Memorandum submitted by the Office of
Gas and Electricity Markets (Ofgem)
1. Ofgem is the Office of Gas and Electricity
Markets. Our principal objective is to protect the interests of
gas and electricity consumers, both present and future, by promoting
competition. We also have a range of important secondary duties,
including promoting security of supply, having regard to the environment
and sustainable development and paying particular attention to
the needs of vulnerable energy consumers. We are also required,
through statutory guidance issued by the Secretary of State, to
help the Government to meet its targets for eradicating fuel poverty
across Great Britain. Ofgem welcomes the opportunity to contribute
to the Committee's inquiry.
BACKGROUND
2. The Scottish Executive Fuel Poverty
Statement, published in August 2002, adopted the following
definition of fuel poverty in Scotland: "A household is in
fuel poverty if, in order to maintain a satisfactory heating regime,
it would be required to spend more than 10% of its income (including
housing benefit or Income Support for Mortgage Interest) on all
household fuel use". Household income was defined as "income
before housing costs".[17]
Fuel poverty is a significant part of a wider problem of poverty
and social exclusion. It is caused by high energy prices, low
incomes and poor housing conditions.
3. We are committed to working with government
to tackle fuel poverty. Competition and regulation have and will
continue to play a key role, keeping the pressure on energy costs
to help make prices as low as possible. Ofgem's work, through
implementing its Social Action Strategy[18],
has an important role to play. We promote best practice by suppliers
in helping more vulnerable customers; regulate where necessary,
for example on key issues such as debt and disconnection and get
involved in the wider debates that will shape future policy on
key issues.
4. However, in an era of higher energy prices
and given the scale and wider causes of fuel poverty, they will
not be sufficient. Further government intervention will be required.
FUEL POVERTY
TARGETS
5. The Scottish Executive has a target to
ensure, so far as reasonably practicable, that people are not
living in fuel poverty in Scotland by November 2016.[19]
6. The Executive's interim targets are to
reduce the number of households living in fuel poverty by 30%
by 2006 over 2002 figures and to have achieved a further reduction
in the total numbers between 2006 and 2010.[20]
THE EXTENT
OF FUEL
POVERTY
7. The Scottish House Condition Survey 1996,
which collected data on housing and incomes, estimated that 738,000
or 35% of Scottish households were in fuel poverty and that 178,000
of these households were in severe fuel poverty, in that they
would be required to spend over 20% of their income on fuel use
in order to adequately heat their homes.
8. Fuel Poverty in Scotland: Further
Analysis of The Scottish House Condition Survey 2002, published
in April 2004, estimated that 286,000 or 13% of households in
Scotland were in fuel poverty and of these 69,000 households were
in severe fuel poverty.
9. The report estimated that improvements
in household incomes was responsible for about half of the reduction
in the level of fuel poverty in Scotland from 1996 to 2002. Approximately
35% of the reduction was attributed to changes in fuel prices
whilst energy efficiency installations accounted for the remaining
15%.
10. The report also undertook a theoretical
exercise to model the impact of changes in energy prices on the
number of households in fuel poverty. This analysis suggested
that each 5% increase in energy prices would increase by a further
30,000 the number of households in fuel poverty.
11. The Scottish House Condition Survey:
Key Findings for 2003-04 updated the findings of the 2002
Survey and estimated that the number of households in fuel poverty
had risen from 286,000 to 328,000 or from 13% to 14.5% of all
households.
12. Due to the small sample size of only
1,500 households, the estimate of the level of fuel poverty published
in the Key Findings for 2003-04 was subject to a range
of uncertainty with the actual percentage of households in fuel
poverty in the range 12% to 18.5%.
13. During the past two years we have seen
considerable rises in energy costs for customers as increasing
wholesale prices are fed through to customers. This impacts on
all energy customers but the effects are most sharply felt by
those on lower incomes who may already be struggling to afford
their energy requirements.
14. Using the findings of the Scottish House
Condition Survey 2002 (see paragraph 11 above), Energy Action
Scotland has estimated that in excess of 600,000 households in
Scotland are now in fuel poverty. Our own analysis, based on the
projections set out in the Government's Energy Review Report in
July 2006, suggests that the number of households living in fuel
poverty by the end of 2006 is likely to have doubled from 2004
numbers. This also suggests a figure of around 600,000 households
in Scotland.
15. Rising prices are threatening the good
progress that has been made in tackling fuel poverty. Whilst new
infrastructure and gas supplies will ease the pressure on wholesale
prices, these are unlikely to return to the levels seen at the
beginning of the decade, reflecting increased environmental costs,
higher oil prices and stronger global energy demand.
THE ROLE
OF OFGEM
16. Ofgem will continue, through implementing
its Social Action Strategy, to work on a number of fronts to help
tackle fuel poverty—keeping pressure on prices and promoting
energy efficiency.
