House of Commons - Business and Enterprise

Select Committee on Business and Enterprise Eleventh Report

5 Fuel poverty

106. Households which spend in excess of 10% of their income on maintaining an adequate level of heating and lighting are defined as being in fuel poverty. Fuel poverty has three contributing causes: the level of household incomes, fuel costs, and the quality of housing (and hence its level of energy efficiency). In 2000 the number of fuel-poor households in the UK was estimated at 4 million. The Government's UK Fuel Poverty Strategy, published in 2001, established a target to eradicate fuel poverty for vulnerable households by 2010. Vulnerable groups include older people, households with children, and people who are disabled or have a long-term illness. Separate targets exist in England and for the Devolved Administrations, but the overall aim is that fuel poverty should be eradicated by 2018.

Recent developments

107. Figure 11 below shows the recent trends for fuel poverty in the UK. Between the late 1990s and 2003 the number of fuel-poor households declined significantly. This was in large part due to increasing incomes, although falling energy prices and energy efficiency also contributed.[202] However, fuel poverty levels have been rising since 2004, primarily because of higher energy prices. Official estimates only run to 2005, though National Energy Action told us it believed fuel poverty levels had now reached around 4.5 million.[203]

Figure 11: Number of households in fuel poverty (1996-2005)

Source: UK Fuel Poverty Strategy 5^th Annual Progress Report 2007

108. In response to mounting concern over the level of fuel poverty, in May 2008 Ofgem published its Fuel Poverty Action Programme, setting out a package of measures to help the fuel poor. Central among these is the intention of the Department for Work and Pensions (DWP), the Department for Environment, Food and Rural Affairs (DEFRA) and BERR to develop data-sharing that will enable energy suppliers better to identify the poorest pensioners most likely to be in fuel poverty. The main energy companies have also agreed to increase their collective expenditure on social assistance for their fuel-poor customers from £50 million per annum at present to £150 million by 2010/11. Although the principles of the programme, and Ofgem's engagement with the issue, were welcomed by stakeholders we spoke to, the Fuel Poverty Advisory Group described many of the measures as "tokenistic", while National Energy Action told us: "It is not going to reverse the fuel poverty trend significantly".[204] In evidence, the Chief Executives of Npower and E.ON UK told us it was time for a "fresh policy look" at the Government's approach to fuel poverty.[205]

109. Other things being equal, with every 10% increase in energy prices 400,000 people go into fuel poverty.[206] The rise in prices since 2004 means the Government is certain to miss its target of eradicating fuel poverty for vulnerable households by 2010. We welcome Ofgem's Fuel Poverty Action Programme as a sign that the Government is aware of mounting concern in this area. In particular we welcome plans to enable data-sharing that will help energy suppliers identify pensioners most in need, although such information will need to be handled with the utmost propriety. We hope the Government will implement similar plans for other vulnerable groups. However, in the context of sharply rising prices and reductions in funds for the Warm Front programme, discussed below, the additional money pledged by the energy companies, while welcome, will make very little difference to the overall number of fuel poor households. We believe the Government must now consider a fundamental re-think of its approach to tackling fuel poverty.

Social tariffs

110. The £50 million that the 'Big 6' will in 2008 spend collectively on social assistance for their most vulnerable customers, supports a range of different actions. These include giving cash rebates, offering benefits entitlement checks, and providing energy advice. All the energy companies also now provide a social tariff to some of their most vulnerable customers. These vary significantly between the suppliers in approach. For example, British Gas's Essentials tariff charges eligible customers its direct debit rate, regardless of whether they are using standard credit or prepayment meters.[207] Elsewhere, Scottish and Southern Energy (SSE) provide a discount of at least 20% off customers' existing tariffs.[208]

111. It is almost impossible to compare the level of support social tariffs offer across the companies because of the various ways in which they are calculated, the extent to which the tariffs they are linked to change with time, and because they are usually part of a package including other forms of social support. Energywatch noted too that some companies' social tariffs are actually more expensive than open market tariffs available to other consumers.[209] Analysis conducted for Energywatch earlier this year estimated around 540,000 consumers were receiving support under the energy suppliers' social packages, although this is not to say that they were being lifted out of fuel poverty.[210] The vast majority of the 4.5 million fuel-poor are, therefore, not benefiting from suppliers' social assistance. The energy suppliers are yet to determine how the pledged increase in expenditure in the coming years will be spent, though the Government's intention to improve data-sharing on pensioners will make it easier for them to target this group.

