House of Commons
Energy and Climate Change
Committee
Energy Prices, Profits
and Poverty
Fifth Report of Session 2013–14
Volume II
Additional written evidence
Ordered by the House of Commons
to be published 26 and 28 February, 16 April, 9 and 21 May,
2 and 16 July 2013
Published on 29 July 2013
by authority of the House of Commons
London: The Stationery Office Limited
The Energy and Climate Change Committee
The Energy and Climate Change Committee is appointed by the House of
Commons to examine the expenditure, administration, and policy of the
Department of Energy and Climate Change and associated public bodies.
Current membership
Mr Tim Yeo MP (Conservative, South Suffolk) (Chair)
Dan Byles MP (Conservative, North Warwickshire)
Barry Gardiner MP (Labour, Brent North)
Ian Lavery MP (Labour, Wansbeck)
Dr Phillip Lee MP (Conservative, Bracknell)
Rt Hon Peter Lilley MP (Conservative, Hitchin & Harpenden)
Albert Owen MP (Labour, Ynys Môn)
Christopher Pincher MP (Conservative, Tamworth)
John Robertson MP (Labour, Glasgow North West)
Sir Robert Smith MP (Liberal Democrat, West Aberdeenshire and Kincardine)
Dr Alan Whitehead MP (Labour, Southampton Test)
The following members were also members of the committee during the
Parliament:
Gemma Doyle MP (Labour/Co-operative, West Dunbartonshire)
Tom Greatrex MP (Labour, Rutherglen and Hamilton West)
Laura Sandys MP (Conservative, South Thanet)
Powers
The Committee is one of the departmental select committees, the powers of
which are set out in House of Commons Standing Orders, principally in SO No
152. These are available on the internet via www.parliament.uk.
Publication
The Reports and evidence of the Committee are published by The Stationery
Office by Order of the House. All publications of the Committee (including press
notices) are on the internet at www.parliament.uk/ecc..
The Report of the Committee, the formal minutes relating to that report, oral
evidence taken and some or all written evidence are available in a printed
volume. Additional written evidence may be published on the internet only.
Committee staff
The current staff of the Committee are Sarah Hartwell-Naguib (Clerk),
Liz Bolton (Second Clerk), Alfred Gathorne Hardy (Committee Specialist),
Tom Leveridge (Committee Specialist), Luanne Middleton (Inquiry Manager),
Shane Pathmanathan (Senior Committee Assistant), Jonathan Olivier Wright
(Committee Assistant), Joe Strawson (Committee Support Assistant), and
Nick Davies (Media Officer).
Contacts
All correspondence should be addressed to the Clerk of the Energy and Climate
Change Committee, House of Commons, 7 Millbank, London SW1P 3JA. The
telephone number for general enquiries is 020 7219 2569; the Committee’s email
address is [email protected]
List of additional written evidence
(published in Volume II on the Committee’s website www.parliament.uk/ecc)
1
Ray Cope
2
Barry Rosindale
Ev w1; Ev w5
Ev w5
3
Chris March
Ev w6
4
National Pensioners Convention
Ev w7
5
IPPR
Ev w11
6
All Party Parliamentary Carbon Monoxide Group
Ev w15
7
Energy Action Scotland
Ev w17
8
Hastoe Housing Association
Ev w20
9
Martin Allan
Ev w21
10
Cornwall Energy
Ev w23
11
Mr D Shah
Ev w31
12
Local Government Association
Ev w31
13
Carillion
Ev w34
14
Brian Mongey
Ev w37
15
Renewable Energy Association
Ev w38
16
Caroline Flint MP
Ev w46
17
UK Government's Fuel Poverty Advisory Group
18
Barnardo's
19
Stephen Littlechild
Ev w67
20
Penelope Draffan
Ev w86
21
Brian Catt
Ev w86
22
Michael Dangoor
Ev w96
23
George Herraghty
Ev w96
Ev w49; Ev w59; Ev w61
Ev w64
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Written evidence
Written evidence submitted by Ray Cope
I wrote a paper back in 2001 about the inaccuracies in gas billing. This paper was for Energywatch to carry
on the work I had done as a director of the Gas Consumers Council. Unfortunately the paper was ignored and
the matters raised have not been followed up. What is more worrying is that billions are to be spent on smart
meters and there are no plans to adjust for temperature or pressure when they are introduced.
Since the paper was written GPS has become widely available and it would now be a simple task to record
the height of properties above sea level and adjust accordingly. Many meters have a probe that would allow
the meter to adjust for temperature variations but for some reason this is not part of the spec for smart meters.
Gas billing is a lottery and the problems have been brushed under the carpet for far too long.I hope the
committee will find time to address some of these issues or pass them on to another committee for investigation.
The purpose of this paper is to explain in non-technical terms the reasons why there are such serious
billing inaccuracies for some consumers in gas measurement. At the extreme margins they could range from
undercharging of 12% to overcharging of 14.7%. It is impossible to say with any accuracy by how much
domestic consumers are overcharged collectively but we estimate less than 2%. This paper discusses options
for putting matters right and in some cases makes recommendations. There are however, issues where the
collective views of the industry are needed before it is possible to decide the way forward. This paper also
provides a brief history of metering and pays tribute to the sterling work of the former Councils representing
gas consumers. They have achieved a great deal but there is still much to do.
Ofgem have recently issued two consultation documents on this subject the first entitled “Energy Billing”
and the second “Gas Energy Measurement”. The first document published on the Internet by Ofgem was
withdrawn on the day of release and substituted by the current one twenty-four hours later. The reason given
for the withdrawal of the first paper was that it contained errors. The wider inaccuracy errors listed in the first
document however are closer to our own calculations. We have responded to the document expressing our
view that the second paper understates the potential billing inaccuracies. The table below compares all three
sets of figures:
The table above lists four component parts of energy measurement and these are dealt with in turn in the
following paragraphs. Wet-gas is not covered and will be dealt with separately in a later paper.
Meters
The record of the gas industry on meter accuracy over the past 30 years has been abysmal. Consumers have
repeatedly paid for the failures of the industry to come to grips with metering issues. An industry that has a
proud record of bringing the benefits of natural gas to millions of homes, and a world leader in technological
developments has let consumers down on metering. Listed below is a summary of some of the problems that
have come to our attention:
—
In the early sixties a design fault on the first digital meters U6’s resulted in excessive endplay
in the figure drum assemblies. This fault led to meters giving unreliable readings. This problem
was almost eradicated by modifications to the design but isolated occurrences have been
detected in more recent meters. There is no absolute guarantee that this defect will ·not manifest
itself in today’s digital meters.
—
In the early eighties the then Eastern Gas Consumers’ Council identified the over-registration
of leather diaphragm meters. We owe a debt of gratitude to them for their persistence that
brought about a replacement programme of 16 million meters. In particular we would like to
single out the Regional Secretary of the Council who has saved consumers billions of pounds
by carrying out the meter-testing programme. This programme incidentally, was regarded as a
waste of money by the British Gas Corporation and was not supported by the then National
Gas Consumers’ Council. It is not too late for some formal recognition of this exceptional
achievement.
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—
—
—
In the nineties Transco provided Ofgas with details of tests carried out on meters removed from
consumers’ homes. At that time Ofgem in London had little metering experience and did
nothing with this information which had been presented to them. The data was set out in a fonn
that was not easy to understand and would probably have continued to gather dust had it not
by chance come to the attention of the Regional Manager of the Eastern Office of the Gas
Consumers’ Council. His natural instinct in matters of this kind immediately led him to believe
there was a hidden problem. After weeks of programme writing and data inputting, the drift
problem with UGI black spot meters was uncovered. Another replacement programme was set
in train and continues today. This time the Gas Consumers’ Council has saved consumers vast
sums of money. Yes, the Regional Secretary of the Eastern Gas Consumers’ Council and the
Regional Manager of the Eastern Office of the Gas Consumers’ Council are one and the same
person.
In the nineties we saw the introduction of ultrasonic meters manufactured by Eurometer and
Siemens. The former British Gas pic had pioneered ultrasonic meters and financially backed an
electronics company called “Gill Electronics” to develop a meter. Eurometer subsequently put
this meter into production under licence to British Gas plc. There was undue haste with the
installation of these meters for reasons best known to the former British Gas plc. The Eurometer
soon developed serious faults in service and to a very much lesser degree so did the Siemens
model. The faults were called “incrementing” which was a polite way of saying they could
record gas that was not bein g used. Yet another overbilling problem. The “increments” were
random and could be large or small. What was perhaps the most mystifying to gas consumers
and gas engineers alike was the phenomenon of these meters registering when they were not
connected to the gas supply! Modification to the design of these meters has eradicated this
problem to the best of our knowledge and they now display an amazing level of accuracy—there
is virtually no evidence of drift. It is unfortunate that the teething problems with ultrasonics has
put them back years and possibly sidelined them for the foreseeable future. Transco no longer
purchase them except for a small quantity of Eurometer semi-concealed meters and trial’s with
the new Siemens prepayment meter.
Siemens were requested by Transco to find another source of supply of diaphragm meters, in
place of or in addition to, UGI for their quantum prepayment meter. Last year Siemens licensed
George Wilson to produce the quantum meter. True to form teething problems developed with
the new model of G4 meter forming part of the quantum system. A fault on an unknown
number of these meters (prepayment and credit) was identified where they would not pass gas.
We understand that there was serious concern that this fault could be intermittent. If this were
the case pilot lights or burners could be extinguished and then gas could escape where
appliances were not fitted with flame failure devices (sometime called flame supervision
devices). We should make it clear that these problems were not caused by the Siemens
electronics part of the Quantum meter system.
The meter purchasing policy of Transco and other transporters has long term and serious consequences if
they get it wrong. One error can so easily turn into millions of errors. We have no data whatsoever on some
of the foreign imports purchased by transporters. We would like to be reassured that these inexpensive meters
do not drift upwards.
Under the present Gas Meter Regulations, domestic sized meters must register within a tolerance of ± 2%
down to 1/50th of the maximum flow rate of the meter. These tolerances apply when meters leave the factory
and whilst they are in use. This standard has not changed over the past 40 years. The new proposed Measuring
Instrument Directive (MID), which is in its final consultation stages, is likely to change these tolerances in two
ways. First there will be a two-staged tolerance for new meters leaving the factory. The minimum requirements
provide for a maximum flow rate down to 1/5th of that rate within a tolerance of ± 1Y2% and from this break
point + 3% down to l/20th of the maximum flow rate. Secondly the inservice tolerances are likely to be doubled
from those when the meter leaves the factory! This would mean ± 3% and + 6%.
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The table below explains what all these figures mean to consumers and why Energywatch will fight to
achieve better standards under the MID during the remaining consultation period:
Temperature
Gas expands and contracts with variation in temperature. For every 1°C the volume changes by
approximately 0.3o/o. All calculations for billing are based upon a gas temperature of 12.2°C but in recent
Ofgem research variation between 0°C and 24°C were recorded. The BG Technology meter survey in July
2000 found flow-weighted variations between 1.7°C and 37°C. In the domestic situation most gas is used
during the winter months and therefore consumers with meters outside benefit over those with meters inside.
The colder the temperature the greater the benefit. Consumers with outside meter boxes living in Scotland
where it is generally colder would therefore benefit even more than those living in the south. Where meters
are installed adjacent to boilers or radiators consumers will be disadvantaged.
The Siemens and Eurometer ultrasonic E6 meters have temperature conversion software and sensors that
could provide temperature converted data in addition to unconverted readings. Current regulations require
measurement by actual volume and therefore converted readings cannot be displayed in isolation. The MID
mentioned earlier will provide for meters to be designed to measure and display temperature converted readings
or as at present to measure unconverted readings. Diaphragm meter manufacturers tell us that conversion
devices could easily be added to the G4 diaphragm meters. Past experience has regrettably shown that all
changes in metering have resulted in serious teething problems to the detriment of consumers. If conversion
devices are to be added to diaphragm meters or software developments to E6’s then proper trials must be
undertaken before they are put into service. Siemens are of the view that adequate trials have already been
undertaken on their meters. This time the Regulator should take personal responsibility for ensuring that
measures taken to correct misbilling do not result in greater inaccuracies!
If the provisions of the MID were to be implemented quickly and temperature compensated meters became
the norm , it would be at least 15 to 20 years before all the existing non-compensated meters were replaced.
In the meantime it might be practicable to calculate “factors” based upon the siting of meters. A simple
grouping might be internal or external with three bands of geographical locations, north, south, and midlands.
If the industry were to decide to go down this road it would need to have systems in place to ensure factors
are adjusted when meters are resited. Research would be needed to find out if temperature variations occur the
same for meters with metal cases U6’s and G4’s and those with plastic cases E6’s and E6v’s.
Pressure
The volume of gas expands and contracts with variation in pressure. The pressure within the meter is
determined by the sum of the prevailing atmospheric pressure and the pressure of the gas at the meter inlet.
Atmospheric pressure varies according to the height above sea level and the prevailing weather conditions. To
compensate for these changes, pressure correcting equipment is available and is used for non-domestic
consumers using large quantities of gas. It is too expensive at present for the domestic market.
It is easy to calculate the effect of height above sea level on gas, as it is a simple arithmetic calculation. For
every 100 metres the volume increases by 1.2%. The industry must decide if it would be practicable to identify
the height above sea level for groups of meter points and allocate the relevant correction factors. Using
postcodes and ordinance survey maps would in theory be a possible way of partially adjusting for the
inaccuracies due to pressure variations.
It would not be practicable to try and compensate mathematically for changes in the weather. The experts
tell us that these climatic changes are unlikely to have any significant impact.
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The pressure at the meter governor should be set at 21mbar and remain constant. We have no knowledge of
how many meter governors are accurately set or if the meter governors become less accurate over time.
This is an area where research is needed to establish some basic facts. When the accuracy of meters is
disputed and sent for testing we wonder if it would be practicable to check the governor at the same time. If
research shows this to be unnecessary then perhaps it would be worthwhile checking the governor setting at
the time of the meter exchange.
Calorific Values
Gas comes ashore at approximately seven gas terminals all with varying calorific values (CV’s). At points
before the gas enters the 12 Local Distribution Zones (LDZ’s) it is measured. There are a number of entry
points for each zone all with varying CV’s.
This means that within a charging zone, the CV will not be uniform and some consumers will receive gas
of a higher heating value than others. Under present Regulations there is a 1MJ/m3 cap after flow weighting
the various inputs, which prevents any consumer being overcharged by more than 2.5%. The diagram below
illustrates this point:
Local Distribution Zone
38MJ/m 3
39MJ/m 3
40MJ/m 3
Gas in The above L.D.Z will vary between 38MJ/m3 and 40MJ/m3 but because current Regulation permit
an overcharge of up to 1MJ/m3 (approximately 2.5%) gas can be billed at 39MJ/m3 for all consumers.
Although there is a cap on the overcharging of consumers there is no cap on undercharging. It is therefore
possible for some consumers to be undercharged by 3% or more and others overcharged by 2.5% in the same
zone. This is illustrated in the diagram below:
Local Distribution Zone
Gas in the above LDZ will vary between 37.5MJ/m3 and 40MJ/m3.
Because of the 1MJ/m3 overcharge cap gas will be charged at 38.5MJ/m3 for all consumers. Some consumers
will be overcharged by 1MJ/m3 and some under charged by 1.5MJ/m3 (over 3%).
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These inaccuracies can be reduced in a number of ways but it is up to the industry to decide which is the
best way forward. Below are three possible steps that could be taken:
— Increase the number of measuring points and/or charging zones. This is likely to be costly.
— Use computer simulations to calculate the value of the gas at various points within the zone
(Tlus is already done in Germany).
— Develop an energy meter that would compensate for temperature, pressure and CV variations.
The Ofgem consultation document suggests setting up an industry-working group to consider how to take
all these matters forward. We fully support an industry group but it must have an equal spread of
representatives. Gas supply companies must be encouraged to take part and not just BGT. Above all, an
independent person who will not be unduly influenced by Transco or Ofgem economists must chair it.
We have a responsibility to ensure these complex and difficult to resolve issues are not brushed aside. We
are uniquely placed to influence suppliers, transporters, meter manufacturers and the Regulator. We will use
our wealth of knowledge and experience to do just that.
We will be judged on our success or failure.
January 2013
Supplementary written evidence submitted by Ray Cope
SMART METERING. PROGRESS OR A WASTE OF MONEY?
I have already submitted a paper explaining the inaccuracies in gas billing and some of the options for
putting matters right. Please add these further comments as I would like the committee to re examine the cost
of introducing smart meters as currently proposed.
The decision to scrap all the existing stock of gas meters is very costly and foolish. There are about ten
million gas meters in use with a built in link (R5 pulse) that can be used to connect to the electronics thus
converting them to smart meters. The only difference is that these meters would not have a gas valve to enable
them to be changed automatically to prepayment. Three hundred million pounds or so is a high price to pay
for this facility when there could be a derogation period to enable these perfectly sound meters to be used.
Times are hard and money must be spent wisely.
