Memorandum submitted on behalf of the Government's Fuel Poverty Advisory Group for England (FPAG)

 

 

The Fuel Poverty Advisory Group is a non-departmental advisory body, which consists of a chairman and senior representatives from the energy industry, charities and consumer bodies. Each member represents their organisation, but is expected to take an impartial view. The role of the Group is to:

Consider and report on the effectiveness of current policies aiming to reduce fuel poverty;

Consider and report on the case for greater co-ordination;

Identify barriers to reducing fuel poverty and to developing effective partnerships and to propose solutions;

Consider and report on any additional policies needed to achieve the Government's targets;

Encourage key organisations to tackle fuel poverty, and to consider and report on the results of work to monitor fuel poverty.

 

1. Executive summary

 

1.1 Progress against Governments targets In 2004 there were 1.2 million households, in England, in fuel poverty; the Government's own estimate indicates that there are now some 4.6 million households. High energy prices have been the biggest driver. The recession, plus the industries investment plans and uncertainty over new generating capacity will exacerbate the problem. The long term and sustainable solution is to radically improve the thermal efficiency of the UK's housing stock and by targeting the fuel poor first. It is, therefore, essential that the government implement programmes to meet the target of eradicating fuel poverty by 2016. Partnerships between local authorities, energy suppliers, and charities with a door-by-door, street-by-street model will be crucial to making more rapid progress.

 

1.2 How many homes could be in fuel poverty by 2016 and should carbon abatement be paid equally by all consumers? With every one per cent increase in prices, another 40,000 households are added to the number of homes in fuel poverty[1]. FPAG remains deeply concerned that the costs and implication of the UK's transition to a low carbon economy, has yet to be sufficiently explored. The Government's Low Carbon Transition Plan reveals an average additional cost of 72 per annum by 2020 for residential consumers. The explicit assumption is that all consumers will take 15% of their full energy efficiency makeover as comfort and the remainder in reduced consumption. For the fuel poor, many of whom under heat, this assumption is false and potentially misleads about the future price of energy and, therefore, its affordability. Furthermore, according to the Centre for Sustainable Energy, the poorest 20% of society emit 60% less than the richest 20%. Should all consumers therefore pay equally for carbon abatement? The attribution of these costs and other levies on consumers' bills to fund decarbonisation of energy production and its end use is increasingly urgent and requires much greater transparency.

1.3 Capital provision for Energy efficiency measures Without Treasury funding, the provision of capital is the most elusive element required to eradicate fuel poverty. FPAG recommends alternative and private capital raising mechanisms and innovative methods of recovery be trialled and explored, such as cost recovery via smart meters. These include private capital provision through a revised supplier's business model, and/or allowing the fuel poor to be part of a regulated 'fair trade' tariff solution with energy efficiency measures.

 

1.4 Fuel poverty definition The current definition of fuel poverty should broadly remain unchanged with a segmented and targeted approach to those most in need.

 

1.5 The coherence of the Government's initiatives on energy efficiency This could be significantly improved. Some of the existing schemes can, on occasions, compete for the same activity such as the CERT Priority Group and the main Government fuel poverty scheme Warm Front. Private sector landlords should have the appropriate incentives to meet specified levels of affordable Thermal Comfort[2] as a pre-condition of rental, such as by properly enforcing the Housing, Health and Safety Rating System.

 

1.6 The methods used to target assistance Opportunities to share data, with appropriate safeguards exist, but some are prohibited. For example, it is not currently possible for local authorities to use data on Council Tax Benefits and Housing Benefit for their own citizens to better target their fuel poverty programmes. Enabling data from Energy Performance Certificates, provided as part of the Home Improvement Packs, to also be used by local authorities, and potentially other stakeholders, for targeting. Capitalising on other face to face activities should be explored.

1.7 Social tariffs and Social price support FPAG is concerned at the regressive nature of the fund raising mechanism. This should be funded through general taxation and not a levy on consumer's bills. Every pound that is spent on social price support does nothing to reduce the long term capital requirement to address poor levels of energy efficiency such as insulation. In regard to social price support eligibility FPAG would support the Cold Weather Payments criteria.

