House of Commons - Energy efficiency and fuel poverty - Environment, Food and Rural Affairs Committee

Energy efficiency and fuel poverty - Environment, Food and Rural Affairs Committee Contents

3 Resourcing programmes

Current programme expenditure

122. Table 2 summarises the budget and funding sources for the main income, price and energy efficiency programmes as at March 2009. Over the next three years the Government and energy supply industry are set to spend around £6.5 billion on Britain's housing stock, including funding energy efficiency schemes such as CERT, CESP and Warm Front. A further £2 billion is budgeted for energy efficiency programmes in social housing stock under the broader Decent Homes programme.[162]

123. CERT, Decent Homes and Winter Fuel Payments have the largest budgets, although only a proportion of the expenditure of these programmes will go directly to tackling fuel poverty. Table 2: Key fuel poverty programme expenditure and budgets

Programme Expenditure
2007-08
Budget
2008-2011
Who pays?

ENERGY EFFICIENCY

Warm Front £350 million.[163] £959 million.[164] Government.

Carbon Emissions Reduction Target (CERT) £700 million spent by energy companies in 2005-08 under Energy Efficiency Commitment.[165] £3.36 billion[166]of which £1.9 billion is to be spent on the "Priority Group."[167] Energy supply industry— able to pass on costs to customers.[168]

Community Energy Saving Programme Not applicable. £350 million.[169] Energy industry—generators and suppliers.

Decent Homes Not identified separately. £2 billion.[170] Government.

INCOME SUPPORT

Winter Fuel Payment £2.071 billion.[171] £2.7 billion for 2008-09.[172] Government.

Cold Weather Payment £4 million.[173] Weather dependent.
Estimated £209 million for 2008-09.[174]
Government.

PRICES

Social tariffs £33.87 million (from a total spend of £57.12 million on social initiatives).[175] £375 million on all social initiatives.[176] Energy supply companies.

Source: Information in this table is derived from a number of different sources. See footnotes.

Scale of funding required

124. We heard a range of views on the level of investment necessary to meet the Government's 2010 and 2016 fuel poverty targets. FPAG suggested that around £1bn a year would be needed between 2008 and 2016 but noted that the figure was dependent on fuel prices.[177] The Committee on Climate Change estimated that it would cost £500 million annually to take the additional 1.7 million households that could be in fuel poverty by 2022 as a result of climate change mitigation policies back out of fuel poverty and mitigate the impacts on those already in fuel poverty. The CCC's analysis noted that while there is scope to remove almost 400,000 households from fuel poverty through energy efficiency improvement, "continuation of current arrangements where costs of energy efficiency improvements are added to energy bills could increase the number of households in fuel poverty by over 400,000, more than offsetting the initial gain".[178]

125. In May 2009 the Centre for Sustainable Energy and the Association for the Conservation of Energy estimated that it would cost £3 billion annually over seven years to raise fuel poor households to the SAP 81 (or Energy Performance Certificate Band B) level necessary to remove most households from fuel poverty. They considered that this would require a "three fold increase in current annual expenditure" on energy efficiency programmes aimed at the fuel poor.[179]

126. Dr Boardman of the Environmental Change Institute told us that getting the five million households in fuel poverty up to a SAP rating of 81 would cost around £5 billion a year although she referred to the Energy Saving Trust view that costs could be up to £8 billion per annum for 2009-2016 inclusive.[180] However she noted that "an annual expenditure of £4.7 billion […] is about four times more than current expenditure on energy efficiency improvements by the Government and utilities combined, but only 50% more than the cost of all fuel poverty programmes (including Winter Fuel Payments)".[181]

127. The Minister told us that to get all households up to a level of SAP 81, at a cost of £7,500 per household, would mean "a programme in the order of £25 billion" and "frankly at the moment that is unrealistic".[182] In a subsequent debate on the floor of the House she revised that figure upwards to £50 billion.[183]

128. We consider around £4 billion a year over the next seven years to be a realistic estimate of the cost of raising the energy efficiency levels of fuel-poor households to SAP 81, sufficient to remove the majority of households from fuel poverty. This would require nearly a trebling of current funding for energy efficiency programmes directed at fuel poor households. However redirecting other "fuel poverty" programme funding into energy efficiency measures would reduce the need for additional public money.

