House of Commons - Energy Prices, Profits and Poverty

Energy Prices, Profits and Poverty - Energy and Climate Change Contents

4 Fuel Poverty

88. Rising energy prices will exacerbate fuel poverty. DECC's latest statistics show the severity of the problem has increased: in 2011 fuel-poor households spent £448 more on fuel costs than the national average, an increase of £26 since 2010.[183] This is largely due to the fact that fuel poor households are more likely to live in inefficient properties, be less able to take advantage of cheaper tariff options such as direct debit tariffs, and have unavoidably high fuel requirements (for example the elderly, disabled people or those with a long-term illness who need to remain at home).[184] . Additionally the lack of consumer trust in energy companies, caused partly by the perception of excessive profits, could undermine efforts to identify and support fuel-poor households. This section will consider the scale of the problem and assesses Government fuel poverty programmes.

Measuring fuel poverty

CURRENT AND NEW DEFINITION OF FUEL POVERTY

89. Effective action cannot be taken without a clear understanding of the scale and nature of the problem to be addressed. Under the current definition of fuel poverty ("the 10 % definition"), a household is said to be fuel poor if it needs to spend more than 10 % of its income on fuel to maintain an adequate level of warmth.[185] Government has a statutory obligation to ensure that by November 2016 "as far as reasonably practicable persons in England or Wales do not live in fuel poverty."[186] The 2001 Fuel Poverty Strategy set out how this would be achieved through policies on energy efficiency, fuel prices and household income.[187]

90. There was consensus among witnesses that Government would fail to achieve this target.[188] Citizen's Advice noted that "without a significant increase in Government spending on the energy efficiency of fuel poor homes the number households in fuel poverty is as likely to increase by 2016 as be eliminated."[189] Some organisations have questioned whether Government is doing all that is "reasonably practicable" to meet the target in light of the closure of the Warm Front (WF) scheme in January 2013. WF was a tax-funded scheme which provided grants for heating and/or insulation measures for qualifying households in England, such those on certain income-related benefits or on pension credit, in order to deliver affordable warmth. Witnesses observed that the closure of WF marked the first time since 1978 when there would be no Government-funded domestic energy efficiency programme in England.[190] NEA claimed that the closure of WF represented a "breach of the legal duties contained in the Warm Homes and Energy Conservation Act" and expressed concern that the Exchequer was "abdicating responsibility for funding fuel poverty programmes and [...] simply shifting the burden on to energy consumers."[191]

91. In 2008, Friends of the Earth and Help the Aged sought Judicial Review on the grounds that Government action on fuel poverty did not represent all that was 'reasonably practicable.' Although the judgement was in favour of Government, the responsible department was cited as noting 'that the Act and Strategy would not (as presently formulated) permit the Government to eliminate Winter Fuel Payments in their entirety or cut Warm Front funding to zero.'[192] The Secretary of State maintained that the Government was meeting its statutory obligations in relation to fuel poverty.[193]

92. As part of the Spending Review in 2010, the Government announced that it would commission an independent review of the current fuel poverty target and its definition. An interim report was published in October 2011 and in March 2012 Professor Hills, Professor of Social Policy at London School of Economics, published the final report of his independent review of fuel poverty, making a number of recommendations and proposing a new indicator for fuel poverty.[194] Under the proposed Low Income High Cost (LIHC) indicator, a household would be considered "fuel-poor" if its fuel costs were above the national average, and if spending this amount would leave a residual income below the official poverty line.[195] Hills also recommended that Government should measure the depth of the problem through a "fuel poverty gap" indicator. This would measure "the amounts by which the assessed energy needs of fuel poor households exceed the threshold for reasonable costs."[196] The LIHC definition is intended to give an indication of the severity of the problem for fuel-poor households by showing the amount by which their costs exceed the national median. The Government published its response to the consultation on Hills' proposals on 9 July 2013, after we had finished taking evidence in this inquiry, confirming that the LIHC indicator would be adopted.[197] Alongside the Government response, DECC published a framework for action on fuel poverty to underpin its forthcoming fuel poverty strategy. This framework set out plans to introduce a new long-term fuel poverty target and strategy.[198]

A BETTER DEFINITION?

93. Many witnesses endorsed the following elements of the Hills' review:

· the recognition of fuel poverty as a distinct national problem;

· the recommendation to focus policy efforts on energy efficiency, and

· the recommendation to introduce a new fuel poverty strategy and target.

However, serious concerns were expressed regarding the effectiveness of the new LIHC indicator. The Government's Fuel Poverty Advisory Group (FPAG) suggested that the use of median household costs to determine affordability and determine the threshold for 'reasonable costs' was problematic, since household energy costs could be below the median and still remain unaffordable to a low-income household.[199] National Energy Action (NEA) emphasised that this was a concern shared by many respondents to the Government's consultation:

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94. Consumer Focus echoed these concerns, stating that the "definition of high energy costs failed to reflect fuel affordability and in effect made 'it almost impossible to literally eradicate fuel poverty.'"[201] This is because under the LIHC indicator, half of all households will be defined as having higher than average (median) costs. DECC noted that it was "difficult to imagine that none of these households would be low income."[202] The Government's response to the consultation on Hills' proposals acknowledged that the energy costs threshold was a point of contention, with "two thirds of those that responded [...] disagreeing with the approach that we suggested."[203] Government cited a lack of robust income data as the reason for not introducing a link between income and bills within the proposed definition. Another concern was that the use of median figures would mean the LIHC indicator would lack sensitivity to changes in energy prices. In oral evidence, Mervyn Kohler, Special Adviser at Age UK, explained why this might be the case:

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However, Professor Hills contested this point in oral evidence, citing the importance of the "fuel poverty gap" indicator in accurately measuring the problem:

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95. Professor Hills pointed out that the previous indicator could lead Government to "focus on action that tips people just across the [fuel poverty] line", rather than those people most in need of support. Under the 10% indicator, a small rise in energy prices could tip disproportionately large numbers of households into fuel poverty due to the number of households close to fuel poverty. Examining the depth of the problem, Professor Hills argued, would "focus your energy on using your resources to make the biggest difference."[206] The new indicator, by taking account of the combined impact of a low income with high energy costs, while defining fewer households as fuel-poor, would be a more accurate measure and would help to identify those suffering the greatest hardship. The IPPR explained that the current indicator captured a broad cross-section of the population, including wealthy households, which distorted the debate about where resources should be targeted.[207]

96. However some witnesses were critical of the fact that the new definition effectively reduced the fuel-poor headcount without any Government action having taken place: NEA observed that "the Hills definition significantly reduce[s] the incidence of fuel poverty - without having provided affordable warmth for a single household."[208] Similarly FPAG observe that "the new definition leads to large numbers of low-income households no longer being classed as 'fuel-poor', yet these households clearly cannot afford their fuel costs."[209]

97. In general, energy companies and service providers welcomed Hills' proposals. Carillion agreed that the "fuel poverty gap" indicator could "enable better targeting of policy towards households most severely affected," a point of view also shared by Scottish Power who noted that the LIHC indicator would "help the Government to better identify and design policies that focus resources on those most in need."[210] E.ON and SSE also expressed their support for the review and revised definition.[211]

98. There has been some concern that the proposed definition is "overly complex", leading to a debate on "complex and abstruse technical issues rather than to policy development and advocacy".[212] In oral evidence Professor Hills acknowledged the importance of "relatively simple-to-measure indicators on the ground" for effective implementation of fuel poverty policies.[213] Hills also stressed the importance of striving for an approach that was "good, rather than perfect":[214]

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99. Witnesses have suggested that the fuel poverty indicator should also incorporate the energy efficiency rating of a property. Jan Rosenow of the Environmental Change Institute at the University of Oxford, described how existing indicators could be improved:

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There was considerable support for this suggestion among witnesses. Professor Hills recommended that a "priority order" be established to target "anybody on a low income who is living in a property with an energy efficiency certificate rating of E, F or G."[217] DECC's consultation also underlined the significance of energy efficiency ratings, stating that "81% of [those households in]the fuel poverty gap, under the LIHC indicator, have an EPC energy efficiency rating of E, F or G."[218] Consumer Focus noted that an indicator based on the number of households living in EPC E, F or G-rated properties "has much merit and would enable tracking of progress, including the impact of local projects and programmes."[219] Government recently announced plans to "monitor [...] the number of fuel poor households who live in the most energy inefficient properties e.g. E, F and G rated properties."[220]

100. We conclude that the focus on low-income under the proposed LIHC indicator, by reference to the official poverty line, ensures a more accurate identification of fuel-poor households. The use of a 'fuel poverty gap' is welcome in giving a measure of the severity of the problem faced by households as energy prices continue to increase. However, we are concerned by the use of median national spend on fuel to determine "high costs" within the indicator. It is clear that fuel costs can be below the median and yet still remain unaffordable. If the median national spend is high it may not provide a true indication of affordability. We recognise that consumers who are paying the median could also be finding their energy bills unaffordable, even if they are not classed as fuel-poor. We recommend Government modifies the proposed definition to better reflect affordability in the context of low-income households by introducing a link between the income threshold and the energy costs threshold within the new indicator.

101. We welcome Government's commitment to monitor the number of fuel-poor households living in E, F and G-rated properties, and recommend that Government use this information to help focus policy on improving some of the UK's most inefficient housing stock.

102. Stakeholders criticised the Hills Review and Government for a lack of engagement with the concerns of consultees. NEA stated that "we have seen no indication of any proposed revisions since Professor Hills published his Interim Report in October 2011"[221] while FPAG criticised the "minimal recognition of the cogent arguments put forward by stakeholders in the final Hills proposals."[222] We are alarmed by the reported lack of Government engagement with input from consultees during the Review process, in particular with regard to recommendations from the Government's own statutory advisory body (Fuel Poverty Advisory Group). Government has not modified the LIHC indicator, despite the fact that two thirds of respondents were opposed to the use of the national median to determine "high costs". We seek assurances that DECC will take full account of stakeholder concerns when formulating the new fuel poverty strategy.