I don’t know the numbers but this method is already being used for commercial and industrial meters.
I believe the roll out plans as they stand are a waste of money. The spec for the smart meter makes no
reference to correcting for temperature or pressure which I am sure you will agree is a disgrace when you have
read my paper explaining the billing inaccuracies.
February 2013
Written evidence submitted by Barry Rosindale
I trust that you will favour me by reading the following, which highlights the scandal of the Domestic Bulk
Liquid Petroleum Gas market.
During the many years that I have been a victim of this scandal, I have written at various times to, The
Secretary of State for Energy and Climate Change, The Energy Minister, my MP, my MSP, The Office of Fair
Trading, The Competition Commissioner, the Press and Trading Standards expressing outrage; it was if the
issue was only of marginal interest to an insignificant few. This lack of positive response is in spite of an
estimated 150,000 mainly rural customers, many of whom are being driven into fuel poverty, of what is still
effectively an unregulated market.
Prior to the Competition Commissioners Order in October 2008, suppliers were able to effectively hold their
customers to ransom by over long contracts and high costs for removing and reinstalling tanks. In that these
issues were addressed it was welcome. However, inexplicably the Competition Commissioner argued that it
was in the interest of the market that suppliers did not have to publicise their prices.
When the Energy Minister required the OFT to carry out a Market Study into Off-grid Energy Supplies in
2010 he was principally concerned about the critical press publicity regarding domestic heating oil costs. The
OFT were reluctant to re-examine the effect of the CC’s Order but had to concede that the confidential pricing
of Domestic Bulk LPG was not acting in the interests of customers. In at least the case of Flogas, the OFT
came to an agreement that customers could be released from their contract if a proposed price rise was
disproportionate to the “Platts LPG Price Index for Northwest Europe”. The OFT did subsequently confirm to
me that such an index was internal to the LPG industry and unavailable to the general public; they suggested
that I could ask the supplier!
Let me illustrate how the market has worked for me in 2012. My 2 year contract with Flogas had 6 months
to run when I was notified that my price was to increase from 49 pence/litre to 56 pence/litre. Dissatisfied with
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Flogas’s reason for the increase, I decided to exercise my right to switch supplier. Through an intermediary,
Avantigas offered me 43.5 p/l, fixed for 9 months. Flogas were determined that they would not release me
from the contract. However, Avantigas told me that they would honour the offer of 43.5p/l in six months time
when the contract expired. Meanwhile, Avantigas inspected the tank and agreed to purchase it and I investigated
how one supplier could under-price another by over 20%. I had to conclude that if both companies purchased
gas from the Mossmorran refinery, and Avantigas were making a commercial profit from a sale of 43.5 p/l then
Flogas were exploiting their position and considerably overcharging. As the contract termination was
approaching and Flogas learned that I was determined to switch, I was offered the opportunity to keep my
March price. I turned it down and a little while later was offered 45 p/l, which I also turned down. During the
last month of the contract I received an unsolicited Supply Agreement from Flogas offering me exactly the
same price as Avantigas, namely 43.5 p/l. My suspicions of collusion were aroused and then confirmed at the
end of the month when Avantigas suddenly announced that they could not accept the tank because “Flogas
could offer no recent history of maintenance of the tank”. When I questioned the regulatory basis of this
decision I was subjected to evasion and finally silence. I had no option other to sign up again with Flogas.
Why am I bothering you with this issue if the end result is that my price from the same supplier has gone
down rather than up? It is because, whilst I can and do fight my corner, I can cite the case of a neighbour who
is paying 59 p/l to Macgas, now acquired by Flogas, and too afraid to challenge price rises when they inevitably
come along. Two tanks in adjacent gardens supplied from the same refinery and now the same supplier, Flogas;
yet a price increase on mine of 35%.
If the price charged for domestic customers from electricity or natural gas were permitted to be confidential
between supplier and individual customer, I feel confident you would ensure price transparency pretty quickly.
What is so different about domestic bulk LPG? If you do not take up this issue and be determined to ensure
fair pricing, who is left to protect vulnerable consumers in a market that is still effectively unregulated?
February 2013
Written evidence submitted by Chris March
Energy Tariffs for Domestic Customers
(A proposal aimed to reduce fuel poverty and fuel use while maintaining necessary profits for the energy
suppliers.)
1. I write as a now-retired Dean of the Faculty of the Environment at Salford University and as a writer on
environmental issues concerned with buildings, I have a particular interest in the problem raised by the
conflicting needs to reduce both fuel use and to avoid fuel poverty in low-income households. I hope therefore,
that my professional views on the subject may be of use in helping to formulate policy.
2. As things
—
—
—
stand, there are three competing “lobbies” involved in the debate:
The energy providers who aim to make their target profit margins.
Those whose incomes are too low to achieve a reasonable level of light and warmth.
The environmentalists who want to see marked reduction in the consumption of fossil fuels.
3. These largely incompatible aims generate the current dilemma as to how all parties can be satisfied. What
is clear is that the only available and effective tool to which to manipulate the outcome, is money: the cost
of fuels.
4. At the moment there are only two cost bands for most domestic users: the more expensive for the first
quantity of energy used, followed, by a less expensive for the remaining irrespective of the amount used.
5. The energy providers have argued that the initial amount consumed has to be higher because of their
standing charges such as their meters etc. I see this is a red herring given that all that really matters to
commercial enterprises is that the annual profit made, is in line with that required by their boards and their
shareholders.
6. The energy users are equally anxious to have energy prices as low as possible so that, in spite a global
need to cut fuel usage, they can use more of it to achieve higher levels of comfort. This, in particular, is true
of those energy users who are disproportionately disadvantaged because of low incomes.
7. How to reconcile these contradictory needs.
8. My solution would be to reverse the current tariff regime by having the lowest rate for the first quantity
of energy used with the costs continually rising through successive cost bands. Those with the lowest incomes
would be better able to achieve decent levels of comfort with the lowest or lower cost bands.
9. At the same time those whose usage took them into the higher bands would pay more for their fuel and
would be inclined to be more economical, thus off setting the additional consumption by the once-fuel-poor.
They may indeed choose to invest in proven energy-saving technologies already ion use in the commercial
world.
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10. Meanwhile energy suppliers would find that the profits lost amongst their poorer users would be similarly
offset by the higher prices incurred by those better able to afford them.
11. Designing these bands as to what level of consumption, their boundaries and their cost would have to
be worked out and is beyond my remit and experience—though not beyond that of others. It may be seen as
interfering with the market place, but if price control of the drinks industry at the point of sale is being
considered, there may well be a precedent for this. And the benefits might be even more significant.
12. If members of the committee accept the logic of my proposal, may I suggest that rather than say “how
do we achieve this” the question be put in another way. Let us assume that we have achieved the outcome and
then ask the question “how did we get here?” The disadvantage of the former question is that people will try
to find reasons why it cannot be achieved whereas in the latter, the mind set is now positive.
13. It is appreciated that the proposal does not fit in with the Green Deal, which relies on an expensive
lower tariff to ensure that the costs of insulation are repaid as fast as. However one of the limitations of the
Green Deal is that it does not help all those in fuel poverty. For example, in the area I used to live in (Rosendale
and Darwen Constituency) and currently in Ramsbottom, a significant amount of the housing stock is of solid
stonewall construction, which cannot be easily or cheaply insulated and much of which is privately owned.
For the occupiers of these properties the Green Deal will either not apply or will still leave many in fuel poverty.
14. I believe that the proposal that I have put forward deals much more comprehensively in tackling fuel
poverty than the Green Deal. However, it does beg the question on how the installation of the housing stock
can and should be improved. The Green Deal, if the lower rate of return identified above is accepted, could be
a partial answer, but it will be necessary to find the funding for a retrofit insulation programme elsewhere. It
is interesting to recall a levy was imposed on all cement sold which funded the Concrete and Cement
Association for its research for decades.
15. I hope the committee find these comments useful.
February 2013
Written evidence submitted by the National Pensioners Convention
1. Introduction
1.1 The National Pensioners Convention (NPC) is Britain’s largest pensioner organisation representing
around 1.5 million older people, active in over 1,000 affiliated groups. The NPC is run by and for pensioners
and campaigns for improvements to their income, health and welfare. This response covers the following areas:
—
Specific health risks facing older people.
—
The principles for defining fuel poverty.
—
Why the Winter Fuel Allowance needs to continue.
—
Why public funding for energy efficiency is needed.
2. Defining Fuel Poverty as a Problem
For the last decade, fuel poverty has been defined by the terms of the Warm Homes and Energy Conservation
Act 2000 (WHECA), which states that a household is affected by fuel poverty if it has a lower income and
faces above reasonable costs in order to keep adequately warm. The government’s 2001 UK Fuel Poverty
Strategy document outlined a working definition of fuel poverty as being when a household would need to
spend more than 10% of its income on energy bills.1
In general, the combination of low income and required energy costs (as set out in the WHECA) remains a
sensible way of measuring fuel poverty, and up till now, the decision to use 10% of income as the threshold
for what constitutes above reasonable costs has been readily understood by all concerned. In addition, the Act
also committed the UK government to eradicating fuel poverty from all households by 2016. Whilst on current
trends, this seems highly unlikely it should nevertheless be seen as necessary.
What is clear from all the available evidence is that fuel poverty is a distinct problem, with specific causes
and effects on those that are suffering. According to the recent Hills Poverty Review, even if only a tenth of
excess winter deaths were linked to cold indoor temperatures caused by fuel poverty, this would be more than
the level of fatal road accidents.2 This analysis was also shared by the Marmot Review Team’s research
which found that cold homes were a main factor in causing the winter increase of respiratory and circulatory
diseases.3
1
2
3
The 10% threshold originated from 1998, when this was twice the median fuel spend as a share of income
Chapter 8, Hills Fuel Poverty Review, CASE Report 69, October 2011
The Health Impacts of Cold Homes and Fuel Poverty, Marmot Review Team, May 2011
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3. Causes of Fuel Poverty
There is widespread recognition that fuel poverty is caused by a combination of factors such as income, fuel
prices, energy efficiency, climate, location (particularly rural areas) and consumption.
There is also considerable evidence to show that the poor often pay more for fuel through the multitude of
tariffs and the online discounts that make it difficult for large numbers to receive the best deal on their energy
consumption. The review found that if the poorest 30% of customers in 2009 were, in fact, on the highest
tariffs within each category, fuel poverty would have been up to 7% higher than reported.4
Given these genuine concerns, the government’s current approach to this issue seems to be in danger of
making the situation even worse. In particular, its lack of meaningful action on energy efficiency measures is
very worrying:
—
The budget for the Warm Front programme this year is £350 million and there is already a six
month waiting list. Yet the budget has been reduced to £110 million for 2011–12 and then to
£100 million for 2012–13. The intention is that after this winding down period there will not
be any publicly funded schemes for improving energy efficiency in people’s homes in England.
—
Government proposals to introduce the Green Deal and Energy Company Obligations will have
very limited appeal or application especially for poorer households and older people unless
other measures are introduced alongside. The government’s Green Deal offers a system whereby
households will borrow money for energy efficiency improvements which they will then pay
back over a period of time. The concept is that households will save more on bills over time
than they will pay. However, this is primarily aimed at owner occupiers who are able to borrow
money and take a risk that they will save money. It also targets those who are able to see this
as a long-term option over 20 to 30 years. It its not therefore suitable for older people and is
unlikely to reach the fuel poor, unless there are incentives or penalties to make sure that it
includes the social housing sector and in particular the private rented sector.
Between 2003 and 2008 domestic gas prices rose by 143% and electricity by 94%, resulting in an average
domestic fuel bill of around £1,300. According to the National Energy Action (NEA) the increase in the scale
of fuel poverty was therefore entirely attributable to higher energy prices.5 In addition, previous studies have
also found that for every 1% increase in energy bills, a further 40,000 older people fall into fuel poverty.
Given that if income, energy efficiency measures and consumption were to remain constant, the main driver
of fuel poverty would be price. Any renewed definition of fuel poverty must therefore focus on the cost of fuel
in relation to income and consumption need.
4. Specific Health and Mortality Risks Facing Older People
There is no doubt that the need for a warmer home is closely linked to the age of the inhabitant. Older
people are less mobile, more likely to spend longer periods of time at home and require them to be heated for
longer periods (including throughout the night) and are physically less able to regulate their body temperature,
making them vulnerable to a number of health risks including hypothermia.6 It is hardly surprising therefore
that older people make up the overwhelming majority of excess winter deaths.
Every year, mortality rises by 19% in the winter months in England. This amounts to an average of 27,000
“excess” winter deaths (EWDs); 90.8% of which last year were in the over 65 age group.7 The majority of
these deaths occur among older people, especially women, and those with underlying health problems.
However, they are not people who would have otherwise died at that time. Most deaths are due to cardiac
disease, strokes and respiratory problems, not hypothermia.
The Marmot Review Team also found there was a greater risk of death in colder housing than in the warmest
housing, estimating that 21.5% of all excess winter deaths could be attributed to cold homes.8 They also
claimed that each centigrade degree reduction below 18°C in temperature in the UK corresponded with an
extra 3,500 deaths.
In the winter period (December to March) of 2011–12 there were an estimated 24,000 more deaths in
England and Wales, compared with the average for the non-winter period. The overall figure represents a death
rate of around eight pensioners an hour during the four month period in question.
4
5
6
7
8
Chapter 2, Hills Fuel Poverty Review, CASE Report 69, October 2011
European Fuel Poverty and Energy Efficiency Project newsletter, April 2009
The Health Impacts of Cold Homes and Fuel Poverty, Marmot Review Team, May 2011
Cold Weather Plan for England: Making the Case, Department of Health, November 2011
The Health Impacts of Cold Homes and Fuel Poverty, Marmot Review Team, May 2011
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Not only is the public shocked by such evidence, but they are angry that government seems incapable of
tackling the issue. Reducing the scale of excess winter deaths must therefore be a priority, regardless of any
separate moves to re-define or measure the scale of fuel poverty.
There are specific reasons why older people are more susceptible to cold weather. Most EWDs (40%) are
due to strokes and heart attacks because the blood becomes more liable to clot in people exposed to the cold.
Older people are more susceptible to clotting because their blood vessels tend to have rougher linings than
those of younger people. As a result, a 1oC lowering of temperature in the living area of an older person is
associated with a rise of 1.3mmHg in their blood pressure, due to cold extremities and lowered core body
temperature.9
An added complication for older people is that they have reduced skin sensitivity to cold and a reduced
perception of how cold it is, thereby making them slower to react to protect themselves. They are also more
likely to be suffering from chronic conditions which may also lower body metabolism which means the body
generates less heat, while stroke, Parkinson’s disease and dementia restrict activity, slowing body heat
generation and conservation.10
On average, weather related deaths from heart disease increase almost immediately with the onset of cold
weather, reaching their highest levels just two days after its arrival. The increase in incidence of stroke deaths
takes place later, at approximately five days after the onset, and it takes another week for deaths from respiratory
illnesses to peak.11
5. Defining Fuel Poverty
The WHECA lays down that a person is to be regarded as living in fuel poverty if they are a member of a
household living on a lower income in a home which cannot be kept warm at a reasonable cost. Currently, a
reasonable cost has been defined as less than 10% of income, whereas being kept warm has been defined using
the World Health Organisation’s definition of 21°C minimum temperature for rooms occupied during the day
and 18°C minimum temperature for bedrooms at night. We see no evidence to suggest that these temperatures
should be altered.
Furthermore, the current fuel poverty indicator has been criticised as being over sensitive to energy price
rises, but there is a danger of moving to an indicator which is under sensitive to price rises and which would
lack credibility. During a period of wage and benefit freezes, inflation and rising energy prices in particular, an
indicator which shows fuel poverty as remaining at much the same level as before or even falling would
be meaningless.
Any definition of fuel poverty must therefore meet certain key principles:
— The cost of fuel required relative to income must be the overall determinant of fuel poverty.
— Required fuel costs are different to actual fuel costs—because many fuel-poor households
regularly ration their fuel use in order to save money.
— The merit of any definition lies in its simplicity and the ability of the population as a whole to
understand how it is measured.
9
10
11
Cold Weather Plan for England: Making the Case, Department of Health, November 2011
El Ansai W and El Silimy S (2008) quoted in The Health Impacts of Cold Homes and Fuel Poverty, Marmot Review Team,
May 2011
Cold Weather Plan for England: Making the Case, Department of Health, November 2011
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6. Why the Winter Fuel Allowance needs to Continue
There is a genuine concern that any attempt to re-define fuel poverty will be used to reduce the numbers
eligible for support, regardless of whether or not their circumstances have materially changed.
Average annual energy bills now exceed £1,345. This absorbs over 20% of the income of a single pensioner
dependent on the pension credit minimum guarantee (£137.35 a week). This year, the government has also
announced its intention to reduce the winter fuel allowance from £400 for the over 80s to £300, and from £250
for the under 80s to £200. When the allowance was originally introduced, it covered around a third of the
average bill. Today, for the under 80s it barely covers a sixth.
