Memorandum by the National Right to Fuel
Campaign
INTRODUCTION
NRFC was established in 1975 with a key objective
to end fuel poverty by securing a warm, dry, well-lit home for
all, regardless of income and location, and has taken a leading
role in putting fuel poverty high on the political agenda. The
Campaign has a membership comprising voluntary organisations,
local authorities, trade unions, individuals, academics and professionals
in housing, social welfare and environmental health.
Currently, it focuses on campaigns to ensure
that there is continuing commitment by Government, Industry and
the regulator to end fuel poverty for all households by 2016.
We also believe that there should be no unfair taxes or fuel price
increases which adversely affect low-income consumers. This includes
all aspects of energy supply from unfair tariff differentials
to prices which are a proper reflection of industry costs.
Our response to the questions posed by the BERR
select committee as part of its full scale inquiry into energy
prices have focused on those which are directly relevant to fuel
poor consumers and which fall into the areas of expertise of Campaign
members.
Our overall impression is that markets do not
work for the fuel poor who are at the bottom of the heap for government,
industry and the regulator in that they neither get the benefit
from a functioning market or adequate protection by regulation
or sufficient income.
INQUIRY QUESTIONS
— Whether the current market structure
encourages effective competition in the retail markets for gas
and electricity;
— Whether there is effective competition
in the wholesale markets for gas and electricity; and
— The relationship between the wholesale
and retail markets for electricity and gas.
PRICING
NRFC wanted to understand whether or not the
price increases over the past several years could be legitimately
explained—could they be accounted for by significant increases
in profit or dividends to shareholders? Or was there some other,
less transparent explanation for the increases which have caused
an increase in the numbers in fuel poverty. This information was
not readily available in the public domain, using publicly available
data. One might expect that this information would be publicly
available from the industry regulator, Ofgem, but this was not
the case so NRFC commissioned its delivery (attached at appendix
1)
The findings from our research, Gas and Electricity
Costs to Householders, demonstrate that domestic consumer expenditure
on gas and electricity increased by considerably more than costs
in the period 2003-06 (the most recent period for which all relevant
data is available). Expenditure rose by around £8 billion
over the period to £22.5 billion. However, and despite comments
by energy companies, fuel costs rose only by £4.5 billion
at most. Other costs such as gas storage, electricity system losses,
VAT, support for renewable energy and energy efficiency and network
costs account for a further 15% of the increases.
As much as £2.5 billion of the extra monies
paid by consumers for the energy therefore seems to have gone
into increased margins. Most of these higher margins have been
in electricity generation, with some also in gas storage and gas
and electricity distribution (the latter two being regulated by
price control by Ofgem)
| | |
| |
| £mn | 2003
| 2006 | Change
| % change |
| | |
| |
| Reported expenditure | 14,264
| 22,491 | 8,227 | 58%
|
| Estimated fuel costs | 4,391
| 8,936 | 4,545 | 104%
|
| Estimated other costs (inc some profits) |
7,849 | 9,249 | 1,400
| 18% |
| Increase in margins | 2,025
| 4,305 | 2,280 | 213%
|
| | |
| |
| | |
| |
Consumers have paid more than £2.3 billion more for
their energy than they ought to have done over 2003-06 and are
continuing to pay over the odds as they deal with price increases
in 2007 and 2008. Ofgem's failure has allowed over half a million
low-income consumers to be pushed into fuel poverty. There are
2.5 million households in the UK whose lives are blighted by cold
homes who because the British energy market is not working effectively.
As we come out of another winter, it is the case that all
suppliers have raised their prices again, even before some consumers
could gain the benefits of the tardy price reductions over 2007.
This is despite the lack of evidence of shortage or constraints
on security of supply.
Government and Ofgem must take action now to prevent further
hardship or face the consequence of more fuel poverty and excess
winter deaths. Further fuel price increases should not take place
until a full investigation has taken place. Government should
take steps to recover excess profit through a windfall tax to
be used to fund fuel poverty programmes.
The Government's energy strategy relies upon independently
regulated competitive energy markets as the most cost effective
way of delivering its objectives.
The evidence here is clear that government should have no
such confidence in a market that allows companies raise prices
with impunity earn huge margins at the expense of vulnerable low
income consumers.
Many energy companies pleaded for sympathy when wholesale
gas prices were increasing and as has been described by one author
"lamented that they are just as much victims as consumers
and that it has been painful indeed for them to have to inflict
inevitable price rises on consumers."[298]
A market where suppliers can require consumers to bear disproportionate
risk is not healthy and action now is needed to address this problem.
