Energy and Climate Change CommitteeWritten evidence submitted by the Department of Energy and Climate Change

1. DECC welcomes the ECC Committee’s inquiry into energy prices, profits and poverty and the opportunity to submit evidence. DECC also looks forward to the Committee’s findings.

2. The government cannot control volatile world energy prices but can still help people get their bills down. The easiest ways to get energy bills down quickly are to get people paying the lowest possible tariffs and to reduce the amount of energy that is wasted.

3. The Government has proposed a range of measures on the retail markets for inclusion in the Energy Bill which will ensure that all households will be able get the best deal for their gas and electricity as soon as possible. The proposals will ensure that energy companies place consumers on the cheapest tariff that meets their preferences and have clear personalised information to help them shop around more easily for the best deals across the market.

4. The Government is making sure there is support for the most vulnerable households with their energy bills. Our policies are helping consumers to use energy more efficiently by providing free or discounted insulation for their home and helping the most vulnerable with their bills.

5. Through the Warm Home Discount Scheme, we expect two million households to receive support in 2012–13. This includes well over one million of the poorest pensioners who have already received an automatic discount of £130 off their electricity bill.

6. Green Deal and the Energy Company Obligation (ECO) will help consumers lower their bills by making their homes more energy efficient. Since its launch on 28 January, hundreds of Green Deal Assessments have been carried out.

7. Through ECO the Government is requiring energy companies to provide an estimated £1.3 billion a year of support for energy efficiency in our homes which includes some £540 million to fund energy saving improvements in around 230,000 low income vulnerable households per year.

8. Investing now in building a diverse, low carbon and efficient energy mix will protect consumers from long term international fuel price volatility resulting in more stable and lower bills than they would have been in the absence of these policies.

Prices

What factors determine energy prices (wholesale prices, company operating costs, green levies, company profits etc)? What contribution do these factors currently make towards a typical household energy bill and how might this change over time?

9. Energy prices are determined by wholesale energy costs, transmission, distribution and metering costs, energy and climate change policy costs and other supplier costs and margins. In the publication “Assessment of the impact of energy and climate change policies on prices and bills: November 2011” DECC has estimated the breakdown of these costs.1 DECC estimates that wholesale energy costs made up around 51% and 43% of the average household gas and electricity bill in 2011 (not including the cost of carbon).

10. Energy and climate change policies (including the cost of carbon in electricity generation) are estimated to have represented, on average, 4% of household gas bills, 10% of household electricity bills, and 7% of household energy (gas plus electricity) bills in 2011. Once savings from energy efficiency policies and the receipt by eligible households of a Warm Home Discount rebate are accounted for, energy and climate change policies are estimated to have added only around 2%, on average, to household energy bills in 2011, compared to a bill without policies in place. DECC’s report on the impacts of policies on energy prices and bills is being updated to reflect recent developments—including the Levy Control Framework—to ensure we present up-to-date analysis. The report will be published shortly.

11. Transmission, distribution and metering costs (19% for both fuels), other supplier costs and margins (21% for gas and 23% for electricity) and a 5% VAT rate were the other main components of household energy bills.

How might these change over time?

12. Wholesale gas and electricity prices can be volatile and are driven by international demand and supply which can vary significantly over time. Reducing the impact of this volatility on energy bills is one of the reasons the Government is working to develop a more balanced energy portfolio to shield UK homes and businesses. Investing now in building a diverse, low carbon and efficient energy mix will protect consumers from long term international fuel price volatility resulting in more stable and lower bills than they would have been in the absence of these policies.

13. There is upward pressure on transmission and distribution costs as around £35 billion2 of investment is required over this decade to reinforce the network, replacing aging infrastructure and supporting the drive to a low carbon economy

14. The impact of policies on household electricity prices is expected to rise to 2020, while the impact of policies on gas prices is expected to remaining broadly the same. The implementation of energy efficiency policies is expected to more than offset the increased cost to households for investment needed to deliver a low carbon future.

15. Though expected rises in fossil fuel prices and transmission and distribution costs mean that energy bills are likely to rise with or without policies, expected savings through energy efficiency and the Warm Home Discount mean that household bills, on average, will not rise as much as they would have in the absence of polices.