In addition, it is noted that these levels will be frozen for the next four years. Given the continuing scale of
excess winter deaths amongst older people and the expected increases in fuel bills, this decision will have a
serious impact on the lives of older people and force many more into fuel poverty. The latest figures from the
Department of Health already show that nearly half (48%) of all fuel poor households have one or more people
aged over 60.12
7. Why Public Investment in Energy Efficiency needs to be Increased
Energy efficiency is an important tool for reducing fuel consumption, damage to the environment and fuel
poverty. However, the responsibility for energy efficient measures being shifted from the public purse to energy
companies (through the Energy Company Obligation ECO) does not seem logical as there will be an obvious
conflict of interest, or at least an underlying disinterest for the companies involved.
The annual cost to the NHS of treating winter-related disease due to cold private housing is £859 million.
This does not include additional spending by social services, or economic losses through missed work. The
total costs to the NHS and the country are therefore unknown, but a recent study showed that investing £1 in
keeping homes warm saved the NHS 42p in health costs.13 It is therefore in the government’s interests, both
socially and economically, to do more to ensure the greatest availability and take-up of energy efficiency
measures.
The impact of funding cuts to local authorities on investment in fuel poverty and energy efficiency
programmes is therefore likely to be highly detrimental to this goal.
8. Conclusion
There can be little doubt as to the negative consequences of fuel poverty on people’s health, stress and
general well-being—yet failing to tackle it often creates larger unrecognised costs on health and other public
services at a later date. We therefore recommend the following action:
—
Fuel poverty should be defined using the key principle of required fuel costs relative to income.
In addition, any definition must be credible and easy for the public at large to understand and
most importantly, support. There should also be recognition of those households that whilst not
yet defined as being in fuel poverty, fall into an “at risk” category if income or family
circumstances were to change.
—
Continue to follow the obligation laid down in the WHEC Act for the government to eradicate
fuel poverty in all homes by 2016.
—
Introduction of a national programme to improve the heating and insulation standards of
existing homes so that they reach the standards of new homes built today. In particular, the
homes of all low income and fuel poor households should be improved to the standard by 2016.
—
Legislation to oblige all fuel companies to provide an industry-wide “social tariff” to low
income and fuel poor consumers—that offers a better deal than tariffs offered to more
financially secure consumers.
—
Ending the use of pre-payment meters.
—
Providing a universal, non-means-tested annual fuel allowance to all vulnerable, older and low
income households set initially at £500 which keeps pace with annual increases in average
energy bills. Use the taxation system appropriately to tax the allowance of those on higher
incomes.
February 2013
12
13
Cold Weather Plan for England: Making the Case, Department of Health, November 2011
Chief Medical Officer Report, Department of Health 2009
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Written evidence submitted by the Institute for Public Policy Research (IPPR)
Executive Summary
— Wholesale energy costs are the largest costs that suppliers incur, and constitute around 46% of
consumers’ energy prices. However, because private, bilateral contracts between generators and
suppliers are the dominant form of trading in the wholesale market the exact amount suppliers
pay is unknown. Improved transparency on wholesale costs is required for a clearer
understanding of how they impact on energy prices.
— In the past the amount suppliers spend on delivering their energy efficiency obligations, and
therefore the impact they have on energy prices, has also been unclear. IPPR research suggests
that these costs to suppliers have been over-estimated in the past, by as much as 40% (Platt et
al. 2012). As a result other supplier costs that contribute to energy prices, including the
suppliers’ profit margins, may have been underestimated.
— The introduction of the Energy Company Obligation (ECO) presents an opportunity to gain an
accurate understanding of energy efficiency policy costs and how they impact on energy prices.
IPPR research suggests the ECO may cost more to deliver than the government expects (Platt
et al. 2012).
— Suppliers’ operational costs are another key component effecting energy prices. IPPR research
has identified that Ofgem’s estimates of these costs show no sign of the suppliers’ achieving
efficiency savings since 2008 (Platt 2012). This is evidence that competition is not working
effectively in the supply market.
— To ensure consumers pay a fair price for their energy, the government should focus on
improving competition in the supply market. The government has adopted IPPR’s
recommendation to restrict the number of tariffs suppliers can offer. We believe this will make
switching options simpler for consumers to navigate, therefore improving switching rates and
competition, and we welcome its introduction. The government should now assess the benefits
from forcing all wholesale trading to occur through some kind of pooling system. By improving
wholesale market liquidity this could significantly improve the prospects for independent
operators in the supply and generation markets, while also improving transparency on wholesale
energy costs.
— In addition to improving competition in the energy market, the government must do more to
tackle fuel poverty. The number of fuel poor households in England alone is currently 2.7
million (according the definition of fuel poverty proposed in the Hills Review (2011)). The
ECO is the main policy for tackling fuel poverty but will only scratch the surface of the
problem, improving the energy efficiency of just 125,000 to 250,000 fuel poor homes across
the whole of the UK by 2023.
— Spending on ECO could go further in tackling fuel poverty if the government resourced local
authorities to help initiatives, conducted a review of challenges the suppliers faced in delivering
their obligations under previous policies, and piloted a new area-based approach to delivering
energy efficiency improvements that focuses on low income and low efficiency areas.
— Ultimately, however, the government must commit more resources to tackling fuel poverty.
When deciding what resources to commit it should factor into its decisions the large simulative
effect that energy efficiency spending can have on jobs and growth.
Detailed Submission Response
Prices
What factors determine energy prices? What contribution do these factors currently make towards a typical
household energy bill and how might this change over time?
1. The overall price a company’s consumer base pays for its energy is determined by the total of that
supplier’s costs and targeted profit margins. The different prices individual consumers pay, however, are
determined by that supplier’s pricing strategies.
Wholesale energy costs
2. Wholesale energy costs are the largest costs that suppliers incur. According to estimates published by
Ofgem they may have accounted for around 46% of the average annual consumer energy bill in 2011–12
(Platt 2012).
3. The amount suppliers actually pay for wholesale energy is, however, unclear. This is because private,
bilateral contracts between generators and suppliers are the dominant form of trading in the market. The ability
of the “Big Six” energy companies (British Gas, EDF, E.ON, Npower, Scottish Power and SSE), which
dominate both the generation and supply markets, to “self-supply” (ie transfer energy between their generation
and supply arms) is a particular cause of low transparency on wholesale costs.
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4. More generally, it is clear that the cost of wholesale energy, in particular the cost of gas, has risen
significantly in recent years. The Committee on Climate Change (2011) has estimated that increases in the
wholesale cost of gas were the main driver behind energy bill rises from 2004 and 2010, adding around £290
to the average annual bill14. This compares with £75 added by low carbon policies over the same period.
5. Predicting how wholesale energy costs will change in coming years is an exercise fraught with uncertainty.
Nonetheless, we have no reason to question the Department for Energy and Climate Change’s (2012) view that
gas prices are likely to rise in the medium term.
Policy and regulatory costs
6. Suppliers incur costs as a result of government policies and regulatory requirements. For the purposes of
this submission, we focus solely on the cost of energy efficiency policies.
7. Previous energy efficiency policies, the Carbon Emissions Reduction Target (CERT) and the Community
Energy Savings Programme (CESP), which ended at the end of 2012, obliged the Big Six to deliver a specific
amount of energy efficiency improvements to properties in the residential sector. While the government
monitored the suppliers’ progress towards achieving their targets it did not monitor how much they were
spending on implementation. As a result the amount the suppliers spent on the policies is unknown.
8. In assessing the costs that make up energy bills the cost of CERT and CESP have often been assumed to
be in line with government estimates (see for example CCC 2012 and DECC 2010). However, in IPPR’s recent
report Energy efficiency: who pay and who benefits? (Platt et al. 2012) we showed how, in 2008, suppliers may
have spent 40% (around £14) less than the government assumed on CERT. We identified that the cost of the
policy overall may have been below government estimates.
9. If, as our research suggests, the cost of CERT was over-estimated, other elements of energy bills, including
the suppliers’ profit margins, may have been under-estimated.
10. Some suppliers claimed that the cost of CERT rose sharply during 2012. The Super Priority Group (SPG)
sub-target within the policy was identified as a particular cause for these increases. Our report shows that
despite increases in 2012, the cost of CERT and the SPG target have stayed in line with government estimates.
These increases were unlikely to have had a major impact on energy bills. Even if the cost of the SPG target
rose by 85% in 2012, as one energy company has claimed (Beech 2012), this will have added just 0.5% to
energy bills. This compares to recent tariff increases by the energy companies of 6 to 11%.
11. CERT has now been replaced by a new energy efficiency policy, the Energy Company Obligation (ECO).
The government’s “central” cost estimate for the policy is that it will add around £1.3 billion a year to energy
bills but we have identified a number of reasons why the cost could be higher (Platt et al 2012). First, high
levels of subsidy may be required to encourage uptake of solid wall insulation. Second, the solid wall insulation
supply chain is not well developed, which may create bottle necks. Third, the Affordable Warmth sub-target
within ECO may be very challenging for suppliers to fulfil. Fourth, potential cost reductions resulting from
strong local authority engagement are unlikely to arise because local authorities’ budgets and resources are
severely stretched.
Operational costs and profit margins
12. As with other cost elements, the suppliers’ operational costs are very uncertain and therefore hard to
predict. Ofgem publishes estimates of the suppliers’ operational costs in their Supply Market Indicator series.
In 2011–12 Ofgem estimated them to make up around 10.4% of the average bill (or £130 of a £1,255 bill)
(Platt 2012).
13. In IPPR’s report The True Cost of Energy (Platt 2012) we show that Ofgem’s estimates have increased
in real terms over time, by £9 per customer per year from 2007 to 2011. If Ofgem’s estimates are accurate it
implies that the suppliers have not delivered efficiency savings in their operational costs that should be expected
if competition was working effectively in the market. Alternatively, if Ofgem’s estimates are wrong and have
not captured efficiency savings that the suppliers have achieved, other elements of energy bills in the Supply
Market Indicators, including the suppliers’ profit margins, may have been under-estimated.
14. In our report, drawing on available public evidence, we also show that the difference between the most
and least efficient supplier, in terms of operational costs per account, increased from a 90% differential in 2007
to a 113% differential in 2010. Theory suggests that in a competitive market the operational efficiency of the
suppliers should be converging over time. We take this as further evidence that competition is not fully effective
in the market.
15. Limitations with the current reporting requirements on suppliers mean their profit margins are unclear.
Examples of profit margins for nationalised energy companies and businesses from other industries suggest
that a profit margin of 3% or slightly more is reasonable for an energy supplier operating in a fully competitive
environment (Platt 2012).
14
The Committee has also published estimates for policy costs on bills in 2011 (CCC 2011). The impact of the increasing wholesale
cost of gas is conflated with suppliers’ costs in this report and estimated to have added £300 to bills from 2004. Around £70
was estimated to have been added by low carbon policies.
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16. By over-estimating the cost of environmental policies and operational costs our research suggests that
Ofgem’s Supply Market Indicators may have under-estimated the suppliers’ profit margins on the average bill
by between 0.5 and 1.5% (Platt 2012).
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. We believe there is insufficient evidence of market failure to support price setting by government or the
regulator. We believe the government’s ambitions for an affordable, secure and decarbonised energy system
are best achieved through a competitive market environment, that is attractive to private investors and in
which innovation has the opportunity to flourish. We believe price setting would have negative implications
for competition.
18. Nonetheless, as research by Ofgem (2011) and IPPR (detailed above) has shown, competition is not fully
functioning in the supply market and measures must be introduced to improve competition. We welcome
Ofgem’s adoption of IPPR’s proposal (Platt 2012) to limit the number of tariffs that suppliers are able to offer.
We believe this will lead to greater levels of switching by consumers and therefore result in a greater level
of competition.
19. Further measures are needed to improve competition. In True Cost of Energy we identified how some
“Big Six” suppliers overcharge their “sticky” customer base (ie customers who they inherited from their time
as monopoly suppliers and have never switched provider) in order to offer deep discounts to more active
customers. Smaller and newer suppliers, who have not inherited sticky customers in the same way, find it hard
to compete against these discounts. This has a negative impact on competition. In the past Ofgem has taken
the view that these deep discounts are a healthy part of competition, which we believe is the wrong approach.
All tariffs, including discounted tariffs, should be reflective of the suppliers’ costs. Indeed, allowing this practice
to continue, while good value for the small number of consumers’ who take advantage, is bad for those who
are over-charged and is ultimately uncompetitive.
20. Another potential barrier to effective competition is that the energy efficiency obligations kick in for a
supplier when they exceed 250,000 customer accounts. Several small suppliers are now reaching this threshold.
The government must ensure these costs do not represent a cliff edge for small suppliers as this will be
detrimental to their ability to grow and compete with the Big Six.
21. Finally more action is needed to reform the wholesale market. Low levels of liquidity in the wholesale
market have been identified by Government as the primary barrier to greater independent activity in the supply
and generation market (HMT and DECC 2010). Ofgem is assessing options for improving liquidity and we
believe this should include consideration of whether all wholesale trading activity should go through some
kind of pooling system, similar to the Nordpool system in Europe. As well as improving wholesale market
liquidity this would also improve transparency of wholesale prices.
How effective is Ofgem in ensuring consumers get a fair deal? Are there any areas for improvement?
22. The energy system is complex and stakeholders often hold very different views on how the market should
be regulated. As a result Ofgem has a challenging role. Nonetheless, one example of Ofgem’s approach to
enforcement gives cause for concern.
23. In March 2011 Ofgem launched a formal investigation into the pricing practices of Scottish Power, who
appeared to be offering non-cost reflective tariffs in contravention of their licensing requirements. Now, almost
two years later, there has still been no update on this issue. This is simply too long a period to constitute
effective enforcement. It may be the case that the licensing requirement is simply too difficult to enforce
effectively, in which case Ofgem should state this publicly and seek other ways to ensure the suppliers offer
fair prices. As it stands the example of Scottish Power sends a signal to the other suppliers that they may be
able to breach the requirements without fear of recrimination.
Profits
Many consumers believe that energy company profits are the reason energy bills have been going up in
recent years. Is this perception fair?
24. The main cause of recent energy bill rises has been the increasing wholesale cost of gas. Increases in
the costs of regulation and policy have also played a role, albeit far smaller. Low levels of transparency around
the suppliers’ businesses make it hard to tell if their profits have altered substantially in recent years.
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?
25. Low levels of transparency on suppliers’ wholesale costs and the costs of energy efficiency policies
prevent an accurate understanding of their profitability.
26. Improving wholesale market liquidity, potentially by introducing a “pool” system for trades (see above)
would significantly improve transparency on wholesale costs.
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27. To improve the transparency of energy efficiency policy costs, Government should require the suppliers
to submit detailed information on the costs of delivering their ECO obligations, which should be independently
verified, for example by Ofgem. The average cost of carbon for each sub-target within ECO, aggregated across
the suppliers, should then be published alongside data on the suppliers’ performance against these sub-targets.
These could then be used within Ofgem’s electricity and gas supply market indicators.
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?
28. The indicators should be adjusted to include actual and not predicted costs of the energy efficiency
obligations.
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?
29. Improving the energy efficiency of fuel poor households is the most cost effective, and only long-term,
solution to tackling fuel poverty. From now until 2016, the primary government policy for addressing fuel
poverty through energy efficiency improvements is the ECO which looks set to fall woefully short of addressing
the government’s legally binding target to eliminate fuel poverty by 2016.
30. According to the indicator for fuel poverty proposed in the Hills Review there are currently 2.7 million
households who are fuel poor in England alone15. The government’s own estimates show that the policy will
improve just 125,000 to 250,000 homes by 2023 (Platt et al 2012). It will therefore only scratch the surface of
the UK’s fuel poverty problem by 2016. In IPPR’s recent report Energy Efficiency: who pays and who benefits?
we estimated that £17.5 billion of investment is needed to improve all fuel poor homes (ibid.), which, at the
current level of expenditure, would not be achieved until 2045.
31. In our report we recommend a number of policy improvements that government could implement to
enable the ECO funding to go further in tackling fuel poverty. These include supporting local authority
engagement in delivering energy efficiency by investing around £40 million in staff and resources, conducting
a review of the challenges that suppliers have faced fulfilling their obligations under CERT, and piloting a new
area-based approach to delivering energy efficiency improvements that focuses on low income and low
efficiency areas (the “LILEA” approach).
32. The LILEA approach is substantively different to, and could be significantly more effective than, the
existing area-based element of ECO, the Carbon Saving Communities Obligation (CSCO). CSCO directs
support towards households in low-income areas, specifically those in the bottom 10–15% of the income
distribution. Targeting of resources under this method will be very inefficient with recent research suggesting
just 26.9% of the recipients will be fuel poor. Under the LILEA approach resources would be provided to all
households in an area that is low income and known to contain inefficient houses. Designed in this way LILEA
could be significantly more efficient than CSCO, with fuel poverty statistics suggesting areas where 50% of
people are fuel poor could be targeted. It would also be less administratively onerous and so reduce costs. We
believe this approach should be piloted and that local authorities are well placed to identify appropriate areas
to target.
