Memorandum submitted by the Institute for Public Policy Research (ippr) (FP 34)

 

1. Summary

The 2010 fuel poverty target has not been met and it is unlikely that the 2016/18 target will be met because rising energy prices, increased levels of worklessness (resulting from the recession) and likely future constraints on public spending will all push up levels of fuel poverty.

There are a number of problems associated with the current definition of fuel poverty, which mean that fuel poverty is not necessarily being addressed in the most appropriate way. The definition therefore needs to be reviewed.

The current fuel poverty strategy does not prioritise energy efficiency measures, even though they represent the most sustainable and cost effective way of addressing the problem. In future, much greater emphasis needs to be given to energy efficiency.

Targeting fuel poverty programmes is notoriously difficult. We welcome attempts to use datasharing to improve targeting as well as moves towards 'area-based' approaches, which avoid the problems of targeting.

Using social tariffs and/or social price support makes sense as a short term measure, but it should not be seen as a long-term option because it is ultimately paid for by energy customers in a regressive way.

Winter Fuel Payments are not an effective way of tackling fuel poverty. They should be rolled into the Basic State Pension and replaced with a more appropriate fuel poverty payment, perhaps along the lines of Heating Additions, which were phased out in the 1980s.

Government should commission an independent review into fuel poverty, which should aim to fundamentally rethink the current approach

 

 

2. About ippr

2.1 The Institute for Public Policy Research (ippr) is the UK's leading progressive think tank, producing cutting edge research and innovative policy ideas for a just, democratic and sustainable world.  Ippr has a strong track record of policy-focused research on climate change, and welfare and poverty. We are currently engaged in a research project to assess the impact of current measures to tackle fuel poverty and to develop recommendations for how the fuel poverty agenda should be taken forward in a context of growing concerns about the fairness in the context of climate change policies, and increased pressure on public spending. We expect to publish our final report in February 2010.

 

3. Introduction

3.1 The winter of 2009/10 has been one of the coldest the UK has experienced for decades. The cold weather has highlighted the continuing problem of fuel poverty in the UK and heightened efforts to address the problem. The Government is conducting a review of its fuel poverty programme and looks set to introduce a new obligation on energy companies to reduce energy bills for vulnerable households. However, this is unlikely to be sufficient to eliminate the problem of fuel poverty entirely.

 

4. Progress against Government targets

4.1 Despite the progress in tackling fuel poverty seen in the late 1990s and early part of the 2000s, the number of people living in fuel poverty has been increasing since 2004/05. As a result, the 2010 target to end fuel poverty for vulnerable households in England will not be met. The primary driving factor in pushing up instances of fuel poverty has been the sharp rise in domestic energy prices seen in recent years; domestic gas and electricity prices have increased by approximately 100 per cent since 2004.[1] Although the introduction of more generous benefits (such as Pension Credit, tax credits and Winter Fuel Payments) and improvements in domestic energy efficiency will have had a beneficial effect on the number of people in fuel poverty, these have been outweighed by the increases in energy prices.[2]

 

4.2 It seems likely that without additional action, fuel poverty will continue to worsen in the future. There are three important drivers that are likely to increase instances of fuel poverty in the future:

1. Energy prices look set to continue rise in overall terms for the foreseeable future;

2. Household income may decline in the short term as a result of the recession and the associated increase in worklessness;

3. The likely reduction in public spending from 2010/11 to reduce the fiscal deficit could reduce the scope for government intervention to tackle fuel poverty.

 

4.3 These pressures suggest that without increased efforts to address fuel poverty, the legally enshrined target to eradicate fuel poverty among all households in England by 2016 will not be met.

 

5. The definition of households in fuel poverty

5.1 Our research identified a number of concerns with the definition of fuel poverty as it currently stands (although it should be noted that some of the experts we interviewed felt that the definition was adequate and should not be changed).

