Energy and Climate Change Committee - Draft Energy Bill: Pre-legislitive ScrutinyWritten evidence submitted by National Energy Action

1. Introduction

National Energy Action (NEA) is a national charity with a primary objective of eradicating fuel poverty. NEA works to tackle fuel poverty through the promotion of policies and services that enable the most financially disadvantaged and vulnerable households to achieve affordable warmth. NEA advocates high standards of heating and insulation as the long-term sustainable solution to fuel poverty, supplemented by fair energy prices and access to the benefits of the competitive energy market.

NEA estimates that fuel poverty currently affects more than 6.5 million households across the UK, and there are serious concerns that this total will increase further as domestic consumers face additional cost burdens as a result of continuing high global energy prices and Government proposals for a low-carbon energy industry. These households experience a number of detrimental health impacts and reductions in general wellbeing as a result of cold damp living conditions. In extreme circumstances low indoor temperatures can lead to premature death.

The cold increases blood pressure which increases risk of heart attacks and strokes. This alone is responsible for approximately 40% of excess winter deaths.

The cold lowers resistance to respiratory infections and impairs lung functions and can trigger bronchoconstriction in asthma.

Damp increases mould growths, which can cause asthma and respiratory infections. These symptoms are responsible for approximately 30% of excess winter deaths.

Another well known yet underrepresented example is impacts on mental and social health. Damp, cold housing is associated with a fourfold increase in depression and anxiety.

Some people become socially isolated as they are reluctant to invite friends round to a cold house.

Finally, in cold homes where only one room is heated, it is difficult for children to do homework, affecting educational and long-term work and health opportunities.

The UK Government is committed to a number of statutory objectives relating to energy security, renewables, climate change and fuel poverty. Compliance with this mix of environmental and social obligations has proven to be both challenging and costly and will continue to be so if Government objectives are to be attained. Simultaneously, retail energy prices continue to rise. Despite very small reductions earlier this year, the main energy suppliers and independent commentators have all confirmed that energy prices will continue to rise well into the 2020s. Whilst it is right to highlight increasing wholesale prices as the principle cause, increased demand and decreasing resources of non sustainable fuels are not the only driver. Whilst policy intervention is clearly required, energy policy is, and will increasingly, drive energy price rises too.

The Government’s Draft Electricity Market Reform legislation sets out the Government’s commitment to transform the UK’s electricity system to ensure that our future electricity supply is secure, low-carbon and, crucially, affordable. Addressing this issue or tension should be a primary focus of the Committee’s investigation.

Whilst NEA recognises the need for sufficient electricity capacity and environmental priorities, analysis of the impacts of policies on prices and bills, including analysis on households, reveals the EMR presents a number of threats to low income and vulnerable consumers. Independent research and initial impact assessments produced by the Department illustrate that many of the EMR proposals would severely impact on the poorest households and that there is a significant, regressive distributional impact.1

Whilst in the short to medium term, wholesale prices are not able to be curbed, if the UK wishes to pursue energy policy in a progressive manner, two key challenges must be overcome by the Government, the Regulator and the energy industry:

DECC and the Regulator need to further analyse and quantify what benefits, risks and costs accrue to different income groups as a result of decarbonisation policies.

Working alongside other Departments, this analysis must be reinforced by suitably ambitious compensatory policies to protect low-income and vulnerable groups.

In addition and as discussed later in this document there is significant risk that, unless remedial action is taken, many of the incentive mechanisms could simply act as a windfall for existing generators to the detriment of low-income and vulnerable consumers. NEA therefore welcomes the opportunity to respond to this call for evidence and seeks to highlight a number of areas that must be taken into consideration before this policy can be implemented.

2. Why should we act now?

To date, a range of market failures and barriers has frustrated attempts to tackle demand and supply side energy inefficiency, in both the traded and non traded sectors. Overcoming these barriers is critical to enabling all energy consumers to reduce their exposure to rising wholesale costs, reduce the costs associated with a transition to a low carbon economy (by obviating the need to build expensive forms of low carbon power generation to satisfy a continuing need for essential energy services) and reduce the consumption of these higher cost energy services (which will increasingly contain implied costs associated with Government policies to reach ambitious energy-related targets).

