Memorandum submitted by Scottish Power Limited (FP 11)
1. ScottishPower is one of the UK's major energy companies, supplying electricity and gas to a total of 5.2 million customer accounts, together with owning significant generation and networks interests. We are part of Iberdrola, one of the world's largest utilities groups.
2. ScottishPower has significantly increased its spending on social programmes in recent years, introducing a social tariff and a number of other schemes and rebates in addition to its ongoing support for the ScottishPower Energy People Trust. We spent in excess of our commitment under the voluntary agreement in 2008-09 and expect to fully meet or exceed our targets in 2009-10 and 2010-11. We are participating fully in the Government's data sharing trial.
Progress against Government's targets
3. The Government has set targets for England and Wales under the Warm Homes and Energy Conservation Act 2000 that, so far as reasonably practicable, fuel poverty is eliminated for vulnerable customers by 2010 and altogether by 2016. The definition of fuel poverty for these purposes is where a household living on a lower income is in a home which cannot be kept warm at reasonable cost. We discuss in the next section the relationship between that legal definition and the commonly used benchmark of 10% of income.
4. Fuel poverty is caused by the interaction of three factors - low incomes, energy prices and poor energy performance of the home. Steady progress is being made on the last of these factors, with the uplifted CERT programme delivering large amounts of cost effective insulation improvement, with a focus on the priority group of customers who are vulnerable by reason of income or age. By 2016, we expect very substantial further progress, so that un-insulated lofts and cavities will largely be a thing of the past. This will be good for the environment and for reducing fuel poverty. This double benefit arises for cost effective insulation measures; it is less clear that the highest cost insulation measures will help with fuel poverty, because of their impact on the bills of people who do not receive them.
5. The Government's Warm Front and Decent Homes programmes can also play a significant role in improving properties, particularly through measures which go beyond insulation and address such matters as modern, high efficiency heating systems. It will be important that the resources available for this important work are maintained or if possible increased.
6. On the income side, it is likely that the recession will have a negative effect, either directly by depressing the level of wages and salaries, or else through downward pressure on future pension and benefit levels. This could apply both to those provided by the state (where budget factors and comparison with wage levels may both depress payments) and the receipts from private pension funds.
7. These effects are compounded by the significant number of people not in receipt of their full benefit entitlements and tax credits. The latest published estimates suggest that the shortfall is in the range of £10-£16 billion a year, equivalent to the entire energy bills of around 10 million households. We believe that a pro-active programme of benefit entitlement checks could identify many of these cases of under-claim and lift a surprising number of families out of fuel poverty.
8. On the question of energy prices, there are two factors - the overall level of prices and the extent of any cross subsidy in favour of disadvantaged customers. The overall level of prices has clearly moved against the consumer in recent years as a result of changes in world energy markets; further adverse movements are likely as the costs of various Government environmental programmes filter into the cost base. At present, DECC estimates that CERT costs around £41 per household per year, increasing to about £52 with current and planned extensions, but significant further costs will arise from new and enhanced programmes including the growth in the renewables obligation, carbon capture and storage, the renewable heat incentive, feed in tariffs and CESP. There is no scope to recover any of this ground from industry profits, not least because of the requirement to achieve a return on the major investments needed in the sector.
9. However, good progress has been made in devising cross subsidy mechanisms that are compatible with the competitive market. Energy suppliers have agreed to spend an additional £225 million in the period 2008-2011 on social initiatives to help address the impacts of rising energy prices on vulnerable customers. Ofgem set out a common framework for suppliers to work within and its recent report, entitled 'Monitoring Suppliers Social Programmes 2008-09', stated that suppliers had spent £157 million on voluntary social programmes in 2008-09, a near three-fold increase compared with the previous year. We believe that the current voluntary commitment by suppliers has been effective in encouraging innovative and efficient fuel poverty initiatives.
10. An important limitation of cross-subsidy programmes is that they need to be paid for by higher energy prices for the people who are not beneficiaries. It is therefore important to find ways to target the help effectively on the areas of greatest social need. It should also be noted that the "tax base" for the payment for cross subsidy measures falls on the generality of consumers; this is generally a more regressive tax base than if the support for fuel poor customers were funded from the taxpayer in the normal way.
11. In conclusion, despite the rise in the headline number of people spending more than 10% of income on fuel, good progress is being made with insulation and cross subsidy measures that will help ensure that the effects of adverse movements in energy costs and incomes for the poorest are minimised. These programmes, delivered by the industry, have grown strongly in recent years. We would however like to see additional work done on the income side, first through a strong drive to deliver benefit entitlement checks and secondly to consider whether better targeting of Winter Fuel Payments could reduce fuel poverty. It will also be essential to maintain or if possible increase programmes such as Warm Front and Decent Homes to address other aspects where housing problems are limiting people's ability to keep warm at reasonable cost.