 

5.2 First, the use of 10 per cent as the cut off point for defining fuel poverty has been questioned. If energy prices continue to rise at a faster rate than income levels, then more and more people will cross this threshold and be classified as 'fuel poor'. There are several ways this problem could be dealt with. First, to increase the limit, for example, by making it proportional to the average spend on energy. The second is to retain the threshold but to identify different subgroups within the 'fuel poor' to help distinguish the most vulnerable. For example, this could mean identifying people who are on the lowest incomes, those who live in 'hard-to-treat' properties or people who are the most susceptible to health problems as a result of living in cold homes.

 

5.3 The second concern with the definition identified by our research was its formulation as expenditure on energy as a proportion of income. Defining fuel poverty in this way results in the confusing outcome that (statistically speaking) reducing energy bills is ten times more effective at removing people from fuel poverty than action to increase household income by an equivalent amount. This statistical effect has been a key factor in promoting action to reduce fuel bills through the voluntary agreement with energy suppliers and then the mandatory social price support. As we will go on to argue in paragraph 8.1 below, there are a number of reasons why increasing the emphasis on reducing bills (and therefore making energy companies and ultimately energy consumers pay) is problematic.

 

5.4 Ippr believes that the definition of fuel poverty should be reviewed as part of a wider independent review on fuel poverty.

6. The coherence of the Government's initiatives on energy efficiency
6.1 The Government's current fuel poverty strategy consists of a three-pronged approach: increasing household incomes, reducing energy bills and improving energy efficiency. It is widely recognised that energy efficiency measures represent the most cost effective and sustainable way to tackle fuel poverty (because energy efficiency programmes have a one-off cost which delivers sustained reductions in energy requirements, whereas measures to increase household income or to provide discounts on energy bills require continued funding).

6.2 However, the current, target-driven approach to tackling fuel poverty has tended to drive policy responses to focus on short-term solutions such as financial measures rather than long-term investment in energy efficiency. For example, the planned expenditure on energy efficiency measures through Warm Front (and equivalent programmes in devolved administrations) and the Decent Homes programme over the three year period between 2008 and 2011 is roughly the same as the annual spend on Winter Fuel and Cold Weather Payments. The lack of emphasis on energy efficiency is also reflected in the failure of current energy efficiency programmes to address hard-to-treat and off-grid properties.

6.3 A number of studies have attempted to estimate how much it would cost to address fuel poverty through a comprehensive domestic energy efficiency programme. The figures produced range from 9.2 billion (supplemented by support for energy costs) to 64 billion.[3] Ippr recommends that a full cost-benefit analysis setting out how long the 'pay-back' period would be for different types of investment should be conducted in order to better inform decisions about how energy efficiency measures could be better prioritised in future.

7. The methods used to target assistance at households which need it most
7.1 Targeting the fuel poor is notoriously difficult due to the diverse nature of households living in fuel poverty. In addition there can be problems achieving high levels of take up, even where targeting is good. There are many reasons that people fail to take up benefits that they are entitled to, but an important one is the stigma associated with being labeled as 'poor'.

7.2 We welcome attempts to improve targeting of energy companies' measures on fuel poverty through data sharing with DWP. If the datasharing trials with Guarantee Pension Credit recipients prove successful, we recommend that the datasharing approach should be extended to include recipients of Cold Weather Payments since there is a strong correlation between people receiving this benefit and those living in fuel poverty. Although datasharing could improve targeting, there is still a problem with uptake, since currently the take-up rate of Pension Credit is only around 70-80 per cent, as measured by expenditure.[4] This means that 20-30 per cent of eligible customers will not receive a rebate under the Energy Rebate Scheme. We recommend that Government continues its work to improve uptake of Pension Credit to ensure that as many people as possible can benefit from the Energy Rebate Scheme (and Mandatory Price Support measures should the datasharing approach be extended to this scheme too).

7.3 We also support moves towards a greater use of 'area-based' approaches (such as the Community Energy Saving Programme and Warm Zones) as these overcome many of the targeting problems - including problems of take up - since the programmes include all households, not only those meeting the definition of being 'fuel poor'.

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

8.1 Our research revealed a strongly held conviction among representatives from NGOs, fuel poverty campaign groups and energy companies that in an ideal world, fuel poverty would be addressed solely through the tax and benefits system. This is because measures applied through energy companies are ultimately paid for by energy consumers and the costs are passed on in a regressive way. This contrasts with the tax and benefit system, where income tax at least is 'progressive' (higher earners pay a larger share of their income in tax than lower earners) and governments can use benefit payments to disproportionately increase the incomes of the poorest.

