Memorandum submitted by Which? (FP 50)
Which? is an independent, not-for-profit consumer
organisation with around 700,000 members and is the largest
consumer organisation in Europe. Which? is independent of government
and industry, and is funded through the sale of Which? consumer
magazines, books and other subscription services.
EXECUTIVE SUMMARY
Consumers spend an average £1,200 per
year on energy bills, most of this on heating, yet as much as
£1 in every £3 spent on heating bills is wasted.
Seven million homes still have unfilled wall cavities and 10 million
homes have no or inadequate loft insulation.[153]
This wastage of heat and electricity is preventable, and at low
cost; and the more energy bills continue to rise, the more important
this becomes especially for those who are struggling financially.
The National Audit Office estimates that the
typical household could save about roughly 30% of energy bills
by adopting the cost-effective measures already available to them.[154]
This highlights the important role of energy efficiency in alleviating
fuel costs and why it is vital that any programs to deliver these
measures, and others, are value for money and effective.
The Carbon Emission Reduction Target (CERT)
is the primary program through which energy efficiency measures
are delivered and we are concerned that it may not be fully delivering
for consumers. Due to poor monitoring and evaluation it is impossible
to assess whether it provides value for money raises and if consumers
benefiting from the scheme. As all consumers pay for CERT this
is clearly of consequence to those who are already or close to
being fuel poor. The Government therefore needs to review whether
or not it is effective and provide value for money before CERT
is extended and evolves further.
FUEL POVERTY
1. Which? has noted with interest that this
short inquiry will look at the steps that have been put in place
to eradicate fuel poverty. We feel that the two areas outlined
in the call for evidence are of relevance to Which? as they all
have an impact on consumers. These areas are: the methods used
to target assistance at households which need it most; and plans
to put social price support on a statutory footing.
2. In relation to these areas we would like
to focus our written submission on one of the main Government
initiative to target to target assistance at households which
need it most, CERT. We are particularly concerned that CERT, which
is designed to improve energy efficiency for us all, may in fact
be driving many into fuel poverty. As part of our submission we
will also comment on the plans to put social price support on
a statutory footing, we are concerned that without additional
provisions there is a real risk of this not delivering the maximum
benefit.
The methods used to target assistance at household
who need it most
3. CERT is the Government's primary mechanism
for improving the energy efficiency of the existing domestic housing
stock. It is a legal obligation on the six largest energy suppliers
who have more than 50,000 domestic customers to meet CO2 emission
targets for the domestic customers they supply. It was estimated
that between 2008 and 2011, the energy suppliers will need
to spend £2.8 billion on carbon reduction measures in
order to meet their targets. In July 2009 the Government
consulted to increase the CERT obligation by 20 per cent
raising this to £3.2 billion.
4. CERT is aimed particularly at those who
could benefit the most from energy efficiency as a Priority Group
which includes those aged 70 and over and those on qualifying
benefits get CERT measures for free as the supplier has to pay
the whole cost.
5. The obligation means that the government
estimates that energy suppliers need to spend £3.2 billion
on CERT between them. There are six suppliers who qualify, these
are: British Gas, EDF Energy, Npower, E.ON, Scottish and Southern
Energy and Scottish Power.
6. Suppliers can promote measures to reduce
CO2 emissions to any domestic consumer in Great Britain.
They are not limited to providing assistance to their own domestic
customers. These measures include loft insulation, boiler upgrades
and energy efficient products, and are promoted to consumers directly,
via contractors or through a relationship with a retailer.
7. On average, CERT results in £45[155]
being added onto every energy bill every year as energy suppliers
are allowed to transfer the cost they incur from CERT onto their
customers.
8. For those benefiting from energy efficiency
CERT measures, the savings may outweigh the increase in bills.
Which? is, however, concerned that CERT may have detrimental implications
on consumers due to:
— The potential it has to increase fuel
poverty;
— The lack of financial monitoring and
inability to determine whether it provides value for money;
— The ability to manipulate the mix of
measures.
A POSSIBLE CAUSE
OF FUEL
POVERTY
9. At least 40% of efficiency measures under
CERT have to be delivered to a "Priority Group" of people
on qualifying benefits or those over 70. However, perversely,
the additional £45 per year on all fuel bills could
be forcing more households into fuel poverty. Those on low incomes
who are not eligible for Priority Group treatment are unlikely
to be able to afford the CERT measures, even with a discount (for
example, cavity wall insulation cost £380 on average).
Yet, these consumers still have to pay for CERT on their bills.
In addition, people living in older properties; where energy efficiency
options are more limited; those who have already implemented energy
saving measures in their home; and those living in rented accommodation
whose landlords have no financial interest in paying for energy
efficiency measures, are all likely to miss out on the full benefits,
yet they still pay the full costs of CERT.
10. It is clear that those not receiving
CERT measures are still paying at a rate estimated by Ofgem to
be £45 per year[156]
for which they receive no direct benefit. In relation to fuel
poverty this is most relevant to those on low incomes are most
likely to be affected by any increase in energy bills since they
spend a higher proportion of their income on electricity and gas.