At the same time, it is universally recognised that fuel-poor households generally consume less energy than more affluent households but are more likely to occupy energy inefficient homes and are less likely to have access to resources to fund heating and insulation improvements. Consequently, and inevitably, high energy prices currently have a disproportionate impact on the poorest households who are further constrained by their limited access to the competitive energy market, eg they are unable to benefit from cheaper tariffs such as online Direct Debit or may not be able to switch suppliers due to arrears. To date, attempts to address fuel poverty programmes have had limited success.

In summary therefore, fuel poverty can involve a complex mix of factors with high energy prices, low household incomes and poor heating and insulation standards all contributing to the scale of the problem. The table below2 illustrates a particularly perverse issue related to fuel poverty: it is often the case that essential fuel expenditure for households on the lowest incomes exceeds that of their more affluent neighbours.

Expenditure as % of income	% of housing stock	Number households	Average income	Average fuel costs (£)	Average SAP
Up to 5%	49.9%	10,890,000	£39,718	£1,124	55
5% to 10%	34.5%	7,383,000	£17,887	£1,203	51
10% to 15%	10.0%	2,145,000	£11,350	£1,351	45
15% to 20%	3.0%	635,000	£9,131	£1,567	38
Over 20%	2.6%	550,000	£5,495	£1.662	37
Total	100.0%	21,407,000	£27,554	£1,201	52

However, this circumstance also emphasises a key distinction between remedial action to address general poverty and remedial action to resolve fuel poverty. In many cases the only solution to general poverty is through long-term income transfer; this is particularly the case for those on permanent low fixed incomes, such as pensioner households, where economic circumstances are unlikely to improve. Conversely, fuel poverty can be eradicated, or significantly alleviated, through one-off investment in energy efficiency improvements including efficient and economic heating systems and effective thermal insulation.

Of course action on fuel poverty also addresses wider issues of poverty in a number of ways. Affordable warmth brings additional benefits to low-income households as a result of increased disposable income which allows additional discretionary spending on other essential goods and services. The energy efficiency approach to fuel poverty can also deliver benefits through the creation of training and job opportunities and through the release of extra spending power to the economic benefit of the wider community.

Professor John Hills has now completed a review of fuel poverty. The final report was published on 15 March 2012. The report demonstrates that, far from being eliminated in 2016, fuel poverty will still affect between 2.6 million and 3.0 million households (containing between 7.8 and 8.9 million individuals) when measured, using his new recommended indicator. The overall impact of policies to ameliorate the issue (income support, energy discounts and energy efficiency) disappointingly demonstrates that this number will be a tenth—but only a tenth—lower than it would otherwise be without these policies. NEA welcomes the review’s recognition of the scale and severity of fuel poverty in this country. We also welcome the review’s recognition that past and current Government policies are not sufficient to meet the Government commitment to eradicate fuel poverty, as required by the Warm Homes and Energy Conservation Act 2000.

Because of these concerns, NEA has been keen to engage with a number of representative groups, NGOs and individuals in order to share our interpretation of the EMR policy proposals; introduce a more frank discussion into the current debate about the costs; and ensure that the medium and long-term benefits of moving to a low carbon (and as it stands, a high cost) energy future are rigorously quantified.

As a result of our consultation with these representative groups, NEA is concerned that these negative distributional impacts will be sustained for little benefit as the policy is likely to fail to lever investment in new low-carbon investment. This is particularly the case where, in the future, the Carbon Floor Price could integrate with plant supported through a Contract for Difference or Low Carbon Feed in Tariff. CfD and FiTs would seem to work at odds with the proposed CPS as a recipient of the CfD/FiT (renewables, new nuclear or CCS) would be largely unaffected by the wholesale market price and carbon signals. The interaction between the CPS and other proposals within the EMR need further examination, especially given the overall cost to the consumer and the evident impact this will have on fuel poverty.

The supporting documents to the EMR makes it clear that by helping to encourage new generation the EMR policy should reduce the wholesale price over the medium and longer term. Theoretically this should benefit the consumer through resulting reductions in retail prices, but this is not currently guaranteed and it will depend on a wide range of additional factors. Whilst it is welcome that the previous Secretary of State for DECC believed the EMR proposals would, in the long term, “result in bills lower than they would otherwise be”,3 the degree of uncertainty regarding the impact these proposals will have in the short, medium term on consumer bills provides no reassurance to NEA. There is significant risk that, unless remedial action is taken, this mechanism could also simply act as a windfall for existing generators to the detriment of low-income and vulnerable consumers.