THE ROLE OF DATA-SHARING

103. Increased data-sharing between Government departments and energy companies could help identify fuel-poor households in a more efficient and cost-effective way. Under The Pensions Act 2008, data-sharing was permitted between the Department for Work and Pensions and energy suppliers to enable automatic payment of the Warm Home Discount (WHD) to low-income pensioners.[223] Witnesses including most energy companies were almost unanimous in recommending the extension of such data-sharing to facilitate the delivery of fuel poverty programmes. EDF also emphasised the importance of cross-departmental engagement and linking programmes such as WHD and Energy Company Obligation (ECO) with benefit checks to achieve greater targeting efficiency:

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104. Ofgem acknowledged in written evidence that increased data sharing could help identify eligible Affordable Warmth Group households under the ECO. Sarah Harrison, Senior Partner, Sustainable Development at Ofgem, outlined how suppliers' data on vulnerable consumers could be shared to help provide targeted support:

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105. Household-level energy consumption and spend data collected by energy companies could also be useful in helping Government to identify fuel-poor households. Ofgem does not currently require energy companies to pass on such data except in the case of the Warm Home Discount scheme, where suppliers are required to provide data on mean annual energy consumption and fuel costs for discounted tariff customers until March 2014.[226] The Government's framework for action on fuel poverty states that it "will consider the scope for increasing the use of automated data matching" and "the role of data sharing in the [...] delivery landscape."[227] The Secretary of State confirmed that data-sharing could be extended if appropriate safeguards were in place:

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106. We welcome Government's recent commitment to consider extending the use of data-sharing to ensure the most efficient and cost-effective delivery of fuel poverty policies. We further recommend that Ofgem considers introducing a licence condition to ensure that energy companies share data on household energy consumption and spend with Government, in order to facilitate identification of fuel-poor households.

Need for urgent action

107. DECC's latest statistics on fuel poverty provided data according to both the 10% definition of fuel poverty, and the proposed new LIHC indicator.[229] The statistics showed that in 2011 there were 4.5 million households in fuel poverty under the 10% definition, of which 3.2 million were in England. Under the new indicator, there were 2.6 million fuel-poor households in England in 2011 (data is only currently available for England).[230] Although under both measures the overall number of fuel-poor households was shown to have reduced, the fuel poverty gap (the difference between energy costs for the fuel-poor and average energy costs) increased between 2010 and 2011. The aggregate fuel poverty gap increased in real terms by £22 million to £1.15 billion, and the average gap increased by £26 to £448 - meaning that energy costs in a fuel-poor household were on average £448 higher than national average fuel costs. DECC attributed this rise to increases in energy prices.[231] The Secretary of State acknowledged that any reduction in overall fuel poverty was likely to be "a temporary reduction" in light of significant energy prices increases since 2011, and that the LIHC indicator revealed that "the depth of fuel poverty has become worse."[232] Other estimates for fuel poverty suggested the scale of the problem is even greater: FPAG estimated that there are approximately 6 million households in fuel poverty, while Consumer Focus suggested that households in fuel poverty would reach 6.2m by 2016 based on current trends.[233]

108. As NEA noted, fuel poverty does not relate to a "small sub-set of the population", but to a large and growing proportion of households in the UK. In this context, it is more urgent than ever that fuel poverty resources are deployed as quickly and as effectively as possible. Many campaigners called for more action on fuel poverty and less academic discussion. Citizen's Advice described Government new fuel poverty strategy as "long overdue" and summed up the frustration felt by some organisations:

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109. We conclude that while an accurate definition of fuel poverty is important, the Government has been unacceptably slow to respond to the Hills Review and take action to stem rising fuel poverty. We are concerned that fuel poverty policy has effectively been frozen at a time when significant energy price rises have made energy costs increasingly unaffordable for vulnerable and low-income households. We welcome the recent publication of the Government's framework for action on fuel poverty which will underpin the Government's fuel poverty strategy when it is introduced. It is imperative that the introduction and implementation of the strategy, expected at the end of this year, is not delayed any further. For Government to have done all that is reasonably practicable to tackle fuel poverty, the new fuel poverty strategy should be published and implemented as an urgent priority.

Fuel poverty policies

110. The Government has a number of schemes in place provide help with high energy costs. These include:

· The Winter Fuel Payment. This is an automatic payment of between £100 and £300 to those in receipt of the state pension. It is not means-tested and is funded through the Exchequer and administered by DWP.

· The Cold Weather Payment of the Regulated Social Fund, administered by DWP. This is payable when local temperature is either recorded as, or forecast to be, an average of zero degrees Celsius or below over 7 consecutive days. Low-income pensioners and other vulnerable consumers receive a payment of £25 for each 7 day period of very cold weather. It is tax-funded.

· The levy-funded Warm Home Discount offers a mandatory reduction of £130 on electricity bills for low-income older households and, on a discretionary basis, for other financially disadvantaged vulnerable households.

· The Energy Company Obligation (ECO) was introduced in January 2013 to reduce the UK's energy consumption and support people living in fuel poverty. It does this by funding energy efficiency improvements worth around £1.3 billion every year. It is a continuation of previous obligations on energy companies to deliver energy efficiency measures across the housing stock, but with a much stronger emphasis on higher cost insulation measures. It will run until March 2015. There are three obligations under the ECO:

· Carbon Saving Obligation (CSO) - this covers the installation of measures like solid wall and hard-to-treat cavity wall insulation, which are ordinarily too expensive to be financed solely through the Green Deal. This aspect is worth around £760m per year.

· Carbon Saving Community Obligation (CSCO) - this provides insulation measures to households in specified areas of low income. It also makes sure that 15% of each supplier's obligation is used to upgrade more hard-to-reach low-income households in rural areas.

· Affordable Warmth Obligation - this provides heating and insulation measures to consumers living in private tenure properties that receive particular means-tested benefits. This obligation supports low-income consumers that are vulnerable to the impact of living in cold homes, including the elderly, disabled and families. This combined with the CSCO will provide around £540m of support per year to low-income households.