 

8.2 However, while we recognise that social tariffs/mandatory price support might not be the ideal option, we also acknowledge that given the current pressures on public expenditure, it will be necessary to continue with energy supplier-led measures on fuel poverty in the short term. But they should not be seen as a long-term option.

 

8.3 The introduction of social price support has a number of advantages over the existing system of social tariffs, most notably because it creates a unified system across all energy suppliers, providing more clarity and consistency for vulnerable consumers.

 

8.4 However, it remains a regressive tool and to try to minimise the impacts of this approach, we recommend that Government should investigate ways to ensure that costs are passed on to customers in the least regressive way possible. One way to do this might be to design the balancing mechanism between energy companies (to ensure no company is made to bear a disproportionate share of costs of implementing the scheme) on the basis of units of energy sold rather than number of customers. This approach would encourage suppliers to pass on the costs on a per-unit basis rather than as a fixed cost per customer. Since people on higher incomes tend to use more energy than those on the lowest incomes, this approach could be more progressive on average.

 

8.5 Our research identified a number of risks associated with the introduction of mandatory price support. First, moving away from social tariffs towards a rebate system means there will no longer be a guarantee that recipients are on the lowest available tariff.

 

8.6 Second, the level of the rebate is not linked to energy prices, so there is a risk that prices could rise by more than the level of the rebate, in which case recipients will be tipped back into fuel poverty.

 

8.7 Third, there is a question about what the level of the rebate should be. If it is set too high, then the additional costs (which are ultimately borne by all energy consumers) could end up pushing customers at the margin (but who are not eligible for rebates) into fuel poverty. There should be scope to increase the level of the rebate in future as a precaution against large energy price rises. However, we recommend that Government should commit to match any future increased spending requirements imposed on energy suppliers with an equal increase in publicly-funded fuel poverty programmes to ensure the balance between government- and energy company-led programmes does not tilt any further towards the energy companies and hence result in a more regressive approach to paying for fuel poverty measures.

 

8.8 A final concern is that customers who were eligible for social price support but who already benefited from a social tariff might be excluded from receiving the rebate. We believe that using data provided by DWP to exclude some people from receiving the rebate goes against the spirit of the data sharing as allowed under the Pensions Act 2008. We therefore suggest that the rebate created by mandatory social price support should be offered in addition to the measures already offered under the voluntary agreements.

 

9. Winter fuel payments and cold weather payments

9.1 It is widely acknowledged that Winter Fuel Payments (WFPs) are not an effective way of tackling fuel poverty, as only 12 per cent[5] of people who receive them are thought to be fuel-poor.[6] However, Winter Fuel Payments are an effective way of increasing the incomes of pensioners using a non-means-tested mechanism, which will benefit those on low-incomes who fail to take up their entitlement to Pension Credit. In addition, Winter Fuel Payments are a popular measure, which is likely to make their removal very challenging politically.

 

9.2 The Environment, Food and Rural Affairs Select Committee have proposed that WFPs should be made taxable and that the entitlement should be stopped altogether for higher rate tax payers.[7] While this is an attractive proposal in principle, it has been suggested that there may be some practical barriers that make this difficult and costly to implement in practice, as suggested by the Government's response to the Select Committee's recommendation.[8] It is difficult to make WFPs taxable because DWP would not be able to tax at source, and even if they could, the individual would need to establish their tax liability with HMRC and would need to make the effort to claim back tax. Stopping the payment for higher rate tax payers also raises difficult questions: would the WFPs be paid and then claimed back at the end of the tax year if recipients found their income was over the threshold, or would the decision about whether to pay the WFPs be based on the previous year's income? The latter case could cause concern for people who are about to retire and see their income drop substantially.