The definition of households in fuel poverty commonly used - i.e. those households where more than 10% of income has to be spent on fuel for adequate heating
12. We think that this definition is not an accurate proxy for the statutory test of whether a household living on a lower income is in a home which cannot be kept warm at reasonable cost. Depending on other necessary outgoings, a fuel bill in excess of 10% of income may, or may not, constitute a financial strain. In addition, the definition should be reviewed because it distorts policy for two reasons:
· it under-weights the impact of income initiatives in addressing fuel poverty;
· it does not adequately address the degree of fuel poverty and therefore does not help focus resources on the areas of greatest need (or properly assess the benefits of programmes like CERT which reduce the depth of fuel poverty for many while taking relatively few below the 10% threshold).
13. The first issue arises because income-enhancing initiatives can have a lesser impact on the fuel poverty statistics than bill reductions, even if the bill reductions are smaller. Suppose a family has monthly fuel bills of £120 and a monthly income of £1000. They are in fuel poverty under the 10% definition. An income initiative worth £150 a month would be sufficient to fully pay their fuel bill, but would leave them in fuel poverty under their current definition. A reduction of their fuel bill of £25 a month would be much less valuable to the family, but would apparently remove them from fuel poverty.
14. This effect could cause the Government to focus unduly on fuel cost related initiatives compared to income initiatives. It is worth noting in this regard that the cost of fuel bill initiatives falls on energy consumers - generally a more regressive revenue raising base than the tax system.
15. For example, consider a reform such as tapering or abolishing Winter Fuel Payments for pensioners earning at the higher rate of tax and spending the sums raised on increasing the payment for other pensioners. This would significantly assist those older pensioners who are having difficulty with their fuel bills, with (almost) no impact on fuel poverty among the group paying for the reform - but would have relatively little impact on the number of people above the 10% limit.
16. Turning to the second difficulty with the definition, it is inevitable that in order to meet the UK's ambitious climate change goals, the proportion of household expenditure that will need to be spent on energy will need to rise. Ofgem has suggested that the sector will need to invest some £200 billion by 2020, and this will inevitably put significant upward pressure on prices. In addition to this, many commentators believe that underlying world market prices for fossil fuels will rise. Against such a background, the criterion of fuel bills exceeding 10% of income could well be met by over 25% of households. As such, the criterion is likely to be a poor differentiator between people with high bills but sufficient residual income for a reasonable standard of living, and people facing a much more serious fuel poverty problem. This could lead to a poor targeting of the available support.
17. We would like to see the Government commission research aimed at finding a more workable definition that both properly accounts for income initiatives and is more effective at highlighting those households who need help with their fuel bills.
The coherence of the Government's initiatives on energy efficiency
18. We welcome the formation of the Department of Energy and Climate Change as it allows one department the opportunity to effectively focus and co-ordinate energy, climate change and fuel poverty policy. However, we must emphasise that for current and future policies to be effective in each of these areas, DECC must have a clear strategy for managing tensions between the objectives.
19. The Government's 11 September 2008 announcement included a 20% increase in the CERT programme and the introduction of the Community Energy Savings Programme (taking the total energy supplier investment to c. £3.6bn in such programmes). With 40% of all CERT money targeted at the Priority Group and CESP targeting households in areas of low income, it is clear that there is a strong focus on energy efficiency for pensioners and vulnerable customers, whilst still enabling the essential carbon savings to be achieved in the able-to-pay sector. In response to this announcement, ScottishPower did take early action in the winter of 08/09 to redirect a significant amount of our CERT spend into the Priority Group. Similarly, in the period of October to December 09 a significant investment in the Priority Group was also made.
20. CESP is significantly less cost-effective in terms of carbon savings than CERT, but it does allow for alleviation of fuel poverty in the most vulnerable groups within our society. Given the higher costs, it is important that the programme remains well targeted at the lowest income areas. CESP could also be a logical testing ground for certain post-2012 policy initiatives and we hope that it complements other Government programmes such as Warm Front and Decent Homes as opposed to competing with them.
21. We welcome the recent announcement of additional funding worth £83.8m to help social landlords insulate hard to treat cavity walls that would not otherwise be filled under the Decent Homes Programme by April 2011. However, the greater problem is in the private sector to which this funding does not apply. The average costs to reach a SAP rating of 80/85 in the private sector could be £10,500. This is a significant sum of money for households, not just the fuel poor. As the focus of CESP will also predominantly benefit Social Housing, it is clear that more action must be taken by DECC to address the energy efficiency of dwellings in the private sector which also houses a significant proportion of pensioners and vulnerable customers.