 

1.8 Winter Fuel Payments This universal and popular 2.7 billion (2008/9) payment means households far from being in fuel poverty also benefit. For many pensioners it is an essential pension supplement and the term 'fuel payment' is potentially misleading. Nevertheless, anomalies such as payment to high rate taxpayers must be explored with a view to the reallocation to those fuel poor households who stand to benefit the most.

 

1.9 Support for households who are not connected to the mains gas grid Existing energy efficiency schemes provide a limited range of support for a number of different property types. There are alternative and renewable technology solutions including air source heat pumps, solar thermal systems, biomass heating and photovoltaic systems now available. FPAG wish to see some larger scale demonstration projects to further establish market knowledge, skills and confidence. We would also suggest that there is an opportunity created by the future renewable and nuclear energy mix. Resistive heating, that is where electricity is converted back into heat, and the opportunity to inject marginal cost energy throughout the day may be such an example and could form part of the system balancing mechanism required in the future.

 

2. Context

 

2.1 Fuel Poverty Figures The Government's own estimate indicates that there are currently some 4.6 million plus households in England in fuel poverty. This compares with 1.2 million in 2004. Almost 50% are pensioners and overall some 80% can be categorised as vulnerable. The average domestic dual fuel bills (gas and electricity) increased from 572 to 1,287 (+125%) between January 2003 and September 2008. Although there has been some recent reduction in energy prices, the long term trend is for them to increase.

 

 

2.2 Non gas areas Government figures for 2006 indicate around 2.7million homes in England do not have mains gas; of these, just under 0.6million (21%) were fuel poor. Their plight is exacerbated by space and water heating costs using kerosene or LPG being respectively 50% and 90% higher than those for mains gas.

2.3 Prepayment meters 14% of households that use a pre-payment meter for either gas, electricity or both are fuel poor (2006 data) - this represents 19% of fuel-poor households. 22% of households within the lowest income decile use prepayment. The latest monitoring data from Ofgem (September 2009) shows prepayment installation for debt recovery at a current rate of more than 1,000 per day (this excludes meter removals).

2.4 Energy debt The recession, together with this winter's extended period of cold weather, plus very high energy prices, is going to cause severe payment difficulties for many consumers. A worrying leading indicator of this is revealed in Ofgem's Domestic suppliers' social obligations report Quarter 3 2009. This reveals an increase in the number of consumers in Quarter 3 entering into new debt repayment arrangements for both fuels; +13% electricity and +21% for gas. This is even more worrying when compared to the same period for 2008; +105% electricity and +149% for gas.

 

2.5 Tariff differentials Despite some licence modifications to ensure tariffs reflect their costs; FPAG remains concerned that inequity persists. A pre-payment dual fuel consumer could pay up to 280[3] more than a consumer with an online deal via the internet and paying by direct debit.

 

Note

 

The diverse nature of the Group's membership may, on some occasions, prevent unanimity on some of the following points.

 

3. Progress against Governments targets

3.1 In 2004 there were 1.2 million households in fuel poverty. The Government's own estimate indicates that there are now some 4.6 million households. The Government has two statutory based fuel poverty targets in England:

 

By 2010 no vulnerable households to be in fuel poverty.

By 2016 no households to be in fuel poverty.

 

3.2 It is clear that the first target will not be met. The second target is already in jeopardy, despite some of the Government's very positive announcements which include:

 

Heat and Energy Saving strategy (HES)

Increased energy companies' social programmes,

The 20 per cent uplift to the current Carbon Emissions Reduction Target programme (CERT) and extension to 2012.

The Community Energy Saving Programme (CESP)

Increased Cold Weather Payments

Warm Front's budget increase

 

3.3 These developments in themselves, although welcome, are inadequate and further measures are required. Particularly in the hard/expensive to treat properties off the mains gas network and those with solid walls. Thus far, despite the increased risk of severe fuel poverty for such households (about a half of all fuel poor households live in such homes), there has been little on offer to improve their energy efficiency. This must all be part of a robustly co-ordinated and detailed plan, with key deliverables, by whom, by when, plus the precise funding detail to eradicate fuel poverty by 2016.

 

4. How many homes will be in fuel poverty by 2016 and should we all pay equally for carbon abatement?

 

4.1 The UK is entering a transformational energy context, but as we move to a low carbon economy, FPAG remains concerned that the costs and its implication have yet to be sufficiently explored. This is essential to adequately inform the decision making process and subsequent policy instruments to ensure consumer equity and affordability.