Whilst these issues may present a difficult challenge to Government in the short term, it is right to recognise that this inequity can only become starker in the near future, with the implementation of policies such as the EMR. It would also be naïve to ignore the considerable risk presented above; the ambition presented by European and UK climate targets may be checked by public sentiment if it is clear that only affluent householders will be in a position to reduce their exposure to increasing energy prices.

Many would regard this avoidable situation as a serious missed opportunity, not only to make good on our own existing commitments but also to demonstrate to the rest of Europe that social and environmental objectives need not necessarily be in conflict. Professor Hill’s analysis goes on to suggest that policies to improve the thermal efficiency of the housing stock that are targeted on those with low incomes and have energy-inefficient homes would be the most effective at reducing the level of fuel poverty whilst also contributing substantially to carbon emission reductions.

3. What can be done now?

As noted above, earlier analysis of the impacts of the Carbon Price Support (CPS) policy and EMR package revealed that the EMR could presents a number of threats to low income and vulnerable consumers.4 NEA believes that, in aggregate, the near final EMR proposals would also severely impact on the poorest households and that there is still a significant, regressive distributional impact. However, despite the Government’s initial impact assessments suggesting this required further attention, the Government’s Draft Electricity Market Reform legislation (and supporting impact assessments) failed to provide any further indication of how these final policies will effect fuel poverty levels (either separately or as a package). In addition, the impact assessments that have been produced to assess the impact these policies will have on domestic fuel bills also fail to provide consistency on counterfactuals or baselines and most “business as usual” scenarios include Carbon Floor Price which distorts the findings.

The Climate Change Act requires the Committee on Climate Change to advise Government on the impact of the Carbon Budgets on energy supplies and fuel poverty levels. They too seem reluctant to undertake this task. The CCC’s publication of December 2011 on the cost of meeting carbon budgets does consider the likely level of domestic fuel bills in 2020. However, its calculations are focused on the vast majority of energy customers, that is dual fuel customers, and are not therefore directly comparable with the DECC figures. In addition the CCC does not provide direct analysis of the different impacts on income decile groups.

The CCC finds that the typical duel fuel customer can expect a household bill of £1,250 in 2020 compared to a bill of £1,060 in 2010 (both figures are in real 2010 prices). The CCC suggests that this includes £130 per household for measures to support low-carbon investments and around £60 for supporting energy efficiency improvements in homes. The CCC goes on to suggest further reductions could be delivered by enhancing the markets for energy efficient appliances and reducing gas use through further insulation and heating controls.

As John Hill’s notes in his final report:

“This analysis of the distributional impact of prices and bills supports the conclusion we drew in our interim report that the distributional impacts of policy design and delivery need to be fully understood and quantified. Only through rigorous assessment of these impacts can future policies be drawn up and delivered that have the desirable impact of assisting those households in fuel poverty”.5

Although the CCC does not focus its analysis on impacts of prices and bills on different types of household, it does refer to the needs of households for whom electricity is the main heating fuel.

It argues that such households could be more exposed to price rises and that the Government should develop policies to protect these households. Clearly, NEA’s primary concerns relate to the circumstances of households for whom energy costs are unaffordable. Whereas more affluent households are able to manage their higher costs and/or consider fuel switching or adopting a renewable technology option, these opportunities are not available to low-income households. Financially disadvantaged households must currently persevere with their expensive and often inefficient heating methods. There is seemingly an urgent need for DECC, the CCC and/or the Regulator to analyse and quantify the final EMR proposals and assess further what benefits and risks accrue to different income groups as a result of the policy and be frank about the uncertainties surrounding them. This analysis should specifically consider whether there is a significant, regressive distributional impact and clearly highlight the impact the EMR policies (separately and collectively) have on fuel poverty levels (in the short, medium and long-term). However, as discussed below, this analysis is not sufficient on its own. If these negative impacts are confirmed, this must be reinforced by action to address the situation and the introduction of compensatory policies to protect low-income and vulnerable groups.