The methods used to target assistance at households which need it most
22. In July 2008, Ofgem set out categories of allowable expenditure enabling energy suppliers to direct spending under the voluntary agreement most appropriately to those living in fuel poverty. In targeting the spending, suppliers will have utilised existing information available about their customers such as the Priority Services Register. However, the numerous drivers of fuel poverty make it difficult for energy companies to accurately identify fuel poor people.
23. We are therefore committed to working with DECC and DWP on the Data Sharing project, which will see DWP and energy suppliers undertaking an exercise to target assistance directly at low-income older pensioners. It is important that the learnings from this pilot project are fully considered when developing plans for the proposed mandatory social price support framework from April 2011 onwards. Looking to future policy in this area, it would be useful to investigate the opportunity to data share in respect of other groups at risk of fuel poverty.
24. As well as the work on identifying the fuel poor, DWP can play a vital role in helping reduce the under-claiming of income related benefits. This work, which could make a huge difference to the number of people in fuel poverty, could also involve HMRC in working to minimise the under-claiming of Working and Child Tax Credit.
Social tariffs and plans to put social price support on a statutory footing
25. Although the current Voluntary Agreement has provided an effective framework for a major increase in social activities by the industry, we consider that any enduring solution should be on a proper statutory basis. For this reason, we have supported the provisions in the Energy Bill on the subject, subject to requesting some clarification to ensure that key elements of the current programmes remain eligible for inclusion in the new process.
26. For us, these elements include Income Maximisation Officers and Hardship Crisis funding across a number of community based fuel poverty programmes, winter rebates and debt assistance for those most in need, ongoing financial support to the ScottishPower Energy People Trust and access to energy efficiency advice and measures for those customers on the social tariff.
27. ScottishPower currently offers a social tariff which complies with Ofgem's definition that the tariff must be at least as good as the lowest tariff offered by us in the region on an enduring basis. This is regardless of payment method and includes online tariffs.
28. This is a difficult process to operate because the target price for the social tariff can move frequently, especially as a result of the fast moving online market. It can lead to very deep discounts for some customers, especially those on high cost payment methods, and much less support for others who may be equally or more in need of assistance. For this reason, we welcome the Government's focus on defining social price support as a fixed deduction from bills that overlays the existing tariff structure.
Winter Fuel Payments/Cold Weather Payments
29. The value of the Winter Fuel Payment was increased at the 2008 Budget and has been held at this revised level at the 2009 Budget, namely £250 for households with one or more pensioners aged 70-79 and £400 to those with a pensioner aged 80 or over. The impact of the Winter Fuel Payment, assuming it is used to pay for fuel, is significant as it represents c. 21% (£250) and 35% (£400) of an average annual Dual Fuel Direct Debit bill with ScottishPower.
30. However, the Winter Fuel Payment could impact fuel poverty more effectively if consideration was given to setting different qualifying criteria to actually target the fuel poor. It is arguable that pensioners who pay income tax at the higher 40% rate do not need the Winter Fuel Payment. If the Winter Fuel Payment was withdrawn or tapered for this group, this could release significant resources, which could be used to increase the level of the Winter Fuel Payment or widen the eligibility to support some non pensioner households at high risk of fuel poverty.
31. The timing and method of payment has also been criticised by a number of stakeholders. The payment is made before Christmas each year, when there is anecdotal evidence to suggest that the payment is not always used to pay fuel bills. In addition, a range of stakeholders would like to see the Winter Fuel Payment paid as a voucher to be 'cashed in' with the pensioners' supply company, or alternatively paid directly to the pensioner's supplier in order to direct it at the need intended. This would align with the core objective of the Winter Fuel Payment.
32. We also welcome the trebling of the Cold Weather Payments. However, this should not be a substitute for ensuring that the correct level of underlying benefit is paid. Experience in projects funded by the ScottishPower Energy People Trust suggests that for every £1 spent in benefit entitlement check programmes, up to £20 additional incomes can be recovered.
Support for households which are not connected to the mains gas grid
33. We are aware of the issues for homes which are not connected to the gas grid. Such households either have significantly larger electricity consumption, in order to carry the heating load, or else require expensive solid or liquid fuels. A small minority receive renewable heat.
34. We have suggested that the costs of some environmental programmes could be spread across electricity and gas customers - at the moment they are mainly charged on electricity. This could ameliorate the impact on electricity-only homes, on the grounds that decarbonisation is predominantly a general social good rather than an improvement in the electricity supply.
35. There have also been suggestions that the solid and liquid fuel sectors could run social programmes. However, the structure of the industry may make this difficult, because much of the retail distribution is handled by small local firms who might not be well equipped to run cross subsidy programmes. Also, because these fuels are more expensive, it may be more difficult for some of those paying for the cross subsidy to do so without themselves finding their budget under pressure.