Memorandum submitted by the Office of
Gas and Electricity Markets (Ofgem) (FP 13)
INTRODUCTION
1. Ofgem welcomes the opportunity to provide
evidence to the Energy and Climate Change Committee's inquiry
into fuel poverty. Reducing fuel poverty has been a long standing
challenge; however Ofgem's Project Discovery has highlighted the
likelihood that energy bills will increase further over the next
10-15 years, making addressing fuel poverty an increasingly
urgent issue. The Committee's inquiry is therefore a timely look
at whether the steps being taken to address fuel poverty are adequate.
2. Ofgem is the regulator of the gas and
electricity industries in Britain. Our principal objective is
to protect the interests of gas and electricity consumers, both
present and future. We do this by promoting effective competition
where appropriate and through the effective regulation of the
monopoly network businesses. We also have a range of important
secondary duties including security of supply, contributing to
sustainable development and paying particular regard to the needs
of certain groups of vulnerable energy consumers. We are also
required, through statutory guidance issued by the Secretary of
State, within our sphere of responsibility to help the Government
meet its targets for eradicating fuel poverty.
3. Fuel poverty has three causes: poor housing,
low incomes and high energy prices. In our view the best way to
tackle fuel poverty is through improving the energy efficiency
of housing—which is the sustainable solution—and through
the tax and benefits system, which is the least regressive and
most flexible way of effecting redistribution. However, we recognise
that in the current economic climate providing financial support
in this way may not be a realistic possibility. Therefore we have
committed to working with Government to ensure that any mandatory
social tariff is as effective as possible and that any potential
negative impacts on the wider consumer base and competition are
minimised. Given our principal duty towards consumers as a whole,
we will look at the total costs that other consumers, including
those on low incomes and at risk of fuel poverty but not benefiting
from any social tariffs, are being asked to pay.
4. Moreover, with regard to energy prices,
there is an important and continuing role for the regulator and
industry, as competition is important to keeping energy prices
as low as possible. Through its energy supply markets probe Ofgem
has been looking to ensure competition benefits all customers,
including those who pay by means other than direct debit. Ofgem's
Social Action Strategy sets out more broadly how we will seek
to meet our social responsibilities and help the Government combat
fuel poverty.
OFGEM'S
CONTRIBUTION TO
TACKLING FUEL
POVERTY
5. Ofgem is helping to tackle fuel poverty
on a number of fronts: by keeping up pressure on energy costs,
promoting competitive energy markets, securing compliance with
regulatory obligations, regulating network monopolies and encouraging
more efficient use of energy.
6. In seeking to protect consumers, Ofgem
considers that effective competition and regulation will help
to provide lower prices for all energy consumers. We at Ofgem
are doing what we can to ensure that the market works well and
does not disadvantage fuel poor consumers.
7. As part of this, last year Ofgem completed
its energy supply markets probe and introduced a number of new
measures aimed at giving customers additional protections and
ensuring that all customers get the full benefits of competition,
including measures to ban undue price differences; tougher rules
on doorstep selling; more transparency in financial reporting;
and, new requirements on suppliers to provide information to help
consumers to get the best deal.
8. In relation to undue price differences,
suppliers voluntarily removed £300 million of unjustified
differentials from prepayment meter (PPM) and off-gas-grid customers'
bills while Ofgem's probe was ongoing. The average PPM price differential
over that paid by direct debit customers has now fallen by 22%
and, at a consumption level which is reflective of an average
PPM customer,[34]
in November 2009 was £86, compared with £109 in
July 2008. Ofgem also introduced two new licence conditions from
1 September 2009 one of which prevents suppliers from
charging more for one payment type than another, unless that difference
can be justified by cost. Ofgem is keeping under review the differences
in charges for different payment methods and customer groups and
will take action if these differences cannot be justified under
our published criteria.
9. In early 2008, Ofgem also funded Citizen's
Advice Bureau (CAB) to carry out a series of pilot sessions called
"Energy Best Deal" offering face-to-face advice regarding
citizens' rights in the household energy supply market. These
sessions were used to raise awareness amongst frontline advice
workers about the savings that people can make by switching supplier
or changing their tariff to their supplier's cheapest. It also
raised awareness about the help available from both suppliers
and Government for those struggling to pay their energy bills.
