Memorandum submitted by the Federation of Petroleum Suppliers (FP 5)
The Federation of Petroleum Suppliers Ltd (FPS) considers it important that the Committee is aware of the structure of the heating oil distribution industry in its inquiry into fuel poverty. FPS submits a resume of the position of heating oil distributors, together with views on assisting fuel poor households that use oil as a heat source and the lack of a common approach by Government departments to tackling climate change.
FPS wishes to address the following two items of those under consideration:
· Social tariffs and plans to put social price support on a statutory footing;
· Support for households that are not connected to the mains gas grid.
The oil distribution industry is concerned at the increasing number of vulnerable customers who are finding it difficult to pay for heating oil. However, heating oil distributors are mostly small businesses operating in a spot market and, unlike the large utility companies, are unable to offer financial assistance to these customers. Consequently, our views on the action that can be taken to alleviate fuel poverty amongst heating oil end users are as follows:
· Oil distributors have budget payment plans but are not in a position to subsidise customers beyond that;
· The industry is highly competitive so that customers can take advantage of any fall in the price of oil by choosing when and from whom to purchase;
· Oil prices change on a daily basis and so there are no tariffs for heating oil.
· Oil remains the best option for those not on gas mains as the heating system is cleaner and easier to operate than coal and cheaper than LPG;
· Government funding is best aimed at reducing annual running costs through insulation, solar heating and installation of condensing oil boilers;
· The UK Government should propose to the EU that VAT on domestic heating bills is reduced to zero;
· The different Government departments involved in implementing EU legislation on the various aspects of climate change must work together to produce cohesive policies.
· The DWP Third Party Payment Creditor Scheme should be extended to permit payments for coal, LPG and oil.
The Federation of Petroleum Suppliers
The Federation of Petroleum Suppliers (FPS) is the trade association for the oil distribution industry in the UK and the Republic of Ireland. It represents the majority of distributors in Great Britain from the small family business, which forms the greater part, to the distribution arms of some of the major oil companies - a total of around 2,750 road tankers. The Federation's members are responsible for almost all deliveries of heating oil to end users in Great Britain.
1.1 Oil distributors are concerned at the increasing number of their customers who are having difficulty in paying for oil to run their heating systems. Whilst distributors are not in a position to subsidise these customers, they are keen to look at other ways in which they can assist them.
1.2 There are around 250 oil distribution companies in Great Britain and approximately 300 in Northern Ireland. The majority are small, family-run businesses. They purchase heating oil from the refiners and importers at market prices, which change on a daily basis.
2 The market situation of the oil distribution industry
2.1 The high prices that oil has been attracting in recent times has put considerable pressure on oil distribution companies, as credit limits with their suppliers have not increased. The ensuing tightening of cash flow positions in a highly competitive industry has resulted many distributors' becoming unviable and having to sell their businesses to larger companies.
2.2 Reports from industry analysts Plimsoll Publishing Ltd confirmed that 2008 was a difficult year for the oil distribution industry and 28% of the companies analysed were losing money as a direct consequence of rising costs and price reductions. 2009 was also a difficult year because of the recession, with most companies reporting profits of less than 1% according to Plimsoll. Their analysis last month (January) reported that more job losses and cost cutting are necessary if distributors are to survive.
However, at the moment, there remain sufficient players in the market to ensure that the price of heating oil to end users is extremely competitive.
2.3 The heating oil market is a volume driven, low margin market. Excluding duty and VAT, UK prices for heating oil and other fuels are amongst the lowest in Europe. Price controls to address fuel poverty would be disproportionate.
2.4 There is a number of oil distributors in each locality from whom customers can buy oil. These can be found in Yellow Pages or via the FPS website. It is therefore simple for customers to phone round to get the most competitive price. As heating oil is purchased on a spot market basis, they have no contract with and so are not tied to a particular supplier and can shop around as they wish.