16. Supply company costs and margins may change overtime as direct and indirect costs change and as market share changes. Government and Ofgem are taking action to bring about greater competition in the energy market to put downward pressure on this element of the bill.

To what extent (if at all) should the Government or the regulator intervene in the market to affect the prices consumers (or certain groups of consumers) pay for their energy? Should any changes be made to the Government’s current approach?

17. Government intervention, such as through price regulation, is needed where competitive markets cannot deliver the best outcome for consumers, often in natural monopoly situations. This is not the present position in UK retail energy markets. The latest figures show UK prices including tax for medium domestic gas and electricity consumers, were the lowest and fourth lowest in the EU 15 respectively.3

18. The Government strongly encourage UK consumers to shop around for the best deal, including through collective switching arrangements, as this will help control costs and competition keeps UK prices as low as possible.

19. The Government has introduced amendments to the Energy Bill that will enable Government to:

(a)Cap the number of tariffs that suppliers may offer;

(b)Require suppliers to move customers on poor value dead tariffs to better value tariffs;

(c)Require suppliers to inform their customers of the savings they can make by moving to the cheapest tariff;

(d)Introduce a tariff comparison tool.

20. These proposals are designed to ensure that the majority of consumers who do not currently engage in the market are on the cheapest tariff that meets their preferences, while making it easier to compare tariffs and shop around for even better deals across the market.

21. Government is also supporting the development of collective purchasing/switching schemes which make it easier for consumers to group together and use market power to negotiate lower energy bills. We have awarded £5 million of support to 31 successful local authority or third sector schemes through the Cheaper Energy Together competition.

22. Artificially reducing retail prices would be unsustainable, reduce the margin suppliers may make to a level that would discourage investment in the new infrastructure we require and put at risk energy security of supply and our climate change objectives.

23. Whilst the Government considers that regulatory intervention on prices would be unhelpful, Government does recognise the importance of helping vulnerable consumers with their energy bills and requires that additional support be made available through the Warm Home Discount Scheme, which supports around two million households each scheme year, including around 1m of the poorest pensioners. In addition, the Department of Work and Pensions automatic Cold Weather Payments, worth £25 a week, are targeted at the elderly, disabled and those with young children. As of 29 January 2013, 5,115,500 payments with a value of £127,887,500 had been paid this winter. DWP also offer automatic annual Winter Fuel Payments to over nine million pensioners.

How effective is Ofgem in ensuring consumers get a fair deal? Are there any areas for improvement?

24. Ofgem is a tough, independent regulator which has shown that it is prepared to take strong enforcement action when necessary and respond to consumer concerns about behaviour in the energy sector.

25. Between April 2011 and March 2012, it fined companies more than £19 million for licence breaches or anti-competitive behaviour.

26. It has carried out detailed investigations into the energy retail market and introduced reforms to address the shortcomings it discovered. Its 2008 energy market probe led to new licence conditions which enhanced consumer protection by improving sales and marketing conduct and banning unfair price discrimination.

27. Following its recent Retail Market Review Ofgem has proposed measures to make it easier for consumers to identify the best tariff across the market. It has proposed banning poor value dead tariffs, restricting the number of tariffs for gas and electricity suppliers may offer to four core tariffs, simplifying bills and requiring personal estimates on bills of the savings consumers can make by moving to the cheapest tariff the supplier offers.

28. Ofgem is also taking forward reform proposals for the wholesale energy market, and have stated a firm preference for intervention to improve liquidity. Greater liquidity should lead to a more competitive and transparent market, increasing customer confidence. The Government supports Ofgem’s objectives, and is keen to see swift and appropriate action. Given the importance of liquidity to competition and the Electricity Market Reform programme the Government is seeking backstop powers in the Energy Bill to enable it to act should industry actions and Ofgem’s reforms not deliver the necessary improvements.

29. Ofgem is also continuing its analysis following the serious allegations of manipulation of trading made by a whistleblower in November. This includes close cooperation with the Financial Services Authority. Ofgem and FSA continue to progress these matters with the necessary priority and consistent with proper examination of the issues.

