Memorandum submitted by the Institute
for Public Policy Research (ippr) (FP 34)
1. SUMMARY
— The 2010 fuel poverty target has not
been met and it is unlikely that the 2016/18 target will be met
because rising energy prices, increased levels of worklessness
(resulting from the recession) and likely future constraints on
public spending will all push up levels of fuel poverty.
— There are a number of problems associated
with the current definition of fuel poverty, which mean that fuel
poverty is not necessarily being addressed in the most appropriate
way. The definition therefore needs to be reviewed.
— The current fuel poverty strategy does
not prioritise energy efficiency measures, even though they represent
the most sustainable and cost effective way of addressing the
problem. In future, much greater emphasis needs to be given to
energy efficiency.
— Targeting fuel poverty programmes is
notoriously difficult. We welcome attempts to use datasharing
to improve targeting as well as moves towards "area-based"
approaches, which avoid the problems of targeting.
— Using social tariffs and/or social price
support makes sense as a short term measure, but it should not
be seen as a long-term option because it is ultimately paid for
by energy customers in a regressive way.
— Winter Fuel Payments are not an effective
way of tackling fuel poverty. They should be rolled into the Basic
State Pension and replaced with a more appropriate fuel poverty
payment, perhaps along the lines of Heating Additions, which were
phased out in the 1980s.
— Government should commission an independent
review into fuel poverty, which should aim to fundamentally rethink
the current approach.
2. ABOUT IPPR
2.1 The Institute for Public Policy Research
(ippr) is the UK's leading progressive think tank, producing cutting
edge research and innovative policy ideas for a just, democratic
and sustainable world. Ippr has a strong track record of policy-focused
research on climate change, and welfare and poverty. We are currently
engaged in a research project to assess the impact of current
measures to tackle fuel poverty and to develop recommendations
for how the fuel poverty agenda should be taken forward in a context
of growing concerns about the fairness in the context of climate
change policies, and increased pressure on public spending. We
expect to publish our final report in February 2010.
3. INTRODUCTION
3.1 The winter of 2009-10 has been one of the
coldest the UK has experienced for decades. The cold weather has
highlighted the continuing problem of fuel poverty in the UK and
heightened efforts to address the problem. The Government is conducting
a review of its fuel poverty programme and looks set to introduce
a new obligation on energy companies to reduce energy bills for
vulnerable households. However, this is unlikely to be sufficient
to eliminate the problem of fuel poverty entirely.
4. PROGRESS AGAINST
GOVERNMENT TARGETS
4.1 Despite the progress in tackling fuel poverty
seen in the late 1990s and early part of the 2000s, the number
of people living in fuel poverty has been increasing since 2004-05.
As a result, the 2010 target to end fuel poverty for vulnerable
households in England will not be met. The primary driving factor
in pushing up instances of fuel poverty has been the sharp rise
in domestic energy prices seen in recent years; domestic gas and
electricity prices have increased by approximately 100% since
2004.[113]
Although the introduction of more generous benefits (such as Pension
Credit, tax credits and Winter Fuel Payments) and improvements
in domestic energy efficiency will have had a beneficial effect
on the number of people in fuel poverty, these have been outweighed
by the increases in energy prices.[114]
4.2 It seems likely that without additional
action, fuel poverty will continue to worsen in the future. There
are three important drivers that are likely to increase instances
of fuel poverty in the future:
1. Energy prices look set to continue rise in
overall terms for the foreseeable future.
2. Household income may decline in the short
term as a result of the recession and the associated increase
in worklessness.
3. The likely reduction in public spending from
2010/11 to reduce the fiscal deficit could reduce the scope for
government intervention to tackle fuel poverty.
4.3 These pressures suggest that without increased
efforts to address fuel poverty, the legally enshrined target
to eradicate fuel poverty among all households in England by 2016
will not be met.
5. THE DEFINITION
OF HOUSEHOLDS
IN FUEL
POVERTY
5.1 Our research identified a number of concerns
with the definition of fuel poverty as it currently stands (although
it should be noted that some of the experts we interviewed felt
that the definition was adequate and should not be changed).
5.2 First, the use of 10% as the cut off point
for defining fuel poverty has been questioned. If energy prices
continue to rise at a faster rate than income levels, then more
and more people will cross this threshold and be classified as
"fuel poor". There are several ways this problem could
be dealt with. First, to increase the limit, for example, by making
it proportional to the average spend on energy. The second is
to retain the threshold but to identify different subgroups within
the "fuel poor" to help distinguish the most vulnerable.