112. To date, the Government has allowed the energy suppliers to determine the type of social assistance they provide. The 'Big 6' argue that this gives them scope to innovate in their approach.[211] As concern over energy prices has increased, there have been growing calls from consumer groups for the Government to mandate social tariffs.[212] In January, the Minister told us he thought setting a minimum standard would mean all the companies would aim simply to achieve that level, thus stifling innovation and competition between the suppliers.[213] In evidence, most of the suppliers shared this view, though SSE told us it would like to see a mandatory definition of what qualifies as a social tariff.[214]

113. In rethinking its approach to fuel poverty the Government must decide whether companies should have a larger, perhaps statutory role to play in delivering its social policy objectives—that is, to what extent energy companies should be expected to divert their profits away from investment and distribution to shareholders, and to what extent relatively more affluent energy consumers, many of whom are themselves far from rich, should, through the price they pay for their electricity, cross-subsidise those who are less well-off. This cross-subsidy is currently modest, but it would inevitably grow if social tariffs were to be expanded.

114. Energy suppliers' existing social assistance initiatives (which go well beyond specific tariffs) do not reach the vast majority of the fuel-poor. They also vary widely, confusing consumers and providing inconsistent coverage. Irrespective of its broader conclusions on the role of such tariffs, we believe the Government should define the criteria for both the prices charged by suppliers under the banner of social tariffs, and for identifying those customers that qualify for them. We recognise that companies could only implement such an approach if they have access to information provided by central and local government. We do not accept the view that a mandatory and comprehensible definition of what constitutes a social tariff would create a 'race to the bottom' for all suppliers—rather, it would provide a minimum level above which they can compete, not only on tariffs, but also on other schemes to assist the fuel-poor.

Raising incomes

115. The main means by which the Government provides specific support towards consumers' energy costs is through the benefits system, using the Winter Fuel Payment. This is a once-a-year tax-free payment of between £100 and £300, depending on age and circumstances, for those over 60. Last year, 11.7 million people received payments. In the 2008 Budget the Government announced that for winter 2008/09 there would be an additional payment of £50 for households with someone aged 60 to 79, and £100 for households with someone aged 80 or over. This top-up is just for one year. The benefit costs the Exchequer over £2 billion a year to provide.[215]

116. As a universal benefit for pensioners, the Winter Fuel Payment is not targeted at the fuel-poor. However, several of our witnesses thought that it should be. The Fuel Poverty Advisory Group described it as "kind of a Christmas payment" for pensioners.[216] National Energy Action, Energy Action Scotland, the Citizens Advice Bureau and the National Right to Fuel Campaign all argued that it should be made available to other vulnerable households, such as families with children, disabled people or those with a long-term illness.[217] The Minister told us there were a range of other benefits for these groups, but that it was "a perfectly reasonable argument for [us] to present to the Chancellor".[218]

117. The Winter Fuel Payment is targeted at pensioners rather than the fuel-poor. The political reality is that either removing it from any existing recipients, or taxing it, to release funds for the genuinely fuel-poor, would be courageous decisions. However, we believe that any additional funds to help households cope with rising energy prices should be better targeted on the fuel-poor—not only pensioners, but also disabled people and other vulnerable consumers.

Improving housing

118. The Government has two main initiatives for improving the energy efficiency of the housing stock. First, the Carbon Emissions Reduction Target (CERT) places an obligation on energy suppliers to achieve targets for reductions in carbon emissions in the household sector. Under CERT, suppliers must direct at least 40% of carbon savings to a priority group of low-income and elderly consumers. Second, the Government's Warm Front programme provides a package of insulation and heating improvements for private homeowners up to the value of £2,700 (or £4,000 if oil central heating is recommended). Although it is not targeted specifically at the fuel-poor, only households on certain benefits are eligible to receive grants.