Building on the success of the pilot a national roll out took
place over winter 2008-09, funded by the Department for Energy
and Climate Change (DECC) and supported by Ofgem. Another roll
out of the campaign is taking place over winter 2009-10, this
time funded by EDF Energy, E.ON and Scottish Power.
10. Ofgem has recently reported that the
number of energy customers entering debt repayment arrangements
for the first time has risen by 105% for electricity and 149%
for gas in Q3 2009 compared to Q3 2008. Ofgem is
concerned about this trend and has been reviewing suppliers' debt
management policies and practices to ensure suppliers are doing
all they can to assist their customers, particularly those who
are vulnerable, to manage their energy bills. We are due to publish
our findings shortly.
11. Related to our debt review, Ofgem has
also recently reviewed suppliers' vulnerable disconnections policies
and practices. Our report,[35]
published in October 2009, outlined a number of best practice
examples amongst suppliers which we will be asking other suppliers
to consider taking forward. It also proposed licence condition
amendments to clarify, in particular, that suppliers must take
all reasonable steps to identify vulnerable customers. We will
be consulting on these proposals shortly. We also secured some
changes to suppliers' existing self-regulatory arrangements.
12. Ofgem has also played a role in working
with a range of stakeholders to help ensure that the help available
from suppliers in the form of social assistance and energy efficiency
measures is effectively targeted towards those who need it most
and in monitoring the contribution made by suppliers. We have
also worked with suppliers and others to try to improve the transparency
around the help that is available with all suppliers now providing
details of their social programmes on their websites to help consumer
advisers understand what is available.
PROGRESS AGAINST
GOVERNMENT TARGETS
13. DECC has estimated that in 2007 there
were four million households in fuel poverty in the UK. Government's
projections estimate that around 4.6 million households in
England were in fuel poverty in 2009 (compared to 2.8 million
in 2007).
14. Through Project Discovery, Ofgem has
highlighted a number of challenges to Britain's gas and electricity
supplies over the next 10-15 years. Chief among these challenges
are a growing exposure to a volatile global gas market, power
stations nearing the end of their life and meeting carbon targets.
As a result of the levels of investment needed to meet these challenges,
consumer bills could rise still further above current levels and
make the Government's statutory target to eradicate fuel poverty
by 2016 increasingly difficult to achieve. We have estimated
that, based on a number of scenarios, consumer bills could rise
by between 13% to 26% by 2020 and, under one scenario, potentially
rise by around 52% in 2016 before falling back to some extent.
This raises significant issues for those in, or at risk, of fuel
poverty and highlights the urgency of identifying whether the
steps that are currently being taken to reduce levels of fuel
poverty are sufficient to ensure that those most in need are helped
out of fuel poverty.
DEFINITION OF
HOUSEHOLDS IN
FUEL POVERTY
15. Fuel poverty is defined as when a household
has to spend 10% or more of its income on energy to maintain a
warm home.
16. As more and more households are captured
by the fuel poverty definition, it will become increasingly important
to identify, target and assist those who are truly struggling
to afford their energy bills. In doing this, it is important to
consider some of the problems with the current fuel poverty metric.
For example, with this metric, a £200 increase in energy
bills would need to be offset by an increase in incomes of £2,000 in
order for fuel poverty numbers not to rise. With the significant
cost of tackling climate change and based on Ofgem's Discovery
work, we can expect that consumer energy bills will increasingly
take up a larger proportion of a household's budget than it has
historically. It is therefore likely that a decision will need
to be taken on prioritising the most serious cases of fuel poverty.
GOVERNMENT'S
INITIATIVES ON
ENERGY EFFICIENCY
17. Improving the energy efficiency of domestic
housing is the most sustainable way to tackle fuel poverty—providing
a longer term solution and one that brings environmental benefits.