In addition, DECC supports collective switching and purchasing schemes for vulnerable customers through the £5 million "Cheaper Energy Together" fund which was launched in October 2012.[235] The Government's flagship energy efficiency programme, the Green Deal, offers loans for home energy efficiency improvements which are repaid over time through energy bills. The idea is that energy savings will be equal to or exceed the costs of installing the measures. However, the Green Deal will have limited application to fuel-poor households concerned about or unable to take on debt.

EFFICACY OF FUEL POVERTY POLICIES

111. Expenditure on the Winter Fuel Payment (WFP) far exceeds spend on any other fuel poverty policy, costing an estimated £1.723 billion in 2013.[236] It is significantly larger than the ECO. Witnesses have questioned whether this is an effective use of Government funds to tackle fuel poverty. According to Professor Hills, "spending more money on the winter fuel allowance is one of the least effective ways of tackling this problem"[237], reflecting the conclusion of the final report that the WFP suffered from "poor targeting and limited value for money from a fuel poverty perspective."[238] British Gas suggested that better targeting of the WFP would enable Government to make a bigger contribution to tackling fuel poverty.[239] The National Pensioners' Convention however supported the continuation of the policy given "excess winter deaths amongst older people and the expected increases in fuel bills."[240]

112. Collective switching could be a useful tool in enabling vulnerable customers to get a good energy deal. Ron Campbell, Chief Policy Analyst at NEA, expressed support for the community-based approach of the Government's collective switching initiatives, although Mervyn Kohler of Age UK noted that individual preferences regarding payment method and type added "extra tiers of complication to a collective arrangement."[241]

113. There was widespread agreement that focussing on long-term energy efficiency programmes was the best way to tackle fuel poverty, as opposed to short-term help with rising bills. Professor Hills' Review identified low energy efficiency as the fundamental cause of fuel poverty, a view reflected in the oral and written evidence of both fuel poverty campaigners and energy companies. Energy efficiency measures were described as a "good national investment" offering value for money in tackling the causes of fuel poverty, while also contributing to decarbonisation objectives.[242] This was particularly applicable to work carried out on existing properties:

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DECC's recently published framework for action on fuel poverty highlighted the cost-effectiveness of energy efficiency measures such as low-cost loft and cavity-wall insulation (CWI), but suggested that bill rebates could prove more cost-effective than the more expensive efficiency measures such as solid wall insulation.[244]

114. We conclude that energy efficiency programmes should be the focus of Government's fuel poverty policy in order to tackle the long-term root causes of the problem cost-effectively. It is disappointing that so much of current Government fuel poverty policy centres on short-term help with bills when improving the thermal efficiency of UK housing stock should be the priority. We welcome the recent announcement in the Spending Review that the Winter Fuel Payment will no longer be paid to those living in warmer European climates. We recommend that Government considers better targeting of the Winter Fuel Payment through means-testing, considering how savings made could be used to boost investment in energy efficiency programmes. We also recommend that Government reviews the allocation of funds for fuel poverty policies, prioritising energy efficiency initiatives over provision of financial assistance.

CLOSURE OF WARM FRONT (WF)

115. As noted earlier, the closure of Warm Front (WF) in January 2013 marked the first time since 1978 that there would be no Government-funded domestic energy efficiency programme in England.[245] By contrast, in other parts of the UK similar schemes continue in operation: the Nest scheme in Wales; the Energy Assistance Package in Scotland, and the Warm Homes scheme in Northern Ireland. The Energy Company Obligation (ECO) is designed to replace WF, however overall expenditure in comparison will be reduced and will derive from levies (see next section and "Use of levies on bills"). Research by the Association for the Conservation of Energy suggested that the total budget reaching fuel-poor households in England had reduced by 26%, while overall spending on energy efficiency programmes in England fell by 44% between 2009 and 2013.[246]

116. England will be the only country in the UK without a tax-funded energy efficiency programme to address fuel poverty following the closure of Warm Front. We are concerned that there have been such significant reductions in the fuel poverty budget for England at a time when rising energy prices are having an increasingly adverse impact on vulnerable households.

THE ENERGY COMPANY OBLIGATION (ECO)

117. ECO replaces Warm Front, the Carbon Emission Reduction Target (CERT) and the Community Energy Saving Programme (CESP). ECO therefore takes on the dual objectives of carbon reduction and fuel poverty alleviation. Under the Affordable Warmth and Carbon Savings Communities Obligation (CSCO) components of ECO, approximately £540 million per year will be directed at low-income households. In 2009-10, CERT, CESP and WF expenditure totalled £1,035 million.[247] Witnesses have expressed concern that ECO resources are not sufficient:

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In oral evidence Ron Campbell of NEA maintained that "the £1.3 billion ECO expenditure should be devoted in its entirety to fuel-poverty programmes."[249]

118. RWE explained that low-income consumers were unlikely to benefit from the Carbon Emissions Reduction (CERO) component of ECO but that this could be incentivised:

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119. In the case of Solid Wall Insulation (SWI), an expensive and intrusive process, a high level of subsidy will be required under ECO to encourage take-up.[251] Suppliers seeking to fulfil obligations cost-effectively are therefore unlikely to target fuel-poor households, but instead target those customers who can part-finance. The Committee on Climate Change suggested that this could be avoided through greater targeting of the fuel-poor under ECO, for example by prioritising SWI measures in the 1.9 million fuel-poor households that live in solid walled properties.[252] As an alternative, Consumer Focus suggested that expensive measures such as SWI should be publicly funded in order to ensure take-up, while low-cost insulation measures could be funded by ECO.[253] In its current form, the ECO is unlikely to provide SWI where it is most needed — in fuel-poor households.