30. This Government reviewed the role of Ofgem soon after taking power. The review took on board a wide range of views and concluded that the regulatory framework has provided good value to consumers and attracted significant investment. The review identified a need for greater role clarity between Ofgem and the Government and recommended that the Government should establish a new statutory Strategy and Policy Statement. The Energy Bill provides powers for the Secretary of State to designate this statement which will provide greater clarity and certainty about the respective roles of Ofgem and Government and set out the strategic context for Ofgem’s role as the independent regulator. This will lead to better alignment and coherence between policy and regulation. Ofgem will also be required to set out annually how it plans to deliver its contributions to the goals set out in the statement and how it will monitor progress.

31. The Government has also strengthened Ofgem’s hand by making it harder for energy companies to block licence changes and we are strengthening Ofgem’s powers further by giving it a new power in the Energy Bill to compel energy businesses to provide redress to consumers who have suffered detriment because of a breach of a licence condition or relevant regulatory requirement. The introduction of this new power shows that the Government will not hesitate to take action where we identify a gap in Ofgem’s powers.

Could it be possible to benchmark energy prices to provide greater certainty about whether consumers are getting a fair deal? If so, how might this be achieved in practice?

32. As set out in the answer to the first question of this inquiry, retail energy prices are determined by a number of different factors including wholesale energy costs, transmission, distribution and metering costs, energy and climate change policy costs and other supplier costs and margins. These prices can move in different directions. For example wholesale costs are volatile and prices can fluctuate upwards as well as downwards.

33. Whilst wholesale energy costs make up the largest part of the bill (approximately 51% and 43% of the average household gas and electricity bill in 2011), the relationship between wholesale prices and retail prices depends on a number of complex factors including the electricity generation mix and suppliers’ energy purchasing, hedging and pricing strategies. Therefore there is no one suitable benchmark against which retail prices can be measured against.

34. Ofgem produces weekly electricity and gas supply market indicators4 which includes a rolling average net margin on supplying a typical standard tariff, dual fuel customer. Ofgem assumes an 18 month hedging strategy to estimate supplier wholesale costs which is indicative of suppliers’ costs. This serves as a useful tracker of average bills and the movement of wholesale costs and supplier margins over time.

35. Domestic energy prices can also be compared to other European countries. This shows that UK prices including tax for medium domestic gas and electricity consumers were the lowest and fourth lowest in the EU 15 respectively.

Could any other measures be put in place to ensure consumers are paying fair prices for energy and to provide consumers with greater confidence in this?

36. The Government has introduced amendments to the Energy Bill that will allow Government to ensure that consumers are on the cheapest tariff that meets their preferences—ie their method of payment, whether they have opted for a standard variable rate tariff or fixed price fixed term product or a green tariff—and have clear personalised estimates of the savings they can make by moving to their supplier’s cheapest tariff.

37. Our proposed amendments include powers to:

(a)Cap the number of tariffs that suppliers may offer. This will end the proliferation of tariffs that has taken place over the last few years and make it easier for consumers to compare tariffs across the market.

(b)Prohibit poor value “dead” tariffs. Where customers on a “dead” legacy deal are paying a higher price than their supplier’s cheapest standard tariff, they will be switched to the cheaper rate.

(c)Require suppliers to provide, on relevant customer communications (such as bills and annual statements), personalised estimates of the savings to be made from moving to the supplier’s cheapest tariff for their current payment method and by moving to the supplier’s cheapest tariff overall.

(d)Require suppliers to use a tariff comparison tool that will allow for comparison of different tariffs on a like for like basis in the way that the APR allows comparison of financial products.

38. These measures, which build on Ofgem’s Retail Market Review proposals, will significantly reduce complexity and enhance transparency for energy consumers, giving them greater confidence that they are not paying more than they need to for their energy.

39. Government is also providing support to collective purchasing and switching schemes through its £5m Cheaper Energy Together fund, which can help consumers to get a better deal on their energy. As an example, the Which? “Big Switch” run last year estimated saving around 37,000 participants an average of £223 per year.

