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

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)


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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© Parliamentary copyright 2013
Prepared 29 July 2013