For example, this could mean identifying people who are on the
lowest incomes, those who live in "hard-to-treat" properties
or people who are the most susceptible to health problems as a
result of living in cold homes.
5.3 The second concern with the definition identified
by our research was its formulation as expenditure on energy as
a proportion of income. Defining fuel poverty in this way results
in the confusing outcome that (statistically speaking) reducing
energy bills is 10 times more effective at removing people from
fuel poverty than action to increase household income by an equivalent
amount. This statistical effect has been a key factor in promoting
action to reduce fuel bills through the voluntary agreement with
energy suppliers and then the mandatory social price support.
As we will go on to argue in paragraph 8.1 below, there are a
number of reasons why increasing the emphasis on reducing bills
(and therefore making energy companies and ultimately energy consumers
pay) is problematic.
5.4 Ippr believes that the definition of fuel
poverty should be reviewed as part of a wider independent review
on fuel poverty.
6. THE COHERENCE
OF THE
GOVERNMENT'S
INITIATIVES ON
ENERGY EFFICIENCY
6.1 The Government's current fuel poverty strategy
consists of a three-pronged approach: increasing household incomes,
reducing energy bills and improving energy efficiency. It is widely
recognised that energy efficiency measures represent the most
cost effective and sustainable way to tackle fuel poverty (because
energy efficiency programmes have a one-off cost which delivers
sustained reductions in energy requirements, whereas measures
to increase household income or to provide discounts on energy
bills require continued funding).
6.2 However, the current, target-driven approach
to tackling fuel poverty has tended to drive policy responses
to focus on short-term solutions such as financial measures rather
than long-term investment in energy efficiency. For example, the
planned expenditure on energy efficiency measures through Warm
Front (and equivalent programmes in devolved administrations)
and the Decent Homes programme over the three year period between
2008 and 2011 is roughly the same as the annual spend on Winter
Fuel and Cold Weather Payments. The lack of emphasis on energy
efficiency is also reflected in the failure of current energy
efficiency programmes to address hard-to-treat and off-grid properties.
6.3 A number of studies have attempted to estimate
how much it would cost to address fuel poverty through a comprehensive
domestic energy efficiency programme. The figures produced range
from £9.2 billion (supplemented by support for energy costs)
to £64 billion.[115]
Ippr recommends that a full cost-benefit analysis setting out
how long the "pay-back" period would be for different
types of investment should be conducted in order to better inform
decisions about how energy efficiency measures could be better
prioritised in future.
7. THE METHODS
USED TO
TARGET ASSISTANCE
AT HOUSEHOLDS
WHICH NEED
IT MOST
7.1 Targeting the fuel poor is notoriously difficult
due to the diverse nature of households living in fuel poverty.
In addition there can be problems achieving high levels of take
up, even where targeting is good. There are many reasons that
people fail to take up benefits that they are entitled to, but
an important one is the stigma associated with being labeled as
"poor".
7.2 We welcome attempts to improve targeting
of energy companies' measures on fuel poverty through data sharing
with DWP. If the datasharing trials with Guarantee Pension Credit
recipients prove successful, we recommend that the datasharing
approach should be extended to include recipients of Cold Weather
Payments since there is a strong correlation between people receiving
this benefit and those living in fuel poverty. Although datasharing
could improve targeting, there is still a problem with uptake,
since currently the take-up rate of Pension Credit is only around
70-80%, as measured by expenditure.[116]
This means that 20-30% of eligible customers will not receive
a rebate under the Energy Rebate Scheme. We recommend that Government
continues its work to improve uptake of Pension Credit to ensure
that as many people as possible can benefit from the Energy Rebate
Scheme (and Mandatory Price Support measures should the datasharing
approach be extended to this scheme too).
7.3 We also support moves towards a greater
use of "area-based" approaches (such as the Community
Energy Saving Programme and Warm Zones) as these overcome many
of the targeting problems—including problems of take up—since
the programmes include all households, not only those meeting
the definition of being "fuel poor".