Profits

Many consumers believe that energy company profits are the reason the energy bills have been going up in recent years. Is this perception fair?

40. DECC estimates that other supplier costs and margins, which includes margins earned as well as operating costs, made up around 21% and 23% of the average household gas and electricity bill in 2011, while wholesale energy costs made up around 51% for gas and 43% for electricity and transmission, distribution and metering costs made up 19% for both fuels.

41. Over the period 2010–12, DECC estimates that wholesale energy costs have contributed to at least 60% of the increase in total household dual fuel bills over the same period.5 The remainder of the increase was driven by other factors: increases in transmission and distribution costs, supplier operating costs and margins which are estimated to have accounted for around 25% of the increase and the costs of energy and climate change policies around 15% of the increase. Rising wholesale energy costs and the need to replace ageing gas and electricity transmission and distribution infrastructure have been the primary drivers of retail energy price rises in recent years, rather than margins made by energy suppliers.

42. Ofgem analysis shows margins in energy supply have generally been low since 2005 and the average energy supply net margin for 2005–10 was around 1.6%,6 although they have increased more recently. This is despite the public perception of profiteering in the domestic energy supply market.

43. Supplier margins over time are linked to the movement of wholesale prices. Ofgem’s latest estimate of the rolling average net margin for suppliers on a typical dual fuel bill in January of £1,420 is £80.7 This equates to a net margin of 5.6%.

44. Data from the company 2011 Segmental Reports show that the average domestic supply margin for the large energy suppliers was as follows:

Electricity	1.1%
Gas	2.8%
Duel Fuel	2.0%

Why is there so much uncertainty about the level of profits the large, vertically integrated energy companies are making? What could be done to improve clarity?

45. Since 2009 Ofgem has required large vertically integrated energy companies to produce Consolidated Segmental Statements, which present the profitability of generation and different supply activities separately. The purpose of this is to provide greater transparency for consumers on the margins energy suppliers are making in different parts of their business. Differences in company structures of the large energy suppliers make comparison across these statements complicated. As part of its Retail Market Review, Ofgem has carried out work to improve the reporting transparency.

46. Ofgem appointed the accountancy firm BDO to review the way that companies report information about the profitability of different parts of their vertically integrated businesses. The review found that the methodologies used by energy were “broadly fair and appropriate”8 but made some recommendations for improvement.

47. As a result in January 2012, Ofgem identified a number of changes to the way that supplier companies could improve the transparency of reporting including:

(a)Standardising how the companies account for generation fuel costs to improve the comparability of the information they provide;

(b)Seeking to ensure that companies use the same accounting standards and methodologies when producing their profit measures;

(c)Proposing a checklist of functions to increase transparency on which ones are reported.

48. In August 2012 Ofgem changed the license condition that sets out the information large energy suppliers must prepare in their Segmental Statements to make it a requirement for energy suppliers to reconcile revenues with profits and to describe how Feed-in Tariff costs and Renewable Obligation costs are allocated.

How useful are Ofgem’s electricity and gas supply market indicators in monitoring the level of profits made by energy companies? Could they be improved?

49. Ofgem’s electricity and gas supply market indicators are useful in helping to understand movements in prices and the relationship to margins suppliers earn through supplying consumers.

50. DECC use the indicators along with other sources such as DECC’s Energy Price Statistics to monitor the retail energy supply market. They are updated weekly so can be used as an indicator before official figures are available such as DECC’s retail price statistics9 or the companies’ Segmental Statements, which are published annually and with a lag.

51. There are some limitations to their use because they are based on assumptions Ofgem must make, such as the average hedging strategies to estimate wholesale energy costs. Ofgem’s methodology is available online.10 In addition the indicators relate to the whole domestic retail market rather than a particular supplier.

52. In terms of improvements, further guidance in helping consumers understand the market indicators could help those whose who do not have a detailed understanding of the energy market.

How useful are the segmental generation and supply statements that major energy suppliers are required to produce in understanding where companies are making their profits?

