Energy and Climate Change CommitteeSupplementary written evidence submitted by the UK Government’s Fuel Poverty Advisory Group

1. The Fuel Poverty Advisory Group has suggested that fuel poor and low-income households should be prioritised for assistance under the carbon saving aspect of ECO. How much of an impact on fuel poverty would this have? Wouldn’t it make it more difficult for companies to identify eligible households?

If all the carbon saving aspect of ECO were to be prioritised to the Fuel Poor (FP) the impact would at least, theoretically, be double the current level of ambition for GB, but would probably achieve significantly more due scale and efficiency. It would also depend on the approach taken to targeting. For example, some 1.5 million FP householders in GB (in 2011), 22% of all FP households, lack access to natural gas supplies and, consequently, are reliant on comparatively expensive and, in some cases, unregulated energy sources—oil, LPG, solid fuel or electricity for heating. Of all GB Oil consumers 39% are fuel poor; of all GB solid fuel consumers 60% are fuel poor.1 FPAG understands that as the gas distribution companies are aware of where non gas properties are located; this should be of invaluable assistance to targeting if the appropriate regulatory drivers and leadership are put in place. Hence, with regards to identifying fuel poor households being made more difficult by FPAG’s suggestion; it should not make it any harder than it already is, but possibly easier. There are creative opportunities to find the most deprived either through non gas area data or through DWP data and local knowledge as discussed later.

The context to FPAG’s suggestion is important. The new Energy Company Obligation contains three elements—Carbon Target, Affordable Warmth (AW) and a Carbon Savings Community Obligation (CSCO). AW and CSCO will be focused on low income households and will amount to some £540 million per annum of the new ECO’s anticipated costs of c. £1.3 billion per annum (Suppliers apparently now consider this will be nearer £1.6 billion). The cost of ECO will be recouped from all consumers’ energy bills but not all consumers will benefit. There is, therefore, a real risk of fuel poor consumers rationing their energy use to effectively enable, in part, ECO measures for the able to pay consumers meet the golden rule through the suppliers ECO contribution. Returning to the £540 million, this will be spent across GB, however, for England this represents a 44% cut in funding for energy efficiency schemes compared to the previous schemes.2 The devolved assemblies will keep their centrally funded schemes and be in addition to the ECO. Government’s own projections indicate ECO alone can only remove between 125,000–250,000 households from fuel poverty by 2023;3 at best a 6% reduction of the current number of fuel poor households.

FPAG does recognise that identifying those in receipt of the required benefits in order to qualify for certain measures is not easy for suppliers to achieve. Indeed, for the super priority group target under CERT, FPAG understands, a bounty of around £150 was being paid by some suppliers to identify a potential recipient. This is totally unsustainable and adds significantly to the cost of the programme to meet the required target. FPAG, therefore, would like to take this opportunity to reiterate, in the strongest possible terms, its request that similar arrangements be put in place by Government that were achieved for the digital TV roll-out to target particular groups of viewers. Whereby Government data was made available to facilitate telephone calls and letters to be sent to householders of a particular age offering additional help with the digital changeover, this included the potential for financial assistance towards a digital television box. FPAG believes that DWP data was used. This appears to have worked extremely well and was not abused. FPAG would, therefore, wish to see a similar determination by Government to put in place similar arrangements with appropriate safeguards, to identify those in receipt of particular benefits, which should, in turn, dramatically improve the costs of executing the new ECO and ensure additional fuel poor households could benefit.

2. The Fuel Poverty Advisory Group said it was disappointed that Benefit Entitlement Checks were not being carried out as part of ECO. Why do you think DECC decided not to do this?

FPAG has never received a satisfactory answer to this question. The only conclusion that can rationally be drawn, at this stage, is that Government does not wish to see additional spending that will increase additional benefit claims.

The background and context to our disappointment are also important. There will be a step change in the costs to be regressively recovered through bills as the new LCF comes into being. Meanwhile, in 2009–10 up to £12 billion in means tested benefits were unclaimed—nearly 25% of all available benefits expenditure.4 Previous years have a similar profile. In addition, up to £3.9 billion in Child Tax Credits and £4.4 billion in Working Tax credits went unclaimed.5

During incorporation of BECs as part of the Warm Front scheme, the BEC service identified on average more than £1,600 per year in additional income for those households that successfully received the service and for some a “passport” to insulation and a heating system; making life-changing differences to low-income vulnerable households in the greatest need.

Hence, the case of an ongoing benefits take up campaign is still relevant today. FPAG is also very disappointed at the Government’s proposal to discontinue publishing the estimates of the benefit take-up series.

3. The Fuel Poverty Advisory Group has advocated the introduction of a “protected block of consumption upon which policy costs are not levied, with costs recovered from consumption above the threshold”. Have you given any consideration to the practicalities of how such an idea might be implemented?