120. We conclude that resources under ECO are insufficient considering the scale of fuel poverty. We recommend that ECO expenditure is devoted primarily to fuel-poor households, and further recommend that Government reconsider how best to incentivise take-up and funding of the most expensive energy efficiency measures such as solid wall insulation.

RURAL FUEL POVERTY

121. Age UK stated that rural fuel poverty is "under-resourced" and requires greater attention from Government.[254] Rural households are particularly vulnerable to fuel poverty due to off-gas grid areas, the number of solid-walled properties, and lower than average wages. Off-gas grid consumers are subject to higher bills due to reliance on heating oil or Liquid Petroleum Gas (LPG) to heat their homes: as a result, the average off-gas grid bill in 2010 was approximately £2,100.[255] One witness expressed concern about the confidential and often uncompetitive pricing of LPG and the difficulties in switching, describing the market as "effectively unregulated".[256] The Committee investigated this issue as part of its inquiry Fuel poverty in the private and off-grid sectors. In a letter in July 2012 to Minister of State Gregory Rt Hon. Barker MP, we outlined our concerns about off-gas grid consumers and questioned the effectiveness of self-regulation in the domestic heating oil market, suggesting that Ofgem could have a role to play.[257]These concerns still stand, and we urge Government to review regulation of the domestic heating oil and LPG market, as well as extending support for fuel-poor households reliant on these fuels.

122. Witnesses have questioned whether ECO resources will be able to address rural fuel poverty. Ron Campbell of NEA described the 15% "rural safeguard" as part of ECO's CSCO as a "fairly modest" ambition, equating to approximately £29 million per year.[258] Consumer Focus and FPAG suggested that the lack of heating cost reduction, "hard-to-reach" and "hard-to-treat" targets in ECO could mean that rural fuel-poor households would lose out compared to previous schemes.[259] Mervyn Kohler of Age UK noted that "a special focus on rural fuel poverty issues might be helpful as part of a fuel-poverty strategy".[260] Hastoe Housing drew attention to the lack of competitive energy deals for those on pre-payment meters or without internet access, and suggested that energy tariffs be reviewed to ensure that low-income, rural households had access to the best deals.[261] Concerns regarding the charges faced by pre-payment consumers were also highlighted by Barnado's, which called for improved access to direct debit facilities for families and a review of price bands for pre-payment meters. The charity also cited the introduction of keypads to pre-payment meters in Northern Ireland as an example of how costs could be brought down through innovation and regulation.[262]

123. We conclude that further and more specialised resources are needed to tackle fuel poverty in rural areas, in particular to address the difficulties experienced by off-gas grid customers. Ofgem and DECC should consider further measures as part of RMR and the Fuel Poverty Strategy to ensure that pre-payment customers and those without internet access are able to obtain best market deals.

Use of levies on bills

124. Environmental and fuel poverty policies may be funded from tax or through levies on bills (see table 10). In our earlier discussion of prices, we examined the cost of UK/EU policy as a component of energy bills (see paragraph 14). Here we consider in more detail the extent and impact of the use levies on consumer bills to fund policy initiative, with particular reference to fuel poverty.

Table 10: Expenditure on fuel poverty and environmental programmes

Programme Who pays? Expenditure

Warm Front (England) Taxpayers £370 million (2009/10)

CERT Consumers[263] £564 million (2009/10)

CESP Consumers £101 million (2009/10)

ECO Affordable Warmth + Carbon Saving Communities Obligation Consumers £466 million (2013)

Winter Fuel Payments Taxpayers £1.723 billion (2013)

Cold Weather Payments Taxpayers £228 million (estimated) (2013)

Warm Home Discount Consumers £237 million (2013)

EU Emissions Trading System Consumers £700 million[264]

Carbon Floor Price Consumers £900 million (2013-14)[265]

Renewables Obligation Consumers £2,156 million (2012/13) (budget available under the levy control framework)

Feed-in Tariffs for small-scale renewables Consumers £196 million (2012/13)
(budget available under the levy control framework)

Contracts for Difference Consumers Not yet introduced

Capacity payments Consumers Not yet introduced

Renewable Heat Incentive Taxpayers £133 million (2012/13)

CCS competition Taxpayers £1 billion

Sources: EV 40 (NEA); Control Framework for DECC levy-funded spending; HM Treasury, Budget 2013; Office for Budget Responsibility, Economic and fiscal outlook, March 2013

125. According to Ofgem, environmental charges currently account for around 11% (£59) of average annual electricity bills and 6% (£49) of average annual gas bills.[266] DECC analysis suggests that energy and climate change policies make up approximately 9% (around £112) of the average annual dual fuel bill.[267] However this is set to rise sharply in future years, with costs falling largely on the wholesale electricity price. DECC estimates that its policies will add to 33% to the average electricity price paid by UK households in 2020 and 41% in 2030.[268] This significant increase is of particular concern to those households, often fuel-poor, that rely on electric heating systems.[269] The Secretary of State explained that the Government's assumption was that companies would "pass on these costs the way they are levied, typically on the basis of relevant units of energy supplied." Although it was up to energy companies to decide how to recoup costs, Government expected approximately one third of policy costs to be passed on directly to household bills. Approximately two-thirds of policy costs would fall on non-domestic consumers, reflecting the share of energy consumption across these consumers. However, the majority of costs are still likely to be passed through to domestic consumers through higher prices for services and products. These extra costs could also impact on the competitiveness of UK exports. Mr Davey also explained that a policy such as ECO, which applied only to households, would be funded by domestic consumers alone.[270] A breakdown of the costs of each levy funded programme can be seen in table 3 (paragraph 14).

