-fuel roll out of smart metering will need to be authorised and facilitated by an appropriate legislative mandate from government.

This is best expressed under primary legislation through a broad enabling framework in the Energy Bill - we do not believe it is appropriate to seek to provide for a rollout via subordinate legislation made pursuant to the Energy Services Directive.

 

energywatch believe that any enabling framework would need to include a process to ensure consumers are protected and able to gain all the benefits of smart metering. These will need to include but not be limited to:

 

Interoperability - an obligation on industry that systems should have two way communications with the supplier, be interoperable between different suppliers and provide (in the home) a minimum of accurate, accessible comprehensible historic and up to date information. Any smart metering model must ensure that consumers are not required to have their gas and electricity supply from the same supplier

Disconnection - smart metering may allow remote disconnection and the extended use of warrants should be introduced to protect consumers against any new form or practice of disconnection from supply

Consumer education - An obligation on government, suppliers and others to deliver a comprehensive, co-ordinated and segmented education programme so the information from smart metering can help change behaviour Contracts should be amended to set out consumers rights and responsibilities with regard to the information that can be sent and received via a smart meter

Transfer of historical consumption information - with the consent of the consumers, suppliers should be required to transfer consumption data when they switch supplier.

Supplier savings - suppliers must pass on to consumers savings in meter reading /caller centres etc following the introduction smart metering.

Prepayment - smart metering can put an end the differential charge for prepayment and make prepayment an option available for all consumers.

In addition to this there will need to be specific range of protections for vulnerable consumers.

3. Feed-in tariffs

Only 2% of UK energy, and just under 5% of UK electricity, comes from renewable sources. The government must deliver a huge increase in renewable energy if it is to meet the EU target of 15% of UK energy from renewable energy by 2020 (about 30% of UK electricity). Reforms to the Renewables Obligation contained in the Energy Bill, which proposes a banding system with varying levels of support to different renewable technologies, is only likely to deliver half of this target.

 

An Energy Saving Trust study (Generating the future) suggested that 30-40% of the UK's total electricity could be provided by small scale renewables. Similarly, a study by Oxford University's Environmental Change Unit, Home Truths, found that in addition to energy efficiency, every home will need renewable technologies installed to generate heat and electricity, if the target of 80% carbon reduction is to be met by 2050. This requires 600,000 installations a year for 42 years. The introduction of a feed-in tariff system, coupled with capital support, could play a key role in ensuring these targets are met.

A feed-in tariff works by guaranteeing a long term premium payment for electricity generated from renewable sources and fed into the grid. The government would fix the level of the tariff to be paid for each technology and set the length of the contract. Many European countries have adopted a feed-in tariff system with considerable success. It has led to faster growth in renewable capacity than is the case in Britain as well as providing a considerable boost to economies.


An enabling power within the Energy Bill would facilitate the introduction of a feed-in tariff system for small scale renewables in Britain. This could be accompanied by a consultation on the precise tariff levels and threshold between support from the feed-in tariff and the Renewables Obligation.

 

February 2008