53. The segmental generation and supply statements that the major energy suppliers are required to produce are useful in helping to understand in what parts of their business suppliers are making their profits. They also enable comparison between the large energy suppliers since they report in a broadly consistent way.

54. As set out above, Ofgem has made a number of improvements to the Segmental Statements since they were first published in order to increase transparency and comparability across companies. The Government supports these improvements and Ofgem’s plans to carry out independent scrutiny of the first year of the statements where changes have been applied.

55. Future steps to improve the statements may be to show how the latest set of statements compares with previous statements ie how they change over time.

Do Ofgem’s supply market indicators and the segmental reports provided by energy suppliers help to increase transparency and public trust in energy companies? Could they be improved to provide greater transparency?

56. Ofgem’s supply market indicators and the segmental reports provided by energy suppliers do improve transparency in the energy supply market. The indicators provide useful information on the movements in wholesale costs, prices and supply margins over time across the market. The segmental statements provide information on the margins earned by individual large vertically integrated suppliers.

57. In order to be useful to a wider audience, including those who do not have a detailed understanding of the energy market, further guidance could be provided to explain how the energy market works and, on the segmental statements specifically, an explanation of the key accountancy terms and concepts involved.

To what extent does the way energy companies communicate profits to the general public influence the public’s perception of these companies?

58. Ofgem’s research has found the public’s view of the energy market to be “overwhelmingly negative”. Energy companies are thought to make excessive profits, and be quick to pass on increases in wholesale prices, but not decreases. Media coverage is a strong driver in forming these perceptions.11 This highlights the importance of the media providing accurate coverage of profits earned by energy companies across their businesses including the retail business.

59. When Ofgem tested their proposed Standard of Conduct on how suppliers should interact with consumers, the over-arching principle of “transparency” was welcomed. Key elements included “Clearly communicating the level of profit and where it goes” and “Explaining how their retail prices move in relation to wholesale prices”.12

60. Perceptions of profits are likely to drive consumer distrust of energy companies. DECC’s research finds that only half (50%) of customers trust their energy provider to give customers a fair deal, and 45% do not trust them to do so.13

61. The Government supports Ofgem’s existing work in increasing the transparency of margins made in the retail market by energy suppliers.

Fuel Poverty

Is the Government on track to meet its target of eliminating fuel poverty by 2016 and will reduced Government spending in this area affect their ability to achieve this target?

62. The Government is committed to meeting its target of ensuring that no household is in fuel poverty in England so far as reasonably practicable by 2016. We are committed to helping people, especially low income vulnerable households, heat their homes more easily.

63. The latest fuel poverty figures showed that fuel poverty actually fell between 2009 and 2010, from 5.25 million households in the UK to 4.75 million. However, fuel poverty remains a huge challenge and the same figures suggest an increase, under the current definition, can be expected in 2011 and 2012.

64. One of the main conclusions of the independent Hills Review commissioned in 2011 was that fuel poverty is not being measured in the right way. The Government is committed to taking forward many of the recommendations of the Hills Review and will publish a new fuel poverty strategy for England—the first since 2001—later in 2013 to ensure that resources are being used as effectively as possible.

65. Not every low income household is fuel poor. DECC is therefore also committed to considering the distributional impact of its energy and climate change policy package. A policy such as the Warm Home Discount is a response not only to fuel poverty, but also to the impact that rising prices can have on all low income households, not just those living in energy inefficient homes.

66. This Government has a range of policies to address the contributing factors of fuel poverty, including the Green Deal Energy Company Obligation, Warm Home Discount, Winter Fuel Payments and Cold Weather Payments. But it is recognised that improving the thermal efficiency of Britain’s housing stock is key in addressing this issue on a sustainable basis.

67. The new Green Deal and Energy Company Obligation will be our flagship policy for improving the energy efficiency of the nation’s housing stock.

68. ECO is expected to be a more effective policy than those policies (including Warm Front) which it effectively replaces. Fuel poverty expenditure on efficiency measures and direct bill support for low income households will increase over the course of this Spending Review period. What is more, we expect ECO to deliver more energy efficiency improvements per £ spent than previous schemes.14

69. The new fuel poverty strategy, that we will publish this year, will give us the opportunity to look again at our existing policies in order to understand how effectively they are supporting the fuel poor. This will help to ensure that we are using our resources in the most effective way.