11. There is a risk of where CERT measures
may create a perverse situation in which more households are forced
into fuel poverty. As CERT has increased energy bills, household
disposable income has decreased. Low income households on the
brink of fuel poverty and as their bills increase then more and
more of them will be classed a fuel poor. As a result, they will
be put on social tariffs and they will no longer be paying for
CERT, or at least not as much, and so those who can still pay
will pay more and more.
12. This situation could become unsustainable
in the long-term as the more people that are forced into fuel
poverty—the less will pay for CERT as they will be on benefits.
The consumers who are left paying CERT will be forced to pay more
of the CERT obligation and are those in that group on the brink
of fuel poverty may therefore be forced into fuel poverty, making
the paying group of consumer forever shrinking. This creates a
vicious circle for the Government, as more and more people will
then qualify for benefits.
13. Which? realises that CERT is a complicated
scheme and that a quick fix will not be available to ensure that
everyone only gets advantages from the scheme, rather than disadvantages.
As a result, we are asking the Government to review how CERT could
be run more cost effectively and how future schemes should be
administered that includes an investigation of whether it should
be continued to be supplier-led or whether an independent body
is required to allocate funds; and how it can be ensured that
all types of households benefit from CERT and future schemes.
We believe that a full investigation is needed to ensure that
the inequality and unfairness of the system is addressed.
POOR MONITORING
AND VALUE
FOR MONEY
14. Suppliers are currently allowed to pass
the estimated cost they incur for CERT straight through to customers.
There is no way of knowing if the suppliers pass this on in full,
in part, or in excess of the actual cost to their customers. As
a result, if costs are unnecessarily high, this will indirectly
increase fuel poverty as more costs are then transferred onto
consumers. An independent report of a previous version of the
scheme revealed that suppliers' costs were 23% less than the Government's
estimate.[157]
But, it is impossible to tell whether this translated into a profit
for suppliers or 23% less costs being transferred to customers.
15. Because of the lack of monitoring of
how costs are transferred to consumers, there are also no checks
to ensure that money spent is used to deliver maximum carbon savings.
The lack of transparency also makes it difficult to unravel the
inter-dependent relationships between manufacturers, installers,
energy suppliers and retailers. Even the Government has acknowledged
the risk of double counting of carbon savings. For example, a
supplier as well as a contractor or retailer could claim credit
for the same CERT measure.
16. This situation is justified on the basis
that the energy markets are competitive, so suppliers are incentivised
to incur costs efficiently and minimise what is passed on to consumers.
In reality, Ofgem has stated that the energy markets are not fully
competitive. We know that many do not "shop around"
for the best deals. Instead, they could pay a higher proportion
of the costs of CERT because they are on uncompetitive or prepayment
tariffs—comparable to the situation.
17. A badly run scheme will result in higher
costs for consumers. Yet, as there is inadequate monitoring in
place to monitor what value we get from CERT, we are unable to
determine whether unnecessary costs are transferred onto the energy
suppliers' customers.
18. To improve on the current situation,
a system to monitor the costs of suppliers and how they are transferred
to customers would be beneficial. This could be done by a requirement
for suppliers to declare carbon tonnes saved per £ on a tariff
by tariff basis. The suppliers would then have to account for
the costs of meeting their CERT targets by reporting savings achieved
as tonnes of carbon saved against the money spent and identifying
differences in costs between tariffs.
19. This would allow consumers to compare
how much their energy supplier transfer of the costs to them compared
to other suppliers. It would also allow Ofgem, DECC and consumers
to judge whether CERT is implemented in a cost effective way.
MANIPULATING THE
MIX OF
MEASURES
20 The current set-up allows suppliers to
over-promote a CERT product to meet their target—even if
that product is not a very effective way of achieving carbon savings.
In the past this was most evident with the big light bulb giveaways,
where 152.6 million compact fluorescent light bulbs (CFL)
were sent out between 2008 and 2009.[158]
Suppliers were able to meet their targets easily and cheaply while
avoiding paying for other measures, such as insulation, that are
more expensive to implement, but that deliver higher energy efficiency
savings.
21. Although this practice has now been
stopped for CFLs, it could still happen for other products, since
current monitoring focuses on whether the targets have been met
(ie CO2 reduction measures delivered), not whether concrete
increases in energy efficiency have been achieved.
22. To improve on the situation, Which?
would encourage the Government to look into how a cap for each
CERT product could be implemented so that once a product starts
to dominate the market, the subsidies from suppliers are stopped
to force suppliers to focus on measures that deliver more long-term
benefits for consumers.
23. This would ensure that situations similar
to the light bulb fiasco could not be repeated.
Proposal to put social price support on a statutory
footing
24. Which? believes that it is important
that all consumers are on the most appropriate tariff for them.