Government has suggested that price increases are in part
the "recovery of wholesale electricity prices from unsustainably
low levels."[299]
However the evidence here suggests companies have been able to
regain profit levels that more than compensate for these low prices.
NRFC is shocked that it may be the case that companies have
used the high wholesale gas prices as a means of gaining profit
levels that would not be sustainable in markets that worked well.
THE EFFECTIVENESS
OF REGULATORY
OVERSIGHT OF
THE ENERGY
MARKET
Suppliers have been able to raise prices and earn excessive
profits because of poor regulatory oversight in the energy market.
Ofgem's recent decision to investigate the energy market can be
described as grudging at best and we have little positive expectation
of the outcome. Ofgem have also failed to provide analysis about
the way in which the energy market has worked over the period
of price increases. We believe that it is now appropriate for
regulatory responsibility for the competitive elements of the
energy market be transferred to the Office of Fair Trading.
It should not be the responsibility of a campaigning body
to produce market analysis when there is a publicly-funded regulatory
body with a specific remit to address the issues raised here.
PROGRESS IN
REDUCING FUEL
POVERTY AND
THE APPROPRIATE
POLICY INSTRUMENTS
FOR DOING
SO
The government has statutory targets to remove all vulnerable
consumers from fuel poverty by 2010 and all other consumers by
2016. The targets are set down in legislation by the Warm Homes
and Energy Conservation Act 2000. The increases in energy prices
have had a profound impact on those who live in fuel poverty who
spend more than 10% of their income on gas and electricity.
While energy price increases have been difficult for all
consumers, they have been especially challenging for consumers
who live with fuel poverty. The energy price increases have had
a significant impact on the numbers in fuel poverty. Work by NRFC
suggests that every 10% increase in energy prices in England puts
another 50,000 people into fuel poverty.[300]
This means that they face stark choices between paying for fuel
and eating. Official fuel poverty figures, recently published
in the 5th Annual Fuel Poverty Strategy Annual Report[301]
by Government confirm the impact that energy prices have had on
their progress to achieving fuel poverty targets.
For England, Scotland and Wales fuel poverty numbers have
risen from 1.75 million in 2004 to 3.39 million in 2006—this
represents an increase of just under 95%. This is likely only
to get worse with further price increases already happening.
England | Scotland
| Wales |
In 2004 there were 1.2 million households in fuel poverty which had increased to 2.6 million by 2006.
| In 2002 there were just under 300,000 households in fuel poverty (13.4% of all households)This had increased to nearly 420,000 households in 2004-05 and 543,000 in 2005-06 (23.5% of all households)
| In 2004 130,000 households were in fuel poverty which had increased to 243,000 by 2006. This is an 87% increase.
|
| |
|
Government continually protests that they are committed to
ending fuel poverty by 2016 but its actions belie these intentions.
It has cut the budget for Warm Front this year which will mean
that fewer fuel poor households will be helped as their numbers
are increasing dramatically. It has also reduced the proportion
of the energy efficiency commitment (now renamed as the CERT)
that will be dedicated to vulnerable consumers. It increased the
Winter Fuel Payment to all pensioner households but only for one
year. There was no additional financial help for other fuel poor
households announced in the budget.
They are relying on the voluntary action of industry to solve
the problem suggesting that industry increase its expenditure
on social programmes from £56 million per annum to £150
million per annum. On the face of it, this may seem significant
but amounts to £44 for every fuel poor household which is
the equivalent of around two weeks gas and electricity (based
on the notion of the £1,000 annual bill).
Government has failed to use the opportunity of the Energy
Bill to provide itself with sufficient powers to make companies
deliver services to fuel poor households (for example social tariffs)
and is not using the powers that it currently has under the Utilities
Act 2000. This legislation would allow Government to set up a
scheme requiring companies to remove the differential in tariffs
between groups that are treated less favourably than others. The
suggestion is that prepayment tariffs should be equalised to those
of standard credit, however the legislation would also them to
be equalised to direct debit tariffs.
March 2008
298
Wright, P (2007) Competition in gas and electricity; companies
profit, consumers pay Consumer Policy Review vol. 17 no. 1 pg
3 Back
299
BERR (2007) The UK Fuel Poverty Strategy: 5th Annual Report pg
37 Back
300
Back
301
BERR (2007) The UK Fuel Poverty Strategy: 5th Annual Report URN/07
pgs 10-13 Back
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