4. The Importance of Immediate Mitigating Policies

As highlighted above, there are growing concerns in the UK over the impact on domestic energy bills of policies to promote decarbonisation and the green agenda. NEA takes the view that public understanding and acceptance of these policies is dependent on the perception that they are fair and that effective action is taken to mitigate any significant detriment to disadvantaged energy consumers. In this context it may be that we can learn from the example currently being set in Australia.

The Australian Government has committed to reduce carbon pollution by 5% from 2000 levels by 2020 regardless of what other nations have actually done, and by 15% to 25%% depending on the scale of global action. The Government also commits to a new 2050 target to reduce emissions by 80% compared with 2000 levels, in line with targets announced by the United Kingdom and Germany.

The primary mechanism to achieve these reductions will initially involve introduction of a carbon pricing mechanism starting at $23.00 per tonne in 2012–13, rising to $24.15 in 2013–14 and to $25.40 in 2014–15. From 1 July 2015, the carbon price will take the form of a fully flexible price under an emissions trading scheme, with the price determined by the market.

The Australian Government estimates that the effect will be to increase average weekly household costs by around $10.00. But the crucial difference is that compensatory measures are intended to prevent any negative impact on vulnerable and low-income energy consumers. The Australian Government6 is committed to a number of remedial policies including that:

More than 50% of the carbon pricing mechanism revenue will be used to assist households.

Millions of households will be better off under the carbon pricing mechanism.

Assistance will be permanent.

Low-income households (including all pensioners) will be eligible for assistance that at least offsets their average expected cost impact from carbon pricing.

Middle-income households will be eligible for assistance that helps them to meet the expected cost impact from carbon pricing.

Households containing individual/s with a relevant concession card and who are certified by a medical practitioner as having a medical condition or disability that means they have high essential electricity costs are eligible for additional assistance through the Essential Medical Equipment Payment.

The European Union’s Third Internal Energy Market Package also gave prominence to consumer interests; the Resolutions insisted on increased consumer rights (regulating areas such as change of suppliers, direct information through smart meters and efficient treatment of complaints). Crucially, Member States were also required to define “vulnerable consumers”, to take measures to tackle “energy poverty” and to prohibit disconnection of gas and electricity at critical times. Within the legislation Member States must ensure that the rights and obligations linked to vulnerable customers are applied.

The UK Government believes itself to be fully compliant with these requirements. Vulnerable customers are defined in the UK Fuel Poverty Strategy and the energy regulator, Ofgem, must carry out its functions in a manner best calculated to further its principal objective having regard to, amongst other things, the interests of people who are disabled or chronically sick, pensioners, those on low incomes and people living in rural areas. In addition, energy suppliers have a number of obligations in their licence conditions relating to vulnerable consumers, for example those who are of pensionable age, disabled and chronically sick. Licence conditions cover a number of specific areas such as free gas safety checks and a moratorium on winter disconnection from supply.

The UK has a comprehensive and sophisticated fuel poverty infrastructure incorporating programmes to improve heating and insulation standards, offer discounts on energy bills and support through Winter Fuel Payments. However, despite these positive measures, the Government has failed to achieve its interim target, adopted in the UK Fuel Poverty Strategy 2001, to eradicate fuel poverty for all vulnerable households in England by 2010 and due to a range of factors (some described within this paper) will also almost certainly fail to achieve the remaining target dates.

It is well known that fuel poverty is caused by a combination of low incomes, high energy prices and poor-quality energy inefficient housing. However, as highlighted above, tackling the energy efficiency of the home is the most rational and sustainable way of permanently resolving this problem at the same time as capturing the opportunity to combine both social and environmental objectives.

Publication of the consultation on the Green Deal and the Energy Company Obligation (ECO) provides welcome detail on the proposed operation of the Government’s planned energy efficiency programme. However, there is a real concern that whist many affluent households may regard the Green Deal as an attractive prospect, to fund a greener and energy-saving lifestyle, the programme will currently fail the most vulnerable and financially disadvantaged households.

The ECO will be paid for by levies on consumer bills with the inevitable consequence of higher costs (and increased fuel poverty) for those who do not benefit directly from the programme. However, current concerns with ECO do not simply focus on the regressive impact of uniform levies on consumer bills,7 or the lack of parity between social and environmental objectives, but on the inequitable access to the potential benefits.