Due to confusion and a lack of understanding of their energy use
many consumers are not on the best tariff and this can result
in consumers paying higher than necessary energy bills.
25. The introduction of minimum standards
for tariffs and improvements to bills and statements would be
a significant step in helping consumers compare and understand
the tariff offerings available.
26. The minimum standards for the tariffs
should include the following elements:
— No hidden charges—no more "no
standing charges" tariffs when these costs are just subsumed
into the overall price, and no unfair penalties if you want to
change energy tariff.
— A time guarantee if you change tariff—tariffs
should be guaranteed for a minimum of 12 weeks.[159]
— Reasonable warning about price changes—companies
should commit to provide a minimum of 12 weeks notice if
a tariff is going to be changed, or when special deals are going
to end.
— Tracker tariffs need to track something
meaningful—until there is a standard measure used to benchmark
tracker tariffs they should be removed from the market.
— No misleading names—"green
tariffs" shouldn't be called green when they don't and can't
deliver energy from renewable sources.
27. The introduction of minimum standards
for tariffs should be complemented with the introduction of a
summary box on all bills and statements that includes the following:
— The amount of energy used.
— The rate of gas and/or electricity per
kWh and how this is broken down on a daily basis.
— How the cost has been calculated.
— Any discounts you are benefiting from
and when they end.
— Any fees you will have to pay if you
change supplier.
28. By addressing tariff confusion and complexity
consumers will be able to better judge the tariff for them, which
may allow them to move out of fuel poverty and therefore not need
social support. For those consumers who are fuel poor and eligible
for the social price support scheme it is important that they
are also on the available cheapest tariff. The amount of support
required per consumer will be less and so enabling the scheme
to reach more consumers, and prevent money being wasted by subsidising
inappropriate and expensive tariffs.
29. The proposed clause in the Energy Bill
currently going through parliament includes proposals to change
the current system. However, the proposed social price support
scheme that will be given statutory footing does not set out provisions
to ensure that customers benefiting from the new support scheme
are also on the most appropriate tariff, and we are concerned
that this will reduce the impact of the social price support scheme.
30. To ensure that the greatest benefit
comes from the new social price support scheme, those who qualify
should be on the cheapest tariff and have their account reviewed
periodically, every six months, to ensure they are still on the
cheapest tariff.
RECOMMENDATIONS
31. The current proposal for the social
price support scheme has the potential to be a wasteful situation,
and therefore needs urgent attention. Likewise, with the CERT
scheme being extended, and other energy efficiency policies already
announced or in the pipeline, these issues must be resolved to
ensure that the benefits outweigh any disadvantages for consumers
including exacerbating fuel poverty. In light of this, Which?
makes the following recommendations:
— Carbon tonnes saved per £ on a tariff
by tariff basis. Ofgem to require suppliers to account for the
costs of meeting their CERT targets by reporting savings achieved
as tonnes of carbon saved against the money spent and identifying
differences in costs between tariffs.
— A cap for each CERT product so once a
product starts to dominate the market, the subsidies from suppliers
are stopped to force suppliers to focus on measures that deliver
more long-term benefits for consumers.
— A review to consider how CERT could be
run more cost effectively and how future schemes should be administered
that includes an investigation of whether it should be continued
to be supplier-led or whether an independent body is required
to allocate funds; and how it can be ensured that all types of
households benefit from CERT and future schemes.
32. In addition, to ensure that money from
the social price support scheme is used efficiently and in the
most effective way to reach the highest number of customers Which?
have the following recommendations for helping consumers address
which tariff is most appropriate for them:
— Introduction of minimal standards for
tariffs to increase comparability of tariff offerings.
— Improve the quality of billing information
to enable consumers to better understand their tariff and energy
use.
— Ensure that the regulatory framework
that will set out the full detail of the social price support
scheme requires that those receiving support have their tariff
reviewed at least once every six months to ensure they are always
on the cheapest tariff available. Where such customers are not
on the cheapest tariffs, ensure their supplier moves the consumers
to that tariff within one month of the review.
February 2010
153 Joan Ruddock's speech to the Green Business Council:
Eco-Build 2009 event, Earls Court Back
154
Programmes to reduce household energy consumption, National
Audit Office, July 2008 Back
155
"Updated Household energy bills explained". Ofgem Factsheet
81, 06.08.09 www.ofgem,gov.uk Back
156
"Updated household energy bills explained", Ofgem Factsheet
66, January 2008. Based on average customer costs of £38 prior
to the September 2008 announcement of a 20% extension of
the CERT obligation. Back
157
Eoin Lees Energy: Evaluation of the Energy Efficiency Commitment
2005-08, 14 December 2008. Back
158
Hansard, 12 October 2009, c480W Back
159
Which? believes consumers should be given notification of a price
increase equal to the amount of time that it will take to shop
around and switch. On average it takes a consumer six weeks to
switch energy tariff, followed by a further six weeks before they
are on the new rate-totalling 12 weeks. Back
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