Memorandum submitted by Which? (FP 50)

 

Which? is an independent, not-for-profit consumer organisation with around 700,000 members and is the largest consumer organisation in Europe. Which? is independent of government and industry, and is funded through the sale of Which? consumer magazines, books and other subscription services.

 

Executive Summary

 

Consumers spend an average 1,200 per year on energy bills, most of this on heating, yet as much as 1 in every 3 spent on heating bills is wasted. Seven million homes still have unfilled wall cavities and 10 million homes have no or inadequate loft insulation[1]. This wastage of heat and electricity is preventable, and at low cost; and the more energy bills continue to rise, the more important this becomes especially for those who are struggling financially.

 

The National Audit Office estimates that the typical household could save about roughly 30% of energy bills by adopting the cost-effective measures already available to them[2]. This highlights the important role of energy efficiency in alleviating fuel costs and why it is vital that any programs to deliver these measures, and others, are value for money and effective.

 

The carbon emission reduction target (CERT) is the primary program through which energy efficiency measures are delivered and we are concerned that it may not be fully delivering for consumers. Due to poor monitoring and evaluation it is impossible to assess whether it provides value for money raises and if consumers benefiting from the scheme. As all consumers pay for CERT this is clearly of consequence to those who are already or close to being fuel poor. The Government therefore needs to review whether or not it is effective and provide value for money before CERT is extended and evolves further.

 

Fuel Poverty

1 Which? has noted with interest that this short inquiry will look at the steps that have been put in place to eradicate fuel poverty. We feel that the two areas outlined in the call for evidence are of relevance to Which? as they all have an impact on consumers. These areas are: the methods used to target assistance at households which need it most; and plans to put social price support on a statutory footing.

 

2 In relation to these areas we would like to focus our written submission on one of the main Government initiative to target to target assistance at households which need it most, CERT. We are particularly concerned that CERT, which is designed to improve energy efficiency for us all, may in fact be driving many into fuel poverty. As part of our submission we will also comment on the plans to put social price support on a statutory footing, we are concerned that without additional provisions there is a real risk of this not delivering the maximum benefit.

 

The methods used to target assistance at household who need it most

3 CERT is the Government's primary mechanism for improving the energy efficiency of the existing domestic housing stock. It is a legal obligation on the six largest energy suppliers who have more than 50,000 domestic customers to meet CO2 emission targets for the domestic customers they supply. It was estimated that between 2008 and 2011, the energy suppliers will need to spend 2.8 billion on carbon reduction measures in order to meet their targets. In July 2009 the Government consulted to increase the CERT obligation by 20 per cent raising this to 3.2 billion.

 

4 CERT is aimed particularly at those who could benefit the most from energy efficiency as a Priority Group which includes those aged 70 and over and those on qualifying benefits get CERT measures for free as the supplier has to pay the whole cost.

 

5 The obligation means that the government estimates that energy suppliers need to spend 3.2 billion on CERT between them. There are six suppliers who qualify, these are: British Gas, EDF Energy, Npower, E.ON, Scottish and Southern Energy and Scottish Power.

 

6 Suppliers can promote measures to reduce CO2 emissions to any domestic consumer in Great Britain. They are not limited to providing assistance to their own domestic customers. These measures include loft insulation, boiler upgrades and energy efficient products, and are promoted to consumers directly, via contractors or through a relationship with a retailer.

 

7 On average, CERT results in 45[3] being added onto every energy bill every year as energy suppliers are allowed to transfer the cost they incur from CERT onto their customers.

 

8 For those benefiting from energy efficiency CERT measures, the savings may outweigh the increase in bills. Which? is, however, concerned that CERT may have detrimental implications on consumers due to:

> The potential it has to increase fuel poverty;

> The lack of financial monitoring and inability to determine whether it provides value for money;

> The ability to manipulate the mix of measures.

 

A possible cause of fuel poverty

 

9 At least 40% of efficiency measures under CERT have to be delivered to a 'Priority Group' of people on qualifying benefits or those over 70. However, perversely, the additional 45 per year on all fuel bills could be forcing more households into fuel poverty. Those on low incomes who are not eligible for Priority Group treatment are unlikely to be able to afford the CERT measures, even with a discount (for example, cavity wall insulation cost 380 on average). Yet, these consumers still have to pay for CERT on their bills. In addition, people living in older properties; where energy efficiency options are more limited; those who have already implemented energy saving measures in their home; and those living in rented accommodation whose landlords have no financial interest in paying for energy efficiency measures, are all likely to miss out on the full benefits, yet they still pay the full costs of CERT.

 

10 It is clear that those not receiving CERT measures are still paying at a rate estimated by Ofgem to be 45 per year[4] for which they receive no direct benefit. In relation to fuel poverty this is most relevant to those on low incomes are most likely to be affected by any increase in energy bills since they spend a higher proportion of their income on electricity and gas.