We have previously advocated what we term a "find and fix"
approach, to ensure that when someone is identified as being in
fuel poverty a comprehensive solution is provided to help lift
them out. Energy efficiency measures directly tackle household
energy expenditure and consequently reduce the share of income
spent on energy. Targeting them effectively at households in fuel
poverty, coupled with initiatives to boost incomes and ensure
fuel poor customers are on the best tariff available given their
circumstances, is a holistic way to address fuel poverty.
18. Government's initiatives in relation
to feed-in tariffs (FITs) and, particularly, the Renewable Heat
Incentive (RHI) provide an opportunity to help the fuel poor.
However, the current design of these schemes is such that low-income
households may find it difficult to meet the up-front costs or
raise the loans for a "pay as you save" type scheme.
Those on low incomes are also less likely to be able to benefit
from these schemes as a result of their housing tenure (e.g. if
they live in private rented accommodation). The complexity of
the schemes also militates against their take up by this group.
We therefore welcome the commitment by Government in the 2009 Pre
Budget Report (and reiterated in DECC's recent consultation on
the RHI) to consult later this year on measures to help low-income
households take advantage of FITs and the RHI.
19. It is also important to note that obligations
such as CERT, and now FITs and RHI, to improve energy efficiency
are placed on suppliers, which then feeds through to energy bills.
These changes can be regressive, impacting most on low income
and fuel poor consumers. DECC figures show that CERT currently
adds around £41 per year to the domestic customer's
fuel bill, which is expected to increase to £52 per
year assuming DECC adopts its preferred approach to extending
CERT. With the addition of the RHI and smart meters, and the inclusion
of the Renewables Obligation, Ofgem has estimated that environmental
initiatives could make up £120-£300 (8-22%) of
domestic bills by 2020.[36]
20. In July 2009 Ofgem published a
discussion paper[37]
which looked at how these obligations could be structured to minimise
the regressive effects and provide a stronger incentive for energy
efficiency. Currently, each supplier's CERT obligation is based
on the total number of domestic customers it supplies. This structure
is inconsistent with incentivising energy efficiency and could
be regressive since energy bills represent a higher proportion
of expenditure for low income than better off households. We therefore
welcome the Government consulting on whether a CERT obligation
based on energy supplied (kWh) would be a more equitable method
of apportioning the overall CERT obligation, rather than the number
of customers supplied.
21. Ofgem will be managing the first stage
of Government's smart metering programme. The role out of smart
meters by 2020 will provide consumers with better information
on their energy usage and help them to cut down waste and make
instant savings on their energy bills. Smart meters also have
the potential to reduce bills further by allowing for time of
use tariffs, making it cheaper to use energy at times when demand
is low, and could allow consumers to switch more easily between
credit and prepayment billing arrangements. For this reason, they
should also help reduce the price differential between PPM and
direct debit payment arrangements.
METHODS USED
TO TARGET
ASSISTANCE AT
HOUSEHOLDS WHICH
NEED IT
MOST
22. We have consistently stressed over many
years that one of the biggest challenges in tackling fuel poverty
is identifying and targeting those most in need of help. Identifying
and reaching the fuel poor in an optimal way requires information
on the individual circumstances of each customer. Energy suppliers
have limited information and there are valid concerns about data
privacy that providing additional information could raise. Finding
solutions to this challenge calls for an effective, joined up
approach, notably from within, and between Government departments,
suppliers and any other agencies involved to ensure that once
an individual consumer has been identified as being in, or at
risk of, fuel poverty they can be provided with access to the
full range of help available from suppliers.
23. As a result of Ofgem's Fuel Poverty
Summit in 2008, a number of key initiatives around targeting were
taken forward, one of which was the data sharing initiative. Following
the Summit, legislative provision was made in the Pensions Act
2008 to facilitate data sharing between DWP and energy suppliers—a
step that Ofgem fully supported. DWP, DECC and suppliers have
since developed more detailed proposals that will help suppliers
to provide targeted help in reducing fuel costs for the poorest
pensioners most likely to be in fuel poverty and to target their
social programmes more effectively.