Despite a welcome move by the Deputy Prime Minister to announce an increase to the resources for low income households under the Energy Company Obligation (ECO) in April, the Government is currently putting in place plans that would halve funding for schemes to improve heating and insulation standards in properties occupied by financially disadvantaged households, despite the fact that energy efficiency is the most rational long-term solution to fuel poverty. From next year, annual expenditure on these heating and insulation programmes will reduce from the 2010–2011 level of £1.1 billion to around £540 million.

NEA’s recent response to the Green Deal and ECO consultation therefore outlines a need to:

Enhance the scale of the Affordable Warmth element of ECO to ensure the Government honours its commitment that low-income and vulnerable households will benefit from enhanced resources to fund the installation of energy efficiency measures, and are provided with adequate upfront support (through ECO, not the Green Deal Finance Mechanism).

Provide a statement clarifying how hard-to-treat properties in low-income communities will be targeted for priority assistance. This statement should set out how the Government envisages an area-based approach will offer assistance, advice and guidance to all households whether fully able-to-pay or those benefiting from partial or full subsidy. NEA is not convinced that the area-based model, despite the strategic and economic advantages of such an approach, will develop naturally without an appropriate level of prescription.

Rather than leading to additional cost, many groups believe it is possible to: target delivery across these low-income communities; deliver large volumes of solid wall insulation; achieve economies of scale; and bring down costs for all consumers. Targeting the carbon reduction element of ECO in this way would represent a much more cost-effective method of meeting carbon targets than providing one-off expensive subsidies to better off households through “pepper pot” delivery. It would also develop the supply chain and expertise in the delivery of innovative technologies thus preparing the way for their wider adoption in the Green Deal proper.

There is a need to accelerate work on the future requirements under a revised Home Energy Conservation Act to ensure local authorities are equipped to take a central role in attempts to tackle both domestic carbon emissions and reduce fuel poverty. This work should consider how all local authorities need to be obliged to work in partnership with appropriate private and voluntary sector agencies to support the reduction of fuel poverty and carbon emissions through domestic energy efficiency, through the Green Deal and ECO, but also more broadly. This work should identify the potential benefits, and also the resources required, to identify high energy use areas (hotspots) through a sample of their housing stock and data from other sources including public health bodies, energy companies and other relevant national or local agencies. NEA believes that this is fundamental to the first phase of delivery of the Green Deal and ECO and presents the greatest opportunity for local authorities to be able to prioritise assistance for those in greatest need and help reduce the local impact of the EMR proposals.

By adapting policies in the coming weeks, not only would the Government honours its commitment that low-income and vulnerable households will benefit from enhanced resources to fund the installation of energy efficiency measures, it would enable the Government to use a range of policies as a strong examples of how social and environmental objectives are not necessarily in conflict. This would be a key message ahead of the Parliamentary stages of the primary legislation for Electricity Market Reform.

5. Longer Term Thinking

Programmes funded through levies on customer bills are inevitably regressive to some extent. This is currently the case where, as we understand it, levy charges to support the Carbon Emissions Reduction Target are distributed across the domestic customer base with no relation to the level of consumption.

Since low-income households generally occupy smaller properties it may be argued that this implies lower needed energy costs and that, consequently, such households would benefit from a levy based on energy consumption. However, as the table below illustrates, low levels of energy consumption are frequently linked to deprivation rather than to low demand, and increased expenditure to meet need rather than expenditure that reflects unaffordable energy costs would weaken the merits of a consumption-based charge.

Income decile	Average actual energy expenditure	Average required annual energy expenditure	Actual expenditure as a proportion of modelled requirement
1	£671	£1,124	60%
2	£764	£1,109	69%
3	£811	£1,173	69%

Conversely, there are serious concerns that specific categories of fuel-poor households could be further disadvantaged by a consumption-based levy. Research carried out by the BRE in 2009 examined the impact on fuel poverty of a range of rising block tariffs. The research found that all four of the options considered did result in modest reductions in fuel poverty and were of particular benefit to older single person households. However the research also concluded that couples with dependent children were more likely to be fuel poor under all four of the options. NEA’s interpretation of this research is that a significant minority of low-income households do face disproportionately high energy costs and would experience further detriment were charges to fund the Energy Company Obligation to be linked to consumption.