126. Many witnesses were concerned about the impact of levies on the fuel-poor and expressed a preference for taxpayer-funded environmental and social programmes.[271]Consumer Focus explained:

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Ron Campbell (NEA) asserted that "the levy is regressive in its function [...] because it does not take any account of [their] ability to pay" in contrast to tax-funded programmes.[273] Jan Rosenow and Dr Nick Eyre, of the Environmental Change Institute at the University of Oxford, stated that while revenue-raising from levies could be considered "regressive", the provision of levy-funded measures such as CERT and CESP could have a positive impact in addressing fuel poverty. Dr Eyre stated that it was possible "for revenues that are raised in a regressive way to be used in a progressive way and for the overall balance to be positive" but noted that this was not the case with environmental levies which implied "all the regressive effects and none of the progressive ones.".[274] Professor Hills of London School of Economics stated that the impact of levies was dependent on how the funds were used. Careful targeting of revenues to low-income households could result in a positive impact and avoid a situation "where people on low incomes are paying higher fuel bills in order to subsidise the energy efficiency of people on high incomes".[275]

127. The Secretary of State Edward Davey explained how the use of levies on bills had been decided at Government level:

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We note that Mr Davey did not offer an explanation as to the reasons behind these decisions. The Secretary of State went on to suggest there was a case for the levy-funded approach since it could encourage more efficient and competitive delivery of programmes from energy companies.[277] Gareth Baynham Hughes, DECC, explained that this reflected an "assumption built into the Hills review" regarding investment in and delivery of energy efficiency programmes. We note however that Hills' final report stated that "funding from energy consumers can increase the fuel poverty gap of those who do not benefit from them".[278] We have noted, in this report (see paragraph 17 to 20 for a discussion of energy company cost-efficiency) and in out report on Consumer Engagement with Energy Markets that the ability of energy companies to deliver cost-effectively is far from proven: and that supplier operating costs were increasing annually, with little evidence of efficiency and operational savings. This leads us to question whether "competitive pressures" on energy companies will indeed lead to a more cost-effective delivery of ECO.[279]

WAYS TO PROTECT THE FUEL-POOR FROM IMPACT OF LEVIES

128. Witnesses have suggested a number of policy initiatives that could help protect the fuel-poor from the impact of levies on energy bills.

Charging per unit of consumption

129. Consumer Focus and Age UK recommended that environmental and social levies were applied on a per-unit of consumption basis (per KWh) rather than a per-household basis through the standing charge. They suggested that this would be in line with the "polluter pays" principle[280] and help to protect fuel-poor households which, on average, consume less energy.[281] Consumer Focus stated that its discussions with energy companies suggested that CERT and CESP levies were applied on a per-household basis, and this was likely to be the case with ECO also.[282] The Secretary of State noted that the Government assumption was that these costs were passed on "typically on the basis of relevant units of energy supplied." (see paragraph 125).[283] However, witnesses have pointed out that it is difficult to establish precisely how levies are distributed across standing or other fixed charges and unit costs:

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130. Witnesses also pointed out that a per-unit approach would be detrimental for some of the most vulnerable households in fuel poverty with unavoidably high levels of energy consumption — such as older people and those who needed to spend most of their time at home due to a medical condition or disability. Professor Hills suggested that a "dual strategy" was needed involving emphasis on per-unit charging combined with extra measures for fuel-poor households in low-efficiency properties.[285]

131. The current tariff structure allows suppliers to reduce energy rates once consumption exceeds a certain threshold.[286] Hastoe Housing Association described how some of the residents living in its most energy efficient homes were paying higher than average per KWh rates due to low consumption. It called for "a reform of the current system where heavy users pay a reduced charge per kWh and low users pay a higher than average charge per kWh."[287] A number of commentators also supported a move toward a single unit price with no standing charge in order to provide greater price transparency and comparability.[288] We recommended Ofgem consider regulating or abolishing standing charges in our Consumer Engagement report. In its response, the regulator stated it was not "ruling out proposing further measures to improve the functioning of the retail energy markets" following robust analysis and assessment.[289]

Alternative tariff structures

132. Alternative tariff structures, such as rising block tariffs or tariffs partly exempt from levies, could help to address fuel poverty.[290] FPAG and Consumer Focus recommended the introduction of a "protected block of consumption" on energy bills on which no levies were raised, with costs recovered above a certain level of consumption. This protected block would be available to all consumers and would provide an incentive for consumers to use less energy as well as protecting the fuel-poor.[291]