119. Warm Front has delivered significant benefits for recipients of grants, and on average it has reduced their energy bills by £300 per annum—some 30%.[219] However, the Chief Executive of the scheme's operator, Eaga, told us it faces some significant challenges. Since 2002, the Government has raised the grant ceiling of £2,700 by far less than the rate of inflation. As a result, the programme has gone from being effectively free at the point of access, to one where a large number of beneficiaries must contribute an additional amount themselves. Eaga told us some 16,000 people are currently on its waiting list because they cannot afford the top-up.[220] Moreover, from this year the Government has cut funding for Warm Front by 16%, from £350 million in 2007/08 to £295 million in 2008/09. Funding will further reduce to £270 million in 2009/10 and £235 million in 2010/11. Yet Eaga told us current demand for the scheme is worth in excess of £400 million a year.[221] In evidence to the Liaison Committee, the Prime Minister suggested that there might soon be developments which could correct this: we hope these announcements are made soon.

120. In its most recent annual report, the Fuel Poverty Advisory Group stated:

"The cut in Warm Front is, to put it mildly, difficult to understand—given the programme's success and given the still more pressing need, in the wake of the price increases, to improve the energy efficiency of homes and heating systems. The programme has been cut when fuel poverty is at its highest level for nearly a decade."

The fuel poverty groups suggested various ways in which the Government could raise funding from other sources to increase support for Warm Front. The FPAG estimates that discontinuing Winter Fuel Payments for higher tax rate payers could raise an additional £200 million, but we do not believe this option is politically acceptable. It also said that the Government could recycle some of the £400 million of additional VAT payments it is receiving from energy customers as a result of recent prices rises and suggests redistributing some of the windfall gains made by electricity generators from Phase 2 of the EU Emissions Trading Scheme, which we discussed in Chapter 3.[222] However, the Government is correct to say that increased VAT income from one area is often counter-balanced by reductions elsewhere. We also note that the Government is making substantial gains from the auctioning of permits under the EU ETS, and would have made more if it had chosen to auction 10% of permits, as it could have done, rather than opting for the lower level of 7%.

121. After several years of increases, it is very disappointing that in the current three-year spending period the Government has reduced the budget for Warm Front at a time when the need for it is greatest. This is especially so, given that HM Treasury has received additional income from the auctioning of permits under Phase 2 of the EU Emissions Trading Scheme, while electricity generators are benefiting from windfall gains from the free allocation of the majority of permits under the same scheme. We hope that this reduction in funding will be corrected very quickly.

122. We recognise the claims made by the generators about the way in which they have used the 'windfall gains' under Phase 2 of the EU ETS, and we understand the danger that regulatory uncertainty could delay investment plans. However, given the apparent size of the gain (something we have already asked Ofgem to examine more carefully), and the extreme need of many households, we believe there is a compelling rationale for at least a modest, one-off top-slicing of these gains to help fund action to reduce the energy bills of vulnerable families in the long term. However, we also note the windfall gains accruing to HM Treasury, and believe it too must make its contribution in these exceptional circumstances.

123. Energy prices are likely to remain high, by historic standards, and the Government is unlikely to be able to raise incomes sufficiently rapidly to meet its fuel poverty target, especially given the current economic downturn. This means that in the future, government and industry efforts need to focus on improving the housing stock of the fuel-poor, as the most cost-effective means of reducing both their energy bills and their carbon emissions. We believe the Government must consider whether the Carbon Emissions Reduction Target and Warm Front should be more precisely focused on helping the fuel-poor, and whether synergies between the two initiatives can be more actively exploited. If the Government remains committed to eradicating fuel poverty it must have in place policy instruments specifically designed to achieve this aim that do not rely on ongoing subsidy of fuel bills. A great many households face a difficult winter; it is imperative that the Government reviews its approach to fuel poverty and does so urgently.

202 Ev 276 (Energywatch) and Ev 462, para 113 (Ofgem) Back

203 Q 426 (National Energy Action) Back

204 Qq 481 (National Energy Action) and 522 (Fuel Poverty Advisory Group) Back

205 Qq 886 (Npower) and 888 (E.ON UK) Back

206 Q 610 (Ofgem) Back

207 Ev 190, para 7.7 (Centrica) Back

208 Ev 493 (Scottish and Southern Energy) Back

209 Ev 289 (Energywatch) Back

210 Cornwall Energy Associates, Proportionality of social tariffs and rebates-Paper for Energywatch, January 2008 Back

211 Ev 263, para 5.5 (Energy Retail Association) Back

212 Ev 275, para 48 (Energywatch), Ev 412 (National Energy Action), Ev 426 (National Right to Fuel Campaign) and Ev 208 (eaga) Back

213 Q 105 (Minister for Energy) Back