Balance of funding responsibilities—energy supply industry and Government roles

129. Defra's Departmental Report for 2008 stated that the increase in CERT activity and the ongoing commitment to Warm Front meant that spending on energy efficiency and other measures in low-income, elderly and disabled households was "expected to rise, by £680 million to around £2.3 billion" in 2008-12 compared to the previous spending period.[184] Subsequently, in September 2008, the Prime Minister announced that the CERT investment target would increase by £560 million, an increase of 25% over three years.[185] However it was not made explicit that much of this programme would require an increased contribution from all fuel users.

130. The majority of the energy supply companies recognised their role in tackling energy efficiency, however, they differed in how this should be framed in future. E.ON UK said that it would "expect suppliers to continue to have a central role in delivering solutions",[186] but it argued that Government should determine who was eligible for support and the extent to which it was "appropriate to fund these benefits either from taxation or from raising costs for customers as a whole".[187] The company believed the current balance of funding to be reasonable.[188]

131. RWE npower did not consider it sensible or sustainable for energy companies uniquely to make financial contributions to deal with social issues—such as general deprivation and poverty.[189]It agreed with Ofgem that the Government should take primary responsibility for addressing poverty because obligations on the energy companies "markedly increase the complexity of the business and potentially deter new entry [and] distort competition".[190] As examples RWE npower cited that "the retail obligation is not borne by domestic oil suppliers" and that "the CESP obligation is borne by producers of electricity, but not producers of gas".[191]

132. Similarly Centrica recognised its role in tackling fuel poverty and climate change, but considered that fuel poverty was "part of a wider problem of poverty and social exclusion" which were issues for the Government.[192] DECC stated that "the Government is strongly of the view that energy companies also have an obligation to customers that runs wider than simply the generation and supply of energy at competitive prices".[193]

133. Several energy companies referred to practice overseas. The German Government, for example, provides heating benefits to those receiving benefits or on very low incomes. Long-term unemployed and welfare recipients have the full the cost of heating paid by the Government.[194] Similarly in Romania local authorities provide vouchers towards the cost of winter heating bills to low income households.[195]

134. Whilst it is right that energy companies contribute to improving the overall energy efficiency of the UK we believe that policies designed to address fuel affordability should be funded from general taxation.

Transparency of funding sources

135. The regulatory impact assessment for the original CERT scheme gave an average annual cost borne by the customer of £38.[196] The extension of CERT announced in September 2008 added around £4 per annum to that sum, according to Consumer Focus, and the new CESP programme added a further £1.20,[197] to give an average annual figure of £43.20 for each dual fuel customer.

136. The actual costs of delivering CERT will vary from supplier to supplier, and are commercially sensitive. We were told that the Defra/Ofgem figure of £38 was broadly correct (see Table 3). Ofgem's energy supply probe noted concerns about lack of transparency in the recharging to customers of energy efficiency programmes.[198] Ofgem recommended that "companies should produce more financial information and do more regular financial reporting so that it is much clearer how costs are being transferred through the business".[199] The regulator, however, does not monitor companies' actual spend on CERT. A Defra review has suggested that suppliers have been able to comply with their obligations at roughly 20% below the cost in the impact assessment for the programme.[200] Ofgem considered it a judgement for energy companies whether to increase bills.[201]

137. Consumer Focus noted that there was "no mechanism to prevent suppliers passing the additional costs of these programmes onto consumers through increased bills, despite the Prime Minister claiming that he did not 'expect the £910 million […]to be passed on to the consumer by the energy companies' ".[202] Gearóid Lane, Managing Director of British Gas New Energy, told us that there was no policy of passing all the costs of CERT to the customer.[203]