33. Ultimately, even with the changes to policy we have proposed, an increase to the financing available for
energy efficiency improvements is necessary if fuel poverty is to be eliminated. Fortunately, spending on energy
efficiency is likely to act as a significant stimulus of economic output. Modelling by Cambridge Econometrics
and Verco (2012) found that improving energy efficiency in fuel-poor households “generates greater
macroeconomic benefits—more jobs and greater growth—than the same injection of spending through other
government spending programmes or cuts in VAT or fuel duty”.
34. Some groups are calling for revenues from the EU ETS and carbon price floor to be spent on energy
efficiency to tackle fuel poverty. Because these instruments increase energy bills and therefore increase fuel
poverty there is logic to their argument. However, since the Treasury has already banked this revenue, other
sources of financing must be considered. One promising route is for the Green Investment Bank, or a British
Investment Bank, to be properly capitalised and allowed to borrow, with funds made available for energy
efficiency measures. If this was to occur ample financing would be available for energy efficiency without
recourse to fiscal easing.
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?
35. The current indicator for fuel poverty captures large numbers of people, including some wealthy
households. This can distort debates about where resources should be targeted and therefore we support the
government’s proposal to redefine the way that fuel poverty is measured. The Hills Review provides substantial
insights on the best way to achieve this which the government should take into consideration.
15
As outlined in paragraph [41] below, IPPR prefers to use this newer definition of fuel poverty than the wider older, wider
definition which estimated fuel poverty in the UK to be nearly 8 million in 2009 (Hills 2012).
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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?
36. The targeting of support for fuel poor households that will be provided under ECO is very poor. Recent
research suggests that just 37.2% of the recipients of support under the Affordable Warmth sub-target of ECO
and 26.9% of the recipients of support under the Carbon Saving Communities Obligation sub-target will be
fuel poor. As a result precious resources are being wasted. There is substantial evidence that if policies are
designed to take account of property-based characteristics their targeting efficiency will significantly improve.
As described above we believe an approach that focuses on low income areas with low efficiency households
holds promise.
37. Targeting of support for fuel poor homes through the Warm Home Discount has had similarly bad results
to that achieved by ECO, with 27% of recipients being fuel poor. The Warm Home Discount should be means
tested and the resources that are saved allocated to other areas of government spending.
References
Beech (2012) “Suppliers ready to publish CERT costs but not alone”, Utility Week website, 26 September
2012.
http://www.utilityweek.co.uk/news/news_story.asp?id=
197471&title=
Suppliers+ready+to+publish+Cert+costs+-+but+not+alone
Cambridge Econometrics and Verco (2012) Jobs, growth and warmer homes: Evaluating the Economic
Stimulus of Investing in Energy Efficiency Measures in Fuel Poor Homes. Cambridge: Cambridge
Econometrics.
Committee on Climate Change (2011) Household energy bills. London: IPPR.
Committee on Climate Change (2012) Energy prices and bills: impacts of meeting carbon budgets. London:
CCC.
Department of Energy and Climate Change (2012) Fossil Fuel Price Projections. London: DECC.
Hills (2011) Getting the measure of fuel poverty: Final report of the fuel poverty review. London School of
Economics and Political Science: London.
HM Treasury and Department of Energy and Climate Change (2010) Energy market assessment. London: HMT
Platt (2012) True Cost of Energy. London: IPPR.
Platt, Rosenow and Flanagan (2012) Energy Efficiency: who pays, who benefits? London: IPPR.
February 2013
Written evidence submitted by the All-Party Parliamentary Carbon Monoxide Group
About the All-Party Parliamentary Carbon Monoxide Group
The All-Party Parliamentary Carbon Monoxide Group (APPCOG) provides a forum for Parliamentarians,
gas industry representatives and other key stakeholders to discuss carbon monoxide poisoning in relation to all
fuels. It is chaired by Barry Sheerman MP, Jason McCartney MP, and Baroness Finlay of Llandaff.
In 2011, it launched an inquiry, “Preventing Carbon Monoxide Poisoning,”16 chaired by Baroness Finlay.
This inquiry estimated that as many as 4,000 people each year17 are diagnosed with low-level carbon monoxide
exposure, with a further 200 admittances to hospital with serious injuries, and 50 fatalities every year,18 but
it is thought that the true numbers are significantly higher,19 as the vast majority of instances of carbon
monoxide poisoning are undiagnosed, and thus, unreported in official statistics.
The inquiry calculated the approximate cost to society, and found that preventing carbon monoxide poisoning
could save the UK £178 million a year, as well as avoid immeasurable human tragedy and suffering.20
The report put forward seventeen key recommendations to tackle carbon monoxide poisoning through
improved detection, increased awareness, and better regulation of safety standards. The APPCOG works to
achieve these recommendations, and related aims which have emerged from working with its key stakeholders.
16
17
18
19
20
http://www.policyconnect.org.uk/appcog/inquiry-2011. Accessed 31/01/2013.
Preventing Carbon Monoxide Poisoning, p. 15
Since the publication of the inquiry, this figure has now been revised to 40 deaths per year. http://www.hse.gov.uk/gas/domestic/
cross-government-group-1112.pdf
A recent study conducted by Liverpool John Moores University in 2011 measured CO levels in 109 homes over a number of
weeks: it found that 24 homes had CO levels greater than 50 ppm (parts per million)—a level in which symptoms of poisoning,
such as headaches, tiredness, and drowsiness can be experienced. A further 53 homes contained CO levels between 10 and 50
ppm.
Similarly, a study conducted at UCL showed that 2% of 597 homes visited were assessed to have a “very high” risk of carbon
monoxide exposure, and a further 4% were estimated as having a “high” risk of exposure to concentrations of CO above WHO
guideline levels. http://www.hse.gov.uk/gas/domestic/uclgasfinal.pdf
Preventing Carbon Monoxide Poisoning, p. 17
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Ev w16 Energy and Climate Change Committee: Evidence
Introduction
The Energy and Climate Change Committee has asked for submissions commenting on energy prices, profits
and poverty. Given the focus of the APPCOG on preventing carbon monoxide poisoning, this response focuses
on only those terms of reference which have the scope to increase carbon monoxide safety. Therefore, this
document will respond to following issue:
— Are there any particular groups that are currently not getting the necessary support from current
fuel poverty policies?
Summary of APPCOG Recommendations
— Households suffering from fuel poverty are less likely to make the regular checking and
servicing of heating and cooking appliances a priority. Similarly, households will be less likely
to purchase a carbon monoxide alarm.
— Therefore, the definition of fuel poverty must also take into account a consumer’s ability to
maintain a safe home. Policies intended to address fuel poverty must ensure that consumers are
safe, as well as warm.
— Ofgem should re-evaluate gas and electricity supply licenses in light of its new risk-based
approach to consumer vulnerability. It recommends that the conditions of licenses move beyond
targeting at-risk groups, but rather, target consumers who are in at-risk circumstances in terms
of energy safety.
— Any information supplied to people receiving the Winter Fuel Payment, or a Cold Weather
Payment, should state the importance of getting appliances regularly checked and serviced, and
of purchasing a carbon monoxide alarm.
— Consumers in fuel poverty living in rented accommodation should be made aware of their
landlords’ legal responsibilities under The Gas Safety (Installation and Use) Regulations 1998
to ensure that gas appliances, fittings and flues provided for tenants are safe.
— Measures intended to address fuel poverty by improving the energy efficiency of a home
through insulation measures may lead to an unintended increase in levels of indoor pollutants,
such as carbon monoxide.21
— Given the relatively low cost of fitting a carbon monoxide alarm in comparison to the total cost
of energy efficiency improvements, the Government should make the installation of a carbon
monoxide alarm, where one is not already present, a requirement under the Green Deal
installer standard.
— Government should encourage energy suppliers to provide a carbon monoxide alarm to
consumers receiving assistance under the ECO scheme.
Are there any particular groups that are currently not getting the necessary support from current fuel poverty
policies?
1. The APPCOG supports Ofgem’s risk-based approach to consumer vulnerability, as “a dynamic state that
can affect anyone at any time and for many different reasons.” It states that vulnerability is “not all about the
individual” and “may also be affected by the nature of the market concerned. Its approach focuses on “the risk
factors, long- and short-term, which could lead to disadvantage and aims to encourage suppliers and distributors
to embed this into how they operate.”22
2. The APPCOG therefore recommends that a similar approach be taken when defining fuel poverty, and
that it must include the consumer’s ability to maintain a safe home. It stresses that policies intended to address
fuel poverty, from both government and the energy industry, must ensure that consumers are safe, as well
as warm.
3. The standard licence conditions of the gas and electricity supply licences require suppliers to establish a
list (the Priority Services Register) of domestic customers that are of pensionable age, disabled or chronically
sick. Eligible customers can ask to be added to their suppliers list; these customers are then eligible for certain
free services specified in the supply licences.23
4. The APPCOG recommends that Ofgem re-evaluate gas and electricity supply licenses in light of its new
risk-based approach to consumer vulnerability. It recommends that the conditions of licenses move beyond
targeting at-risk groups, but rather, target consumers who are in at-risk circumstances in terms of energy
safety, such as consumers who have recently moved house.
21
22
23
The Health Impacts of Cold Homes and Fuel Poverty, the Marmot Review Team. http://www.instituteofhealthequity.org/projects/
the-health-impacts-of-cold-homes-and-fuel-poverty. Accessed 08/02/2013.
Proposals for a new consumer vulnerability strategy, Ofgem, p.6. http://www.ofgem.gov.uk/Sustainability/SocAction/
Documents1/Proposals%20for%20a%20new%20Consumer%20Vulnerability%20Strategy.pdf. Accessed 08/02/2013.
Energy Affordability: helping develop Ofgem’s Vulnerable Consumers’ Strategy http://www.ofgem.gov.uk/Sustainability/
SocAction/Documents1/Energy%20Affordability_
helping%20develop%20Ofgem%E2%80%99s%20Vulnerable%20Consumers%E2%80%99%20Strategy.pdf. Accessed 08/02/
2013.
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5. A report published by the Institute for Fiscal Studies in March 2011 found that the income of the median
UK household has fallen by 1.6% since 2008.24 A recent news article from Northern Ireland revealed the
measures taken by residents in fuel-poor households to keep warm, which included the use of unsafe appliances
and unmaintained appliances.25
6. A recent survey by the Gas Safe Register revealed that 9 million out of 21 million homes using gas do
not have annual gas safety checks on their appliances, with 1.6 million admitting to never having had appliances
checked. When asked why they did not have their appliances checked, 37% cited cost as the main reason.26
Therefore, it is reasonable to assume that households suffering from fuel poverty will make the regular checking
and servicing of heating and cooking appliances even less of a priority. Similarly, households will be less likely
to purchase a carbon monoxide alarm.
7. The APPCOG recommends that any information supplied to people receiving the Winter Fuel Payment,
or a Cold Weather Payment, should state the importance of getting appliances regularly checked and serviced,
and of purchasing a carbon monoxide alarm.
8. In particular, vulnerable homeowners should be made aware of their eligibility to receive free gas safety
checks. A recent survey by the Gas Safe Register revealed that 88% of elderly homeowners have never claimed
a free gas safety check, and that £134 million worth of gas safety checks go unclaimed.27
9. Consumers living in fuel poverty in rented or Local Authority/Housing Association accommodation should
be made aware of their rights as a tenant. Such tenants must be made aware of the need for their landlord’s
legal responsibilities under The Gas Safety (Installation and Use) Regulations 1998 to ensure that gas
appliances, fittings and flues provided for tenants are safe.
10. Measures intended to address fuel poverty by improving the energy efficiency of a home through
insulation measures may lead to an unintended increase in levels of indoor pollutants, such as carbon
monoxide.28 Furthermore, there is potentially an increased risk of death and illness from carbon monoxide
poisoning if ventilation is reduced while continuing to use old gas heating systems.
11. Given the relatively low cost of fitting a carbon monoxide alarm in comparison to the total cost of energy
efficiency improvements, the Government should make the installation of a carbon monoxide alarm, where one
is not already present, a requirement under the Green Deal installer standard.
12. Similarly, Government should encourage energy suppliers to provide a carbon monoxide alarm to
consumers receiving assistance under the ECO scheme.
February 2013
Written evidence submitted by Energy Action Scotland
1. Introduction
(i) Energy Action Scotland (EAS) is the Scottish charity with the remit of ending fuel poverty.
EAS has been working with this remit since its inception in 1983 and has campaigned on the
issue of fuel poverty and delivered many practical and research projects to tackle the problems
of cold, damp homes.
2. Fuel Poverty in Scotland
(i) The Scottish Government is required by the Housing (Scotland) Act 2001 to end fuel poverty,
as far as is practicable, by 2016 and plans to do this are set out in the Scottish Fuel Poverty
Statement. The number of Scottish households living in fuel poverty dropped from 756,000
(35.6%) in 1996 to 293,000 (13.4%) in 2002. Half the reduction was due to increases in
household income, 35% to reduced fuel prices and 15% to improve energy efficiency of
housing. The most recent figures from the Scottish House Condition Survey Key Findings
Report show that there were 684,000 households living in fuel poverty in Scotland in 2011,
representing 28% of total households.
(ii) According to figures produced by the Scottish Government early in 2008, for every 5% rise in
fuel prices an estimated 46,000 more households would go into fuel poverty. Based on these
figures EAS estimates that there are currently 900,000 households, more than four in ten, in
fuel poverty in Scotland. This significant increase in fuel poverty is widely accepted to be due
to the dramatic increases in domestic fuel prices and EAS is very concerned about the impact
on vulnerable customers.
24
25
26
27
28
http://www.ifs.org.uk/pr/pr_210311.pdf. Accessed 08/02/2013.
http://strabanechronicle.com/2013/01/17096/. Accessed 08/02/2013.
http://www.gassaferegister.co.uk/news/gas_safe_register_news/9_million_british_families_at.aspx?year=2011. Accessed 08/02/
2013.
http://www.gassaferegister.co.uk/news/gas_safe_register_news/elderly_ignore_free_checks.aspx?year=2011. Accessed 08/03/
2013.
The Health Impacts of Cold Homes and Fuel Poverty, the Marmot Review Team. http://www.instituteofhealthequity.org/projects/
the-health-impacts-of-cold-homes-and-fuel-poverty. Accessed 08/02/2013.
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(iii) EAS was pleased to take part in the Select Committee’s outreach event at Anniesland College
in Glasgow on Thursday 7 February 2013 and welcomed the opportunity to both inform the
Committee’s inquiry and to advise on the current situation relating to fuel poverty in Scotland.
EAS is pleased to provide this response. Many of the points raised were covered in some format
during the course of the Select Committee meeting.
3 Energy Prices
(i) The cost of energy, gas and electricity has risen steadily since 2003–4 when the impact of the
deregulated market was seen to its fullest extent. Since that time the number of suppliers has
fallen from 13 to what is now termed the Big Six, however over the last few years there has
been a number of newer but smaller entrants into the market for gas and electricity, for example
the Co-operative or Ebico. Due to their relatively small size, these entrants are often excluded
from the regulations governing the larger six companies in terms of providing support such as
the Warm Home Discount. In some cases a consumer who would otherwise be eligible would
miss out on the £130 rebate given by the Warm Home Discount if they moved to one of these
smaller suppliers.
(ii) When comparing prices between suppliers it has been stated that there is a bewildering array
of tariffs and that these are confusing to compare across suppliers. This is one reason that EAS
is supportive of the Government’s drive to reduce the number of tariffs that energy suppliers
can offer. This should help reduce confusion and make for greater ease in measuring like for
like. It is worth noting that the Co-operative note the fact that they only have one tariff, however,
they are not the cheapest and suggest that they have never set out to be the cheapest supplier.
(iii) The real issue is not one of profit or excessive profits from the retail side of the suppliers
businesses as was suggested during the outreach meeting. The problem as EAS views it is the
wholesale market. The wholesale cost shown on consumer’s bills makes up over 40% of the
total bill and is excluded from the calculation of profit made by the companies and shown to
Ofgem. This is not part of the £65 or so that they report as profit from each customer. The
profit on the wholesale costs is taken by the generators and in the case of the six largest of the
companies they all have generating businesses. It is this profit that adds to the overall profit
and contributes to the headline figures so often quoted in the press.
(iv) EAS believes that in order to attain a true competitive market for all suppliers big and small
there must be a more transparent wholesale market with strong regulation from Ofgem. The
recent coverage in the press whereby gas from the UK fields was sold to Europe at a lower
cost than the purchase of LNG from the Asian market to be used in the UK, demonstrates that
there is an attitude verging on cavalier in terms of the trading of gas. There is little apparent
concern for the plight of fuel poor households.
