Select Committee on Business and Enterprise Written Evidence


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)
£mn2003 2006Change % change
Reported expenditure14,264 22,4918,22758%
Estimated fuel costs4,391 8,9364,545104%
Estimated other costs (inc some profits) 7,8499,2491,400 18%
Increase in margins2,025 4,3052,280213%


  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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