8. SOCIAL TARIFFS
AND PLANS
TO PUT
SOCIAL PRICE
SUPPORT ON
A STATUTORY
FOOTING
8.1 Our research revealed a strongly held conviction
among representatives from NGOs, fuel poverty campaign groups
and energy companies that in an ideal world, fuel poverty would
be addressed solely through the tax and benefits system. This
is because measures applied through energy companies are ultimately
paid for by energy consumers and the costs are passed on in a
regressive way. This contrasts with the tax and benefit system,
where income tax at least is "progressive" (higher earners
pay a larger share of their income in tax than lower earners)
and governments can use benefit payments to disproportionately
increase the incomes of the poorest.
8.2 However, while we recognise that social
tariffs/mandatory price support might not be the ideal option,
we also acknowledge that given the current pressures on public
expenditure, it will be necessary to continue with energy supplier-led
measures on fuel poverty in the short term. But they should not
be seen as a long-term option.
8.3 The introduction of social price support
has a number of advantages over the existing system of social
tariffs, most notably because it creates a unified system across
all energy suppliers, providing more clarity and consistency for
vulnerable consumers.
8.4 However, it remains a regressive tool and
to try to minimise the impacts of this approach, we recommend
that Government should investigate ways to ensure that costs are
passed on to customers in the least regressive way possible. One
way to do this might be to design the balancing mechanism between
energy companies (to ensure no company is made to bear a disproportionate
share of costs of implementing the scheme) on the basis of units
of energy sold rather than number of customers. This approach
would encourage suppliers to pass on the costs on a per-unit basis
rather than as a fixed cost per customer. Since people on higher
incomes tend to use more energy than those on the lowest incomes,
this approach could be more progressive on average.
8.5 Our research identified a number of risks
associated with the introduction of mandatory price support. First,
moving away from social tariffs towards a rebate system means
there will no longer be a guarantee that recipients are on the
lowest available tariff.
8.6 Second, the level of the rebate is not linked
to energy prices, so there is a risk that prices could rise by
more than the level of the rebate, in which case recipients will
be tipped back into fuel poverty.
8.7 Third, there is a question about what the
level of the rebate should be. If it is set too high, then the
additional costs (which are ultimately borne by all energy consumers)
could end up pushing customers at the margin (but who are not
eligible for rebates) into fuel poverty. There should be scope
to increase the level of the rebate in future as a precaution
against large energy price rises. However, we recommend that Government
should commit to match any future increased spending requirements
imposed on energy suppliers with an equal increase in publicly-funded
fuel poverty programmes to ensure the balance between government-
and energy company-led programmes does not tilt any further towards
the energy companies and hence result in a more regressive approach
to paying for fuel poverty measures.
8.8 A final concern is that customers who were
eligible for social price support but who already benefited from
a social tariff might be excluded from receiving the rebate. We
believe that using data provided by DWP to exclude some people
from receiving the rebate goes against the spirit of the data
sharing as allowed under the Pensions Act 2008. We therefore suggest
that the rebate created by mandatory social price support should
be offered in addition to the measures already offered under the
voluntary agreements.
9. WINTER FUEL
PAYMENTS AND
COLD WEATHER
PAYMENTS
9.1 It is widely acknowledged that Winter Fuel
Payments (WFPs) are not an effective way of tackling fuel poverty,
as only 12%[117]
of people who receive them are thought to be fuel-poor.[118]
However, Winter Fuel Payments are an effective way of increasing
the incomes of pensioners using a non-means-tested mechanism,
which will benefit those on low-incomes who fail to take up their
entitlement to Pension Credit. In addition, Winter Fuel Payments
are a popular measure, which is likely to make their removal very
challenging politically.
9.2 The Environment, Food and Rural Affairs
Select Committee have proposed that WFPs should be made taxable
and that the entitlement should be stopped altogether for higher
rate tax payers.[119]
While this is an attractive proposal in principle, it has been
suggested that there may be some practical barriers that make
this difficult and costly to implement in practice, as suggested
by the Government's response to the Select Committee's recommendation.[120]
It is difficult to make WFPs taxable because DWP would not be
able to tax at source, and even if they could, the individual
would need to establish their tax liability with HMRC and would
need to make the effort to claim back tax. Stopping the payment
for higher rate tax payers also raises difficult questions: would
the WFPs be paid and then claimed back at the end of the tax year
if recipients found their income was over the threshold, or would
the decision about whether to pay the WFPs be based on the previous
year's income? The latter case could cause concern for people
who are about to retire and see their income drop substantially.
