Examination of Witness (Question Numbers
80-99)
MR DEREK
LICKORISH
10 MARCH 2010
Q80 Miss Kirkbride: That cannot possibly
be right.
Mr Lickorish: That is with the
policy measures put in place on average to alleviate the issue
of customers' bills. Then you have Ofgem's recent announcement
where with Project Discovery, which I welcome, I think it was
a bold and brave move by Ofgem to come out and say it, although
it may be a bit late in the day, nevertheless they have said it,
they are talking about potentially 14 per cent, 25 per cent or
60 per cent. If you take 60 per cent at 40,000, that is 2.4 million.
So if you add the 2.4 million to the 4.6 million that is seven
million, seven million households in England in fuel poverty if
that comes to pass. I accept it is very difficult to say what
energy prices will be but it is not unreasonable to challenge
what is in the Transition Plan, which is a very comfortable scenario
where we will not have problems with any industrial relations
on the import of gas, we will be importing up to 70 per cent of
our gas at times of winter peak. I do not think that is desirable,
but we are where we are. We are going to have to see some fix
put in place in terms of the price of carbon to shift it to around
€40-plus a tonne to facilitate the construction of nuclear
power. With all that uncertainty it is likely to drive capacity
margins much tighter, and as you drive capacity margins tighter
that will push up prices and exacerbate volatility.
Q81 Dr Turner: Several bodies and
witnesses, in particular National Energy Action, have described
the current structure of domestic energy efficiency measures as
unfit for purpose. Certainly the operation of CERT in practice
has come under considerable criticism. Do you agree with those
criticisms? If you do, what would you do about it?
Mr Lickorish: I think you always
have to reflect on the context in which those various mechanisms
were set up. Of course, the context has now changed because we
were heading in the right direction on fuel poverty and now we
are heading in another direction. In terms of CERT, that was designed
at the outset to be the biggest bang for the buck in terms of
carbon reduction and it has achieved that. The problem that the
scheme has is that we are now trying to do something else with
it. It is very difficult to target the priority group customers,
it works out very expensive to do that. Moving my answer on to
the question that you pose: there is no doubt that the schemes
we currently have, bearing in mind the task that we face, are
unfit for purpose and, therefore, we do need to have a radical
rethink. I welcome what has been announced in the Household Energy
Management Strategy where we are going to look at it street-by-street,
the local authority, the partnership, the long-term big approach
to deal with energy efficiency measures. Coming back to what I
would do about it, it comes back to the roadmap and having all
that set out there as part of a grand plan. I am not keen on a
massively centrally controlled programme because the overheads
to manage such a thing would be considerable, but I think there
is room to do something with the local authority, energy companies
and other stakeholder partnerships by breaking the problem down
into bite-sized pieces. I would start the process soon with some
pilot trials of where we see that cooperation likely to emerge
because that will help inform what we need to do for the future.
We cannot just move to a massive change in the way that some people
desire because we do not have the knowledge or understanding to
do it.
Q82 Dr Turner: You are clearly right
about the different context because when Warm Front, et cetera,
was established we were in a phase of unrealistically low energy
prices at the time and now we have had a very severe reality check.
Given that the Household Energy Management Strategy has been published
which, as you rightly point out, takes a new direction, which
of the measures outlined in that strategy do you think are the
most important and the most likely to be effective?
Mr Lickorish: If you can bear
with me I wrote a considerable note about that point and I want
to move it in front of me. The partnership working is a significant
step forward. I am actually going to have to find that, so if
you can bear with me I will just do that.
Q83 Dr Turner: One you prepared earlier!
Mr Lickorish: Yes, it is indeed
one I prepared earlier. It is not in the piece of paper I have
near the top. From memory, we generally agree with the broad thrust
that is in the strategy.
Q84 Paddy Tipping: Derek, send us
the piece of paper.
Mr Lickorish: I have found it,
I am pleased to tell you. We obviously welcome that to try and
link some things together with the smart meters and in-home displays.