138. According to Ofgem, supplier obligations such as CERT and the Home Energy Saving Programme (HESP) could "result in increases to energy bills and therefore can be regressive, impacting most on low income and fuel poor consumers".[204] CERT's Priority Group mechanism is designed to mitigate this impact but Ofgem said that a significant number of fuel poor will be "paying for the costs of these programmes and not receiving any benefits".[205] The Energy Saving Trust supported greater public expenditure as it is less regressive.[206] FPAG considered the regressive nature to have been exacerbated by the rebalancing[207] of CERT.[208]

139. After 2011 there will be a "very limited" number of cost effective measures available for installation in the priority group post-2011. Ofgem warned that the Government would have difficulty requiring suppliers to target "such a high proportion of the scheme's activity on the low income group in future".[209] The regulator warned that in such circumstances the Government would have to ensure that low income and fuel poor consumers were adequately protected. Centrica said that "CERT should remain the predominant vehicle for delivering domestic energy efficiency measures", but added that there should be commercial incentives for suppliers to go beyond their regulated target.[210]

140. The Parliamentary Warm Homes Group considered that CERT "should be paid for out of central taxation",[211] a view echoed by Ofgem who told us that revenue raised through the general tax system was more progressive and would have less adverse impact on those in fuel poverty".[212] The regulator recommended additional funding come from "recycling revenues from environmental schemes" such as the EU Emissions Trading Scheme.[213]

141. Help the Aged considered CERT funding has reached its limit and referred to the scheme as "bribing people with their own money" but "with few people having any understanding of what their supplier may be prepared to offer by way of help".[214]

142. Centrica noted that "suppliers will aim to meet their carbon target in the most cost-efficient way, something the programme was designed to achieve as clearly this limits the impact on customers' energy bills".[215] RWE npower referred to the Ofgem view that the costs of CERT were "legitimate components to be considered when setting prices",[216] and E.ON UK said that "the costs of our CERT obligation form part of our operating cost base and, as with any business, we aim to cover our costs and make a profit".[217]

143. Table 3 below provides details of the average annual costs charged to customers for environmental schemes.Table 3: Household energy bill components 2008

SCHEME COST PER CUSTOMER

EU Emissions Trading scheme £31 (electricity bills only)[218]

Renewables Obligation £10 (electricity bills only)

Carbon Emissions Reduction Target (CERT) £38 (combined cost for both electricity and gas bills)

Source: Ofgem "Household energy bills explained, Factsheet 66", January 2008.

144. In our report Climate change: the "citizen's agenda" published in July 2007 we called for better billing to be in place within the next 12 months incorporating "not only energy consumption in kWh, but how this related to cost, carbon dioxide emissions, and with individual historical usage to help consumers make informed decisions about energy use reduction and efficiency savings".[219]

AWARENESS OF SUPPORT

145. The Energy Saving Trust plays a leading role in promoting energy efficiency and renewables to the domestic household sector. Supported through grant funding from Defra—£29.1 million in 2007-08—it provides domestic energy efficiency advice through its network of advice centres and works in partnership with local organisations such as local authorities. The Government's Heat and Energy Saving Strategy plans to "roll out a Home Energy Advice Service".[220]

146. There are concerns about how a lack of awareness of the assistance available under Government and industry schemes impacts on take-up of grants. Information from the Energy Retail Association shows that there is a low awareness of the availability of help through schemes such as CERT. In a survey undertaken in 2008, 32% of respondents were unaware that "there are grants available to fit free or reduced cost home insulation and other energy saving measures".[221]

147. There is a lack of clarity about what companies are spending on CERT and to what extent this expenditure is being recouped from customers. Equally customers are largely unaware of the assistance available to them under the scheme. We called over two years ago for action to clarify information on fuel bills and have been disappointed with the lack of consistent action from the energy supply industry in response to this.