(v) EAS is also concerned that when price rises are applied that often these rises are not solely on
the unit cost of energy but are placed mainly on the daily standing charge. This means that
even when the consumer is able to reduce their consumption by a small amount the rise in the
standing charge—over which they have no control—effectively means that the company takes
more money and the householder is provided with less heat and power. Between March 2010
and December 2012 one supplier raised their daily standing charges by over 100%. During the
same period, the average tariff increase was 5% for electricity and 20% for gas. This strongly
suggests that the wholesale cost of energy is not the main cause of rising bills as we are led to
believe, but the cost of supplying the customer. If the customer managed to use one less unit
of energy per day from their gas consumption they would save approximately 4 pence, but
would still be paying around 16 pence a day more than they did 2 years ago. It should be noted
that the example given here is from one of the very few suppliers who actually publish their
prices in this format. Others are not so open and it is therefore almost impossible to make a
similar comparison.
(vi) Despite the rise in the daily standing charge it is still the wholesale cost of energy that makes
up the greatest percentage of the bill, approximately 42%, and it is this part that customers
know least about. EAS is pleased that Ofgem is currently undertaking a consultation into the
“Wholesale power market liquidity”. EAS would hope that the outcome of this will be to
introduce greater transparency into the wholesale market and allow access to cheaper fuels to
all players and not just the “Big 6”.
4. Rising Block Tariffs
(i) The chair Mr Yeo in his remarks at the meeting said he was aware of rising block tariffs as a
means of helping people get better value for the energy they require. This is worthy of comment
as it is something that EAS has a strong view on. Rising block tariffs seem to be a fairer means
of buying energy for those who use little energy. However, there are several distinct drawbacks,
firstly the question of who makes the calculation of what constitutes a low user. If this was to
be on house size does it take into account occupancy? If done on the energy efficiency of the
house, who makes the calculation of the energy need for the house. Would the calculation take
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into account the location of the house, the orientation, the exposure, the height above sea level,
etc? Would the assessment be made on the actual usage over past years, or a theoretical usage
based on a set of assumptions, such as the need to keep the home at a certain and agreed
comfortable temperature for a certain and agreed proportion of the day. Overall there are far
too many variables to consider in a way that would give any degree of certainty to the
householder. It is also EAS’s belief that this type of tariff would be unworkable for many
elderly and vulnerable consumers as they would be frightened to exceed their agreed allowance
and so ration their usage even further than they do now for fear of increased costs or getting
into debt.
5. Fuel Poverty Definition
(i) The Government are currently considering a change to the definition of fuel poverty used in
England after a consultation issued by DECC in light of the research undertaken by Professor
John Hills. In its response to the DECC consultation, EAS stated:
(ii) EAS believes that the definition proposed by Professor Hills is flawed to a considerable degree.
(iii) Firstly, it is overly complex in its measurement and so would require a great deal of data to be
gathered to make an assessment (on an individual basis) of whether a household is to be classed
as fuel poor or not.
(iv) It is also, in the main, immune to any movement in energy prices. This assumed immunity does
not make energy more affordable to vulnerable households. Whilst a reduction in the number
of fuel poor households resulting from a simple change of definition is doubtless a very
attractive prospect for the Government, defining a household out of fuel poverty will not make
it any easier for that household to keep warm, pay fuel bills and avoid fuel debt. There are
already very real concerns that such an apparent reduction will result in a belief by the
Government that the level of investment in tackling fuel poverty can be reduced with
equanimity.
(v) A further point is that the change in definition does nothing to assist in finding or identifying
the fuel poor. In fact by effectively declassifying a large number of pensioner households, it is
distinctly at odds with Government support programmes (the Warm Home Discount and the
Winter Fuel Payment, for example) for fuel poverty alleviation. If the Hills definition is to be
adopted will Government change its policy on the targeting of its programmes of assistance?
Will it remove payments to newly “non-fuel poor” pensioners who currently comprise the Core
Group, as well as a large proportion of the Broader Group, eligible for the Warm Home
Discount?
(vi) The proposed definition is one which EAS believes will not be easily understood by the public,
or indeed by many policy makers in areas such as social housing where many of the fuel
poverty alleviation programmes are delivered. It is likely to be understood only by academics
and accordingly will be of little practical use to those working to alleviate fuel poverty.
(vii) Finally, the use of median figures within the proposed definition effectively means that fuel
poverty will never be eradicated. It is the Scottish Fuel Poverty Forum’s belief that the proposed
definition will keep a significant number of households in fuel poverty permanently. EAS is
concerned that if median income continues to fall at the level that it has done over the past
year, the number of households with income below the median level will also fall, making it
appear that there are fewer fuel poor households.
(viii) EAS does not believe the current definition to be as flawed as is suggested. Replacing the
current definition because it has imperfections with a definition which is fundamentally,
significantly flawed and extremely complex does little to help identify or bring support to those
currently living in fuel poverty.
In its interim report, the Scottish Fuel Poverty Forum recommended:
… that further work is undertaken on the assumptions underpinning the Scottish definition. In
particular, the appropriateness of the room temperature level which is higher than that adopted
in England, the method of assessing household income and occupancy levels, and examination
of a potential upper income threshold.
(ix) That interim report concluded—any definition of fuel poverty and subsequent measurement is
a complex combination of factors which will result in different households falling above or
below a fuel poverty line.
(x) EAS is supportive of the Scottish Fuel Poverty Forum’s call for further research, which would
examine the assumptions underpinning a fuel poverty definition. EAS understands that Scottish
Ministers, on receipt of the Scottish Fuel Poverty Forum’s recommendations, have agreed to
continue to use the current 10% definition while further agreeing to commission research on
the assumptions supporting it.
EAS believes that by retaining the current definition and by making sure the assumptions are
fit for purpose, progress against targets can be measured effectively and that where progress is
being made that it is reflected in a reduction in fuel poor homes.
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(xi) EAS supports a continued use of current definition while suggesting that DECC should, as it is
intended in Scotland, test the assumptions that support the definition. In conclusion EAS would
not support a move by DECC to adopt Professor Hills’s recommendation as is currently
proposed.
6 Conclusion
(i) EAS would suggest that there is still much to be done to truly understand the makeup of
ordinary domestic energy bills and that the proposals by Government to reduce the number of
tariffs and make comparison of supplier’s offers are welcome.
However, reducing the number of tariffs so that everyone is on the lowest tariff effectively
means that the lowest tariff will become the norm and suppliers will therefore simply raise the
price of the lowest tariff so that overall profits are maintained. This may in turn strangle
competition and have the unintended consequence of squeezing smaller suppliers out of the
market place.
(ii) EAS further believes that the wholesale market must be more transparent and that the sale of
such a basic commodity as energy must be subject to tighter regulation and in this way drive
down prices to the consumer.
(iii) Finally, EAS believes that simply by changing the definition of fuel poverty to remove more
households from it will not make energy more affordable, it will not allow people to purchase
the energy they need to stay warm and dry in their homes. It will simply mask the problems
and remove obligations on Government and fuel suppliers to help fuel poor and vulnerable
consumers.
February 2013
—
—
Written evidence submitted by Hastoe Housing Association
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?
How effective is Ofgem in ensuring consumers get a fair deal? Are there any areas for
improvement?
1. Hastoe would urge the Committee to consider:
— How the most competitive tariffs can be made available to those on low fixed income who prepay and do not have access to the internet.
— 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.
2. Fuel poverty is a serious issue and people living in rural communities are often at greater risk due to
being off the mains gas system and having lower incomes. Hastoe is responding to the problem of rural fuel
poverty by building all our new homes to very high environmental standards and developing a “Hastoe Green
Homes Standard” which guides our retrofitting programme including the retrofitting of over 100 ground source
heat pumps over the last two years utilising RHPP funding. We are also leading on the construction of
Passivhaus homes, with two completed schemes (Ditchingham, Norfolk and Wimbish, Essex) and another 146
in our programme. Passivhaus is we believe the way forward for rural communities both on and off mains gas.
3. We are concerned that the current energy tariff structure is both preventing our residents from fully
benefitting from improvements in energy efficiency and penalising those people who are at greatest risk of
suffering fuel poverty. We know from our discussions with our residents, many of whom live in rural off-gas
communities, that they are not able to benefit from the most competitive energy tariffs.
4. Many of our residents are pre-paying for energy ie not paying via direct debit often due to cash flow
problems or because they do not have access to bank accounts and, as a result are not eligible for the best
energy tariffs. In addition, many of our residents do not have broadband and are not able to benefit from online offers and comparison websites.
5. For some of our residents who are on low fixed incomes, the inability to access the most competitive
tariffs can significantly reduce their opportunities to achieve affordable warmth in their homes.
6. The lack of access to the most competitive rates is a problem for our residents across our housing stock
and somewhat perversely can also have an effect on residents living in our most energy efficient Passivhaus
homes. This is because the amount of energy consumed in our Passivhaus homes falls below the thresholds
for many of the better tariffs. In other words, the current tariff structure penalises those who are consuming
the least energy as they pay more per kWh than those consuming more energy.
7. The scheme at Wimbish won the Best Residential Project in the UK Passivhaus Awards 2012 and has
attracted funding for an in-depth performance evaluation study from the Technology Strategy Board.
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8. Data from the first 12 months confirms that gas consumption for heating and hot water is very low,
averaging 1500 kWhs a year for the six flats, and 2500 kWhs a year for the eight houses—far below the
national average of between 18 and 20 thousand kWhs.
9. When we fed these figures into online comparison websites, we discovered that our tenants were being
heavily penalised for their low consumption, paying nearly twice as much per kWh for gas as “normal”
consumers. This is because their consumption is well within the threshold for the lowest tier but far from far
from lowest cost tariff. Ostensibly, these unfair bills could be offset by the online and direct debit discounts
on offer which could amount to £55 and, at Wimbish, would be at least a third of the total. However, many of
our tenants are unlikely to be in a position to take advantage of such discounts being neither eligible for direct
debits nor having broadband.
10. In summary, we would ask that a review of the energy tariff structure considers how low income, rural
households at high risk of being in fuel poverty can be given fair access to the best energy deals.
February 2013
Written evidence submitted by Martin Allan
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?
All, but we don’t know by your own admission (63) how genuine price and profit is relative to production,
, and if you don’t know you ought to know because tax in ever form must be directly related to all delivery
aspects of energy production and supply. Speculation determines wholesale prices and also causes instability
in the energy market place. The demand on energy consumption is relatively stable and relatively predictable
in the domestic market, mainly its fluctuations is weather. Insulation and home production of energy would
over time directly challenge monopoly to the point that utilities will drop price to meet that alternative its not
clear green deal it a domestic generation option.
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?
Energy poverty is no longer postcode specific its disposable income specific, indirect intervention to support
individual domestic energy production as well as insulation, to challenge monopoly and allow alternative green
market entry. Allow no bench marking and one fixed unit rate for energy. Government has failed and it appear
it will fail to address the lack of open market issue and seems intent to allow monopoly companies to agree a
bench mark unit rate to stop each other undercutting for custom (why), while by your own admission
government not sure about operating costs of utilities. They might tell you what their margin is but you are
not in a position to say it’s real or “cowboy builder” approximate. And proposing monopoly companies will
install smart meter, but consumers will pay for that installation to tell them how to be efficient when in reality
government doesn’t know how efficient the supply is. It’s not an open market governments have been sleeping
on the job, and allowed it to become too complex allowing monopoly comfort in chaos.
How effective is Ofgem in ensuring consumers getting a fair deal? Are there any areas for improvement?
They appear to be questioning infrastructure priorities which shows concern about operating cost legitimacy
which is good, They mean nothing to me as poor consumer, I am confident they will tell to go through a
complaints procedure which will involve a lot of my time and capacity to understand what needs not be a
complex relationship with utilities, which I will withdraw from due to a lack of capacity and time. .It could be
effective, however if you don’t know the cost of energy production ,structure or strategy it is not in a place to
determine fair pricing while you allow a monopoly to exists, they can peruse rule breaking but not price.
Therefore they mean nothing to me. An improvement could be once you have a real open market and remove
the possibility of benchmark removing cartel and barriers to market entry forcing monopolies to fight for
custom with each other making it easier to determine anti-competitive practise I will benefit.
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 is achieved in practise?
Monopoly is already benchmarking and you are allowing it to become oppressive consumer choice, remove
benchmark and robustly promote competition.
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?
open the UK energy market to the world, don’t allow energy to go out of the country cheaper than its coming
in, one rate of electricity per unit/£ only, always guaranteed for one month for each energy provider with
energy consumers given the same obligation. All consumers can sign up to ofgem e energy management, I can
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go on the ofgem site and see all energy companies one unit rate for that day and change at the touch of a
button as would be the case of a market trader buy or sell. Ofgem will be able to monitor and administer
provider’s performance and behaviour directly. As it was said energy is leaving the country cheaper than its
coming in open the ofgem market to the world market, to take advantage of that scam also.
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?
Yes and you are not in a position to say they are wrong because you don’t have a handle on utilities
operating costs or profit. It is not your concern that efficient companies are making a profit it is only your
concern if those companies are making a loss by other anti-competitive practice. A company will be healthier
if it addresses turnover rather than profit government should be the same. There is not a competitive market .
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?
Vertically integrated companies are making is that a word for monopoly cartel .Ask HRMC to do their job
and get people who understand tax avoidance nationally and internationally and remove complexity and replace
it with clarity of production to terminal price. That’s task 1 AND IF ITS TO DIFFICULT OR COMPLEX
THERE IS A TAX GAP.
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?
They are irrelevant because to get profit to an acceptable public perception level it would just have to spend
money on something ridiculous or sensible to put price up and justify lower profit, government would not
know because you don’t even know what the operating cost are or if profit is a paper exercise. ofgem seem to
realise this telegraph December.
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?
Complex and irrelevant and detached from the end user eg ,All my bill has to say for the month is your bill
is £36, £1 a day consumption, £5 operating cost equalling £1 business operation, £1 busines profit, £1
infrastructure £2 government tax.
Fuel Poverty Household Micro Wind Generators and Solar Panels is the Poverty Solution
— 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?
— Eliminate fuel poverty by 2016 No, reduced pending will clearly make thing worse.
— 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?
I can only see in Hill report measurement proposals, not fuel poverty solutions at an individual
level. I don’t need you to tell me I am in fuel poverty I need a solution or alternative to get me
out of it , fund installation of winds solar in my back garden and let it pat for itself and after
that you can make a profit on what I don’t use. Green deal doesn’t seem to go that far.
— 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? Eco will help but it won’t address price or the
integrity of open market, market entry to compete with big six or allow household solutions to
self-generation ,
— What support is available for fuel poor households living in solid-wall and hard-to-treat
properties? Could this be improved? Green Deal. Best solution Is to make them energy neutral
bys elf generation taking them out of carbon measure figures. Cavity, cladding and other
insulation will help but it is not a solution to neutralising price.
— Will the Government’s proposals to ensure that consumers are on the cheapest tariff have any
impact on fuel poverty? Yes but price I different, and if the cheapest tariff is out of reach it
will a no effect on poverty.
— To what extent do fuel-poor households engage in switching? What are the barriers to greater
levels of switching from these groups?
— It too complex and require capacity to assess and understand most people not just fuel poverty
don’t understand
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—
To what extent do fuel-poor households current take advantage of energy efficiency schemes?
Not sure. Can anything be done to increase uptake? Give them the projected savings as a bill
cut for a period upfront then remove it if they fail to engage,
February 2013
Written evidence submitted by Cornwall Energy
Cornwall Energy is an independent advisor and commentator on energy policy, regulation and markets in
the United Kingdom. Our customers include suppliers, generators, public bodies, service providers, financial
institutions and law firms.
We specialise in “demystifying” the policy and regulatory environment for clients and, among other things,
provide forecasting services, including how third-party charges (environmental/social programme costs and
network charges) are likely to evolve over the short- and medium-term.
Our Third Party Charges Index that shows that the network, environmental, and energy efficiency elements
of the average household electricity bill have risen by 68% since 2010. We estimate that for 2013–14 thirdparty charges will account for almost two-fifths of the typical household electricity bill. Significant increases
in third party charges for all consumers are locked in for the future.
Changes in third party charges are very difficult for suppliers to predict and are becoming a major inhibitor
of supply competition in the non-domestic markets.
We believe more work is needed by government and Ofgem to understand the impact that third-party charges
have on costs to all consumers and the effectiveness of competition in the domestic and business energy
markets, especially electricity.
We provide more detail below.
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?
Energy suppliers will assess the commodity, collateral, third-party charge and operating costs they have or
will incur when designing their energy tariffs. Each supplier will approach this differently, depending on their
trading and risk strategies and available resource to track and model third party charge movements.
We have observed that third-party charges (that is non-discretionary charges suppliers face for use of
networks to move energy to customers’ premises and fulfil environmental and social obligations placed on
them by government) have become increasingly volatile, difficult to predict, and on a general upward trend.
Where suppliers have insufficient time to account for third-party charges (or are simply too resource intensive
to try and predict) they are likely to take a “best guess” view of charges to include in their tariffs and hope
they are neither pitched too low to eat into working capital/profit nor too high as to make them uncompetitive.
To differing degrees all suppliers struggle to account for these third-party charges in their retail offerings,
primarily due to the short notice they have of final charges and the year on year changes seen. To quantify
these elements of the typical retail electricity bill Cornwall Energy has developed a Third Party Charges Index
to assess how electricity third-party charges have evolved since 2010 (see Annex A).