We welcome the pay-as-you-save, we think this is a significant
development. What I am concerned about is that we do not have
how the fuel poor will manage to take advantage of what is happening
in this space, because where will the funding come from for people
who effectively under-heat their homes. Unless we find a mechanism
to get capital into those customers measures, they are not going
to benefit in the same way. I welcome further developments on
District Heating, we see that as another positive step. On the
subject of District Heating schemes, an element which is missing
is with the new renewable energy mix that we are going to get
I think that presents us with an opportunity to assist certain
types of heating. It is quite a complex idea, but I will try and
express it simply. In the Low Carbon Transition Plan there is
a lot of comment about managing renewable energy in the future
and at times we will be faced with having to disconnect renewable
energy because it is not required. I would have thought there
would be an opportunity for renewable energy at its marginal price
to be deployed into resistive type heating systems, such as the
old storage heaters, but in a much more modern development, in
electric underfloor heating, perhaps in social properties, where
it would be equitable to do something on that basis bearing in
mind that all customers will pay for so many of the feed-in tariffs,
the renewables obligations and so on, as the proposal is currently
structured and, therefore, there is an opportunity that we should
be developing as part of the Household Energy Management Strategy
to take advantage of that. There are a number of things that are
good in it, but there are also some areas where it is weak, not
least how we deal with the fuel poor and other opportunities with
renewable energy.
Q85 Dr Turner: You have called for
Government to determine the feasibility of a SAP 81 standard for
all homes. In the best traditions of if you are asking a question
it helps to have a fair idea of the answer beforehand, what do
you think the feasibility is going to be given that an awful lot
of our housing stock is pre-1940 and does not have cavity walls
and it is exceedingly technically difficult and expensive to bring
up to that standard? What do you think the answers to your call
are going to be?
Mr Lickorish: In the analysis
that has been undertaken by the Association for the Conservation
of Energy and Consumer Focus, the thing that attracts us to that
strategy is that it will alleviate the vast majority of people
from fuel poverty. I accept there are different views as to how
much that would cost. Anywhere between £5 billion and £8
billion a year for the next six or seven years is the kind of
cost that has been put to it. All the time these proposals are
based on a number of assumptions to do with the condition of households
in the UK. One of the challenges that we have to ratifying whether
we can or cannot do this work is knowing what is the scope for
doing it in the properties that we have and, of course, we do
not have a national database of property conditions on which to
make sure that we can do what we are saying we should. I believe
that it has to be possible. It may take longer than through to
2020, but if we are going to achieve the Government's carbon reduction
targets we have to do something like that in order to meet that
ambition.
Q86 Mr Anderson: In discussions I
have had recently with Which? they have serious concerns
about the operation of CERT, not least the fact that it is a supplier-led
scheme so, therefore, there is an incentive for the suppliers
not to be as good as we would want them to be. There is a contradiction
between them wanting to make a profit and trying to reduce the
use of energy. Do you think CERT has been a success?
Mr Lickorish: I think CERT has
been a success in what it has set out to do. It was not a fuel
poverty programme. It has had its weaknesses. There is no doubt
that far too many low energy lamps were posted to customers, so
it is clear from a governance point of view there could have been
some improvements to that. It has filled a lot of cavities and
it has dealt with an awful lot of lofts, so in terms of a superficial
judgment on my part on has it been a success, I think we have
done an awful lot that we would not otherwise have done and it
has been done cost-effectively. Again, that was in another context
and not the context where we are today and, therefore, whatever
the extension of CERT is in its final form post-2012 it will need
to be part of a much bigger, much more ambitious and better coordinated
scheme and arrangements than we currently have.
Q87 Mr Anderson: I could not agree
with you more on what you have just said. Is anybody doing any
work to make sure that happens?
Mr Lickorish: Certainly there
is consultation out at the moment on the extension of CERT. From
a Fuel Poverty Advisory Group point of view I can tell you that
on the 24th of this month we will be devoting a whole day to that
issue as to what happens post-2012 along with bringing a fair
trade tariff-type concept into the arena as a further means of
managing energy costs for fuel poor going forward.
Paddy Tipping: One of the themes you
have talked to us about is customers who are relatively disadvantaged.
Can we move on to talk about targeting?
Q88 Dr Whitehead: Do you think it
makes any sense to have a fuel poverty programme to eliminate
or reduce fuel poverty based on estimating the numbers in fuel
poverty using the Housing Condition Survey and then attempting
to go and reduce those numbers in fuel poverty when we do not
actually know where those in fuel poverty are and cannot know
as a result of the methods by which we have determined the number
of people who are in fuel poverty in the first place?
Mr Lickorish: I think you have
almost answered the question yourself in what you have said. It
is very difficult for me to say that is the right way we should
proceed. I think we have to be careful about the message we send
in answering that question. First of all, I think we need to acknowledge
that Warm Front has been very successful and has dealt with something
like two million households, it has saved them an awful lot of
money. I have been to a number of properties that have received
Warm Front measures and I have been to a number of Warm Zone properties
and seen the tremendous improvement it has made to people's lives.
