Memorandum submitted by Scottish and Southern
Energy (SSE) (FP 24)
OVERVIEW
The Government is unlikely to meet its fuel
poverty targets for 2010 and 2016—this is:
(a) because of the targets that the Government
has set itself, and the definition of fuel poverty against which
it benchmarks these targets; and
(b) because the policies that it has implemented
in this area have failed to address each of the three main causes
of fuel poverty distinctly.
The current targets are benchmarked against
a flawed definition of fuel poverty which makes them extremely
difficult to achieve. This is because, under the definition, the
number of households in fuel poverty is constantly changing.
Government should therefore look again at fuel
poverty targets, and consider whether these assist or hamper policy
makers. It is not always appropriate for Government to set targets,
especially where significant aspects of the target are out of
its control; in practice, flawed targets can undermine policy
objectives.
In addition the Government needs to focus on
developing policies that tackle each of the three main causes
of fuel poverty distinctly—up to this point its approach
has been piecemeal, disjointed and complex. It is only through
focussing on each of the causes that Government has any chance
of eradicating fuel poverty in the long term.
A. DEFINING FUEL
POVERTY
According to the Government, "a household
is said to be in fuel poverty if it needs to spend more than 10%
of its income on fuel to maintain a satisfactory heating regime
(usually 21 degrees for the main living area, and 18 degrees for
other occupied rooms)."
This definition is commonly accepted and understood
by the vast majority of the parties involved with fuel poverty
including Government, consumer groups and energy suppliers.
Flaws in the Definition
The major flaw with this definition is that
fuel poverty is measured as a percentage of income. Therefore
somebody paying 9.9% of their income on heating/power is classified
as "not fuel poor", while somebody paying 10.1% of their
income is "fuel poor". As such the figure for the number
of households living in fuel poverty is constantly changing, depending
on people's circumstances, choices, the weather and a whole host
of other factors. This means that the Government's fuel poverty
eradication targets are set against a definition which will make
it very hard for them to actually be achieved.
Therefore, on the basis that fuel poverty is
an accepted concept in the UK (although it appears to be less
so elsewhere in Europe) Government should not be afraid of reviewing
the definition. Better policy outcomes that help people most in
need may be the result.
Working with the Definition
The fact remains, however, that there needs
to be a definition of fuel poverty. Government and stakeholders
will wish to continue to work with the current definition, in
spite of its flaws, in advance of any more fundamental review.
It is therefore the Government's fuel poverty targets that should
be re-evaluated.
Clearly it would be a brave political decision
to announce that the Government is re-evaluating its approach
to fuel poverty due to the complexity of the problem. However
it would allow it to focus on policies to effectively combat the
three main causes of fuel poverty.
Given the problems that the Government has experienced
with its current approach SSE's view is that the current definition
of fuel poverty should be used as an umbrella definition which
acts as a reference point for policies which tackle each of the
three main causes distinctly.
Whilst the overall aim of eradicating fuel poverty
would remain, goals or targets would be set for each of these
distinct policies, not for fuel poverty as a whole—in this
scenario the definition of fuel poverty would act as a barometer
for measuring progress on fuel poverty, not as a benchmark against
which overarching targets are set. (More on this below).
B. THE THREE
MAIN CAUSES
OF FUEL
POVERTY
Fuel poverty is not a homogenous term. Rather
there are three distinct causes of fuel poverty each of which
need to be addressed separately. These are:
— the energy efficiency of people's homes;
— the cost of energy—energy prices
at any one time.
The energy efficiency of people's homes
SSE firmly believes that energy efficiency is
the most sustainable means of tackling fuel poverty, as well as
providing the best way to achieve a reduction in carbon emissions
arising from energy consumption.
In theory the more energy efficient a property
is the less energy it will need to adequately heat and power it,
and therefore its energy bills will be lower. As many houses in
the UK are currently very energy inefficient it takes more energy
to heat them to an adequate temperature than would be the case
if energy efficiency measures were installed. This results in
households using more energy, and therefore spending more money,
than they need to.
