Memorandum submitted by Scottish and Southern Electricity

(SSE) (FP 24)

 

Overview

The Government is unlikely to meet its fuel poverty targets for 2010 and 2016 - this is:

 

a) because of the targets that the Government has set itself, and the definition of fuel poverty against which it benchmarks these targets and;

b) because the policies that it has implemented in this area have failed to address each of the three main causes of fuel poverty distinctly.

 

The current targets are benchmarked against a flawed definition of fuel poverty which makes them extremely difficult to achieve. This is because, under the definition, the number of households in fuel poverty is constantly changing.

 

Government should therefore look again at fuel poverty targets, and consider whether these assist or hamper policy makers. It is not always appropriate for Government to set targets, especially where significant aspects of the target are out of its control; in practice, flawed targets can undermine policy objectives.

 

In addition the Government needs to focus on developing policies that tackle each of the three main causes of fuel poverty distinctly - up to this point its approach has been piecemeal, disjointed and complex. It is only through focussing on each of the causes that Government has any chance of eradicating fuel poverty in the long term.

 

 

A) Defining Fuel Poverty

 

 

According to the Government, "a household is said to be in fuel poverty if it needs to spend more than 10% of its income on fuel to maintain a satisfactory heating regime (usually 21 degrees for the main living area, and 18 degrees for other occupied rooms)."

 

This definition is commonly accepted and understood by the vast majority of the parties involved with fuel poverty including Government, consumer groups and energy suppliers.

 

 

Flaws in the Definition

The major flaw with this definition is that fuel poverty is measured as a percentage of income. Therefore somebody paying 9.9% of their income on heating/power is classified as "not fuel poor", while somebody paying 10.1% of their income is "fuel poor". As such the figure for the number of households living in fuel poverty is constantly changing, depending on people's circumstances, choices, the weather and a whole host of other factors. This means that the Government's fuel poverty eradication targets are set against a definition which will make it very hard for them to actually be achieved.

 

Therefore, on the basis that fuel poverty is an accepted concept in the UK (although it appears to be less so elsewhere in Europe) Government should not be afraid of reviewing the definition. Better policy outcomes that help people most in need may be the result.

 

 

Working with the Definition

The fact remains, however, that there needs to be a definition of fuel poverty. Government and stakeholders will wish to continue to work with the current definition, in spite of its flaws, in advance of any more fundamental review. It is therefore the Government's fuel poverty targets that should be re-evaluated.

 

Clearly it would be a brave political decision to announce that the Government is re-evaluating its approach to fuel poverty due to the complexity of the problem. However it would allow it to focus on policies to effectively combat the three main causes of fuel poverty.

 

Given the problems that the Government has experienced with its current approach SSE's view is that the current definition of fuel poverty should be used as an umbrella definition which acts as a reference point for policies which tackle each of the three main causes distinctly.

 

Whilst the overall aim of eradicating fuel poverty would remain, goals or targets would be set for each of these distinct policies, not for fuel poverty as a whole - in this scenario the definition of fuel poverty would act as a barometer for measuring progress on fuel poverty, not as a benchmark against which overarching targets are set. (More on this below).

 

 

B) The Three Main Causes of Fuel Poverty

Fuel poverty is not a homogenous term. Rather there are three distinct causes of fuel poverty each of which need to be addressed separately. These are:

 

the energy efficiency of people's homes;

people's incomes; and

the cost of energy - energy prices at any one time.

 

 

The energy efficiency of people's homes: SSE firmly believes that energy efficiency is the most sustainable means of tackling fuel poverty, as well as providing the best way to achieve a reduction in carbon emissions arising from energy consumption.

 

In theory the more energy efficient a property is the less energy it will need to adequately heat and power it, and therefore its energy bills will be lower. As many houses in the UK are currently very energy inefficient it takes more energy to heat them to an adequate temperature than would be the case if energy efficiency measures were installed. This results in households using more energy, and therefore spending more money, than they need to.

 

This factor can push households, which would not be fuel poor if they lived in a more efficient property, into fuel poverty as defined above. Conversely these people can be lifted out of fuel poverty if the energy efficiency of their home is improved. It is therefore important that those who are in fuel poverty are given the means with which to adequately insulate their homes - given that they are fuel poor this work needs to be done at no, or minimal, cost to the householder.

 

In addition, it is important that the whole of the UK's housing stock is made more efficient in order to ensure, amongst other things, that other households don't fall into fuel poverty in the future.

 

People's incomes: a correlation between poverty and fuel poverty is inevitable. Energy bills for a house depend on the usage of the householders rather than the level of income the household receives - i.e. two families of a similar size, living in identical houses in the same area, and using the same amount of energy, and on the same tariff, will pay the same amount for their energy.

 

It is logical that those with low incomes spend a greater share of this income on their energy bills. Given the differing nature of people's personal circumstances, one household could spend 15% of their income on energy and the other 1.5%.