 

11 There is a risk of where CERT measures may create a perverse situation in which more households are forced into fuel poverty. As CERT has increased energy bills, household disposable income has decreased. Low income households on the brink of fuel poverty and as their bills increase then more and more of them will be classed a fuel poor. As a result, they will be put on social tariffs and they will no longer be paying for CERT, or at least not as much, and so those who can still pay will pay more and more.

 

12 This situation could become unsustainable in the long-term as the more people that are forced into fuel poverty - the less will pay for CERT as they will be on benefits. The consumers who are left paying CERT will be forced to pay more of the CERT obligation and are those in that group on the brink of fuel poverty may therefore be forced into fuel poverty, making the paying group of consumer forever shrinking. This creates a vicious circle for the Government, as more and more people will then qualify for benefits.

 

13 Which? realises that CERT is a complicated scheme and that a quick fix will not be available to ensure that everyone only gets advantages from the scheme, rather than disadvantages. As a result, we are asking the Government to review how CERT could be run more cost effectively and how future schemes should be administered that includes an investigation of whether it should be continued to be supplier-led or whether an independent body is required to allocate funds; and how it can be ensured that all types of households benefit from CERT and future schemes. We believe that a full investigation is needed to ensure that the inequality and unfairness of the system is addressed.

 

Poor monitoring and value for money

 

14 Suppliers are currently allowed to pass the estimated cost they incur for CERT straight through to customers. There is no way of knowing if the suppliers pass this on in full, in part, or in excess of the actual cost to their customers. As a result, if costs are unnecessarily high, this will indirectly increase fuel poverty as more costs are then transferred onto consumers. An independent report of a previous version of the scheme revealed that suppliers' costs were 23% less than the Government's estimate[5]. But, it is impossible to tell whether this translated into a profit for suppliers or 23% less costs being transferred to customers.

 

15 Because of the lack of monitoring of how costs are transferred to consumers, there are also no checks to ensure that money spent is used to deliver maximum carbon savings. The lack of transparency also makes it difficult to unravel the inter-dependent relationships between manufacturers, installers, energy suppliers and retailers. Even the Government has acknowledged the risk of double counting of carbon savings. For example, a supplier as well as a contractor or retailer could claim credit for the same CERT measure.

 

16 This situation is justified on the basis that the energy markets are competitive, so suppliers are incentivised to incur costs efficiently and minimise what is passed on to consumers. In reality, Ofgem has stated that the energy markets are not fully competitive. We know that many do not 'shop around' for the best deals. Instead, they could pay a higher proportion of the costs of CERT because they are on uncompetitive or prepayment tariffs- comparable to the situation.

 

17 A badly run scheme will result in higher costs for consumers. Yet, as there is inadequate monitoring in place to monitor what value we get from CERT, we are unable to determine whether unnecessary costs are transferred onto the energy suppliers' customers.

 

18 To improve on the current situation, a system to monitor the costs of suppliers and how they are transferred to customers would be beneficial. This could be done by a requirement for suppliers to declare carbon tonnes saved per on a tariff by tariff basis. The suppliers would then have to account for the costs of meeting their CERT targets by reporting savings achieved as tonnes of carbon saved against the money spent and identifying differences in costs between tariffs.

 

19 This would allow consumers to compare how much their energy supplier transfer of the costs to them compared to other suppliers. It would also allow Ofgem, DECC and consumers to judge whether CERT is implemented in a cost effective way.

 

Manipulating the mix of measures

 

20 The current set-up allows suppliers to over-promote a CERT product to meet their target - even if that product is not a very effective way of achieving carbon savings. In the past this was most evident with the big light bulb giveaways, where 152.6 million compact fluorescent light bulbs (CFL) were sent out between 2008 and 2009[6]. Suppliers were able to meet their targets easily and cheaply while avoiding paying for other measures, such as insulation, that are more expensive to implement, but that deliver higher energy efficiency savings.

 

21 Although this practice has now been stopped for CFLs, it could still happen for other products, since current monitoring focuses on whether the targets have been met (i.e. CO2 reduction measures delivered), not whether concrete increases in energy efficiency have been achieved.

 

22 To improve on the situation, Which? would encourage the Government to look into how a cap for each CERT product could be implemented so that once a product starts to dominate the market, the subsidies from suppliers are stopped to force suppliers to focus on measures that deliver more long-term benefits for consumers.

 

23 This would ensure that situations similar to the light bulb fiasco could not be repeated.

 

Proposal to put social price support on a statutory footing

 

24 Which? believes that it is important that all consumers are on the most appropriate tariff for them. Due to confusion and a lack of understanding of their energy use many consumers are not on the best tariff and this can result in consumers paying higher than necessary energy bills.