24. While data sharing is a key step, effective
targeting of the fuel poor requires information not just on incomes
but also on housing condition and potentially other information
about the household's circumstances. One advantage of the current
voluntary scheme on social support is that it allows for creativity
in how to target (but with the downside that the eligibility criteria
are not always clear).
25. The Eaga pilot (also an initiative from
the summit) was aimed at demonstrating the advantage organisations
that visit the customer in their home have because they are able
to identify customers who may be in need of help based on information
about both incomes and housing. The pilot involved Eaga signposting
3,000 customers to their suppliers for advice on the help
available and to ensure they were on the supplier's cheapest tariff.
A number of suppliers are continuing to work with Eaga in this
way.
26. There are also many examples of local
authorities and others working with partnerships such as Eaga
to give help and financial assistance to fuel poor customers for
energy efficiency measures, benefit entitlement checks and tariff
advice. These demonstrate the potential role third parties and
local authorities can play in targeting.
SOCIAL TARIFFS
AND PLANS
TO PUT
SOCIAL PRICE
SUPPORT ON
A STATUTORY
FOOTING
27. We have sought over the years to play
our part in tackling fuel poverty—from encouraging the introduction
of the first social tariffs as part of suppliers' Corporate Social
Responsibility (CSR) work; through monitoring of the current programmes;
to facilitating debate on some of the important challenges and
promoting better coordination.
28. Under the voluntary agreement with Government
suppliers are already providing significant social support to
customers. Ofgem monitors these arrangements on behalf of Government.
Our most recent report showed that suppliers had spent £157 million
against a target of £100 million for the first year
of the commitment with over a million customer accounts benefitting
from some form of social tariff or discount.
29. The big challenge in putting these arrangements
on a statutory footing is the question of eligibility and scale,
which is a policy decision to be taken by Government. Given our
principal duty towards consumers as a whole we will look hard
at the total costs that other consumers including those on low
incomes and at risk of, or in, fuel poverty but not benefiting
from any social tariffs, are being asked to pay.
SUPPORT FOR
HOUSEHOLDS NOT
CONNECTED TO
THE MAINS
GAS GRID
30. Ofgem's remit and powers as defined
by statute are explicitly confined to the gas and electricity
supply networks and markets. The regulation of LPG, oil and other
heating fuels therefore falls outside of this legal remit.
31. In relation to extending the gas network,
as part of the Gas Distribution Price Control Ofgem introduced
an incentive mechanism to encourage gas distributors to extend
their gas networks to communities not connected to the gas network.
32. As part of this, Ofgem recently approved
new partnership arrangements that will mean up to 20,000 fuel
poor customers that currently rely on electricity, coal or fuel
oil to heat their homes could be connected to the mains gas network.
Under these arrangements, gas distribution networks will work
with partners, such as the EAGA partnership, to provide fuel poor
households with a gas connection and grants for gas central heating
and energy efficiency.
33. For some customers, an alternative to
extending the gas network could be the installation of micro-generation
technologies, such as ground source heat pumps. Through the distribution
price control we have taken steps to provide for the network reinforcement
needed to support ground source heat pumps.
34. In regards to the electricity consumed
by those consumers who are off the gas grid, Ofgem's energy supply
probe found, among other things, that the dual fuel discounts
available to gas and electricity customers were such that electricity
only customers were losing out disproportionately and that this
was having a detrimental impact on consumers not connected to
the gas network. The probe remedies discussed above were designed
to help tackle this issue.
February 2010
34 20% less gas and 8% less electricity than average,
based on findings during the Probe. Back
35
"Review of protection for vulnerable customers from disconnection",
Ofgem, October 2009. http://www.ofgem.gov.uk/Sustainability/SocAction/Publications/Documents1/Review%20of%20vulnerable%20customer%20disconnections%20report.pdf Back
36
These figures do not include the costs of carbon associated with
the EU Emissions Trading Scheme or the cost of FITs. Back
37
"Can energy charges encourage energy efficiency? A discussion
paper to prompt debate", Ofgem, July 2009. http://www.ofgem.gov.uk/sustainability/Documents1/Final%20discussion%20paper%2022%20July.pdf Back
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