Memorandum submitted by the Office of Gas and Electricity Markets (Ofgem) (FP 13)

 

 

Introduction

 

1. Ofgem welcomes the opportunity to provide evidence to the Energy and Climate Change Committee's inquiry into fuel poverty. Reducing fuel poverty has been a long standing challenge; however Ofgem's Project Discovery has highlighted the likelihood that energy bills will increase further over the next 10-15 years, making addressing fuel poverty an increasingly urgent issue. The Committee's inquiry is therefore a timely look at whether the steps being taken to address fuel poverty are adequate.

 

2. Ofgem is the regulator of the gas and electricity industries in Britain. Our principal objective is to protect the interests of gas and electricity consumers, both present and future. We do this by promoting effective competition where appropriate and through the effective regulation of the monopoly network businesses. We also have a range of important secondary duties including security of supply, contributing to sustainable development and paying particular regard to the needs of certain groups of vulnerable energy consumers. We are also required, through statutory guidance issued by the Secretary of State, within our sphere of responsibility to help the Government meet its targets for eradicating fuel poverty.

 

3. Fuel poverty has three causes: poor housing, low incomes and high energy prices. In our view the best way to tackle fuel poverty is through improving the energy efficiency of housing - which is the sustainable solution - and through the tax and benefits system, which is the least regressive and most flexible way of effecting redistribution. However, we recognise that in the current economic climate providing financial support in this way may not be a realistic possibility. Therefore we have committed to working with Government to ensure that any mandatory social tariff is as effective as possible and that any potential negative impacts on the wider consumer base and competition are minimised. Given our principal duty towards consumers as a whole, we will look at the total costs that other consumers, including those on low incomes and at risk of fuel poverty but not benefiting from any social tariffs, are being asked to pay.

 

4. Moreover, with regard to energy prices, there is an important and continuing role for the regulator and industry, as competition is important to keeping energy prices as low as possible. Through its energy supply markets probe Ofgem has been looking to ensure competition benefits all customers, including those who pay by means other than direct debit. Ofgem's Social Action Strategy sets out more broadly how we will seek to meet our social responsibilities and help the Government combat fuel poverty.

 

Ofgem's contribution to tackling fuel poverty

 

5. Ofgem is helping to tackle fuel poverty on a number of fronts: by keeping up pressure on energy costs, promoting competitive energy markets, securing compliance with regulatory obligations, regulating network monopolies and encouraging more efficient use of energy.

 

6. In seeking to protect consumers, Ofgem considers that effective competition and regulation will help to provide lower prices for all energy consumers. We at Ofgem are doing what we can to ensure that the market works well and does not disadvantage fuel poor consumers.

 

7. As part of this, last year Ofgem completed its energy supply markets probe and introduced a number of new measures aimed at giving customers additional protections and ensuring that all customers get the full benefits of competition, including measures to ban undue price differences; tougher rules on doorstep selling; more transparency in financial reporting; and, new requirements on suppliers to provide information to help consumers to get the best deal.

 

8. In relation to undue price differences, suppliers voluntarily removed 300 million of unjustified differentials from prepayment meter (PPM) and off-gas-grid customers' bills while Ofgem's probe was ongoing. The average PPM price differential over that paid by direct debit customers has now fallen by 22% and, at a consumption level which is reflective of an average PPM customer[1], in November 2009 was 86, compared with 109 in July 2008. Ofgem also introduced two new licence conditions from 1 September 2009 one of which prevents suppliers from charging more for one payment type than another, unless that difference can be justified by cost.  Ofgem is keeping under review the differences in charges for different payment methods and customer groups and will take action if these differences cannot be justified under our published criteria.

 

9. In early 2008, Ofgem also funded Citizen's Advice Bureau (CAB) to carry out a series of pilot sessions called 'Energy Best Deal' offering face-to-face advice regarding citizens' rights in the household energy supply market. These sessions were used to raise awareness amongst frontline advice workers about the savings that people can make by switching supplier or changing their tariff to their supplier's cheapest. It also raised awareness about the help available from both suppliers and Government for those struggling to pay their energy bills. Building on the success of the pilot a national roll out took place over winter 2008/09, funded by the Department for Energy and Climate Change (DECC) and supported by Ofgem. Another roll out of the campaign is taking place over winter 2009/10, this time funded by EDF Energy, E.ON and Scottish Power.

 

10. Ofgem has recently reported that the number of energy customers entering debt repayment arrangements for the first time has risen by 105% for electricity and 149% for gas in Q3 2009 compared to Q3 2008. Ofgem is concerned about this trend and has been reviewing suppliers' debt management policies and practices to ensure suppliers are doing all they can to assist their customers, particularly those who are vulnerable, to manage their energy bills. We are due to publish our findings shortly.

 

11. Related to our debt review, Ofgem has also recently reviewed suppliers' vulnerable disconnections policies and practices. Our report[2], published in October 2009, outlined a number of best practice examples amongst suppliers which we will be asking other suppliers to consider taking forward. It also proposed licence condition amendments to clarify, in particular, that suppliers must take all reasonable steps to identify vulnerable customers. We will be consulting on these proposals shortly. We also secured some changes to suppliers' existing self-regulatory arrangements.