 

4.2 For example, DECC and Ofgem do not appear to understand the apparent dichotomy of their respective conclusions regarding the costs implications of low carbon energy for consumer's energy bills. The Government's Low Carbon Transition Plan gives only one energy price scenario, and a clearly optimistic one, with an average additional cost of 72 per annum by 2020. This is based on the assumption that all consumers will take 15% of their full energy efficiency makeover as comfort and the rest in reduced consumption. For the fuel poor, many of whom under heat, this assumption is false and could potentially lead to complacency about the future affordability of energy for the fuel poor. Ofgem's recent announcement raising affordability and its other concerns is timely and welcome. Furthermore, Ofgem's recent energy price scenarios indicate a potentially worst case scenario of a 60% price increase.

 

4.3 Should all consumers pay equally for carbon abatement? According to the Centre for Sustainable Energy, the poorest 20% of society emit 60% less than the richest 20%! The attribution of these costs is important and will require Ofgem's intervention to determine, for example, should recovery be on a per kWh basis, plus a higher charge at a certain consumption threshold? Smart meters could facilitate differential charging if this became policy.

 

4.4 A range of factors, such as security of supply, imported gas, carbon prices, low carbon objectives, power station construction and policy issues etc all have the potential to create uncertainty in the energy markets, drive energy prices higher and, increase the numbers of households in fuel poverty. A thorough analysis of these factors and their implications for consumer equity and pressures placed on energy suppliers to keep energy prices low must be undertaken.

 

4.5 With every one per cent increase in prices, another 40,000 households are added to the number of homes in fuel poverty (Consumer Focus 2009).

 

5. Capital provision for energy efficiency measures

 

5.1 Without Treasury funding, the provision of capital to enable the installation of energy efficiency measures to eradicate fuel poverty is the most elusive element of the fuel poverty challenge.

 

5.2 FPAG considers it essential that the up-front installation costs of energy efficiency measures, including more expensive measures, are fully funded for low income households.

 

6. There is an opportunity to explore whether the supplier's business model can incorporate the capital provision, from whatever source, for energy efficiency measures and a robust cost recovery mechanism to assist the eradication fuel poverty.

 

6.1 Suppliers/Distribution Network Operators (DNO's)/National Grid and others, with the appropriate cost recovery mechanism, may be able to raise the capital, at an acceptable cost, for energy efficiency measures, and this should be further explored. Smart meters could facilitate the secure and long term electronic means of cost recovery. This could endure through change of supplier/ownership/tenancy, potentially by being tied to the property and being an additional part of a unique long term Distribution Use of System (DUOS) charge.

 

Fuel poor consumer If a supplier funds and executes a full range of measures in return for a longer term consumer relationship, part of a consumer's social price support could be used to fund the capital interest payment. The capital could be repaid when public funds permit or at the time of property sale. If payment of the capital interest is made by Government, then the consumer could remain within existing competitive market rules.

 

Non fuel poor consumer Capital could be recovered as per 'Pay As You Save' proposal but over a longer term. By using a smart meter channel for payment and without the need to have separate billing, this should facilitate lower risk and therefore better cost of capital

 

6.2 As alternative to 6.1 above, or a combination of both, the benefits of fuel poor households being offered the opportunity to be part of a regulated solution with a 'fair trade' tariff and a complete energy efficiency makeover should be explored.

 

6.3 The 'fair trade' tariff may not be the cheapest and could, for example be related to a small percentage difference to the best online deal. Some 50% of the fuel poor are pensioner households. Price differentials for the internet literate consumer buying energy and being serviced on line, compared to someone paying by prepayment for dual fuel, is now in excess of 280 per annum[4]. Some 5 million pensioners have never even been on line. Poor literacy, numeracy, lack of broadband and being unbanked all drive consumer exclusion from the competitive market. Nevertheless, all consumers currently pay for the systems and overheads that facilitate the competitive market.

 

6.4 The CERT extension proposals should be developed so that suppliers are required to fully treat a particular number of fuel poor households if a means can be found to identify them.

 

6.5 The CERT extension provides an excellent opportunity to help build the evidence base on which to determine some elements of future energy policy and strategy. For example, DECC analysis concludes that consumers' bills will increase on average by only about 70 due to environmental requirements, as previously mentioned.