Has the Hills Review resulted in any changes to fuel poverty policy? How could its findings be used to improve the efficacy of fuel poverty policy?

70. The Hills Review has provided considerable insight into the problem of fuel poverty, in particular how best to measure fuel poverty and how to identify priorities for assistance. At the heart of the recommendations made by the Review is a call for a new definition of fuel poverty. This focuses attention on what makes fuel poverty a distinct issue: the overlap of having both a low income and higher than typical energy costs. The Government has consulted changing the fuel poverty measurement framework and will be publishing a response to the consultation soon.

71. As well as framing the issue of fuel poverty in a new way, the Review touched on the challenge of targeting fuel poverty policies at those who most need help. The new measurement framework, which includes a measure known as the fuel poverty gap, will allow us to understand in much more detail who is fuel poor and the particular characteristics of those who are worst off. In turn, we hope to be able to design even more effective policy responses.

72. Moving to a new framework provides an opportunity to reappraise our existing policies to see how well they are targeted towards those households we are most concerned about. This is something we will examine further in our forthcoming fuel poverty strategy.

To what extent are current fuel poverty policies reaching the right people? Are there any particular groups that are currently not getting the necessary support? And will this change under the move to ECO?

73. This is an issue we will look at in more detail in our forthcoming strategy. The eligibility criteria for existing policies are designed to reach those we most want to help in the best way possible. For example, the eligibility criteria for ECO Affordable Warmth include private tenure households in receipt of particular means tested benefits and tax credits under an income threshold. The effect is to focus assistance where fuel poverty rates are worst. We have removed the SAP threshold that was part of the Warm Front eligibility criteria and which acted as a barrier for people wishing to access the scheme.

74. In addition around £190 million worth of support per annum will be delivered to those living in low income areas through the Carbon Saving Communities obligation (CSCo). This should support a further 100,000 households in low income areas each scheme year. Those living in social housing are likely to be a major beneficiary of this obligation given the economies of scale that can be achieved by working with Local Authorities and other community-led schemes. As poverty is more dispersed in rural areas, a sub-target has been included in the ECO Carbon Saving Communities obligation to ensure that 15% of support is delivered to low income, rural properties, more likely to be off the gas grid.

75. The Warm Home Discount scheme, which provides a rebate off energy bills, supports around two million households each scheme year, including over one million of the poorest pensioners. This policy is very successfully targeted at low income households, helping in this way to address not only fuel poverty but also the broader question of the distributional impact of our energy and climate change policy package.

76. In addition the DWP automatic Cold Weather Payments are also targeted at the elderly, disabled and those with young children. DWP also offers automatic annual Winter Fuel Payments to pensioners

What support is available for fuel poor households living in solid-wall and hard-to-treat properties? Could this be improved?

77. Solid wall and hard to treat cavity wall insulation are both eligible measures under the ECO Affordable Warmth obligation. We recognise that energy suppliers will seek to meet their ECO obligations in the most cost-effective way and this is likely to mean focusing on basic insulation and boiler repairs/replacements.

78. It is more likely that solid wall insulation, for example, will be delivered on a larger scale under the Carbon Saving Obligation and Carbon Saving Communities obligation, particularly in social tenure properties which provide economies of scale.

79. In terms of overall targeting, 40% of ECO is specifically targeted at low income households through the Affordable Warmth and Carbon Saving Communities obligations, but we expect around 50% overall of ECO to be offered to low income households.

80. Part of the purpose of developing a new fuel poverty strategy is to see how our concern for those in the deepest fuel poverty—which may include those leaving in solid-walled homes in off-grid areas—is matched by our ability to target policies on those households and the costs of doing so.

Will the Government’s proposals to ensure that consumers are on the cheapest tariff have any impact on fuel poverty?