Despite these reservations NEA recognises that the majority of fuel-poor households would stand to benefit from a consumption-based approach and that this would represent modest progress in making the current practice less regressive. We would therefore endorse movement to a consumption-based model of customer contribution whilst urging Government to recognise concerns over implications high consumption fuel-poor households and the need to address resulting adverse consequences through the welfare benefits system.

Direct funding of energy efficiency programmes through HM Treasury represents a more progressive and equitable approach as there are limitations to further increasing the burdens on consumers. Because of constrained public finances, this may be difficult; however this will be increasingly viable when hypothecated revenue such as auction receipts from the EU Emissions Trading Scheme and revenue that might be generated by a carbon price floor price will be available to HM Treasury.

The EU ETS currently covers the direct emissions of CO2 from large scale emitters (capacity over 20MWth) including power stations, major industrial emitters, CHP plants, and a number of institutional emitters (eg large hospitals). Installations must surrender allowances to cover their total emissions each year. Allowances are obtained either from their allocation or bought from the market. According to Deutsche Bank, selling carbon emissions permits to businesses participating in Europe’s carbon trading scheme could raise 60 billion euros ($85.24 billion) a year for European Union governments from 2013.

In November 2006, the European Commission launched a review of the EU ETS, as required under Article 30 of the EU Directive on the EU ETS, with the aim of proposing an amended Directive which would improve the functioning of the System from 2013 onwards. The proposed amended Directive was published on 23 January 2008 as part of the European Commission’s broader Climate and Energy package. The purpose of this consultation was to seek views on the Commission’s proposals set out in the amended EU ETS Directive and Member State’s positions on them.

The Commission proposal stated that at least 20% of revenues from auctioning (in phase 3) should be earmarked for a range of climate, or fuel poverty measures. The Commission specifically listed the following uses:

Reduce GHGs, including through contributions to Global Energy Efficiency.

Renewable Energy Fund, for adaptation and to fund research and development.

Develop renewable energy to meet 2020 20% target and to meet energy efficiency targets.

For CCS.

Avoid deforestation in Least Developed Countries.

Adaptation in developing countries.

Address fuel poverty/

The UK Government was opposed to the Commission’s proposal to hypothecate or “earmark” the revenue from auctioning as it would contravene the Government’s principles on the sound management of public finances. They stated:

“Earmarking, or hypothecation is an inefficient means of determining public expenditure priorities, which prevents judgements being reached in the round on the relative prioritisation of competing public expenditure programmes. It also introduces a direct link between the level of funding for a particular programme and the buoyancy of the revenue stream used to finance it, removing the flexibility to allocate resource according to need and exposing the programme to greater risks if the revenue stream proves less predictable than expected. Imposing legally binding hypothecation at EU level is also contrary to the principle of subsidiarity. The Government believes that these decisions are best taken at national level”.

To date the UK Government has generated limited income from auction receipts. However (once p3 of the EU ETS is introduced and the Carbon Floor Price) the Treasury is likely to raise more than £2 billion in carbon revenue next year, with the Treasury raking in £4 billion each year by 2020 and £7 billion by 2027. This is enough revenue to super insulate more than 600,000 homes every year over the next 15 years. It could bring nine out of 10 homes out of fuel poverty, quadruple carbon emission cuts compared to the Government’s energy efficiency policies and create up to 200,000 more jobs.

6. Conclusion

The Government can do little to disguise that these proposals will add substantially to already soaring energy bills and place much more risk on domestic energy consumers. Further work is required to quantify these risks and who they most affect.

Whilst NEA supports reform of the energy market, it looks as though those on the lowest incomes (and those that use least energy) will suffer the most and are least likely to be able to counter the increase in cost by taking advantage of other existing government policies. This requires a response. The most natural place to start is to adapt current policies (and/or those currently being developed) in order to illustrate to a sceptical public that social and environmental objectives are not necessarily in conflict but also to avoid genuine hardship.

NEA believes these concerns should also prompt a major, cross party, rethink and ensure that distributional equity is hardwired into Government energy policy in the future.

As highlighted above, as a direct result of the EMR proposals, Treasury is likely to generate (through VAT on consumers’ increased energy bills and increased carbon taxes) substantial revenue, ultimately there will be a need to invest this back into an ambitious energy efficiency programme, targeted at the most vulnerable.