9.3 We recommend that ultimately, the WFP should
be rolled into the Basic State Pension for the sake of clarity
about the widely recognised purpose of the payment. This would
also have the benefit of making the payment taxable thus avoiding
the technical problems associated with taxing a separate WFP.
As WFPs are phased out, a new form of benefit that genuinely addresses
fuel poverty would need to be introduced. One possibility would
be to introduce a new form of benefit along the lines of Heating
Additions, which were phased out in the 1980s. Heating Additions
were paid to Supplementary Benefit (Income Support) claimants
who met certain criteria relating to the vulnerability of members
of the household and characteristics of the dwelling.
10. NEED FOR
A RADICAL
REVIEW OF
THE FUEL
POVERTY STRATEGY
10.1 The context in which fuel poverty is being
addressed has changed substantially since the Government's fuel
poverty strategy was first developed in the early 2000s. Energy
prices are rising, climate change is much higher on the political
agenda and new technologies are offering new solutions to the
problem. We believe that the time is right for a fundamental rethink
of the Government's approach to the problem to ensure that it
is fit for purpose in today's Britain. DECC's current review of
fuel poverty does not go far enough as it will only deliver incremental
changes to the current approach, rather than a thorough and strategic
rethink.
10.2 We recommend that the Government should
commission an independent review into fuel poverty, which should
consider the following questions:
— How can energy efficiency measures be
prioritised over cuts to energy bills and income support?
— Should fuel poverty be redefined to ensure
a more rational approach to selecting fuel poverty measures?
— Is target-setting an appropriate approach
to addressing the problem?
— How should responsibility for paying
for fuel poverty measures be divided between government and energy
companies to ensure the fairest approach?
— Who should deliver fuel poverty programmes?
Could there be a role for Distribution Network Operators or local
authorities as well as central government and energy suppliers?
And is there scope for better partnership working between these
organisations?
— How can new technologies (such as smart
meters, micro generation and community heating) be used to help
address fuel poverty?
11. CONCLUSION
11.1 Despite the Government's efforts, fuel
poverty looks set to get worse, not better, in the coming years.
While recent policy initiatives in this area (including increases
in winter fuel payments and cold weather payments and the new
mandatory price support scheme) will help tackle the problem to
some extent, they will not be sufficient to eradicate fuel poverty
entirely.
11.2 A new approach to dealing with fuel poverty
is necessary and the first step towards this should be an independent
review of fuel poverty that would fundamentally rethink the UK's
fuel poverty strategy and ensure it is fit for purpose in a world
of rising energy prices.
February 2010
113 Office for National Statistics (ONS) (2009a) Economy
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114
Energy Action Scotland and National Energy Action (2009) The Cost
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Scotland/National Energy Action. Available at
http://www.eas.org.uk/downloads/The%20Cost%20of%20Affordable%20Warmth_FINAL%20VERSION.pdf
Back
115
Jenkins D P (2009) "The value of retrofitting carbon-saving
measures into fuel poor social housing" Energy Policy
38(2): 832-839 ; Preston I, Moore R and Guertler P (2008)
How Much? The cost of alleviating fuel poverty Bristol:
Centre for Sustainable Energy; Baker W (ed) Raising the SAP:
Tackling fuel poverty by investing in energy efficiency London:
Consumer Focus. Available at http://www.consumerfocus.org.uk/assets/1/files/2009/11/FuelpovertyproofingcostpubMay09final.pdf
; Environment, Food and Rural Affairs Select Committee (2009)
Energy Efficiency and Fuel Poverty, Third Report of Session
2008-09 London: TSO Back
116
Department for Work and Pensions (2009b) Benefit Expenditure
Tables Available at http://research.dwp.gov.uk/asd/asd4/medium_term.asp Back
117
It should be noted however, that this figure is likely to be an
underestimate owing to recent increases in domestic energy prices. Back
118
Environment, Food and Rural Affairs Select Committee (2009) Energy
Efficiency and Fuel Poverty, Third Report of Session 2008-09 London:
TSO. Back
119
ibid Back
120
Department of Energy and Climate Change (2009c) Government
Response to the Efra Select Committee Inquiry: Energy Efficiency
and Fuel Poverty London: DECC, available at: http://www.official-documents.gov.uk/document/cm77/7719/7719.pdf Back
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