 

9.3 We recommend that ultimately, the WFP should be rolled into the Basic State Pension for the sake of clarity about the widely recognised purpose of the payment. This would also have the benefit of making the payment taxable thus avoiding the technical problems associated with taxing a separate WFP. As WFPs are phased out, a new form of benefit that genuinely addresses fuel poverty would need to be introduced. One possibility would be to introduce a new form of benefit along the lines of Heating Additions, which were phased out in the 1980s. Heating Additions were paid to Supplementary Benefit (Income Support) claimants who met certain criteria relating to the vulnerability of members of the household and characteristics of the dwelling.

 

10. Need for a radical review of the fuel poverty strategy

10.1 The context in which fuel poverty is being addressed has changed substantially since the Government's fuel poverty strategy was first developed in the early 2000s. Energy prices are rising, climate change is much higher on the political agenda and new technologies are offering new solutions to the problem. We believe that the time is right for a fundamental rethink of the Government's approach to the problem to ensure that it is fit for purpose in today's Britain. DECC's current review of fuel poverty does not go far enough as it will only deliver incremental changes to the current approach, rather than a thorough and strategic rethink.

 

10.2 We recommend that the Government should commission an independent review into fuel poverty, which should consider the following questions:

How can energy efficiency measures be prioritised over cuts to energy bills and income support?

Should fuel poverty be redefined to ensure a more rational approach to selecting fuel poverty measures?

Is target-setting an appropriate approach to addressing the problem?

How should responsibility for paying for fuel poverty measures be divided between government and energy companies to ensure the fairest approach?

Who should deliver fuel poverty programmes? Could there be a role for Distribution Network Operators or local authorities as well as central government and energy suppliers? And is there scope for better partnership working between these organisations?

How can new technologies (such as smart meters, micro generation and community heating) be used to help address fuel poverty?

 

11. Conclusion

11.1 Despite the Government's efforts, fuel poverty looks set to get worse, not better, in the coming years. While recent policy initiatives in this area (including increases in winter fuel payments and cold weather payments and the new mandatory price support scheme) will help tackle the problem to some extent, they will not be sufficient to eradicate fuel poverty entirely.

 

11.2 A new approach to dealing with fuel poverty is necessary and the first step towards this should be an independent review of fuel poverty that would fundamentally rethink the UK's fuel poverty strategy and ensure it is fit for purpose in a world of rising energy prices.

February 2010

 

 

 

 

 



[1] Office for National Statistics (ONS) (2009a) Economy webpages, available at: http://www.statistics.gov.uk/cci/nugget.asp?id=19

[2] Energy Action Scotland and National Energy Action (2009) The Cost of Affordable Warmth Glasgow/Newcastle-upon-Tyne: Energy Action Scotland/National Energy Action. Available at http://www.eas.org.uk/downloads/The%20Cost%20of%20Affordable%20Warmth_FINAL%20VERSION.pdf

 

[3] Jenkins D P (2009) 'The value of retrofitting carbon-saving measures into fuel poor social housing' Energy Policy 38(2): 832 - 839 ; Preston I, Moore R and Guertler P (2008) How Much? The cost of alleviating fuel poverty Bristol: Centre for Sustainable Energy;

Baker W (ed.) Raising the SAP: Tackling fuel poverty by investing in energy efficiency London: Consumer Focus. Available at http://www.consumerfocus.org.uk/assets/1/files/2009/11/FuelpovertyproofingcostpubMay09final.pdf ; Environment, Food and Rural Affairs Select Committee (2009) Energy Efficiency and Fuel Poverty, Third Report of Session 2008-09 London: TSO

 

 

[4] Department for Work and Pensions (2009b) Benefit Expenditure Tables Available at http://research.dwp.gov.uk/asd/asd4/medium_term.asp

 

[5] It should be noted however, that this figure is likely to be an underestimate owing to recent increases in domestic energy prices.

[6] Environment, Food and Rural Affairs Select Committee (2009) Energy Efficiency and Fuel Poverty, Third Report of Session 2008-09 London: TSO

 

[7] ibid

[8] Department of Energy and Climate Change (2009c) Government Response to the Efra Select Committee Inquiry: Energy Efficiency and Fuel Poverty London: DECC, available at: http://www.official-documents.gov.uk/document/cm77/7719/7719.pdf