 

As such it is important that people's incomes are maximised. Many of those people who are in fuel poverty are also in poverty, and therefore will commonly qualify for benefits of some kind. Currently there are 16.5 billion worth of unclaimed means-tested benefits and tax-credits; ensuring that people receive their full benefit entitlements will help to ease the pressure that energy bills can have on some households, budgets. SSE offers benefits checks to customers who are on its social tariff, as well as to some households in areas in which it is undertaking energy efficiency work. Whilst SSE will continue to do this work, it is clearly sub-optimal for private companies to continue to do something which is clearly the ultimate responsibility of public agencies.

 

The cost of energy: the nature of the UK's energy market means that customers are more exposed to the volatility of the global market than their counterparts in France and Germany.

However in the past this exposure to the market led to consumers in the UK paying less than those in Europe because the price of wholesale gas and electricity was much lower. In September 2009 DECC stated that 'Estimates suggest that, for the period July to December 2008, prices for medium domestic gas and electricity consumers....were the lowest and seventh lowest in the EU 15 respectively.' These variations in prices illustrate the positive nature of the UK market model compared with counterparts elsewhere in the EU.

 

However it is generally accepted that over the medium and long term wholesale energy prices will rise as global demand for fossil fuels increases. Added to this are the raft of Government low carbon transition programmes that are being funded through consumers' bills. Currently these amount to 9% of bills but are forecast to be around 30% by 2020. The combination of these two factors means that it is likely that consumers' energy bills will rise over the next decade.

 

Therefore, apart from providing discounts on these energy bills through mandated social price support, there is little that the Government can do to shield consumers from these rising costs. The focus therefore needs to be on dealing with the two issues mentioned above - income maximisation and improving the energy efficiency of properties. As noted above energy efficiency is of particular importance because the unit cost of energy is predicted to rise - therefore the focus must be on reducing the number of units used.

 

SSE feels that these need be to looked at as a series of distinct issues, all of which need to addressed separately. However there has only been one policy from Government - its policy on social price support - that has actually tackled one of these causes directly; other attempts to tackle the causes have been done indirectly through policies that are perceived to be related, which has led to a piecemeal and disjointed approach to tackling the problem.

 

SSE therefore feels that Government should accept that current policies will not achieve the results required to meet the fuel poverty targets it has set itself.

 

 

Current Government Approach: Piecemeal and Disjointed

The largest and most fundamental problem that policymakers face when considering the fuel poverty issue is whether to tackle it through social policy or through energy policy. This question has not been properly resolved which has, in part, led to the piecemeal and disjointed approach that Government has adopted. It is worth noting that this disjointed approach has not been helped by the devolution of certain powers - e.g. on energy efficiency - to the administrations in Wales and Scotland which creates different approaches between national and regional programmes.

 

SSE feels that income maximisation falls under social policy, energy efficiency falls under energy policy, and the cost of energy (as measured by bills rather than unit prices) falls under both. Therefore energy suppliers definitely have a major role to play in improving the efficiency of the UK housing stock, and are also part of the solution when dealing with the cost of energy; Government should also play a role here and should take the lead on maximising people's incomes.

 

However the main methods that the Government has used for tackling fuel poverty up to this point are through energy policy. Energy efficiency work is carried out under the Carbon Emissions Reduction Programme (CERT) and Warm Front; and social price support, which will be mandatory if the current Energy Bill becomes law, is also provided by energy suppliers. The problem with the current Government approach to fuel poverty is that a) it attempts to tackle only two of the three causes; and b) it deals with improving the energy efficiency of fuel poor households through a policy which was not specifically designed for this purpose:

 

Energy Efficiency:

The Carbon Emissions Reduction Target (CERT) is designed to reduce carbon emissions and in this sense it has been a great success. However it is not an instrument that was designed to tackle fuel poverty and as such Government efforts to use it in this matter - e.g. through changes to the Priority Group (those aged 70 and over and those in receipt of relevant benefits / tax credits) - have not been successful.

 

Many of the measures that a household would need to be lifted out of fuel poverty - e.g. solid wall insulation, replacement heating systems - are not available under the scheme, and many households which probably are fuel poor do not qualify for "free" measures under CERT because they are not over 70 or on benefits.

 

Similar problems could apply to the new approaches. Although the final details for Heat and Energy Management (HEM) strategy are not yet known it is a programme designed to roll-out energy efficiency measures in order to reduce carbon emissions and energy usage across the UK's housing stock.

 

However the Government's CESP programme - which is targeted at Lowest Super Output Areas in England and Wales, and Data Zones in Scotland - is encouraging, and there will be a number of lessons to be learnt about which approaches work best when attempting to tackle the energy efficiency problems of fuel poor households.

 

N.B. It should be emphasised that CERT has been a highly effective programme in reducing both the UK's carbon emissions and its energy demand and HEM (the proposed successor to CERT) will have a vital role to play in ensuring that all of the UK's housing stock is made more efficient; this is crucial in ensuring, amongst other things, that more people don't fall into fuel poverty in the future. However a separate programme specifically designed to improve the energy efficiency of fuel poor households is also needed.

 

Social Assistance

In the Energy Bill the Government has proposed that it is given very broad powers to allow it to mandate a variety of social assistance packages through energy suppliers, building on the current offerings that suppliers provide.