That is a very important point that I want to make. What is the
alternative? At the moment, because of the, I was going to say
paranoia about data protection, it is a significant issue in terms
of identifying the appropriate individuals in order that they
should receive the measures. We have had to find some sort of
surrogate mechanism thus far to try and target these people, and
there is no doubt that what we have been using is far from perfect.
As the National Audit Office said, 47 per cent of those who receive
the measures not actually in fuel poverty, but let us not lose
sight of the fact that an awful lot of them are very close to
it and households do move in and out of fuel poverty so it is
very difficult to track. I welcome what is happening with the
data matching exercise between DWP and the suppliers. It is a
pity that the legislation that facilitated that was through the
Pensions Act and, therefore, we are only currently talking about
Pension Credit. As I mentioned earlier, there is an opportunity
with local authorities and partnership working going forward where
we may have a better means of targeting those in fuel poverty.
If I reflect back to some work that the Centre for Sustainable
Energy did for me back in the early 1980s when we were looking
at the fuel poverty propensity model to see if we could target
it better then, we involved some local authorities and when you
tell them, "You have got these properties here and these
properties there, they do not have this or that", they already
know that. There is a lot to be done with the information that
they have, again by running some significant large-scale trials
in terms of targeting using that partnership, taking onboard the
English House Condition Survey. As you will know, that is only
based on 8,000 properties per annum and is a rolling piece of
information but, nevertheless, it is thorough and is helping to
build a picture. There is opportunity to target better, local
authorities have some information, and I accept the way we currently
are is not the best way but we are where we are and we need to
push very hard on what else we can do in terms of government benefits
that are being paid to people and see if we cannot do more data
sharing and more data matching to improve the overall targeting.
Q89 Dr Whitehead: Is it true that
we are where we were because of the numbers who are in fuel poverty
being a direct correlation of fuel prices. In terms of finding
out who is fuel poverty there are three factors: there is the
income of the household, the efficiency of the house and the notional
amount of energy that the household should use in order to heat
the house to a reasonable temperature. Is it possible, in your
view, at least in one of those, to develop a national database
of household energy efficiency which would be one method of narrowing
down those factors as far as individual households are concerned?
Mr Lickorish: Yes. My worry about
a national database is the time it will take to construct and,
having done it, you then have to keep it up-to-date. That is one
problem. I am not saying we should not tackle it. If we look at
the information we currently have available I do not believe we
have tapped into that enough. I know that the energy performance
certificates that have been produced have been mentioned in this
Committee, we have around four million of them so far, all of
those should enable us, if we can coordinate it correctly and
declare an appropriate champion to pull this together for us we
should be able to do something in the relatively short-term for
the four or five million households that we have without waiting
to go and do a full-blown analysis of 25 million households. Whilst
I accept we do need a national database, I think it would be something
that pushes us too far into the distance in order to deal with
the immediate problem of addressing those that we have now.
Q90 Dr Whitehead: You have mentioned
previously the problems of data sharing and data protection on
the issue of the income of households, I imagine, but in terms
of the knowledge of what it is costing those households who may
be in fuel poverty to use fuel, that information is already with
energy companies. How optimistic are you that data sharing which
might match income and use of energy is either feasible or acceptable
in terms of procedures that would be needed?
Mr Lickorish: It has to be entirely
feasible, but there are some hurdles that have to be overcome.
If there is a neutral point in the middle where this is brought
together where data protection issues can be preserved it ought
to be possible. Obviously I have spent a long time in an energy
company and they spend huge sums of money targeting customers
for various propositions. They engage some of the best brains
in the country about various processes that there are to do demographic
modelling of the area. We ought to be able to bring that skill
from those companies to the data that is held on people's incomes,
plus, as you say, the supply companies do have the consumption
data in order to bring it together. I am optimistic that it can
be done, but what I am less sure about is the process to put it
together bearing in mind it has taken so long to get us to the
point where we are now in just beginning to do the data matching.
In a note I saw it said it was started in 2008 but it was not,
it was started in 2005. It has taken us five years to get this
far, which is unforgivable. I was with the chief executive of
the ERA only last week and it has stalled again because of the
change in one particular word in the contract in bringing this
forward. If I could just go back to the national database and
remind you that we are going to be fitting a smart meter into
every household between now and 2020. Does this not provide an
opportunity to do something in terms of a national database? I
know the timing of that does not fit very well, but bearing in
mind the work that has to go on in the customer's home in terms
of fixing things to walls and so on, it should not be too difficult
to extend this a bit to try and take that on board.