This factor can push households, which would
not be fuel poor if they lived in a more efficient property, into
fuel poverty as defined above. Conversely these people can be
lifted out of fuel poverty if the energy efficiency of their home
is improved. It is therefore important that those who are in fuel
poverty are given the means with which to adequately insulate
their homes—given that they are fuel poor this work needs
to be done at no, or minimal, cost to the householder.
In addition, it is important that the whole
of the UK's housing stock is made more efficient in order to ensure,
amongst other things, that other households don't fall into fuel
poverty in the future.
People's incomes
a correlation between poverty and fuel poverty
is inevitable. Energy bills for a house depend on the usage of
the householders rather than the level of income the household
receives—ie two families of a similar size, living in identical
houses in the same area, and using the same amount of energy,
and on the same tariff, will pay the same amount for their energy.
It is logical that those with low incomes spend
a greater share of this income on their energy bills. Given the
differing nature of people's personal circumstances, one household
could spend 15% of their income on energy and the other 1.5%.
As such it is important that people's incomes
are maximised. Many of those people who are in fuel poverty are
also in poverty, and therefore will commonly qualify for benefits
of some kind. Currently there are £16.5 billion worth of
unclaimed means-tested benefits and tax-credits; ensuring that
people receive their full benefit entitlements will help to ease
the pressure that energy bills can have on some households, budgets.
SSE offers benefits checks to customers who are on its social
tariff, as well as to some households in areas in which it is
undertaking energy efficiency work. Whilst SSE will continue to
do this work, it is clearly sub-optimal for private companies
to continue to do something which is clearly the ultimate responsibility
of public agencies.
The cost of energy
The nature of the UK's energy market means that
customers are more exposed to the volatility of the global market
than their counterparts in France and Germany.
However in the past this exposure to the market
led to consumers in the UK paying less than those in Europe because
the price of wholesale gas and electricity was much lower. In
September 2009 DECC stated that "Estimates suggest that,
for the period July to December 2008, prices for medium domestic
gas and electricity consumers ... were the lowest and seventh
lowest in the EU 15 respectively." These variations in prices
illustrate the positive nature of the UK market model compared
with counterparts elsewhere in the EU.
However it is generally accepted that over the
medium and long term wholesale energy prices will rise as global
demand for fossil fuels increases. Added to this are the raft
of Government low carbon transition programmes that are being
funded through consumers' bills. Currently these amount to 9%
of bills but are forecast to be around 30% by 2020. The combination
of these two factors means that it is likely that consumers' energy
bills will rise over the next decade.
Therefore, apart from providing discounts on
these energy bills through mandated social price support, there
is little that the Government can do to shield consumers from
these rising costs. The focus therefore needs to be on dealing
with the two issues mentioned above—income maximisation
and improving the energy efficiency of properties. As noted above
energy efficiency is of particular importance because the unit
cost of energy is predicted to rise—therefore the focus
must be on reducing the number of units used.
SSE feels that these need be to looked at as
a series of distinct issues, all of which need to addressed separately.
However there has only been one policy from Government—its
policy on social price support—that has actually tackled
one of these causes directly; other attempts to tackle the causes
have been done indirectly through policies that are perceived
to be related, which has led to a piecemeal and disjointed approach
to tackling the problem.
SSE therefore feels that Government should accept
that current policies will not achieve the results required to
meet the fuel poverty targets it has set itself.
CURRENT GOVERNMENT
APPROACH: PIECEMEAL
AND DISJOINTED
The largest and most fundamental problem that
policymakers face when considering the fuel poverty issue is whether
to tackle it through social policy or through energy policy. This
question has not been properly resolved which has, in part, led
to the piecemeal and disjointed approach that Government has adopted.
It is worth noting that this disjointed approach has not been
helped by the devolution of certain powers—eg on energy
efficiency—to the administrations in Wales and Scotland
which creates different approaches between national and regional
programmes.