81. The proposals will help the majority of consumers, including the fuel poor. Ofgem’s findings show that the proportion of those consumers who claim they have never switched is 10% higher amongst consumers in social grades D and E than the average. Significant savings can be made through switching—for example, those customers who have never switched and pay by standard credit could save up to £200 a year by switching supplier and paying by direct debit.

82. The Government’s proposals are designed to help the unengaged consumer onto the cheapest tariff and empower them to shop around across the market to seek out even better deals.

To what extent do fuel-poor households engage in switching? What are the barriers to greater levels of switching from these groups?

83. Research suggests that vulnerable consumers15 are less likely to switch energy supplier than consumers generally. Overall, 14% of consumers switched electricity supplier in the last year, according to Ofgem’s tracking survey.16 Ofgem’s findings show that the proportion of those consumers who claim they have never switched is 10% higher amongst consumers in social grades D and E than the average. Those who have never switched are more likely to belong to the least affluent social groups, live in rented accommodation and rural areas, pay by pre-payment meter or standard credit and lack internet access.

84. DECC’s tracking survey also finds that those in lower social grades are more likely never to have switched supplier (49% of DEs and 34% of ABs). Social renters (48%) and private renters (55%) are also much more likely than owner-occupiers (35%) never to have switched.

85. Vulnerable consumers are also less likely to have switched tariff or payment method with their existing supplier—5% of pre-payment gas customers switched one of these in the last year, compared to 14% of direct debit customers.17

86. The Government’s proposals to legislate in the Energy Bill on tariffs are designed to ensure that the majority of consumers who do not currently engage in the market are on the cheapest tariff that meets their preferences, while making it easier to compare tariffs and shop around for even better deals across the market.

87. In addition, the Government is supporting the development of collective switching and purchasing schemes, which are an innovative way for consumers to group together and use market power to negotiate lower energy bills. We have awarded £5 million of support for the most innovative local authority or third sector schemes through the Cheaper Energy Together competition. The aim is to support a variety of schemes to test how best to engage customers in the energy market, and particularly how these can help vulnerable and low income customers.

88. These policies are designed to overcome a number of barriers that research has shown consumers face when considering switching. These include a lack of awareness of the possibility of switching, lack of access to information perhaps through not being online, uncertainty about savings that could be achieved through switching and complexity of tariffs. Reluctance or being unable to switch from a pre-payment meter is another barrier to switching for some vulnerable consumers.

To what extent do fuel-poor households current take advantage of energy efficiency schemes? Could anything be done to increase uptake?

89. The Warm Front scheme has assisted 2.3 million homes vulnerable to fuel poverty across England since it was introduced in 2000. Alongside this, the GB wide CERT SPG and CESP obligations have provided targeted energy efficiency support to low income vulnerable households.

90. The Hills Fuel Poverty Review showed conclusively that what matters most in terms of fuel poverty is how money is spent, with energy efficiency schemes targeted on low income households being the most effective at reducing fuel poverty over the longer-term. This is why we have designed the ECO such that a minimum of 40% of the total support will be targeted specifically at low income households through the ECO Affordable Warmth and Carbon Saving Communities obligation, with the expectation that over 50% of ECO as a whole will benefit low income households.

91. The type of support offered through ECO, including boiler repairs and replacements, should act as a trigger for households to actively come forward and apply for assistance through the scheme.

92. Given that ECO works alongside the Green Deal, it is able to take advantage of the Green Deal infrastructure to facilitate delivery. We have set up a referral mechanism at the Energy Saving Advice Service (ESAS), the government funded call centre for DECC’s customer facing policies. The operators will ask customers a series of questions about their personal circumstances and if they may be eligible for support under ECO Affordable Warmth. With the customer’s consent, ESAS will then verify their benefit status with the Department for Work & Pensions before referring eligible customers on to a supplier to receive heating and/or energy efficiency measures. This ECO Affordable Warmth referral mechanism is operational and a dedicated Affordable Warmth team is currently in place to increase the number of calls that can be taken and to ensure these customers are treated with care.

93. We are also engaging with our key stakeholders such as Citizens’ Advice Bureau and Consumer Focus to ask them to promote the ECO offer to their customers to increase awareness.

February 2013