 

12. Ofgem has also played a role in working with a range of stakeholders to help ensure that the help available from suppliers in the form of social assistance and energy efficiency measures is effectively targeted towards those who need it most and in monitoring the contribution made by suppliers. We have also worked with suppliers and others to try to improve the transparency around the help that is available with all suppliers now providing details of their social programmes on their websites to help consumer advisers understand what is available.

 

Progress against Government targets

 

13. DECC has estimated that in 2007 there were 4 million households in fuel poverty in the UK. Government's projections estimate that around 4.6 million households in England were in fuel poverty in 2009 (compared to 2.8 million in 2007).

 

14. Through Project Discovery, Ofgem has highlighted a number of challenges to Britain's gas and electricity supplies over the next 10-15 years. Chief among these challenges are a growing exposure to a volatile global gas market, power stations nearing the end of their life and meeting carbon targets. As a result of the levels of investment needed to meet these challenges, consumer bills could rise still further above current levels and make the Government's statutory target to eradicate fuel poverty by 2016 increasingly difficult to achieve. We have estimated that, based on a number of scenarios, consumer bills could rise by between 13% to 26% by 2020 and, under one scenario, potentially rise by around 52% in 2016 before falling back to some extent. This raises significant issues for those in, or at risk, of fuel poverty and highlights the urgency of identifying whether the steps that are currently being taken to reduce levels of fuel poverty are sufficient to ensure that those most in need are helped out of fuel poverty.

 

Definition of households in fuel poverty

 

15. Fuel poverty is defined as when a household has to spend 10% or more of its income on energy to maintain a warm home.

 

16. As more and more households are captured by the fuel poverty definition, it will become increasingly important to identify, target and assist those who are truly struggling to afford their energy bills. In doing this, it is important to consider some of the problems with the current fuel poverty metric. For example, with this metric, a 200 increase in energy bills would need to be offset by an increase in incomes of 2,000 in order for fuel poverty numbers not to rise. With the significant cost of tackling climate change and based on Ofgem's Discovery work, we can expect that consumer energy bills will increasingly take up a larger proportion of a household's budget than it has historically. It is therefore likely that a decision will need to be taken on prioritising the most serious cases of fuel poverty.

 

Government's initiatives on energy efficiency

 

17. Improving the energy efficiency of domestic housing is the most sustainable way to tackle fuel poverty - providing a longer term solution and one that brings environmental benefits. We have previously advocated what we term a "find and fix" approach, to ensure that when someone is identified as being in fuel poverty a comprehensive solution is provided to help lift them out. Energy efficiency measures directly tackle household energy expenditure and consequently reduce the share of income spent on energy. Targeting them effectively at households in fuel poverty, coupled with initiatives to boost incomes and ensure fuel poor customers are on the best tariff available given their circumstances, is a holistic way to address fuel poverty.

 

18. Government's initiatives in relation to feed-in tariffs (FITs) and, particularly, the Renewable Heat Incentive (RHI) provide an opportunity to help the fuel poor. However, the current design of these schemes is such that low-income households may find it difficult to meet the up-front costs or raise the loans for a "pay as you save" type scheme. Those on low incomes are also less likely to be able to benefit from these schemes as a result of their housing tenure (e.g. if they live in private rented accommodation). The complexity of the schemes also militates against their take up by this group. We therefore welcome the commitment by Government in the 2009 Pre Budget Report (and reiterated in DECC's recent consultation on the RHI) to consult later this year on measures to help low-income households take advantage of FITs and the RHI.

 

19. It is also important to note that obligations such as CERT, and now FITs and RHI, to improve energy efficiency are placed on suppliers, which then feeds through to energy bills. These changes can be regressive, impacting most on low income and fuel poor consumers. DECC figures show that CERT currently adds around 41 per year to the domestic customer's fuel bill, which is expected to increase to 52 per year assuming DECC adopts its preferred approach to extending CERT. With the addition of the RHI and smart meters, and the inclusion of the Renewables Obligation, Ofgem has estimated that environmental initiatives could make up 120 - 300 (8-22 per cent) of domestic bills by 2020[3].

 

20. In July 2009 Ofgem published a discussion paper[4] which looked at how these obligations could be structured to minimise the regressive effects and provide a stronger incentive for energy efficiency. Currently, each supplier's CERT obligation is based on the total number of domestic customers it supplies. This structure is inconsistent with incentivising energy efficiency and could be regressive since energy bills represent a higher proportion of expenditure for low income than better off households. We therefore welcome the Government consulting on whether a CERT obligation based on energy supplied (kWh) would be a more equitable method of apportioning the overall CERT obligation, rather than the number of customers supplied.

 

21. Ofgem will be managing the first stage of Government's smart metering programme. The role out of smart meters by 2020 will provide consumers with better information on their energy usage and help them to cut down waste and make instant savings on their energy bills. Smart meters also have the potential to reduce bills further by allowing for time of use tariffs, making it cheaper to use energy at times when demand is low, and could allow consumers to switch more easily between credit and prepayment billing arrangements. For this reason, they should also help reduce the price differential between PPM and direct debit payment arrangements.