148. We recommend that Ofgem requires all energy suppliers to apply improved and consistent standards for the provision of information on bills. Bills must include a clear breakdown of the costs per household of CERT, so as to give every indication of the cost/benefit of this intervention, as well as giving a cost per household of other programmes required by the regulatory regime such as the European Emissions Trading Scheme and the Renewables Obligation. Billing must also provide signposted information to encourage customers to take up home energy assistance available under its CERT scheme.

149. We recommend that Ofgem requires energy companies to report annually on the expenditure undertaken to meet CERT or its successor programmes. This information should show clearly the proportion of spending funded by both the company and its customers.

Windfall tax on energy companies

150. The free allocation of EU Emissions Trading Scheme permits is potentially worth around £2 billion per year to electricity generators.[222] Several organisations have recommended a windfall tax against that benefit, to be used for funding home energy efficiency schemes. Friends of the Earth recommended that in addition to a windfall tax the auctioning of permits should be "used to help sustain this fuel poverty programme".[223] Centrica also told us that the revenue accrued from the sale or auctioning of carbon emission allowances should be "used in areas of fuel poverty or delivering low carbon or zero carbon technology".[224]

151. Scottish and Southern Energy, however, referred to a report by Morgan Stanley which said that "there was no windfall in energy supply, and that the carbon allocations received by energy generators had been put to good use through subsidising customers' fuel bills, and investing in new generation capacity".[225] The Minister told us that the Government was not in favour of a windfall tax at present but that such a tax could be considered in the future.[226]

152. It is not clear whether Ofgem has sufficient access to the energy companies' financial information. We received conflicting evidence on this from Ofgem who told us "we do have powers that we use in our energy supply probe exactly to get all the detailed information that we need from companies",[227] yet also that "there are some areas where we are seeking additional powers […] in respect of the wholesale gas and electricity market we want to have additional powers that tackle market abuse".[228]

153. We are concerned that Ofgem has been slow to address failings in some parts of the energy market and has not communicated clearly to customers what steps they and energy companies have taken to ensure prices for all customers are kept as low as possible.

162 "Save money, Save Energy; Government takes action on family fuel bills", Defra news release, 11 September 2008. Back

163 Report by the Comptroller and Auditor General, The Warm Front Scheme, HC 126 (2008-09), p 10. Back

164 Report by the Comptroller and Auditor General, The Warm Front Scheme, HC 126 (2008-09), p 11. The £959 million breaks down into £395 in 2008-09, £369 in 2009-10 and less than £200 million in 2010-2011. Back

165 "Energy efficiency key facts", Energy Retail Association, web pages, www.energy-retail.org.uk/energyefficiency Back

166 Information on household energy efficiency, Defra website. http://www.defra.gov.uk/environment/climatechange/uk/household/supplier/cert.htm Back

167 Department of Energy and Climate Change, Amendments to the Carbon Emissions Reduction Target Consultation Proposals, February 2009, p 14. Back

168 "Updated household energy bills explained", Ofgem Factsheet 66, January 2008. This explains that in 2008 a customer using gas and electricity would have paid on average £38 towards the CERT programme. This is prior to the September 2008 announcement of a 20% extension of the CERT obligation. Back

169 Department of Energy and Climate Change, Community Energy Saving Programme Consultation Document, February 2008, p 5. It should be noted that the Government is proposing that the CESP and CERT programmes should run until the end of 2012. Back

170 "Save money, Save Energy; Government takes action on family fuel bills", Defra news release, 11 September 2008. In addition the April 2009 Budget announced £100 million to improve insulation in 150,000 social homes. HM Treasury, Budget 2009, Building Britain's Future", HC 407, April 2009, p 140. Back

171 HC Deb, 10 February 2009, col 1806W Back

172 HC (2007-08) 1099, Ev 13 Back

173 HC Deb, 10 February 2009, col 1806W Back