Conclusions and Recommendations
Energy prices
1. Energy
bills are rising and are likely to continue to rise in the future.
The wholesale price of fuel has been the largest contributing
factor, driven by rising global gas prices. Several other factors
are also contributing to price rises including the need to invest
and finance UK's electricity and gas network and energy and climate
change policies. The extent to which energy supply companies are
actively working to reduce their operating costs remains unclear.
(Paragraph 20)
2. We
welcome Ofgem's and the Government's proposals to ensure energy
companies to improve the way they communicate with their customers.
In addition to their proposals we recommend that the regulator
compel energy companies to:
a) Standardise the presentation of their bills
to make it easier to understand bills and compare prices (for
example on a price comparison website);
b) Identify the various components which make
up the costs of the bill (i.e. wholesale price of fuel, costs
of supply (i.e. transmission, distribution and metering), the
costs of UK/EU policy (including support for low-carbon/renewables
and energy efficiency schemes) and company margins (i.e. operating
costs and profit);
c) Express price changes in pounds and pence as
well as percentages. (Paragraph 25)
3. We
are disappointed at the regulator's slow progress on requiring
energy companies to improve their transparency and communication
with their customers. We hope that Ofgem will use its existing
powers to ensure that its RMR reforms are implemented. If the
requirements proposed under Ofgem's RMR are not in place by the
August 2013 as promised, we recommend that the Government stand
ready to use any statutory powers to compel greater transparency
from energy companies, early in 2014. We believe that this intervention
should deliver the desirable long-term aim of incentivising companies
to provide more competitive products for consumers. It should
not be considered a one-off intervention to reduce energy company
profits. (Paragraph 26)
4. We
also repeat the recommendation made in our Consumer Engagement
report that DECC should lead a full and frank conversation about
the contribution that consumers are being expected to make towards
ensuring we have safe, secure and affordable energy supplies in
future. DECC should set out a detailed strategy and programme
for action over the next two years. This should include how it
will engage with the public on these issues in a meaningful way.
(Paragraph 27)
5. Despite
serious shortfalls in the way energy companies communicate with
their customers, we are pleased to see that they have started
to make some progress on improving how they communicate with their
customers. It is clear that some are doing better than others.
We commend those companies, including British Gas and EDF Energy,
who are developing innovative new ways of communicating complex
information to their customers. We are concerned, however, that
their efforts are still falling far short of what is required
to increase transparency and improve consumer trust. It is clear
that meaningful improvements are unlikely to be achieved without
regulatory intervention. (Paragraph 29)
6. We
are disappointed that energy supply companies have not gone to
greater lengths to explain to their customers the reasons behind
energy price rises. It should come as no surprise to energy companies
that poor communication on their part
has resulted in deep mistrust from their customers. We welcome
the industry's acknowledgement that it has failed to act and needs
to simplify and improve bills including explaining the individual
components of a bill and the reasons for the upward pressure on
prices. (Paragraph 35)
7. We
recommend that Ofgem also include 'profit margin' and 'rate of
return on capital' (because excessive profit margins are a symptom
of poorly functioning markets) in the above list of metrics which
would help determine whether the supply market was competitive.
(Paragraph 40)
8. We
conclude that the small level of switching by customers between
energy suppliers suggests the retail market is not as competitive
as it could be. There is, however, insufficient data to determine
accurately the actual level of competition in the retail market.
We repeat our recommendation that when Ofgem implements its
final Retail Market Review measures, it should publish its targets
for improvements in the market as a result of these measures and
the criteria it will use to judge the success of the measures.
Going forward, Ofgem should also publish an annual assessment
of the effect those measures are having on competition and consumer
engagement. (Paragraph 42)
Profits
9. We
understand that there may be difficulties in getting large vertically
integrated energy companies to report their trading activities
especially if they are foreign owned or based overseas. However,
we believe that the increase in transparency and associated consumer
trust clearly justifies including trading activities in the statements.
We recommend that Ofgem require the big six to include trading
activities in the statements. There is an opportunity for energy
companies to make reputational gains by setting an example of
best practice. In the context of low consumer confidence, we hope
that energy companies will see the benefits of increased transparency.
(Paragraph 62)
10. We
believe that obtaining an independent opinion as opposed to requiring
an audit of the statements is unsatisfactory because it does not
provide a sufficient level of assurance to bolster trust in energy
companies. The potential cost and inconvenience to the large vertically
integrated businesses would be eclipsed by the gains in confidence
an audit would bring. We recommend that Ofgem require the statements
to be audited. (Paragraph 65)
11. We
note that Scottish Power recently changed its financial reporting
period to align with the majority of companies. We believe that
the costs and inconvenience to SSE to change its year end would
be outweighed by the gains in comparability across the different
statements. We recommend that Ofgem require SSE to change its
financial reporting period to align with the other large vertically
integrated energy companies. (Paragraph 67)
12. We
reject Ofgem's assertion that most of BDOs recommendations would
put unnecessary burdens on the big six. The impact of BDO's recommendations
should be considered as a package We believe that taken as a whole,
the benefits of BDOs recommendations - in terms of improvements
to transparency and comparability of the statements and associated
improvements in consumer trust - significantly outweigh any burdens
on the six largest vertically integrated energy companies. We
acknowledge that there will be additional costs involved with
implementation of BDO's recommendations, but we believe that the
benefits in terms of increased transparency and competition, and
the potential downward pressure on prices that may result, justifies
the expense. (Paragraph 70)
13. We
recommend that Ofgem should require
the six largest vertically integrated companies to implement BDO'
recommendations 1 (publishing statements to the same year-end),
2 (independent auditor opinion on statements), and 4(reporting
of trading function results). We also encourage Ofgem to consider
requiring implementation of BDO's recommendations in full and
to publish, in its response to this report, its analysis of the
cost to energy companies of full implementation. We also recommend
that Ofgem undertake further work to assess current transfer pricing
policies. (Paragraph 71)
14. We
believe that the Supply Market Indicator is a useful tool, for
assessing the supply margin of the big six's retail business.
The disagreements between Ofgem and the energy companies over
the figures, played out in the media, are deeply unhelpful and
only work to erode public trust in the companies and confidence
in the regulator. Companies should engage constructively in improving
the SMI. We recognise the methodological concerns and recommend
that Ofgem actively review the methodology and improve it so that
the SMI more accurately reflects the actual activities of energy
companies. (Paragraph 77)
15. We
recommend that the Government ensure Ofgem takes full advantage
of these new REMIT powers. (Paragraph
79)
16. Improving
wholesale market competitiveness will be vital in ensuring customers
are paying a fair price for their energy. We are astonished at
how long it has taken Ofgem to act since it first identified this
as an issue in 2008. The relatively light touch approach favoured
by Ofgem has failed to deliver the changes required to improve
competition. We recommend that urgent intervention is required
to resolve this problem. Ofgem needs to implement its proposals
to improve liquidity as soon as possible taking a more assertive
approach than it has in the past. (Paragraph 87)
Fuel Poverty
17. 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. (Paragraph 100)
18. 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.
(Paragraph 101)
19. 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. (Paragraph 102)
20. 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. (Paragraph 106)
21. 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. (Paragraph 109)
22. 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. (Paragraph
114)
23. 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. (Paragraph 116)
24. 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. (Paragraph 120)
25. 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. 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. (Paragraph 121)
26. 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.
(Paragraph 123)
27. We
conclude that the increasing use of levies on bills to fund energy
and climate change 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. (Paragraph 136)
28.
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.
(Paragraph 137)
29. 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. (Paragraph
138)
30. 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.
(Paragraph 142)
31. 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.
(Paragraph 147)
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