133. Others were concerned about the possible use of rising block tariffs as a mechanism to alleviate fuel poverty. DECC highlighted that such tariffs are likely to have an adverse impact on high-consuming fuel-poor households, and are also in conflict with Ofgem's RMR proposals to eliminate multi-tier tariffs.[292] EAS suggested that rising block tariffs would leave elderly and vulnerable consumers "frightened to exceed their agreed allowance".[293] A simpler approach was proposed by the NEA through introduction of a "universal social tariff to households meeting the pre-defined eligibility criteria."[294]

REINVESTING REVENUES IN ENERGY EFFICIENCY PROGRAMMES

134. Some witnesses expressed support for the Energy Bill Revolution campaign to reinvest carbon tax receipts from the EU Energy Trading System (EU ETS) and Carbon Price Floor (CPF)[295] into energy efficiency and fuel poverty programmes.[296] Audrey Gallacher, Director of Energy at Consumer Focus, argued that reinvesting revenue generated by the CPF into energy efficiency measures could "take nine out of 10 homes out of fuel poverty" as well as reducing carbon emissions.[297] Fuel poverty groups expressed dismay that while energy intensive industries would receive compensation for the impact of EU ETS, carbon price floor and CfD policies,[298] no support would be available for domestic fuel-poor consumers.[299] When questioned as to the viability of using carbon tax receipts in this way, the Secretary of State responded that it was an unlikely prospect:

If it is a theoretical question, [...] "Is it possible", I think it is probably possible. Whether it is likely I think is really the question. I do not think it is very likely. Successive Governments and successive Chancellors have taken the Treasury view in these types of things that hypothecation is not the right way to go. There are some fights one has in Government because you think you can win them and there are the fights that you think, "Maybe that is quite a tough call". While I have great sympathy with the way the Energy Bill Revolution make their arguments and one can understand the power of their argument, they are up against decades, if not centuries, of Treasury orthodoxy on hypothecation.

300

We note however that the Australian and French Governments have used carbon tax revenues in this way to provide support measures for households.[301]

GOVERNMENT SPEND ON FUEL POVERTY

135. A number of witnesses cited research by the Association for the Conservation of Energy, which suggested that overall spend on energy efficiency programmes in England had fallen by 44%. The same research showed that the budget targeted at fuel poverty in England would fall from £1.19m in 2009 to £879 million in 2013.[302] This underlines our concern regarding energy efficiency resources in England (see paragraph 115). In oral evidence, we questioned the Secretary of State regarding the cut in fuel poverty spend shown in the Department's Annual Report and Accounts: £319m was spent in 2010-11, while £97m was spent in 2011-12.[303] The Secretary of State maintained that "if you add both taxpayer-funded and levy payer-funded, the overall spending on fuel poverty programmes has increased during the spending review period."[304] A recent parliamentary written answer confirmed that estimated spend in 2014-15 would be greater than spend in 2010-11 when levy-funded programmes are included.[305] However, we note that tax-funded expenditure has decreased significantly following the closure of Warm Front and that focus has shifted to levy-funded schemes paid for by consumers, namely ECO and WHD. Witnesses concerned by reduced tax-funded Government spending in this area also pointed out that the impact of welfare reform and the Levy Control Framework on fuel poverty had yet to be assessed by Government.[306]

136. We conclude that the increasing use of levies on bills to fund energy and climate policies is problematic since it is likely to hit hardest those least able to pay. We note that public funding is less regressive than levies in this respect.

137. We are particularly concerned by the significant projected increase in the wholesale electricity price and how this will impact on households reliant on electric heating. It is clear that vulnerable and fuel-poor consumers require protection from the impact of rising bills and extra support to ensure affordable warmth in their homes. We therefore recommend that Government consider introducing a "protected block of consumption" on bills exempt from levies, as proposed by FPAG and Consumer Focus.

138. We note that under the current tariff structure, energy users are effectively penalised for low consumption, with reduced rates for high energy consumption. This is at odds with both energy conservation and fuel poverty aims. We therefore recommend that the Government and Ofgem consider how tariffs could be restructured to ensure that energy conservation is incentivised, while ensuring that high consuming vulnerable consumers are protected.

DELIVERY OF FUEL POVERTY POLICIES

Use of targets

139. Government is subject to a fuel poverty target to ensure that by November 2016 "as far as reasonably practicable persons in England or Wales do not live in fuel poverty."[307] There was consensus among many witnesses that Government would not achieve this target.[308] The IPPR noted that ECO, as the main policy instrument for addressing fuel poverty, looked set to "fall woefully short of addressing the government's legally binding target to eliminate fuel poverty by 2016."[309] Citizen's Advice stated that "without a significant increase in Government spending on the energy efficiency of fuel poor homes the number households in fuel poverty is as likely to increase by 2016 as be eliminated."[310] Given reduced spending on energy efficiency programmes, some organisations have questioned whether Government is indeed doing all that is "reasonably practicable" to meet the target (see paragraphs 90 and 91).