FPAG has been giving some consideration to the implications of such a development. FPAG has established, in conjunction with Consumer Focus, a tariff review group. Research is currently being undertaken to look at the efficacy of the proposal and also its implications and options for implementation. This includes the quantum of the protected block for each quarter and the distributional impacts.

For the fuel poor household, fuel poverty generally translates into below average consumption for 85% of fuel poor households. The balance, many of whom use electricity for heating, should be prioritised for urgent measures as outlined in the previous question.

FPAG believes the simplest way of having such a protected block approach, is for it to be available to all consumers. Such an approach provides an incentive to all consumers to use less energy and is also in concert with the principle of the polluter pays.

For the supplier, FPAG perceives the simplest way would be for levies to be applied explicitly to bills and based on consumption above a threshold yet to be determined.

FPAG considers that if social and green costs are going to continue to be recovered regressively through bills the “protected block” could begin to introduce a progressive and more equitable mechanism for their cost recovery. The timing is opportune with the Levy Control Framework (LCF) set to increase and smart meters soon to be deployed. The Government recently agreed to raise the cap on its various low carbon and social policies to reflect the new Contracts for Difference (CfD) and capacity market arrangements through LCF. The LCF budget for 2012–13 is £2.35 billion. This will increase to £7.6 billion in real terms by 2020–21. FPAG believes this will cost a dual fuel customer £241 per annum from its current £94 per annum today. Policies covered by the current LCF include the Renewables Obligation (by far the largest element), Feed-in-Tariff and Warm Home Discount. In future, this will also include Contracts for Difference—the main contributor to the increase. The LCF does not include other Government policies, such as the Energy Company Obligation and Carbon Floor Price, nor those emanating from EU legislation, such as the EU Emissions Trading System (ETS).

4. The Fuel Poverty Advisory Group expressed disappointment that energy intensive industries were being given protection from the impact of the EU ETS and Contracts for Differences on their energy bills yet no equivalent support was being offered to fuel poor households. Would it be possible to offer compensation for environmental levies such as the EU ETS to fuel poor households in practice and how might this be achieved?

FPAG believes that there are several ways in which compensation could be made to fuel poor households to offset the implications of the EU ETS and contracts for differences. These include:

1.A protected block of consumption as outlined in question three above could begin to provide such a long term mechanism.

2.Build on the success of the data matching for the Warm Homes Discount with the DWP data for those in receipt of pension credit; identify other means tested benefit worthy recipients such as those in receipt of cold weather payments, with an additional payment.

3.Although not assistance at the individual consumer level; increase the £540 million sum available under Affordable Warmth from the additional Treasury receipts that accrue through additional VAT on energy as prices continue to rise and also from the carbon price floor and or the EU ETS auction. Such a move would significantly increase the resources available to insulate and fuel poverty proof the homes of the fuel poor.

5. Suppliers profits and transparency.

FPAG understands that the segmental accounts currently prepared by energy suppliers for Ofgem, do set out the profits associated with different parts of the energy supply chain. However, they lack promulgation with a narrative leaving stakeholders to unable to comment in an informed way. Meanwhile, it is very unclear why retail profits appear relatively modest with some making no profit at all, and for several years. Yet it is apparent that generation must be making significant profits. For example, the recent acceleration of coal burning, due to its low price triggered by the shale revolution in America, is a clear indication of the positive economics.

FPAG believes that the segmental accounts should provide robust information as to the size and source of profitability throughout the value chain. They were apparently reviewed in early 2012 by the accounting firm BDO and found to be broadly robust. They made a number of detailed recommendations that were considered by Ofgem. However, with the criticality of this essential part of the nation’s infrastructure, and parlous state of sufficient generating capacity, should these operations now be subject to greater scrutiny? Generation, unlike the regulated distribution network operator businesses, is not subjected to the same financial ring fencing requirements. It should, therefore, be a matter for Government to satisfy itself that Ofgem has sufficient powers to ensure the confidence of consumers regarding profitability and also security of supply. This is of growing importance following Ofgem recent warning about capacity, plus generation activity appears to be increasingly run on a Pan-European basis by some companies. The introduction of the carbon price floor form 1 April 2013 and subsequently EMR CfDs, LCF etc and increases in wholesale energy price; will increase the cost of energy to consumers.

There is no doubt the “waters are muddied” by both the media and suppliers about energy profits—consumers deserve better and need clarity and honesty. Generation profits and transfer pricing by vertically integrated retail businesses are not transparent to consumers. FPAG believes that there needs to be a clear narrative on energy costs and why they change. If consumers believe accusations of profiteering they are likely to feel helpless and disengage from the retail market. Such disengagement is not in their interests, nor is it helpful to achieving the aims of the Green Deal, Energy Company Obligation, and Smart Metering initiatives, all of which rely on high levels of consumer engagement.

March 2013