 

6.6 Government should develop the smart meter framework to facilitate a long term and robust cost recovery mechanism/channel to enable consumers to purchase energy efficient appliances. Old appliances tend to be less efficient that new ones and fuel poor households are less able to acquire them. In order to address this and also the future requirements for Demand Side Management (DSM), Government should also explore the case for appliances purchased via the proposal to be available for DSM as a condition of sale.

 

6.7 Government should consider if there should be an incentive for DNOs/National Grid to facilitate the provision of capital and its long term cost recovery through the mechanism outlined above. The fragmented nature of the energy supply chain does not lend itself to the economic model that exists in many other countries. However, Ofgem does seek to get DNOs engaged in this through Distribution Price Control Review (DPCR) 5 compared to previous DPCRs which effectively facilitated larger assets to meet growing demand. This could be incentivised through investment in the network being avoided.

7. Fuel poverty definition

 

7.1 The current definition of fuel poverty as a household needing to spend more than 10% of their household income on all domestic fuel use, including appliances, to heat their home to an adequate level of warmth, should remain unchanged. However, with the inexorable rise in the numbers it is inevitable that some segmentation and prioritisation must now be made to address the most serious cases as a matter of extreme urgency.

 

8. The coherence of the Government's initiatives on energy efficiency

8.1 The coherence and co-ordination of the current policies must be significantly improved. The main programmes are:

 

 

Warm Front FPAG believes that Warm Front has been an extremely successful and beneficial programme. This provides grants to private sector households claiming a range of means tested and other welfare benefits to install a range of insulation measures and heating systems. The Scheme has worked well and is estimated to have assisted 215,000 households in the financial year 2009/10. The Scheme assisted some 233,594 households across England in 2008/09, saving an average of more than 350 per year off their energy bills, and 1 tonne of carbon. In 2007/08 the Scheme assisted 268,900 households, and in 2006/07 253,079. With the increase in funding announced in the recent Pre-Budget Report it is estimated the scheme will assist 166,000 households in 2010/11.

 

More than 30% of the activity carried out under Warm Front is in households with the lowest SAP ratings (less than 30).

The Scheme's Benefit Entitlement Check service identifies an average of more than 1,600 per year in additional income for those households that successfully take up the service.

Carbon Emissions Reduction Target (CERT) CERT's primary obligation is to reduce carbon emissions with the companies required to achieve a proportion of the savings (currently 40%) from a so called Priority Group. The Priority Group is defined as those households claiming a range of eligible benefits and households with someone aged 70 or over. CERT delivers a range of measures that provide the companies with cost effective carbon savings. These include a limited range of insulation measures including cavity wall and loft insulation. CERT measures can be delivered in any home irrespective of tenure.

FPAG would like to emphasise the achievements of schemes and programmes to date, in order to make clear that a significant amount has been achieved, and with more investment there is more that could very quickly be done

8.2 In addition local authorities and other social landlords invest in energy efficiency measures in their properties to meet the thermal comfort criteria of the Decent Homes Standard.

 

8.3 These welcome programmes represent considerable investment in energy efficiency and significant proportion of which can be invested in schemes to address fuel poverty. However, Warm Front and CERT will, for example, compete on occasions directly to install the same measures in the same properties.

 

8.4 In addition, the six major energy supplier companies can switch their schemes 'on and off', often at short notice, to manage the delivery of their targets. Similarly, when Government funding for Warm Front is uncertain, forward planning for suppliers and installers becomes very difficult. While this will be logical from the companies' perspective, it creates significant problems and militates against coherent, long term delivery and investment in capacity.

 

8.5 The Thermal Comfort criterion of the Decent Homes Standard has encouraged considerable investment in energy efficiency in social sector properties. However, the standards are relatively low and properties which meet the basic standards are unlikely to provide affordable warmth to the majority of tenants with today's increasing energy prices. While it is accepted that many social landlords have gone beyond the minimum standards, FPAG believes that the aim of the standard should be to provide affordable warmth to the majority of social tenants. As such, the thermal comfort criteria should, as a minimum, guarantee that properties meet the current Building Regulations standards for insulation and heating system efficiency. The Government is in the process of reviewing the Decent Homes Standard. This review offers the opportunity to revise the Standard to the extent that it represents a more effective tool to address fuel poverty in the social sector.