We have focussed on the electricity bill because:
— all households have electricity supply, whereas around 4 million households do not have access
to piped gas;
— third-party charges are more volatile and regionalised than those seen for gas, making it more
difficult for suppliers to assimilate changes into retail offerings; and
— the majority of costs related to supporting government’s social and environmental policies are
collected from the electricity bill.
Levies
The cost of subsidising renewables is increasing. The two current environmental schemes that are payable
through electricity bills are the Renewables Obligation (RO), which supports the deployment of large-scale
projects, and feed-in tariffs (FiTs), which encourage small-scale micro-generation.
Electricity suppliers are obliged by statute to meet the costs of supporting accredited renewable generation
under both schemes; with the expectation their costs are recovered from the end consumer. Suppliers have little
control over the level of charge to be recovered—the decision is made based on the amount of renewables
capacity that is accredited in a given year and they amount of power each project produces.
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FiT costs now exceed typical gross profit margins in the larger non-domestic market meaning unexpectedly
high costs cannot be readily absorbed by suppliers. So in the non-domestic markets it is becoming more
common for suppliers to take powers through their contracts to “pass through” unexpectedly high increases in
third party charges. Sometimes suppliers have acted on these clauses seeking retrospective payments, causing
distress to their customers, damage to their own reputations and undermining customer confidence in the
market. This is particularly the case with FiTs where a quarterly reconciliation process has consistently resulted
in higher than expected costs for this scheme. In our opinion competition in the non-domestic energy markets
is being severely inhibited by the FiT reconciliation
From 2016 bills will be subject to a new environmental charge. Contract for difference (CfD) FiTs will
eventually replace the current RO, which closes to new projects in 2017. But rather than one scheme recovering
payments over another, both schemes will be recovering money for the projects accredited under them for a
time. Payments under the RO will completely cease in 2037 (20 years after the final opportunity to become
accredited under the scheme).
We expect the combined effect of these three environmental schemes to more than double in real terms
by 2020.
Where suppliers are subject to energy efficiency programmes the expectation is that the compliance costs
are passed through to customers. Unlike the FiTs and RO there is little information on the actual costs incurred
by suppliers to fulfil these programmes. The costs of the new Energy Company Obligation (ECO) will be more
closely monitored than its predecessor programmes (CERT, CESP etc.), which is welcome.
We note that as smaller suppliers become subject to ECO (and other programmes) there is a real concern
that the additional compliance costs placed on these parties are likely to have a significant impact on their
ability to continue to provide competitive offers to the market as fixed (and on-going) costs will be spread over
a much smaller customer base.
Networks
Network companies recover their allowed revenues (as set by Ofgem via the price control process) from
users. Charges are set annually (although there is scope for within year change) and must be derived from
charging methodologies approved by Ofgem. At their core these charging methodologies should produce costreflective charges—that is network users should see a price signal that takes account of the cost of providing
the assets they are deemed to use.
The network companies have licence obligations to notify the market in advance (150 days for electricity
transmission and 90 days for electricity distribution) that charges are to change. Indicative charges though are
not issued to the market until much later (typically December for transmission and January for distribution
charges for the coming April).
Final charges are not known until late January for transmission and late February for distribution. Experience
has shown that final charges often materially differ from indicatives. Suppliers then have limited time to assess
how they recover these costs from customers.
Alongside the timing issue we argue that the drive from Ofgem to ensure all network companies use
“common” methodologies to produce cost-reflective charges has resulted in overly complex models that mean
suppliers have little or no chance to confidently assess future costs in retail offerings. The impacts of this are:
—
it introduces unnecessary risk for suppliers who have little option but to take a “best guess”
view on network charges over the coming year or two when setting tariffs;
—
large swings in network charges could (alongside other cost changes) trigger the need to change
existing tariffs, which is costly;
—
from a consumer’s perspective there is little opportunity to respond to network price signals—
households bills are not itemised and so customers see no network price signal (even if they
did it is questionable how they could respond); and
—
current arrangements ultimately have a detrimental impact on retail competition as this regulated
element of the bill has become unnecessarily volatile.
As network companies have a very clear view of the revenues they can collect from users, in their entirety,
over the life of a price control (now set for eight years) it makes no sense that we are in a situation where we
now have designed into the market, via regulation, high levels of cost uncertainty. This manifests as risk and
probably unnecessary cost to the customer.
This is a wholly irrational situation given that network costs account for around a quarter of the typical
household electricity bill.
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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?
There presently exist numerous interventions that affect prices—be these to support desired generation
technologies, subsidise network costs in certain locations, improve energy efficiency, or mitigate energy costs
for certain groups of consumers. Although these interventions may be necessary they do increase barriers to
entry and place constraints on small growing suppliers to the detriment of retail competition and ultimately
customers. Volatility in these charges is already damaging non-domestic supply competition and we fear this
unfortunate outcome could extend in to the household market.
Interventions should be limited. Regulatory and government efforts should be focussed on ensuring that
wholesale and retail markets are functioning in the best interests of consumers.
We believe there is a need for a thorough assessment of how third-party charges impact on wider retail
market competition. We recommend an assessment consider:
— how suppliers (new entrants, growing smaller suppliers, large vertically integrated companies)
can and do assimilate third-party charges;
— options to smooth third-party charge changes; and
— how third-party charges could be more predictable.
How effective is Ofgem in ensuring consumers get a fair deal? Are there any areas for improvement?
The regulator’s Retail Market Review work is addressing this, and we expect to see final decisions from
Ofgem this summer. We believe the impacts on supply competition, including how charges fall on different
user classes, and new entry in to the retail market, need to be a much greater feature of Ofgem’s decision
making processes in network charging and from DECC in policy design.
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?
No comment.
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?
See our comments on profits.
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?
The lack of transparency surrounding commodity elements of customers’ final bills fosters the perception
that energy company profits are unreasonable. Ofgem’s segmental accounts have helped increase transparency
to a degree. However, good industry knowledge is required to interpret them and there are legitimate concerns
about comparability between information produced by different companies. The treatment of internal trades
and cost transfers is particular area of concern
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?
Following its 2008 competition review (commonly referred to as the “Probe”) the regulator introduced via
licence obligations on the six large vertically integrated companies to publish segmental accounts for their
generation and retail businesses.
Despite this being a step in the right direction we believe Ofgem needs to further overhaul the rules for to:
— standardise the methodology for inter-business activities (the transfer price), stipulating the
basis on which these regulatory accounts should be prepared;
— incorporate upstream gas as this remains a major omission; and
— the net margin made on an average bill and how this is reinvested.
Without these changes the exercise will remain a compliance burden on the companies without real
compensating benefits for stakeholders including consumers.
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?
We have grave concerns with the supply market indicators issued by Ofgem. The hedging strategy model
that the regulator employs is too simplified a representation of the Big Six’s actual purchasing; does not reflect
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how companies procure wholesale energy; and (for power) contradicts its own assessment of the health of the
wholesale electricity market.
The current process uses averaged information for an 18-month hedging strategy to estimate supplier
wholesale costs. This mechanistic approach assumes wholesale products are procured on a monthly basis for
one eighteenth of their needs.
No business trades in this manner. Moreover Ofgem’s own assessment of wholesale electricity market
liquidity concludes that there are very low levels of trading in products more than a season out.
The supply market indicators could be improved by using a more accurate hedging strategy methodology.
The industry should be asked to help Ofgem refresh its assumptions.
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?
As noted above we believe there is scope to improve the information provided by the large energy companies
in their segmental accounts.
We do acknowledge they have some benefit, particularly because they separate out domestic supply from
non-domestic supply for both electricity and gas.
Without clear information on transfer prices from generation to supply (together with the volume of traded
power and the route the supplied power took) the segmental accounts will continue to have limited benefit.
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?
Note out comments above.
To what extent does the way energy companies communicate profits to the general public influence the
public’s perception of these companies?
No comment.
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?
Our assessment of third party charges concludes that this element of the household bill is likely to increase
over the coming years, adding pressure to efforts to eliminate fuel poverty.
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?
No comment.
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?
No comment.
What support is available for fuel poor households living in solid-wall and hard-to-treat properties? Could
this be improved?
No comment.
Will the Government’s proposals to ensure that consumers are on the cheapest tariff have any impact on fuel
poverty?
We believe an intervention of this nature will ultimately be detrimental as the prices of the cheapest tariffs
are likely to rise. We fear that suppliers will “level up” their prices.
To what extent do fuel-poor households engage in switching? What are the barriers to greater levels of
switching from these groups?
No comment.
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To what extent do fuel-poor households currently take advantage of energy efficiency schemes? Could
anything be done to increase uptake?
No comment.
February 2013
Annex A
CORNWALL ENERGY THIRD PARTY CHARGES INDEX DOMESTIC ELECTRICITY Q113
—
Excluding VAT.
—
Third party charges levied by suppliers to cover electricity network and policy costs have increased
the Cornwall Energy index 48% since 2010.
—
A further increase in the index of 20% to 168 is projected for 2013–14 based on indicative charges
and equivalent to £233 payable per household.
—
Third party charges will account for 38% in current bills up from 28% in 2010–11.
—
Significant regional variations in the index due to network charges.
2013-14
Component
2010-11
2011-12
2012-13
indicative
Networks
100
121
131
144
Environment
100
129
193
262
Energy efficiency
100
176
204
210
CORNWALL INDEX
100
130
148
168
-
30
18
20
139
180
206
233
28
35
36
38
Year-on-year
£ per household equiv.
% share of bill
(total bill from Ofgem calculations in
supply market indicators)
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Networks
Distribution (DUoS)
— Pays for the local network upkeep between transmission lines and the meter.
— Charges have increased across each of the 14 distribution regions since 2010–11.
— Between 2010–11 and 2013–14 (indicative) the average GB consumer will see a charge rise
of 45%.
— Distribution in 2013–14 is expected to account for £120 of the average bill.
Transmission
—
—
—
—
(TNUoS)
Pays for national network upkeep.
Charges have also risen across each transmission region since 2010–11.
The 2013–14 (indicative) charge will be 76% higher than in 2010–11
Transmission in 2013–14 is expected to account for £20 of the average bill.
High Distribution Cost Area charge (HDCA)
— Provides discount for high distribution costs in northern Scotland.
— Typically charge rises by inflation, but in 2012–13 the rise was 10% because of an underrecovery in the previous year.
— Charge likely to be under £1 in 2013–14.
Balancing (BSUoS)
— Covers National Grid’s costs for keeping system in balance.
— Charges are rising over time owing to increasing amounts of renewables. Between 2010–11
and 2012–13 charges rose 16%. 2013–14 charges currently 11% up on 2010–11 but could be
much higher.
— Balancing in 2013–14 currently expected to cost £5 on the average bill.
2013-14
Component
2010-11
2011-12
2012-13
indicative
GB average DUoS
100
122
131
145
GB average TNUoS
100
133
162
176
HDCA
100
101
111
114
BSUoS
100
116
116
111
Networks
100
121
131
144
Environment
Renewables Obligation (RO)
— Scheme to support the development of large-scale renewables projects.
— Costs of the scheme more than doubled between 2010–11 and 2013–14 (up 112%).
— Charge in 2013–14 likely to be £35, up from £17 in 2010–11.
Feed-in Tariffs (FiTs)
— Scheme supports deployment of small-scale microgeneration installations.
— The charge has risen exponentially since the scheme’s launch in 2010.
— Cost to customer in 2010 was under £0.20 but in 2013–14 cost is considerably higher at
almost £9.
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2013-14
Component
2010-11
2011-12
2012-13
indicative
RO
100
117
154
212
FiTs
100
1250
3773
4955
Environment
100
129
193
262
Energy Efficiency
Carbon Emission Reduction Target (CERT)
— Covers the cost of reducing domestic carbon emissions.
— Cost of the scheme rose until 2012–13 when it closed. The charge will not be levied in 2013–14.
— In 2010 the cost per customer was £18, rising to £32 in 2012–13.
Energy Companies Obligation (ECO)
— Pays for insulation in vulnerable and/or hard to treat households.
— Replacement for CERT and CESP from 2013–14.
— Baseline of zero in 2010–11 to 2012–13.
— Forecast cost in 2013–14 is £34 per customer.
Community Energy Savings Programme (CESP)
— Supports vulnerable communities in reducing carbon emissions.
— Cost rose between 2010–11 and 2012–13. Like CERT, CESP closed in 2012–13.
— Annual cost per customer remained under £2.
Warm Homes
—
—
—
Discount (WHD)
Rebate on winter energy bills for low-income and most vulnerable customers.
Four-year scheme with zero baseline in 2010–11.
Costs expected to reach almost £8 by 2013–14.
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2013-14
Component
2010-11
2011-12
2012-13
indicative
100
151
176
188
CESP
100
105
110
0
WHD
-
100
116
130
100
176
204
210
CERT à ECO
1
Energy efficiency
1 As noted in the text, ECO replaced CERT and CESP from 1 January 2013. The 2013-14 index value for CERT à ECO can be
considered as “ECO only” costs.
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Written evidence submitted by Mr D Shah
Prices
I believe that the issue of energy prices is very complex, therefore the Govt./Regulator must have very
competent and experienced people who understand energy markets. Only then the energy Co’s can be held
responsible for their actions. Rules and regulations can be enacted and enforced.
OFGEM should have appropriate powers of enforcement.
Profits
Bills are always going up. Part of the problem is profits, and lack of competition, transparency. Consumers
are therefore reluctant to switch. All major suppliers are the same. Customer service is very poor. If you write
to them, they do not reply. Phone them then incorrect info. is given out. To get some form of redress is very
difficult. Therefore public just give up. Public just do not have the expertise to take them on. Unfortunately
regulators are not helpful as well. On 16 Nov 12 British Gas put up prices be 6%, which is not mentioned in
the Bill which was received in Jan 13. Prices have increased, I have got new format Bill 4 pages which is as
confusing as ever. They give all sorts of figures which do not tie-up. It is basically a nightmare, I do not know
how many thousands of pounds extra I may have paid over the years.
This is what is going on with banks. PPI, Libor Rate, Interest Rate Swaps, Investments, the list goes on and
on. Vast majority of public just do not understand all these. Even those who understand are also duped. This
is how Gas Co’s. tariffs work; confusing.
Fuel Poverty
The latest Bill I have received is for £453.58 for Q. St. Period 10.10.12 to 9–1–13. It is eyewatering, we are
a couple only and it is a 3 Bed Small Semi. Both are pensioners. It is double-glazed. With all other expenses
we manage to keep afloat. Unfortunately because of severe weather conditions we have to keep warm and use
energy. It is a essential commodity. Finally the Customer Service of British Gas is very poor. It is a National
Icon yet service is very very poor. I have experienced it first hand.
I conclude here and hope my submission may be helpful to committee and bring about some positive
changes/outcome.
I thank you all for your time, trouble and giving me the opportunity to express myself, my opinions and
views.
P.S. If you would like, I will be happy to send you my latest GAS BILL original for you to see and
then return.
February 2013
Written evidence submitted by Local Government Association
Introduction
The Local Government Association (LGA) is the national voice of local government. We work with councils
to support, promote and improve local government.
We are a politically-led, cross party organisation which works on behalf of councils to ensure local
government has a strong, credible voice with national government. We aim to influence and set the political
agenda on the issues that matter to councils so they are able to deliver local solutions to national problems.
Summary of Evidence
— With energy prices rising and many people on low incomes facing benefit cuts, increasing numbers
of households will struggle to pay their fuel bills. Councils already play a major role in helping
people reduce their energy bills particularly those most at risk of fuel poverty. Councils delivered
over 50% of energy efficiency programmes in 2010 and are seeking to do more.
— Locally-designed schemes that are based on an understanding of individuals’ needs and
circumstances are more effective than national definitions at reaching those in fuel poverty.
— Councils have a key role to play in designing those schemes, communicating and raising awareness
of schemes amongst local residents and promoting greater uptake by households across all tenures.
— Councils are best-placed to broker relationships and facilitate data-sharing across a range of partners
including energy suppliers, private landlords, the NHS and the voluntary sector to help identify and
support those in fuel poverty.
— Councils are actively promoting collective switching schemes as a key means of helping people
reduce energy costs.
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—
—
Councils should be able to access the Energy Company Obligation (ECO) brokerage scheme (without
having to attain Green Deal Provider status) to support locally-led fuel poverty schemes to ensure
maximum value for money and reach.
The lead role that local authorities play in ensuring that resources are used to help those most in
need should be reflected in the new national fuel poverty strategy.
Future Challenges in Addressing Fuel Poverty
With energy bills continuing to rise faster than household income, increasing numbers of households will
find it difficult to pay their energy bills and will be at risk of fuel poverty. Five of the six major energy suppliers
have announced price increases this year, adding between £80 and £112 to a typical household’s annual bill.