2.5 The financial costs of fuel for households off the gas mains are not always as high as popular belief would have. The latest figures from the independently compiled Sutherland Tables of Comparative Domestic Heating Costs, which show that the annual costs of heating and hot water for a three bedroom house, using the various fuels at prices averaged over the six months to October 2009, are:
Housecoal (Open fire and radiators) £1171
Electricity (Storage heaters, radiators and immersion) £1191
Mains gas (Condensing boiler) £856
LPG (Condensing boiler) £1360
Oil (Condensing boiler) £818
Copies of the Sutherland Tables can be obtained via ww.sutherlandtables.co.uk.
Whilst the price of heating oil did rise considerably for a period last year, suppliers responded swiftly when the price fell again.
Because the price of oil responds swiftly to changes in the price of crude, it gives customers the opportunity to stock up when the price is low.
3 Industry assistance for vulnerable households
3.1 Almost invariably, distributors offer monthly payment schemes to customers. Until recently, the majority of distributors would try to ensure on a charitable basis that vulnerable customers were not left totally without fuel. However, the numbers of fuel poor have increased to a level whereby they can no longer afford to do this.
3.2 The price the distributors pay for oil varies on a daily basis. The price the customer is charged depends on this and also on a number of other variables, such as delivery volume, location of the delivery site, whether a number of deliveries in the same neighbourhood can be combined to cut down on costs, ease of access to the delivery site - some need 'mini' tankers where there is limited access, etc. Because of these variables, distributors do not operate payment tariffs and a 'social tariff' is not applicable.
4 Government assistance for vulnerable households
4.1 FPS endorses the Government's initiative to provide financial assistance for vulnerable households to become more energy efficient and so reduce running costs permanently - and hopefully to a level that the households can afford. This seems a more sensible use of funds than continuing to subsidise higher running costs year after year.
4.2 For households using oil for heating, FPS recommends Government support for better insulation, solar panels and condensing boilers. Oil condensing boilers are the most efficient on the market at up to 97% SAP seasonal efficiency ratings compared with 93.3% for LPG and 91.5% for mains gas. (Source: DEFRA's Boiler Efficiency Database - http://www.sedbuk.com). This would be a cheaper and less disruptive solution for households off the gas mains than extending the gas mains to areas of low density/sparse housing. Also, it would avoid the inequity of taxpayers' money to be used to provide extensions to the privately owned gas mains infrastructure.
4.3 The Dept for Work and Pensions operates a third party payment creditor scheme. Under this scheme, gas and electricity suppliers can be paid by DWP for supply to customers with outstanding debts to maintain supply or to prevent any further debt accruing. If this scheme were to be extended to coal, LPG and oil distributors, it would be of great benefit to many of the fuel poor who require immediate help with fuel bills.
4.4 President Sarkozy suggested some time ago that the EU should perhaps consider reducing the minimum VAT level on domestic heating fuels to zero, as so many consumers are struggling to pay for heating. FPS suggests that the UK Government should formally propose such a measure to the EU. Although it would achieve only a small reduction in bills, these small amounts would help those on low incomes.
5 A consistent approach to energy efficiency
5.1 FPS considers it of paramount importance that the different Government departments involved in the various climate change measures and fuel poverty work together to produce consistent, complementary policies.
5.2 FPS is currently working with DECC's Low Carbon Business Unit to encourage and help end users to increase their energy efficiency under the Energy Services Directive. Part of the FPS and its members' work on this is to encourage customers to change to more efficient condensing boilers and install better insulation and solar panels, as well as considering using a biofuel/mineral oil mix fuel.
5.3 DECC's Renewable Heat Team is proposing to implement the Renewable Heat Incentive Strategy in direct conflict with the Energy Services Directive and Fuel Poverty policies.
The Renewable Heat Incentive Strategy proposes placing a further levy on fossil fuels in addition to the Climate Change Levy. Money raised from this new levy will be used to subsidise conversion of households and businesses without access to mains gas to renewable heating fuels. However, the new levy will place an additional financial burden on the fuel poor. Although they will be able to take advantage of the subsidies, many fuel poor households are in rented accommodation where conversion to renewable heating sources will be the landlord's decision and many others will need assistance in evaluating and changing to renewable heat sources.