Q91 Charles Hendry: Are you satisfied
that the definition of fuel poverty is the right one, namely,
"People using more than ten per cent of their income on fuel
to maintain a reasonable temperature"?
Mr Lickorish: I believe that the
definition may not be perfect but it is the one that we have.
It would be a very difficult thing politically, no matter who
is in power, to start tinkering with that. I would sooner it was
left alone. What I do believe is that with the numbers of people
that we have we now have to prioritise within the group that we
have, so we will have to go for the severely disadvantaged with
regard to fuel poverty just because the numbers are so big.
Q92 Charles Hendry: There are also
elements at the moment which are putting upward pressure on people's
bills which are not related to the electricity they are going
to be consuming, for example the renewable heat incentive, the
feed-in tariffs, which are all going to add to people's bills,
but many of the people who are fuel poor are the people in the
community who are least likely to be going down the route of microgeneration
or solar thermal or aspects like that. Do you think it is reasonable
that they should still be paying to, in a way, subsidise those
who are better off for installing those technologies?
Mr Lickorish: It will not surprise
you to hear that I think it is unfair in the way we are proposing
to recover these costs, particularly as more of the costs fall
onto electricity. If you go back to the point I made earlier where
20 per cent of the three lowest income deciles use electricity
for heating because they do not have gas or only have electric
heating, for those customers these environmental measures will
add around 4.5 pence per kilowatt hour to every kilowatt hour
they use. That in itself is surely unfair. There is a case, maybe
within the 4.6 million I mentioned, for prioritising an age distinction
that we should establish as to who should be paying for these
measures, bearing in mind that the total renewable benefits will
not be realised for quite some time. If you are 75 or 80, is it
unreasonable to say that you may not live to see the benefits
that will provide. I go back to the point I made earlier. I would
welcome some more rigorous analysis around the environmental costs
that we are adding to customers' bills and whether there is not
a more equitable way in which those costs should be recovered.
Although I am a real fan and advocate of smart meters, and I apologise
for that maybe, there is opportunity to have differential cost
recovery because smart meters will facilitate the infinite range
of tariffs that are necessary to do that. If I can just build
on that point, and I have mentioned it once already, that is to
do with a fair trade type arrangement. There is no doubt that
the vast majority of fuel poor customers do not participate in
the competitive market, yet they pay all the costs of the competitive
market. The churn in the market is around 25 per cent, so for
each customer who churns all other customers incur a cost of around
£100. That is a substantial cost that those people who do
not participate in the market have to pay for. It is a further
inequity building on the point about the environmental costs they
are going to pay and see no benefit from. If you contrast that
to the social price support that we are proposing, which is around
£100 to £130 off customers' bills, you could do so much
more in that other arena which may have a greater impact in terms
of bringing those customers out of fuel poverty.
Q93 Charles Hendry: Do you think
we should prioritise the rollout of smart meters so that they
are put first into the homes of those who are going to be in fuel
poverty, or is that going to be unmanageable?
Mr Lickorish: I have floated that
idea in other quarters and there is an anxiety, and I understand
that, that we would not want those who are vulnerable in any way
to start with any teething problems that there might be. I think
we can park that because we will not be deploying something unless
we are absolutely certain about it. The way in which I see smart
meters evolving is along these sorts of lines: having agreed the
smart meter specification, we cannot go and order 49 million meters
on day one, it is just not going to work like that, the whole
project needs to be de-risked in some way. If you imagine, perhaps,
20 or 30 points throughout the United Kingdom where we can start
the smart meter rollout, we could skew that to take into consideration
the more difficult and fuel poor consumers so that we make sure
they start getting some of those benefits sooner rather than later
and we will learn a great deal from that. I think we can skew
it in a way that we should because that would also ensure equity
in the way in which smart meter costs will be recovered.
Q94 Sir Robert Smith: I must remind
the Committee of my entry in the Register of Members' Interests
as a shareholder in Shell and, for this inquiry, Honorary Vice-President
of Energy Action Scotland, a fuel poverty charity. On that point
about targeting smart meters, presumably that would be on a physical
area because surely it is most cost-effective to do a whole street?
You would not want to go and do two houses in a street, go round
the corner and do another two houses and then come back and do
the rest.
Mr Lickorish: It sounds eminently
sensible, but the challenge we have is that the whole energy value
chain has become so fragmented and the competition in metering
that was going to facilitate metering innovation has not delivered
that at all. We are going to have to find the appropriate frameworks
which will drive the lowest cost rollout, and I think Ofgem have
that in their sights.