SSE feels that income maximisation falls under
social policy, energy efficiency falls under energy policy, and
the cost of energy (as measured by bills rather than unit prices)
falls under both. Therefore energy suppliers definitely have a
major role to play in improving the efficiency of the UK housing
stock, and are also part of the solution when dealing with the
cost of energy; Government should also play a role here and should
take the lead on maximising people's incomes.
However the main methods that the Government
has used for tackling fuel poverty up to this point are through
energy policy. Energy efficiency work is carried out under the
Carbon Emissions Reduction Programme (CERT) and Warm Front; and
social price support, which will be mandatory if the current Energy
Bill becomes law, is also provided by energy suppliers. The problem
with the current Government approach to fuel poverty is that (a)
it attempts to tackle only two of the three causes; and (b) it
deals with improving the energy efficiency of fuel poor households
through a policy which was not specifically designed for this
purpose.
Energy Efficiency
The Carbon Emissions Reduction Target (CERT)
is designed to reduce carbon emissions and in this sense it has
been a great success. However it is not an instrument that was
designed to tackle fuel poverty and as such Government efforts
to use it in this matter—eg through changes to the Priority
Group (those aged 70 and over and those in receipt of relevant
benefits/tax credits)—have not been successful.
Many of the measures that a household would
need to be lifted out of fuel poverty—eg solid wall insulation,
replacement heating systems—are not available under the
scheme, and many households which probably are fuel poor do not
qualify for "free" measures under CERT because they
are not over 70 or on benefits.
Similar problems could apply to the new approaches.
Although the final details for Heat and Energy Management (HEM)
strategy are not yet known it is a programme designed to roll-out
energy efficiency measures in order to reduce carbon emissions
and energy usage across the UK's housing stock.
However the Government's CESP programme—which
is targeted at Lowest Super Output Areas in England and Wales,
and Data Zones in Scotland—is encouraging, and there will
be a number of lessons to be learnt about which approaches work
best when attempting to tackle the energy efficiency problems
of fuel poor households.
N.B. It should be emphasised that CERT has been
a highly effective programme in reducing both the UK's carbon
emissions and its energy demand and HEM (the proposed successor
to CERT) will have a vital role to play in ensuring that all of
the UK's housing stock is made more efficient; this is crucial
in ensuring, amongst other things, that more people don't fall
into fuel poverty in the future. However a separate programme
specifically designed to improve the energy efficiency of fuel
poor households is also needed.
Social Assistance
In the Energy Bill the Government has proposed
that it is given very broad powers to allow it to mandate a variety
of social assistance packages through energy suppliers, building
on the current offerings that suppliers provide.
SSE's approach to date has been to engage with
Government towards a package that is:
1. Simple and easy for customers to understand
and receive.
2. Designed so it does not impact too heavily
on non fuel poor customers with costs specified upfront.
3. Equitably spread across suppliers.
4. Set up so that eligible customers can be easily
found by energy suppliers.
5. Designed so that implementation costs are
kept to a minimum,
Social tariffs and rebates provide assistance
to those who are struggling with their energy bills. However ultimately
they should be used as an addition to policies on income maximisation
and improving energy efficiency—they should not, in the
long-term, remain at the forefront of fuel poverty policy due
to their regressive nature. SSE accepts the proposed mandation
of social price support in the current Energy Bill but feels that
it is only a temporary solution that deals with one element of
fuel poverty.
In addition the funding mechanisms for this,
and other Government schemes, need to be carefully considered.
Currently the Government is using the consumer base to fund fuel
poverty policies (and other programmes such as CERT and the RO)
through additions to bills—the cost of this proposal is
estimated to be approximately £10 per dual fuel customer.
However because of the nature of the consumer
base this is regressive; all consumers pay equal amounts towards
fuel poverty, regardless of income levels. Government should be
aware that this simply exacerbates the problem—bills rise
because of the fuel poverty levy, causing more people to fall
into fuel poverty, causing bills to rise further and so on. It
may therefore be time to consider whether the tax base—which
is means tested—would be a fairer way to fund a scheme which
is designed to assist the poorest and most vulnerable households.