As it is, fuel poverty statistics from the Department of Energy and Climate Change (DECC) show that there
were 3.5 million households in England in fuel poverty in 2010, compared with 1 million in 2004. Changes to
be introduced by welfare reforms will mean many low income families see a reduction in benefit income at
the same time as their fuel bills increase. In addition, public sector spending cuts will make it more difficult
for councils and their public sector partners to support fuel poverty initiatives. In the face of these challenges
we need to ensure that all available funding for energy efficiency and reducing energy costs is used in the most
effective and efficient way.
The Hills Review recognised that national definitions and targets have not been effective tools for identifying
the real incidence of fuel poverty in the UK and determining who should be eligible for support. The revised
national definition recognises that there are a range of factors that need to be taken into account to identify
those most in need.
However, the experience of councils, who deliver more than half of all energy efficiency programmes,
demonstrates that effective fuel poverty solutions have to be designed with local circumstances in mind. The
debate about national definitions of fuel poverty and the focus on energy companies’ duties on energy efficiency
should not obscure the fact that schemes need to be delivered in the most efficient and effective way at local
level. The new national fuel poverty strategy should enable decisions about where and how to target funding
to be made at the local level.
Council Action to Address Rising Energy Costs and Fuel Poverty
Councils play a major role in helping their residents to reduce energy costs and help people out of fuel
poverty. In 2010, councils provided (solely or in partnership) over 50% of the available energy efficiency
programmes in England. Examples include:
— Bristol Energy Efficiency Scheme insulated 10,000 homes across the city, with particular attention
to the needs of the elderly, disabled and fuel poor.
— Kirkless Warm Zone, which offered every household in the area a chance to improve its energy
efficiency, insulated over 51,000 homes and generated £80 million in economic benefits. Kirklees
has insulated the highest percentage of properties of any council in England and Wales and as such
strongly indicates there remains strong potential for basic insulation measures if schemes and
marketing are well designed with a compelling offer.
— Home Energy Lincolnshire Partnership, a joint scheme between the County Council and all of the
district councils in the area, saved local residents over £1 million in energy bills.
Councils have knowledge and information about their communities that allow them to tailor schemes to
take account of factors such as tenure, housing type, housing density, income, deprivation and demography.
For example:
— Bolton Council has been leading an area-based scheme to address fuel poverty, prioritised through
the mapping of indices of multiple deprivation.
— Cheshire West and Chester are using the Homes Energy Efficiency Database, the local private sector
stock condition survey and other local sources of data including council tax support recipients and
NHS data on excess winter deaths.
Councils are also best placed to bring together funding and partners to target initiatives where they are
needed most. For example:
— Walsall Metropolitan Borough Council has a partnership with NPower and Walsall NHS, to tackle
fuel poverty, cold related illnesses and excess winter deaths. The scheme trains a wide range of
workers, who visit people in their homes, to establish whether the clients they are visiting are
suffering ill health as a result of living in a cold damp home. They are then offered energy efficiency
improvements and new boilers.
— Nottingham City Council has engaged Nottingham Energy Partnership, private landlords, Nottingham
City Homes and support agencies such as Age UK Nottingham and Nottinghamshire on a coordinated
approach to tackling fuel poverty in the area.
In 2011, the LGA and DECC entered into a Memorandum of Understanding that recognises how councils,
through local governance, can ensure climate change policies and programmes protect and help the most
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vulnerable, particularly the fuel poor. We are now seeking to build on this relationship to ensure that councils’
pivotal role continues to be recognised in Government policy.
Targeting People most at Risk of Fuel Poverty
The energy companies themselves have identified the need for information to identify the households to
whom support should be directed. Councils can facilitate information-sharing at a local level to identify those
most in need in their local areas, which they have already been doing through their local schemes. For example:
— Partners in the Oldham community budget pilot on fuel poverty are setting up a database to identify
households most likely to be in fuel poverty and those who are likely to experience health problems
as a result. Households can also be referred to the project by partners including the fire service and
health workers.
— Blackpool works with NHS Blackpool and dovetails with their flu mailing lists. They are extending
this to a direct referral pilot with local GPs.
Increasing take up of Energy Efficiency Schemes, Particularly the Fuel Poor
Councils play an important role in promoting the uptake of energy efficiency schemes and helping people
to determine which measures would best meet their needs. Many councils help local residents to understand
which benefits and grants are available to them and understand the tariffs offered by various energy suppliers.
The importance of local authority involvement was demonstrated in the Carbon Emissions Reduction Target
(CERT) programme. An evaluation of the programme carried out for DECC confirmed that local authority
endorsement was “considered crucial to reassure householders of the scheme’s credibility and therefore drive
uptake.” (Evaluation of the delivery and uptake of the Carbon Emissions Reduction Target, DECC, 2011)
The Government’s proposals for outreach appear to be largely limited to a national hotline number that will
refer callers to energy companies. This is however unlikely to be the most effective mechanism for “hard to
reach” residents. Councils are better able to promote awareness and uptake of energy efficiency schemes,
particularly because they are able to broker the local partnerships that are needed to reach the residents who
are most likely to need support. For example:
— Blackpool Council funds a programme called “Counter Attack Services” with the NHS and Age
Concern, which uses the council’s care and repair agency to visit homes and provide advice on fuel
poverty measures, assist with completing forms for benefits, and undertake home safety checks.
— Liverpool City Council holds fuel poverty surgeries in various locations across the city, including
health centres, GP surgeries and libraries. Residents are offered advice on issues around fuel poverty,
including energy efficiency, social tariffs, switching fuel suppliers and more.
— Area based approaches where householders are contacted about Council sponsored schemes through
tailored community marketing and a door to door approach have been successfully run by a number
of Councils including Hull City Council, Leeds City Council and Kirklees Council to name but a
few of many such examples.
Many councils have also been seeking to increase the uptake of energy efficiency in private rented sector by
targeting private landlords:
— Teignbridge District Council’s Landlord’s Energy Assistance Scheme provides grants to private
sector landlords for measures that would improve the energy efficiency of a property occupied by a
vulnerable tenant, such as those in receipt of a means tested benefit, aged 70 years or over or have
a child aged less than six years.
— Royal Borough of Kensington and Chelsea produced a comprehensive guide for private landlords on
energy efficiency and dedicated Environmental Health Officers to assess properties referred to them
for excess cold hazard enabling advice to be given or enforcement taken as appropriate
What more could be done?
With deep cuts to their funding making it more challenging for councils to maintain levels of investment
and support, it is essential that all available funding for energy efficiency and reducing energy costs is used in
the most effective and efficient way. Councils are looking to opportunities provided by Green Deal and Energy
Company Obligation (ECO) to drive future initiatives. For example:
— Five local authorities in the northeast, coordinated by Newcastle City Council, are leading the rollout of the Green Deal across their areas with a view to improving the energy efficiency of up to
15,000 homes.
— Birmingham City Council will be delivering the Green Deal through Birmingham Energy Savers,
partnering with Carillion Energy Services to improve the energy efficiency of up to 60,000 homes
in the city, create over 350 jobs and help 600 people into training.
The LGA is supporting councils to learn from each other and share good practice on tackling fuel poverty
in their areas through Climate Local, which a web-based platform that offers topic-based guides and supporting
resources, an online community and opportunities for peer learning.
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Allow Access to Energy Company Obligation (ECO) Brokerage
It will be vital to maximise the finance that is available through the ECO. The Government needs to ensure
that locally-led schemes to alleviate fuel poverty have fair access to ECO. Under current arrangements, access
to the ECO brokerage system is limited to Green Deal providers. The LGA would like to see this changed so
that councils can use the brokerage to support energy efficiency projects. Opening up the ECO brokerage to
councils would help to target support to the households that are most in need, whilst encouraging a broader
competitive market to drive cost efficiencies and foster the development of a range of products and services.
Collective Switching
Councils are taking the lead in supporting collective switching, with the need to address fuel poverty in their
areas a key driver for providing this service. More than 25 local authorities have set up or are in the process
of developing a variety of schemes, with more than 80 projects reported to be in the pipeline. In January, the
largest switching auction run by local authorities to date saw 50,000 people sign up.
Many council-led schemes include elements specifically designed to help those living in fuel poverty; for
example:
— Peterborough City Council’s “Ready to Switch” scheme was the first in the UK to allow people on
pre-payment meters to join, giving some of the area’s poorest people the opportunity to reduce their
bills. Many other council-led schemes have followed suit.
— Cornwall Together is a collective purchasing scheme pioneered by Cornwall Council and several
local partners. 10% of the expected savings from switching will go into a fund to address fuel
poverty across the county.
The LGA has been promoting the benefits of collective switching, working with DECC to develop advice
and helping local authorities to find ways to simplify the procurement process.
Review of the Energy Company Obligation
The LGA believe that it is vital to review progress on the Energy Company Obligation early following its
first year of operation to ascertain whether or not it has been successful at delivering carbon and energy savings
under its current design. Councils are well placed to offer informed comment on how the Energy Company
Obligation (and Green Deal) are working on the ground.
February 2013
Written evidence submitted by Carillion
Carillion welcomes the opportunity to respond to the Inquiry into Prices, Profits and Poverty. In order to put
our comments into context, it may be helpful to outline briefly our role in the provision of energy services
across the UK.
Carillion is one of the UK’s leading support services companies with a substantial portfolio of Public Private
Partnership projects and extensive construction capabilities. The Group has annual revenue of over £5 billion,
employs around 46,000 people and operates across the UK, in the Middle East, Canada and the Caribbean.
Our energy services business is a leading provider and installer of renewable technologies and domestic
heating services in the UK. We currently operate within the private domestic, social and commercial market
sectors offering a wide range of energy efficient renewable technologies and domestic heating services to
our customers.
We manage the Warm Front scheme on behalf of the Department of Energy and Climate Change in addition
to having delivering a number of carbon-saving energy efficiency programmes under CERT and CESP. We
were one of the UK’s first registered Green Deal Providers and are partnering with Birmingham City Council
to deliver Birmingham Energy Savers, the flagship Green Deal programme, which aims to lift up to 40,000
homes out of fuel poverty by 2015.
Responses to Individual Questions
Prices
1. 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?
Carillion accepts that a high proportion of domestic total energy prices consist of wholesale costs as reported
by Energy UK,29 though we are aware that there is growing concern surrounding the impact of levies on
consumers’ bills. We note research from ACE and CSE, however, indicating that though bills are projected to
29
http://www.energy-uk.org.uk/customers/about-your-energy-bill/the-breakdown-of-an-energy-bill.html
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rise overall by 2020, the impact of policies levied on bills is expected to have a mitigating impact on the bills
of average consumers with gas central heating compared to a “do nothing” scenario.30
2. 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?
Carillion recognises that it would be difficult for Government or Ofgem to intervene on domestic energy
prices, which are affected by global market forces; however, we would support more progressive tariff
structures, such as a rising block tariff, which would provide an incentive for consumers to use less energy.
3. How effective is Ofgem in ensuring consumers get a fair deal? Are there any areas for improvement?
We are supportive of the work that Ofgem is doing to simplify tariffs to help consumers more easily navigate
the market, provided this does not stifle innovation and to develop a new consumer vulnerability strategy.
However, we recognise that Ofgem’s remit is limited by licence condition provisions and we would welcome
additional support for households off the gas grid, who make up 17% of households in Britain but are overrepresented among fuel poor households with 28%, 37% and 34% of off-grid households living in fuel poverty
in England, Scotland and Wales respectively in 2011.31
4. 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?
Carillion supports benchmarking consumers’ energy bills both as a tool to encourage demand reduction and
to help consumers identify whether they are getting a good deal, as outlined in consumer research from
DECC.32 Benchmarking could be adopted for similar households with average consumption and exemplar
low energy households. A localised element could also be developed, provided this did not identify individual
households’ consumption without their consent.
It is also important to recognise that price is not the only differentiator, customer service must also be
considered.
5. 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?
We broadly support the proposals in the recent DECC discussion document “Ensuring a Better Deal” to
develop better communication with energy customers, for example, through a tariff comparison tool, however,
it is important to only provide consumers with information that is highly salient and can be easily interpreted—
preferably implementing standardised terminology across companies.
Carillion is also a signatory to the Energy Bill Revolution campaign, which supports reinvesting revenue
generated from carbon taxes to fund energy efficiency and renewable measures for households to tackle fuel
poverty—as the Fuel Poverty Advisory Group 10th Annual Report highlights, industry receives compensation
for the impact of the EU ETS, carbon floor price and CfD policies, therefore it would also be reasonable for
domestic consumers to be supported to reduce the impact of rising prices.33
Prices
We are supportive of the proposals within the Retail Market Review and look forward to implementation of
the proposals.
Fuel Poverty
12. 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?
Though we welcome the implementation of the ECO, which will contribute towards the elimination of fuel
poverty, we would support a more ambitious range of policies if fuel poverty is to be eliminated by 2016,
particularly since DECC expect ECO to assist only between 125,000—150,000 by 2023.34 Under the existing
definition, levels of fuel poverty are continuing to rise and it therefore appears unlikely that the statutory target
will be achieved by 2016.
We welcomed the Hills’ recommendation that the government should set out a “renewed and ambitious
strategy for tackling fuel poverty” and believe there is a pressing need for this to be published as soon
as possible.
30
31
32
33
34
Impact of future energy policy on consumer bills, ACE, Centre for Sustainable Energy, 2012.
Consumer Focus, Off-gas consumers: information on households without mains gas heating. Baker, W, 2011.
Empowering Households, research on presenting energy consumption benchmarks on bills, DECC 2011.
FPAG 10th Annual Report, 2011/2012, 2012.
DECC—Green Deal and ECO final impact assessment, 2012.
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13. 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?
Carillion welcomed Professor John Hills’ Review of Fuel Poverty; however we have concerns regarding
the proposed new definition of fuel poverty, though we acknowledge the existing definition has weaknesses.
Theoretically, we supported the closer linkage of fuel poverty with the definition in the WHECA as affecting
low-income high energy cost households, since the existing definition can capture a range of low-income
households, who are perhaps mainly suffering from more general income poverty. However, we are concerned
that a relative threshold for defining fuel poverty in effect means that the overall numbers in fuel poverty are
likely to remain relatively static, and the impact of rising fuel costs on fuel poverty is underestimated. The
proposed definition also masks the fact that many low-income households continue to find heating their home
unaffordable, even though they may live in relatively efficient properties.
We support the concept of measuring the depth of fuel poverty via the “fuel poverty gap,” which may enable
better targeting of policy towards households most severely affected, rather than encouraging policies that
focus on those at the margins of fuel poverty—who can be statistically be removed from fuel poverty through
minor income measures that do not tackle the structural causes of the problem.
14. 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?
We appreciate that the majority of fuel poverty policy is targeted at those most likely to be vulnerable, such
as those meeting the Affordable Warmth criteria under ECO and those eligible for the Warm Home Discount.
However, there are undoubtedly some policies, such as the universal Winter Fuel Payment, which is not
targeted.
We welcome the inclusion of a specific rural sub-obligation within the ECO, as well as the CSC element,
however, there are difficulties with trying to achieve multiple policy objectives (carbon saving and combating
fuel poverty) within a single initiative—for example, difficulties energy suppliers had identifying sufficient
super-priority group householders under CERT, or strict geographical boundaries under CESP. We appreciate
that some of these issues have been resolved under ECO, for example flexible boundaries, though, complex
policy attempting to achieve multiple objectives, must be carefully designed and reviewed.
15. What support is available for fuel poor households living in solid-wall and hard-to-treat properties?
Could this be improved?
We are concerned that the support available under the main carbon-saving element of the ECO may remain
inaccessible to some individual fuel poor households as this funding is reliant on Green Deal finance being
granted, though take-up in the private rented sector utilising ECO subsidy may have a positive impact on fuel
poverty in this sector.
We welcome the opportunity that area-based programmes have to deliver whole building retrofitting,
particularly on behalf of local authorities, such as our work with the London Borough of Redbridge to install
Ecopod renewable communal heating systems, glazing and solid-wall insulation to a number of hard to treat
tower blocks.35
We would welcome further support for hard to treat housing such as this for fuel poor households in private
housing and mixed tenure estates, since we note that DECC anticipate that households qualifying under the
AW element of ECO are likely to receive heating and basic insulation measures only and this is likely to be
delivered in a more pepper-potted manner. Additionally, whilst we are in the early stages of ECO and in a
transition phase from CERT/CESP, if the industry and government recognise barriers to delivery Government
should consider amending the legislation to try and remedy these initial issues.
16. Will the Government’s proposals to ensure that consumers are on the cheapest tariff have any impact on
fuel poverty?
We welcome DECC’s proposals to simplify tariffs, provided this has the intended effect of engaging
participation in the market rather than stifling innovation or causing price levelisation. However, prices are
only one contributor to fuel poverty and in the long-term price is perhaps the element least within customers’
control. Though we hope simplifying energy tariffs will hopefully encourage more consumers to engage in the
market and switch suppliers, the value of switching is ultimately limited as the savings that can be achieved
between the best deals are minimal. We would advocate a continuing focus on improving energy efficiency to
best tackle the root causes of fuel poverty.
17. To what extent do fuel-poor households engage in switching? What are the barriers to greater levels of
switching from these groups?