 

25 The introduction of minimum standards for tariffs and improvements to bills and statements would be a significant step in helping consumers compare and understand the tariff offerings available.

 

26 The minimum standards for the tariffs should include the following elements:

No hidden charges - no more 'no standing charges' tariffs when these costs are just subsumed into the overall price, and no unfair penalties if you want to change energy tariff.

A time guarantee if you change tariff - tariffs should be guaranteed for a minimum of 12 weeks.[7]

Reasonable warning about price changes - companies should commit to provide a minimum of 12 weeks notice if a tariff is going to be changed, or when special deals are going to end.

Tracker tariffs need to track something meaningful - until there is a standard measure used to benchmark tracker tariffs they should be removed from the market.

No misleading names - 'green tariffs' shouldn't be called green when they don't and can't deliver energy from renewable sources.

 

27 The introduction of minimum standards for tariffs should be complemented with the introduction of a summary box on all bills and statements that includes the following:

The exact tariff name.

The amount of energy used.

The rate of gas and/or electricity per kWh and how this is broken down on a daily basis.

How the cost has been calculated.

Any discounts you are benefiting from and when they end.

Any fees you will have to pay if you change supplier.

 

28 By addressing tariff confusion and complexity consumers will be able to better judge the tariff for them, which may allow them to move out of fuel poverty and therefore not need social support. For those consumers who are fuel poor and eligible for the social price support scheme it is important that they are also on the available cheapest tariff. The amount of support required per consumer will be less and so enabling the scheme to reach more consumers, and prevent money being wasted by subsidising inappropriate and expensive tariffs.

 

29 The proposed clause in the Energy Bill currently going through parliament includes proposals to change the current system. However, the proposed social price support scheme that will be given statutory footing does not set out provisions to ensure that customers benefiting from the new support scheme are also on the most appropriate tariff, and we are concerned that this will reduce the impact of the social price support scheme.

 

30 To ensure that the greatest benefit comes from the new social price support scheme, those who qualify should be on the cheapest tariff and have their account reviewed periodically, every six months, to ensure they are still on the cheapest tariff.

 

Recommendations

 

31 The current proposal for the social price support scheme has the potential to be a wasteful situation, and therefore needs urgent attention. Likewise, with the CERT scheme being extended, and other energy efficiency policies already announced or in the pipeline, these issues must be resolved to ensure that the benefits outweigh any disadvantages for consumers including exacerbating fuel poverty. In light of this, Which? makes the following recommendations:

 

> Carbon tonnes saved per on a tariff by tariff basis. Ofgem to require suppliers to account for the costs of meeting their CERT targets by reporting savings achieved as tonnes of carbon saved against the money spent and identifying differences in costs between tariffs.

 

> A cap for each CERT product so once a product starts to dominate the market, the subsidies from suppliers are stopped to force suppliers to focus on measures that deliver more long-term benefits for consumers.

 

> A review to consider how CERT could be run more cost effectively and how future schemes should be administered that includes an investigation of whether it should be continued to be supplier-led or whether an independent body is required to allocate funds; and how it can be ensured that all types of households benefit from CERT and future schemes.

 

32 In addition, to ensure that money from the social price support scheme is used efficiently and in the most effective way to reach the highest number of customers Which? have the following recommendations for helping consumers address which tariff is most appropriate for them:

 

> Introduction of minimal standards for tariffs to increase comparability of tariff offerings.

 

> Improve the quality of billing information to enable consumers to better understand their tariff and energy use.

 

> Ensure that the regulatory framework that will set out the full detail of the social price support scheme requires that those receiving support have their tariff reviewed at least once every six months to ensure they are always on the cheapest tariff available. Where such customers are not on the cheapest tariffs, ensure their supplier moves the consumers to that tariff within one month of the review.

 

February 2010



[1] Joan Ruddock's speech to the Green Business Council: Eco-Build 2009 event, Earls Court

[2] Programmes to reduce household energy consumption, National Audit Office, July 2008

[3] Updated Household energy bills explained. Factsheet 81, 06.08.09 www.ofgem,gov.uk

[4] "Updated household energy bills explained", Ofgem Factsheet 66, January 2008. Based on average customer costs of 38 prior to the September 2008 announcement of a 20% extension of the CERT obligation.

[5] Eoin Lees Energy: Evaluation of the Energy Efficiency Commitment 2005-08, 14 December 2008.

[6] Hansard, 12 October 2009, c480W

[7] Which? believes consumers should be given notification of a price increase equal to the amount of time that it will take to shop around and switch. On average it takes a consumer 6 weeks to switch energy tariff, followed by a further 6 weeks before they are on the new rate - totalling 12 weeks.