TACKLING THE
THREE CAUSES
OF FUEL
POVERTY
The fundamental flaws in the current definition
of fuel poverty mean that the number of households living in fuel
poverty is constantly changing, making any targeting initiatives
very difficult to implement, and fuel poverty targets very difficult
to achieve. In addition the policies that Government has implemented
to tackle fuel poverty have failed to address each of the three
main causes distinctly. Therefore SSE feels that:
(a) The Government should look to re-evaluate
its targets based on the three main causes of fuel poverty, using
the current definition as a point of reference, not a benchmark
against which over-arching targets are set, and keeping open the
option of re-working the definition itself.
(b) The Government should publish an overarching
fuel poverty strategy that is not constrained by targets, and
which has effective policies specifically targeted at each of
the three main causes of fuel poverty in a holistic, rather than
piecemeal, fashion. As noted above the current definition of fuel
poverty can be used as an umbrella definition which acts as a
reference point for these policies.
This is an approach that SSE has used in its
efforts to help its most vulnerable customers. It has used the
definition as it currently stands as a guide, focussing on customers
personal circumstances on a case-by-case basis, rather than whether
they fit the definition exactly. By adopting this approach SSE
is able to target assistance at the most vulnerable as it can
take into account a number of key variables including personal
circumstance and lifestyle and offer the appropriate assistance
accordingly.
The focus from Government should be on ensuring
that homes are more efficient and household's incomes are maximised;
social price support and other measures offered by suppliers will
then provide a safety net for those who are still in fuel poverty
after both of these issues have been tackled. However what this
needs is a joined up energy efficiency and income maximisation
programme the sole aim of which is tackle fuel poverty (and, by
extension, poverty itself)—as such it would be separate
from CERT or HEM, the aim of which is to cut carbon emissions,
but would almost certainly draw on the lessons learnt from CESP.
An example of what the structure of this overarching
strategy might look like in very basic terms is illustrated above.
Each of the three areas would have a set of distinct targets and
goals, and then policies in place to meet these—progress
would then be measured against the current definition.
| Overall Aim: eradicating fuel poverty.
|
Reference Point to Measure Progress: a household is in fuel poverty if it needs to spend more than 10% of its income on fuel to maintain a satisfactory heating regime.
|
1. Income Maximisation |
2. Energy Efficiency | 3. Energy Cost
|
| Policies | Policies | Policies
|
| Targets | Targets | (Targets N/A)
|
| |
|
POSSIBLE POLICIES
As noted above here has been no emphasis on maximising people's
incomes within any of the Government's fuel poverty policies.
One possible way to do this would be to restructure the Winter
Fuel Payment (WFP). This would be a bold move for the Government,
or any political party, to suggest reform, yet this is exactly
what it could call for, for the following reasons:
— In 2006-07 Winter Fuel Payments were made to around
100,000 households containing pensioners with total annual income
above £100,000. The overall spread of the Winter Fuel Payment
is not directed in any way towards giving support for those that
need it most.
— The Winter Fuel Payment is not paid to people with
disabilities or to struggling families with children, or disabled
children.
— Winter fuel payments are made to former UK residents
living in the European Economic Area. In winter 2007-08 payments
were made to over 30,000 people living in Spain, Portugal, Greece
and Italy or Spain. At £250 a claim, this exceeds £7.5million.
These people may not be the best recipients of assistance.
— Finally, the payment is paid into pensioners' accounts
in December. Would it not be more sensible for the payment to
be a discount off bills, and to be paid in instalments in mid
winter, and at the end of winter (when bills for the previous
winter are actually coming through), or even directly to the energy
supplier to be committed as a discount off bills?
In conclusion, SSE believes that the WFP, though highly valuable
for around half of those pensioners who receive it, is no longer
entirely fit for purpose. In today's environment of higher energy
prices it would be better directed so that it is received by those
pensioners who really need it, and given to other vulnerable groups,
such as those with disabilities or large families. This could
be start of a range of policies aimed at maximising the income
of households in a targeted manner.
February 2010
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