17. Through regular market surveillance
and by promoting greater transparency, we help to make sure that
markets are working as effectively and efficiently as possible.
18. By breaking down barriers, for example,
to the development of smarter metering, consumers could benefit
from better information to manage household energy costs. This
could spawn more innovative meters to replace expensive pre-payment
meters with cheaper alternatives. We are also looking at the barriers
to the further expansion of the gas network and to the development
of microgeneration.
19. Through our role to facilitate best
practice we will continue to use research to encourage the development
of social initiatives and good quality advice to consumers. We
will also work with other agencies, for example to help break
down barriers to the use of bank accounts and direct debits among
low income consumers which can provide access to cheaper tariffs.
In partnership with consumer organisations, we will also work
to get the message across about the choices available to reduce
household energy costs.
20. Energy suppliers have, under Ofgem's
encouragement, also acted to help vulnerable customers and have
introduced a range of social initiatives (eg social tariffs, trust
funds, benefits health checks). We estimate that across GB suppliers
spent around £110 million in 2004-05 and that spending in
subsequent years has increased beyond those levels.
AREAS FOR
FURTHER ACTION
21. Around 50% of the reduction in the number
of households living in fuel poverty in Scotland during the period
1996 to 2002 has been attributed to rising incomes. If we are
to continue to make progress in tackling fuel poverty then increasing
household incomes must remain the primary focus, both in terms
of raising income levels and improving the take-up of benefits
by those who are entitled to them.
22. The other key are of focus must be in
improving the quality of the housing stock in Scotland. Insulation
measures, central heating systems and other energy saving measures
can help households to keep warm and bring significant reductions
in energy bills; delivering a sustainable solution for households.
23. Some houses may be more difficult to
treat than others. In Scotland there are high numbers of solid
wall homes which are more difficult to insulate. There is also
a large rural population which has limited access to mains gas
and relies heavily on more expensive heating methods such as solid
fuel or electric systems.
24. Significant strides have been made through
measures such as the Scottish Executive's Central Heating programme,
the Warm Deal and by suppliers through the Energy Efficiency Commitment
(EEC), which Ofgem administers, to install cost effective heating
systems in homes and to improve energy efficiency. Measures such
as these provide enduring and sustainable solutions to fuel poverty.
Other measures, such as new microgeneration technology may also
have a role to play, in particular in helping to tackle rural
fuel poverty.
25. In terms of the need for direct action
to lower energy prices we firmly believe that the solution for
most households lies in improved incomes and better housing rather
than direct intervention in the prices which, on the scale required,
could undermine competitive markets.
26. Furthermore, we consider that any additional
funding required to meet fuel poverty targets should come from
general taxation and not from consumers via fuel bills. The increased
fuel prices required are likely to be significant and could impact
hard on those who, while not in fuel poverty, may be struggling
to pay their bills.
27. Given the cost of environmental measures
has been a driver of higher energy costs, there may be case for
recycling some of the funds raised through these measures to help
tackle fuel poverty. For example, if government were to auction
allowances under the European Union Emissions Trading Scheme (EU-ETS)
some of the revenue generated from this could be used to fund
further measures to help tackle fuel poverty.
28. However the challenge we face is not
simply financial, it is also one of identifying those in fuel
poverty and persuading them to take up the help that is available
to them.
29. Ofgem believes that new impetus needs
to be given to identifying individuals who need help and ensuring
that comprehensive solutions are offered to those households once
they have been found—a "find and fix" approach.
There is a clear role for the Department of Work and Pensions,
and perhaps local authorities, in helping to identify and target
the fuel poor.
30. At the government's invitation Ofgem
has been leading a piece of work to develop and deliver a package
of help to older customers this winter. Suppliers, government,
consumer groups and agencies have been working together over the
summer to develop a package of help which brings together energy
efficiency advice and measures, income maximisation and available
help from suppliers. This offer of help will be made using Pension
Service delivery channels, a significant step which helps to overcome
some of the identification problems we have referred to above.
A trial is planned for later this month with a view to a more
substantive roll-out if the trial proves successful and it is
hoped that this approach will prove to be a useful model for a
more joined up approach to targeting measures to fuel poor households
across the whole of Great Britain.
Stuart Hudzon
Ofgem
October 2006
17 "The Scottish Fuel Poverty Statement",
Scottish Executive, August 2002, paragraph 3.4. Back
18
http://www.ofgem.gov.uk/temp/ofgem/cache/cmsattach/16721-sapstrategbro06.pdf?wtfrom=/ofgem/work/index.jsp§ion=/areasofwork/socialactionplan Back
19
Ibid, paragraph 7. Back
20
"Indicators of Sustainable Development for Scotland: Progress
Report 2005" Scottish Executive, August 2005, Indicator 20. Back
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