 

8.6 FPAG believes that Government should now be taking the necessary action to ensure private sector landlords have the appropriate incentive to meet specified levels of affordable Thermal Comfort as a pre-condition of rental. Meanwhile, increasingly, local authorities are setting targets for the proportion of private sector properties in their areas required to meet the Decent Home Standard. As a result, an enhanced Thermal Comfort requirement in the Standard could also help to combat fuel poverty in owner occupied and private rented properties.

9. The methods used to target assistance at households which need it most.

 

9.1 The challenges around targeting are well understood and FPAG welcomes the Pensions Act provision for data sharing between the Department for Work and Pensions (DWP) and energy suppliers. However, other opportunities to share data, with appropriate safeguards, do exist but are either currently not possible or have yet to be explored. These, for example, include local authorities, and potentially other stakeholders, not being able to use data on Council Tax Benefits and Housing Benefit for their own citizens to better target their fuel poverty programmes. Enabling data from Energy Performance Certificates, provided as part of the Home Improvement Packs, to also be used by local authorities for targeting.

 

9.2 Meanwhile, the Warm Front and CERT programmes identified above are significantly demand led and therefore often require potential beneficiaries to contact the companies or the managing agents directly. The companies and managing agencies also utilise a range of additional methods to target those eligible for assistance, however, the related cost of so doing can lead to limited attempts to target those most in need. For example, the inclusion of all over 70's in the CERT Priority Group, means it is more cost effective to promote these schemes to the more articulate, aware and better off over 70's than those most in need who may, for example, have literacy, numeracy or other learning difficulties.

 

9.3 The direct, proactive approach taken by, for example, Warm Zones, Green Streets, NEA, and the Warm Front tariff pilot are much more effective at identifying the target market. This approach, together with the partnership building with local care agencies and other voluntary organisations, can provide vulnerable households with reassurance and result in improved take up amongst the most vulnerable and needy households.

 

9.4 FPAG, therefore, welcomes the proposed data sharing exercise between suppliers and the DWP that seeks to significantly improve the targeting of those most in need and believe that it is essential that such data sharing can be made to work effectively.

 

9.5 FPAG considers it essential that a national property database of energy efficiency standards, potentially building upon the Energy Saving Trust's Home Energy Efficiency Database, is developed at the earliest opportunity. Such a database could potentially play an invaluable role in targeting energy efficiency and fuel poverty programmes if linked to data sharing such as that being trialled with the DWP.



 

10. Social tariffs and Social price support

 

10.1 FPAG acknowledges that suppliers have made progress in this respect and welcomes the Government's proposal to put this on to a statutory basis in the form of social price support. However, FPAG wishes to emphasise its concern at the regressive nature of the fund raising mechanism and considers that this should be funded through general taxation and not a levy on consumer's bills. The increasing number of levies on fuel bills and the consumer inequity that this creates has the potential to put even more consumers into fuel poverty. Furthermore, it must be recognised that social price support is a temporary fix of a fuel poverty 'symptom' and does not address the 'illness' of inadequate insulation. Every pound that is spent on social price support does nothing to reduce the long term capital requirement to address poor levels of insulation.

 

10.2 In regard to social price support eligibility, notwithstanding the Group's previously listed concerns about the regressive nature of the proposal, FPAG would support the Cold Weather Payments criteria:

 

People over 60 who receive Pension Credit

Those with a child under 5  in the family and get income Support or income-based Jobseeker's Allowance

 

Or those who receive:

 

pensioner premium, higher pensioner premium or enhanced pensioner premium

disability premium or severe disability premium

disabled child premium

Child Tax Credit that includes an individual element for a child or qualifying young person who is disabled or severely disabled

 

10.3 FPAG suggests households on means tested benefits with school age children should be added to the above.

 

10.4 To deal with those off gas with only electricity and who use electricity as their main heating fuel should receive a higher level social tariff on their electricity bills and broadly equivalent to the discount dual fuel consumers would receive.