140. The usefulness of such an elimination target can therefore be questioned. The interim target to eliminate fuel poverty by 2010, introduced under the Fuel Poverty Strategy, was also missed.[311] Professor Hills expressed a preference for short-term, adaptable targets:

312

Mervyn Kohler of Age UK noted that targets would only be useful if they could ensure that the "trajectory [for fuel poverty] is downwards instead of remorselessly upwards, as it has been for the last seven or eight years."[313]

141. Government has acknowledged that an elimination target may not represent the best approach for tackling fuel poverty and has set out plans to establish a new target based on the number of households living in inefficient properties.[314] This target will be set through secondary legislation, although there will be a statutory requirement in primary legislation for the Secretary of State to adopt a strategy to meet the target. DECC stated that "detailed proposals for consultation...on the form, date and level of target" will follow in due course.[315]

142. We agree with Government that an elimination target is not the best approach for tackling fuel poverty. The importance of a target lies in its ability to create political momentum and measure the effectiveness of policy. The current target has failed to achieve these objectives. We therefore support Government proposals to introduce a new target which focuses on improving the energy efficiency of fuel-poor households. We look forward to hearing further details on the form, date and level of the proposed target. Government should also consider whether further short-term, fuel poverty targets which can adapt to changing policy contexts could also be introduced as part of its forthcoming fuel poverty strategy.

Role of energy companies

143. Some have questioned whether energy companies are the best delivery agent for fuel poverty policies such as ECO. It was suggested that large energy companies may not know a great deal about local housing stock.[316] In addition, a lack of consumer trust toward energy companies could hinder effective delivery.[317] The National Pensioners' Convention also suggested a potential conflict of interest or "underlying disinterest" for energy companies in encouraging customers to reduce energy usage.[318] SSE expressed concern that suppliers were required to "seek information about their customers that are beyond the normal customer/commercial company relationship, such as benefits data and health conditions."[319] The company therefore proposed that a "central agency" be set up to match consumers with support. In the longer term, an energy company obligation may not be the best way to address fuel poverty.[320]

Community-based approach

144. A community-based approach to tackling fuel poverty could overcome some of these barriers. NEA suggested this could involve the following elements:

· Practical heating and insulation improvements

· Energy, money and fuel debt advice

· Assistance in claiming full benefit entitlement

· Community-based collective switching.[321]

Mervyn Kohler of Age UK stressed the benefits of a community approach involving local authorities in terms of efficient delivery and greater community engagement and confidence.[322] Consumer Focus also endorsed an area-approach:

323

145. DECC's framework for action on fuel poverty recognised the effectiveness of area-based approaches, but suggested that "the clustering of fuel poverty in a specific area is uncommon." A street-by-street approach could therefore result in many non fuel-poor households receiving support. Given the limited resources available, Government suggested that using "benefit proxies" could be a more efficient means of targeting support.[324]

146. In oral evidence, Jan Rosenow and Dr Nick Eyre of the University of Oxford agreed that an area-based approach which sought out low-income, low-efficiency areas was likely to achieve a higher targeting efficiency.[325] According to the Local Government Association (LGA), over half of all energy efficiency programmes were delivered by councils. It maintained that locally-designed schemes were more effective than national definitions and suggested that local councils were "best-placed to broker relationships and facilitate data-sharing across a range of partners."[326] The LGA recommended that local councils were granted access to the ECO brokerage scheme without having to acquire Green Deal provider status, in order to support fuel poverty schemes at a local level.[327] Ofgem agreed there was a "key role for face to face advice provision by trusted intermediaries" in supporting vulnerable consumers, citing the Energy Best Deal campaign delivered in conjunction with Citizen's Advice.[328] Ron Campbell of NEA noted that this was a positive development but suggested that it should be extended in scope to provide a more comprehensive service offering advice on debt and energy efficiency grants as well as switching.[329]

147. The Energy Savings Advice Service and Big Energy Saving Network, as highlighted by the Secretary of State in oral evidence, are a step in the right direction but further resources will be needed to reach the most vulnerable fuel-poor households.[330] We conclude that energy companies are not the best delivery agent for fuel poverty policies due to low levels of consumer trust and lack of local knowledge. In the longer term, policy instruments such as the Energy Company Obligation may not therefore be the most effective means of addressing fuel poverty. Local councils and voluntary organisations may have greater knowledge of property and occupant characteristics, leading to a more effective targeting of resources. We therefore recommend that Government considers how to maximise the involvement of councils, voluntary sector organisations and other trusted intermediaries as part of its new fuel poverty strategy. We also recommend that Government considers extending access to the ECO brokerage scheme to local councils, in order to ensure finance for locally-led energy efficiency projects.

183 DECC, Annual report on fuel poverty statistics 2013, May 2013 Back

184 Professor John Hills, Fuel poverty: the problem and its measurement: Interim report of the fuel poverty review, CASE Report 96, October 2011; Professor John Hills, Getting the measure of fuel poverty: Final report of the fuel poverty review, CASE Report 72, March 2012 Back

185 The adequate standard of warmth is usually defined as 21 degrees for the main living area, and 18 degrees for other occupied rooms Back

186 Warm Homes and Energy Conservation Act 2000 Back

187 DECC, UK fuel poverty strategy 2001: Government response to the consultation on amending reference to the warm front scheme eligibility criteria, 21 March 2011 Back

188 Ev w7, Ev 1, Ev 40, Ev w34, Ev 54, Ev w49 Back

189 Ev 1 Back

190 Ev 40, Ev 54, Ev w49 Back

191 Ev 40 Back

192 Ev 40; Case No: CO/3373/2008, Royal Courts of Justice, 23/10/2008. Back

193 Q 455 Back

194 Professor John Hills, Fuel poverty: the problem and its measurement: Interim report of the fuel poverty review, CASE Report 96, October 2011; Professor John Hills, Getting the measure of fuel poverty: Final report of the fuel poverty review, CASE Report 72, March 2012 Back