 

SSE's approach to date has been to engage with Government towards a package that is:

 

1) Simple and easy for customers to understand and receive

2) Designed so it does not impact too heavily on non fuel poor customers with costs specified upfront

3) Equitably spread across suppliers

4) Set up so that eligible customers can be easily found by energy suppliers

5) Designed so that implementation costs are kept to a minimum

 

Social tariffs and rebates provide assistance to those who are struggling with their energy bills. However ultimately they should be used as an addition to policies on income maximisation and improving energy efficiency - they should not, in the long-term, remain at the forefront of fuel poverty policy due to their regressive nature. SSE accepts the proposed mandation of social price support in the current Energy Bill but feels that it is only a temporary solution that deals with one element of fuel poverty.

 

In addition the funding mechanisms for this, and other Government schemes, need to be carefully considered. Currently the Government is using the consumer base to fund fuel poverty policies (and other programmes such as CERT and the RO) through additions to bills - the cost of this proposal is estimated to be approximately 10 per dual fuel customer.

 

However because of the nature of the consumer base this is regressive; all consumers pay equal amounts towards fuel poverty, regardless of income levels. Government should be aware that this simply exacerbates the problem - bills rise because of the fuel poverty levy, causing more people to fall into fuel poverty, causing bills to rise further and so on. It may therefore be time to consider whether the tax base - which is means tested - would be a fairer way to fund a scheme which is designed to assist the poorest and most vulnerable households.

 

Tackling the Three Causes of Fuel Poverty

The fundamental flaws in the current definition of fuel poverty mean that the number of households living in fuel poverty is constantly changing, making any targeting initiatives very difficult to implement, and fuel poverty targets very difficult to achieve. In addition the policies that Government has implemented to tackle fuel poverty have failed to address each of the three main causes distinctly. Therefore SSE feels that:

 

a) The Government should look to re-evaluate its targets based on the three main causes of fuel poverty, using the current definition as a point of reference, not a benchmark against which over-arching targets are set, and keeping open the option of re-working the definition itself.

 

b) The Government should publish an overarching fuel poverty strategy that is not constrained by targets, and which has effective policies specifically targeted at each of the three main causes of fuel poverty in a holistic, rather than piecemeal, fashion. As noted above the current definition of fuel poverty can be used as an umbrella definition which acts as a reference point for these policies.

 

This is an approach that SSE has used in its efforts to help its most vulnerable customers. It has used the definition as it currently stands as a guide, focussing on customers personal circumstances on a case-by-case basis, rather than whether they fit the definition exactly. By adopting this approach SSE is able to target assistance at the most vulnerable as it can take into account a number of key variables including personal circumstance and lifestyle and offer the appropriate assistance accordingly.

 

The focus from Government should be on ensuring that homes are more efficient and household's incomes are maximised; social price support and other measures offered by suppliers will then provide a safety net for those who are still in fuel poverty after both of these issues have been tackled. However what this needs is a joined up energy efficiency and income maximisation programme the sole aim of which is tackle fuel poverty (and, by extension, poverty itself) - as such it would be separate from CERT or HEM, the aim of which is to cut carbon emissions, but would almost certainly draw on the lessons learnt from CESP.

 

An example of what the structure of this overarching strategy might look like in very basic terms is illustrated above. Each of the three areas would have a set of distinct targets and goals, and then policies in place to meet these - progress would then be measured against the current definition.

 

 

Overall Aim: eradicating fuel poverty.

 

Reference Point to Measure Progress: a household is in fuel poverty if it needs to spend more than 10% of its income on fuel to maintain a satisfactory heating regime.

 

1. Income Maximisation 2. Energy Efficiency 3. Energy Cost

Policies Policies Policies

Targets Targets (Targets N/A)

 

 

Possible Policies

As noted above here has been no emphasis on maximising people's incomes within any of the Government's fuel poverty policies. One possible way to do this would be to restructure the Winter Fuel Payment (WFP). This would be a bold move for the Government, or any political party, to suggest reform, yet this is exactly what it could call for, for the following reasons:

 

In 2006/07 Winter Fuel Payments were made to around 100,000 households containing pensioners with total annual income above 100,000. The overall spread of the Winter Fuel Payment is not directed in any way towards giving support for those that need it most.

The Winter Fuel Payment is not paid to people with disabilities or to struggling families with children, or disabled children.

Winter fuel payments are made to former UK residents living in the European Economic Area. In winter 2007-08 payments were made to over 30,000 people living in Spain, Portugal, Greece and Italy or Spain. At 250 a claim, this exceeds 7.5million. These people may not be the best recipients of assistance.

Finally, the payment is paid into pensioners' accounts in December. Would it not be more sensible for the payment to be a discount off bills, and to be paid in instalments in mid winter, and at the end of winter (when bills for the previous winter are actually coming through), or even directly to the energy supplier to be committed as a discount off bills?

 

In conclusion, SSE believes that the WFP, though highly valuable for around half of those pensioners who receive it, is no longer entirely fit for purpose. In today's environment of higher energy prices it would be better directed so that it is received by those pensioners who really need it, and given to other vulnerable groups, such as those with disabilities or large families. This could be start of a range of policies aimed at maximising the income of households in a targeted manner.

 

February 2010