Q95 Sir Robert Smith: You mentioned
2008 was a false starting date for data sharing. I suppose it
is in the records because in 2008 there was a lot of headline
panic because energy prices were shooting up again and the Government's
one trick response was to say, "We will do data sharing".
That is why 2008 has impinged on people's minds, but it is 2010.
Mr Lickorish: It was 2005 when
we actually started it. I used to be a member of the Fuel Poverty
Advisory Committee in those days and I was given the task of trying
to get this going. The idea in 2005 was data sharing in order
that we could send a voucher to the appropriate customers who
would get money off their bill and the data sharing was the means
by which it should be done. You may well be right about the 2008
point which reignited—if reignited is not an overstatement—the
data sharing.
Q96 Sir Robert Smith: It allowed
people to get headlines to be seen to be doing something and it
turns out in 2010 we are still here.
Mr Lickorish: We are still here.
I do think it will happen now.
Q97 Mr Weir: You and other groups
have argued that social tariffs should be available to wider groups
rather than just pensioners. Can you tell us have you done any
research as to how much that would cost and what groups you have
in mind?
Mr Lickorish: We have responded
to this in several ways as the Fuel Poverty Advisory Group. Of
course, our desire for it to go to a wider group is tempered by
the regressive nature of the mechanism by which the funds are
made available. The current view of the committee is that we would
like to see Cold Weather Payments as a more appropriate means
by which the social price support is targeted and that would take
us to something like 4.2 million households. If that were around
£100 a customer it would be £420 million, but the sums
we have available are only 300 million. There is going to be a
doubling of the current 150 million, but all will be recovered
through customers' bills and that process itself will drive more
customers into fuel poverty. We have always said that we would
prefer this funding to come from general taxation, but I am not
naive enough to not recognise the current financial constraints
that we have in terms of additional sums from the Treasury, hence
why I have spoken about other measures such as the fair trade
tariff idea looking at the situation where prepayment customers
are not being charged £300 a year more than the best online
deal. There are a number of ways in which we could improve the
difference without just the social price support. We have also
done further work to see if you could make better use of the social
price support money. If, for example, it were, say, £100
to £130, would that money be better spent as an interest
payment on a substantial capital measure for a fuel poor household.
If that particular customer was to say, for argument's sake, and
some might shoot me for saying this, "I will give up the
right to shop around. I want to be on a fair trade tariff, therefore
I will not be costing blah, blah, blah", and there is the
means by which the social price support could be used to fund
the capital, bearing in mind 66 per cent of the fuel poor are
owner-occupied properties, there is a capital asset at the back
of this which could at some stage be used to pay the whole of
the capital cost of the measures. I have not entirely answered
your question. We are looking at it very carefully to see if there
is not a better means by which we can deal with the long-term
problem, which is the fabric of the building, rather than subsidising
people to use energy that is being wasted, which is what we are
doing, but I accept we are where we are.
Q98 Mr Weir: You have answered most
of the other questions I had down here. You mentioned the pressures
on bill payers and this is the opposite point which Charles was
making about the fuel poor and its regressive nature, but at a
time of rocketing fuel prices and less, if any, increase in income
there must be pressure on those who are not in fuel poverty, a
reducing number who are paying the full bill and obviously that
is going to get worse, as you suggest, and more people will go
into fuel poverty. How do we break that cycle? You suggested general
taxation but I cannot see any government opting for that in the
foreseeable future.
Mr Lickorish: That is why we are
taxing ourselves to try and find other means of facilitating capital
into the equation. The regulator's view at the moment of the weighted
average cost of capital for a DNO is 4.6 per cent. Our view is
you could do something quite substantial in terms of significant
measures with the social price support even at less than what
we are proposing, but that would require some changes to the market
model that we have in place at the moment and also some regulatory
intervention. I have been floating these ideas in other areas
and I will not miss this opportunity to do the same.
Q99 Mr Weir: One of the problems
that often comes up with housing is that there is a large amount
of privately rented housing where landlords might be more reluctant
to invest in energy efficiency measures and better measures. What
could we do to deal with that problem?
Mr Lickorish: 17 per cent of the
fuel poor live in the private rented sector. I hear it, but I
do not accept a landlord saying he is going to be reluctant to
do it if it was a requirement of letting out the property and
he would just leave it empty. That may be a threat, and I can
imagine a lot of lobbying noise in that context, but I would have
thought that with the appropriate carrot and stick, and there
has to be the right balance, we ought to be able to put in place
the regulations that do require the private rented sector and
the socially rented sector to have appropriate regulation that
requires a certain standard of thermal efficiency to be achieved
over a realistic time that will enable that property to be rented
out.
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