 

Methods used to target assistance at households which need it most

 

22. We have consistently stressed over many years that one of the biggest challenges in tackling fuel poverty is identifying and targeting those most in need of help. Identifying and reaching the fuel poor in an optimal way requires information on the individual circumstances of each customer. Energy suppliers have limited information and there are valid concerns about data privacy that providing additional information could raise. Finding solutions to this challenge calls for an effective, joined up approach, notably from within, and between Government departments, suppliers and any other agencies involved to ensure that once an individual consumer has been identified as being in, or at risk of, fuel poverty they can be provided with access to the full range of help available from suppliers.

 

23. As a result of Ofgem's Fuel Poverty Summit in 2008, a number of key initiatives around targeting were taken forward, one of which was the data sharing initiative. Following the Summit, legislative provision was made in the Pensions Act 2008 to facilitate data sharing between DWP and energy suppliers - a step that Ofgem fully supported. DWP, DECC and suppliers have since developed more detailed proposals that will help suppliers to provide targeted help in reducing fuel costs for the poorest pensioners most likely to be in fuel poverty and to target their social programmes more effectively.

 

24. While data sharing is a key step, effective targeting of the fuel poor requires information not just on incomes but also on housing condition and potentially other information about the household's circumstances. One advantage of the current voluntary scheme on social support is that it allows for creativity in how to target (but with the downside that the eligibility criteria are not always clear).

 

25. The Eaga pilot (also an initiative from the summit) was aimed at demonstrating the advantage organisations that visit the customer in their home have because they are able to identify customers who may be in need of help based on information about both incomes and housing. The pilot involved Eaga signposting 3,000 customers to their suppliers for advice on the help available and to ensure they were on the supplier's cheapest tariff. A number of suppliers are continuing to work with Eaga in this way.

 

26. There are also many examples of local authorities and others working with partnerships such as Eaga to give help and financial assistance to fuel poor customers for energy efficiency measures, benefit entitlement checks and tariff advice. These demonstrate the potential role third parties and local authorities can play in targeting.

 

Social tariffs and plans to put social price support on a statutory footing

 

27. We have sought over the years to play our part in tackling fuel poverty - from encouraging the introduction of the first social tariffs as part of suppliers' Corporate Social Responsibility (CSR) work; through monitoring of the current programmes; to facilitating debate on some of the important challenges and promoting better coordination.

 

28. Under the voluntary agreement with Government suppliers are already providing significant social support to customers. Ofgem monitors these arrangements on behalf of Government. Our most recent report showed that suppliers had spent 157m against a target of 100m for the first year of the commitment with over a million customer accounts benefitting from some form of social tariff or discount.

 

29. The big challenge in putting these arrangements on a statutory footing is the question of eligibility and scale, which is a policy decision to be taken by Government. Given our principal duty towards consumers as a whole we will look hard at the total costs that other consumers including those on low incomes and at risk of, or in, fuel poverty but not benefiting from any social tariffs, are being asked to pay.

 

Support for households not connected to the mains gas grid

 

30. Ofgem's remit and powers as defined by statute are explicitly confined to the gas and electricity supply networks and markets. The regulation of LPG, oil and other heating fuels therefore falls outside of this legal remit.

 

31. In relation to extending the gas network, as part of the Gas Distribution Price Control Ofgem introduced an incentive mechanism to encourage gas distributors to extend their gas networks to communities not connected to the gas network.

 

32. As part of this, Ofgem recently approved new partnership arrangements that will mean up to 20,000 fuel poor customers that currently rely on electricity, coal or fuel oil to heat their homes could be connected to the mains gas network. Under these arrangements, gas distribution networks will work with partners, such as the EAGA partnership, to provide fuel poor households with a gas connection and grants for gas central heating and energy efficiency.

 

33. For some customers, an alternative to extending the gas network could be the installation of micro-generation technologies, such as ground source heat pumps. Through the distribution price control we have taken steps to provide for the network reinforcement needed to support ground source heat pumps.

 

34. In regards to the electricity consumed by those consumers who are off the gas grid, Ofgem's energy supply probe found, among other things, that the dual fuel discounts available to gas and electricity customers were such that electricity only customers were losing out disproportionately and that this was having a detrimental impact on consumers not connected to the gas network. The probe remedies discussed above were designed to help tackle this issue.

 

February 2010



[1] 20% less gas and 8% less electricity than average, based on findings during the Probe.

[2]'Review of protection for vulnerable customers from disconnection', Ofgem, October 2009. http://www.ofgem.gov.uk/Sustainability/SocAction/Publications/Documents1/Review%20of%20vulnerable%20customer%20disconnections%20report.pdf

[3] These figures do not include the costs of carbon associated with the EU Emissions Trading Scheme or the cost of FITs.

[4]'Can energy charges encourage energy efficiency? A discussion paper to prompt debate', Ofgem, July 2009. http://www.ofgem.gov.uk/sustainability/Documents1/Final%20discussion%20paper%2022%20July.pdf