 

10.5 Eligible households with only electricity and who use another fuel source, such as oil or LPG, as their main heating fuel should receive a social price support on their electricity bill and a 'heating addition' within their benefits.  The 'heating addition' should recognise the additional costs associated with these heating fuels. This proposal, and that in 10.5, would require some Ofgem intervention in order for supplier equity due to different levels of non gas areas etc.

 

11. Winter Fuel Payments (WFP)

 

11.1 For 2008-2009 the Government will have spent circa 2.7 billion on WFP. The universal nature of this popular payment means that millions of households who are comparatively affluent and far removed from fuel poverty, some even living overseas, and high rate taxpayers benefit from the payment.

 

11.2 The Government has previously estimated that the Payment removes only 100,000 households from fuel poverty; an extremely poor return for such an investment. However, FPAG does recognise that in addition to the difficulty of changing this payment there is a real risk of damaging the undoubted benefit this brings to those in or close to financial hardship particularly during the winter months. For many pensioners the WFP is an essential pension supplement and the term 'fuel payment' is potentially misleading.

 

11.3 Nevertheless, there are some clear anomalies, such as payment to high rate taxpayers. This should be explored with a view to the reallocation of monies to those households who would benefit the most. For example, at an annual cost of some 200 million those non-pensioner households on the lowest incomes and with an additional vulnerability factor i.e. some form of disability or a child under 5 years of age could receive substantial direct support with their actual winter fuel costs which could potentially be credited directly to their energy accounts, and financial support to allow a capital provision to be made available with interest only payments required.

12. Support for households who are not connected to the mains gas grid

12.1 FPAG would wish to take this opportunity to reinforce the need for creativity in the use of electricity and for the fuel poor in particular. The future generating mix will create a number of significant challenges in balancing supply and demand in a renewable and nuclear energy context. The decision to take production from a renewable source compared to nuclear or clean coal will require new demand side management opportunities. For example resistive heating in a fuel poor context and the opportunity to inject marginal cost energy throughout the day should be thoroughly explored as part of this strategy.

 

12.2 FPAG is concerned that current energy efficiency schemes provide a limited range of support for households occupying a number types of property, including those not connected to the mains gas network. There is clear evidence that mains gas is currently the cheapest fuel for space and water heating. FPAG welcomes the recent introduction of arrangements by the energy regulator, Ofgem, to fund the extension of the mains gas network to households and communities living in the most deprived areas in the short term.

 

12.3 There are alternatives heat sources, Solar, Heat Pumps etc for non gas fuel poor consumers. Despite Ofgem's proposal to facilitate some modest extension of the mains gas network, there is a growing awareness that most off-gas communities will, in the long run, have to rely on some form of alternative. Uncertainties about longer-term gas prices provides a further argument for adoption of heat sources and systems that can be widely applied in rural and other hard/expensive to treat housing. FPAG, therefore, welcomes the inclusion of alternative proven technologies on the Warm Front Scheme to specifically benefit fuel poor non gas households.

 

12.4 NEA, both through Warm Front and separately, has been involved in a number of alternative and renewable technology solutions including air-source heat pumps, solar thermal systems, biomass heating and photovoltaic systems. NEA has also tested state of the art internal insulation products that may prove commercially viable and look to Government to demonstrate commitment and political will in the widespread promotion and support of these new technologies.

 

12.5 FPAG would, therefore, wish to see some larger scale demonstration projects to further establish market knowledge, skills and confidence. In addition to the above, a tower block as part of district heating scheme would be one such example.

 

12.6 FPAG would also wish for the planning process for new shopping centres and supermarket developments to be required to explore the potential for their waste heat to be reused. There are enormous amounts of heat dissipated to the atmosphere through cooling and freezing in such developments.

 

12.7 Turning to heat pumps in particular, their development brings the very real prospect of an alternative solution to oil heating for non gas areas. FPAG would like to see specific application tariffs developed as part of this programme. Smart Meters will facilitate more creative tariffs and demand side management opportunities. FPAG, therefore, asserts that OFGEM be required to consider the regulatory incentives that would be necessary to stimulate the development of such tariffs, and also the implications for rural electricity networks coping with the added demand.

February 2010



[1] "Fixing the SAP" Consumer Focus 2009

[2] As defined in the Decent Homes Standard

[3] "Fixing the SAP" Consumer Focus 2009

[4] "Fixing the SAP" Consumer Focus 2009