There is limited evidence available that fuel-poor households are specifically benefiting from switching
energy suppliers. We are supportive of local authority and campaigning organisation collective switching
35
http://www2.redbridge.gov.uk/cms/news_and_events/latest_news/2012/september_2012/residents_set_to_benefit_from.aspx
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initiatives. However, it is important that these schemes specifically reach out to fuel poor households rather
than only benefiting households that are already engaged, energy literate, and who may have already switched
supplier as an individual. Furthermore, it is important that cheaper deals negotiated through collective switching
are not at the expense of other consumers, in the same way that loss-leading tariffs have arguably been
subsidised by “sticky” customers on standard tariffs in the past.
18. To what extent do fuel-poor households current take advantage of energy efficiency schemes? Could
anything be done to increase uptake?
Carillion believes it is difficult to accurately assess the uptake of energy efficiency measures from fuel poor
households since polices designed to tackle fuel poverty tend to identify households using proxies such as age,
income, receipt of benefits or geographical location, therefore targeting of measures towards these groups is
imperfect. Our experience delivering a number of schemes for groups likely to be fuel poor both at national and
local level, suggests that take-up is greatest when this is supported by sustained community level intervention.
We also support a multi-agency approach to helping fuel poor households take advantage of help available—
for example maximising opportunities for fuel poverty initiatives to link with health campaigns, benefit checks
and financial advocacy services. This could be combined with an overarching Government advertising
campaign for fuel poverty issues to raise awareness and help bring together information on the full range
of policies.
Better sharing of data, potentially including data-sharing with DWP would also be beneficial for identifying
eligible householders, who may otherwise be unaware of the help that may be available.
February 2013
Written evidence submitted by Brian Mongey
Prices
1. The elephant in the room is the fall in the value of sterling and its influence on energy prices. The
“Worthless Pound Policy” being championed by the Bank of England is responsible for at least 1/3 of the rise
in energy prices over the past six years. Assuming that the pound had maintained its value, agsinst other
currencies, at 2000–07 levels then energy prices in the UK would be at least 25% lower than their current level.
2. Data to support the above claims can be found on EUROSTATsite. Energy price inflation of the past six
years in the UK has been very significantly in excess of the levels seen in Eurozone countries both collectively
and individually. The data suggests that is not just the ~25% decline in the value of sterling that has been
passed on to the consumer.
3. There is in addition the costs associated with sterling volatility. Utility companies may avail of a number
of financial instruments to reduce exposure to sterling or international fuel prices but there is an enevitable
cost associated with this strategy. Since the primary purpose of these financial instruments is to protect the
profitability of the players involved the customer has to shoulder the cost. I would be surprised if sterling
volatility is not contribution three to 5% of the final costs paid by the consumer.
4. As horrifying as the energy inflation statistics appear they do not fully convey the magnitude of the price
increases being experience by low energy users (and one could expect real fuel poverty to be characterised by
energy usage levels that are significantly lower than average). Although I don’t fall into the fuel poverty
classification I have had to make significant reductions in my energy consumption in order to retain some
control of my expenses. Having made such reductions in consumption I have found that the standing charge
imposed by most suppliers represents as much as 50% of my project annual bill. Where a supplier does not
impose a standing charge the unit price is significantly higher than rivals, those this option is still the most
cost efficient for my needs. I have detailed the change in costs below, comparing my current charges with
those I paid in 2004.
5. In 2004 gas was 1.2p/unit, now 5.06 electricity in 2004 as 6.0p/kWhr now 15.9p/kWhr. My own anecdotal
evidence can be supported by an article in the Guardian of 19 Sept 2012 “Low users paying more for energy”.
6. While there is a cost associated with energy supply to individual properties, the magnitude of the fuel
poverty issue suggests that if the Industry (including the regulator) and the Government were really interested
in reducing fuel poverty, revenues generated by standing charges (or dual pricing schemes with the same effect)
would be redistributed into a marginally higher charge per unit used.
7. Any additional benefit of such a policy would be to increase the level of price transparency for the
individual customer. The unit price would mean “the unit price”.
8. My own preference is that the Utility companies should be required to state the Unit price on both bills
and their adverting much in the same way that lenders have to display the %APR associated with a loan. It
would be a requirement that any standing charge be fully reflected in the unit price and apply to from the very
first unit.
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9. With regard to possible complaints from high energy users who may have to pay fractionally higher
charges (I would be surprised if any increase were greater than 5%) it should be remembered that with any
scare commodity prices are supported in part by profligate use. The same high energy users are likely to find
various energy saving measures more cost effective.
10. A focus of energy reduction on the most profligate user, has the potential to deliver much more significant
reductions in energy saving which will have a beneficial effect (though admitidly small) on energy prices.
Fuel Poverty
1. Anyone who thinks that any progress has been made on fuel poverty over the past decade is deluding
themselves. The exact opposite is the case. Even when we get figures on the number of people/households in
fuel poverty they are hopelessy out of date since energy prices have in all likelihood risen in the period between
research and publication. Additionally the drivers on energy price inflation point only in one direction. The
combination of the BOE’s “Worthless Pound Policy” is likely to drive another round of price increases by the
energy companies perhaps as early as the next few weeks.
2. In the absence of some intervention I would not be surprised to see in excess of 40% falling into the fuel
poverty classification. I suspect that the figure would be closer to 50% if many had not responded to the
successive wave of price rises by cutting consumption. My own response has been to reduce electricity
consumption by in excess of 30% and more than halve my gas consumption.
3. Another driver for continued escalation of energy prices in the UK is the requirement to pay for new
energy infrastructure.
4. If the proposed cost of the High Speed 2 (HS2) rail link are any indicator of energy infrastructure costs
we could conceivably see a doubling of energy bills. Infrastructure costs in the UK appear to be completely
out of line with that seen in other European counties. The latest stretch of the Spanish high speed rail network,
from Madrid to Valencia, cost 6.6 Billion Euros (This equates to ~15 m euro per kilometer). The projected
cost for HS2, which is of comparable distance to the Madrid Valencia, is £32 (Costs in excess of £95 million
per mile)
5. Merely upgrading the west coast mainline cost more per mile than building new dedicated high speed
lines in France.The west coast mainline upgrade cost £9 billion, £22 million per mile. The French build the
TGVest (Paris to Strabourg) for 10 m euro per kilometer. Infrastructure projects are characterised by the long
time scales associated with bringing the project to fruition and repayment of the capital involved in funding
construction. Infrastructure projects will only be undertaken where profit is assured, and financial costs
associated with guaranteeing profitability may be of the same magnitude as the actual construction costs. .
Barriers To Switching
1. One particular practice that is bound to have a very detrimental effect on poorer household is the delay
in repayment of outstanding credit following a change in supplier. Rather than repayment via the direct debit
mechanism that has been set up to pay the supplier, the market practice appear to be for the supplier to instruct
the customers bank to close the direct debit and only begin to discuss repayment when/if the customer enquires
about repayment. My own experience it that I am still awaiting repayment from my previous supplier over a
year after switching (the outstanding credit being approximately equal to my annual bill) and a second
outstanding credit balance more than five years after switching supplier.
2. One measure to tackle this practice would be for the utilities to return outstanding credit, following
switching, based on uprating any repayment based on any change in prices in the intervening period.
February 2013
Written evidence submitted by the Renewable Energy Association
REA EVIDENCE TO THE ECC COMMITTEE INQUIRY ON ENERGY PRICES. ADDRESSING
QUESTION
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?
The Renewable Energy Association represents renewable energy producers and promotes the use of all forms
of renewable energy in the UK across power, heat, transport and renewable gas. It is the largest renewable
trade association in the UK, with over 1,000 members, ranging from major multinationals to sole traders. For
more information, see: www.r-e-a.net.
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1.0 Executive Summary
1.1 Support for renewable energy is frequently blamed in the media, and by some politicians, for escalating
energy bills. However, the reality is that in 2012 support for renewable energy was responsible for just 1.6%
of household energy bills. In recent years wholesale gas prices have escalated sharply, and unpredictably. The
UK is increasingly dependent on imports of gas.
1.2 Ofgem data shows that average dual fuel energy bills increased over £200 from 2010–12. A further
round of price increases was announced since the publication of these figures. REA analysis showed only
around 4% of this increase, over a comparable time period, could be attributed to renewable energy support.
The UK could have delivered its 2020 renewable energy targets two to three times over for this £200 addition
to household energy bills. Yet disproportionately little fuss is made about the cost of our dependence on volatile
fossil fuel markets.
1.3 Government has a tendency to underestimate the price increase of fossil fuels. For example, we are now
exceeding DECC’s “high” fossil fuel price scenario for the purposes of calculating the cost of delivering the
2020 renewable energy targets, as set out in the 2009 Impact Assessment to the Renewable Energy Strategy.
1.4 DECC analysis anticipates that the Renewables Obligation will add £48 to household energy bills in
2020. No breakdown has been provided by DECC of the anticipated contribution from renewables under the
EMR CfD support costs estimated at £41 in 2020. With significant reductions being made in public support
for renewable technologies this year (eg solar 20% reduction, onshore wind 10% in RO support), future public
support will clearly be lower than historically. The Feed-In Tariff will add £6 to household energy bills this
year, but REA modelling on the FIT scheme anticipated this as a result of the uncontrolled boom in solar
power at the end of 2010/beginning of 2011. The FIT will rise at a much smaller rate in future under the new
FIT control mechanism.
1.5 In addition to levying costs on households, renewables can contribute more broadly to household
prosperity, for example, by providing jobs (REA/Innovas estimate up to 400,000 by 2020), avoiding
increasingly expensive environmental externalities and by providing inflation-free sources of power.
Furthermore some technologies, eg solar power, are reducing in price rapidly and will offer householders the
prospect of cheaper power than grid electricity.
2.0 What proportion of household energy bills can be attributed to Renewable Energy?
2.1 Ofgem data shows average dual-fuel energy bills have risen by £205 in the past two years (July 2010 to
July 2012) [See endnote 1]. According to Ofgem figures, the typical annual dual fuel bill has risen by over
£200 in the last two years, from £1,105 in July 2010 to £1,310 in July 2012. See Ofgem: “Electricity and Gas
Supply Market Indicators—1 August 2012”, 8 August 2012.36
2.2 Analysis by REA based on Ofgem/DECC data shows support schemes for renewables over a similar
period have contributed around £4 to energy bill price increases.i That equates to 2% of total bill increases
over the past two years. Or in other words, factors other than renewables subsidies are responsible for 98% of
energy bill rises over the past two years. Furthermore, the subsequently announced new round of price increases
means that renewables accounted for an even smaller proportion of energy bill rises.
2.3 Energy prices are comprised of a number of elements. Ofgem’s factsheet “Updated household energy
bills explained”,37 list these components as: Wholesale energy, supply costs and profit margin; Distribution
charges; Transmission charges; VAT; Environmental charges; and Other costs. Figure 2.3 shows the current
proportions of these factors in average gas and electricity bills, with “Environmental costs” contributing 6%
and 11% to these respectively.
2.4 “Environmental costs” includes all Government programs to save energy, reduce emissions and tackle
climate change. The latest estimate is that these currently amount to around £82 on an annual bill37 and whilst
they do impact on price suppliers charge for energy bills, some of these programmes do help to reduce the
costs of bills for vulnerable groups.
36
37
www.ofgem.gov.uk/Markets/RetMkts/rmr/smr/Pages/indicators.aspx
http://www.ofgem.gov.uk/Media/FactSheets/Documents1/household-bills.pdf
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Figure 2.3
OFGEM BREAKDOWNS FOR GAS AND ELECTRICITY BILLS (DECEMBER 2012)38
2.5 A third of the “environmental costs” of electricity bills can be attributed to the Energy Company
Obligation (ECO) and a third to other environmental costs which have not been specifically stated. Renewable
energy makes up the final third adding £27 to household bills this year; £21 from the Renewables Obligation
(RO) and £6 from Feed-in-Tariffs (FiTs).38 When separating these “environmental costs” out, the RO formed
2.8% of electricity bills in 2012 whilst FiTs formed just 0.8%, see figure 2.5.
Figure 2.5
ADAPTED FROM OFGEM FURTHER BREAKDOWN OF ELECTRICITY BILLS (DECEMBER 2012),
INDICATING THE PROPORTION OF THE RO AND FITS.
Wholesale energy, supply
costs and profit margin
Distribu"on charges
Transmission charges
VAT
Other costs
Energy Company
Obliga"on
Other Environmental costs
2.6 Whilst policies for renewable energy have had a small impact on electricity bills, they have had no
impact on gas bills. This is a result of the Government’s decision to fund the RHI through general taxation
rather than a levy on fossil fuel suppliers. The emphasis on biomass at the commercial scale means renewable
heat support is relatively lower than for electricity technologies. Only £4.75 million has been spent to date
according to Ofgem data on the RHI scheme. £22 million is the estimate for the current financial year according
to DECC analysis.
38
http://www.ofgem.gov.uk/Media/FactSheets/Documents1/household-bills.pdf
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3.0 What proportion on energy bills has been spent on Renewable Energy policies in the past?
3.1 According to analysis by the CCC, the average dual-fuel energy bill for a typical household increased
from around £605 in 2004 to £1,060 in 2010. Of the total £455 increase, approximately £290 was due to the
increase in the wholesale price of gas; around £70 can be attributed to increasing transmission and distribution
costs; £20 to VAT; £45 to policies funding of energy efficiency in improvements in homes; and around £35
due to policies supporting investment in low-carbon power generation. In line with this analysis over 80% of
the increasing in energy bills between 2004 and 2010 were unrelated to low-carbon measures.39
3.2 Figure 3.2, produced by the CCC3, shows the breakdown of the change in retail electricity prices from
February 2004 to January 2011 (an increase of 5.7 p/kWh). As is illustrated the change was mainly due to
wholesale generation costs with renewables representing a much smaller percentage of the increase.
Figure 3.2
CCC BREAKDOWN OF THE CHANGE IN DOMESTIC RETAIL ELECTRICITY PRICES (FEBRUARY
2004–JANUARY 2011)39
4.0 What is the projected impact of Renewable Energy policies on energy bills in the future?
4.1 DECC: Estimated Impacts of our policies on Energy Prices40
4.1.1 In November 2011 DECC released a report on the “Estimated impact of energy and climate change
policies on energy prices and bills”.40 The report estimated the contribution of individual climate change
policies on average retail gas and electricity prices paid by UK household for the years 2020 and 2030, see
figure 4.1.1. As can be seen, when looking at the FiTs, the RO and the EMR, these policies are predicted to
comprise a larger proportion of energy bills in 2020 than in 2011. However the impact of these policies on the
energy prices is then forecast to decrease in the longer-term to 2030 whilst the “base prices” (energy prices
excluding policies) are expected to continually increase from 2011 to 2030 as a result of a rise in the
wholesale prices.
39
40
http://downloads.theccc.org.uk.s3.amazonaws.com/Household%20Energy%20Bills/CCC_Energy%20Note%20Bill_interactive_
1.pdf
http://webarchive.nationalarchives.gov.uk/20121217150421/www.decc.gov.uk/assets/decc/11/about-us/economics-socialresearch/3593-estimated-impacts-of-our-policies-on-energy-prices.pdf
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Figure 4.1.1
DECC ESTIMATED IMPACT OF ENERGY AND CLIMATE CHANGE POLICIES ON AVERAGE
RETAIL GAS AND ELECTRICITY PRICES PAID BY UK HOUSEHOLDS (INCLUDING VAT)41
4.1.2 This analysis makes the important point that what matters to householders is their net energy bill, not
the cost of electricity per kWh. Household bills can be reduced very significantly through successful energy
efficiency measures. It is important, for the growth of renewable energy, that energy efficiency schemes are
successful.
4.1.3 However, given the volatility of energy prices, this analysis is clearly only an estimate and should be
seen as such. It is therefore surprising that such detailed figures have been used.
41
http://webarchive.nationalarchives.gov.uk/20121217150421/www.decc.gov.uk/assets/decc/11/about-us/economics-socialresearch/3593-estimated-impacts-of-our-policies-on-energy-prices.pdf
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Figure 4.2.1
DECC ESTIMATED IMPACT OF ENERGY AND CLIMATE CHANGE POLICIES ON AVERAGE
HOUSEHOLD ENERGY BILLS IN YEAR 202042
4.2 DECC: Policy impact on prices and bills42
4.2.1 DECC calculate that while low-carbon policies may add to consumer bills over the coming years, their
presence may reduce average household bills by 7% by 2020 in comparison to if such policies were not present,
see figure 4.2.1.42 However, there are a lot of assumptions made in this calculation.
4.2.2 The REA would like to see clearer assessments of projected renewable energy support costs. Impact
Assessment are often overlaid on previous policies or mixed up with “low carbon” measures, so there is no
clear assessment of expected renewable energy support costs (the EMR CfD IA is a case in point). The
renewables industry has nothing to hide from the public as the case for investment in renewable energy is so
strong. In fact the opposite is true—accurate costs help us to reduce the fear generated by hysterical
overestimates in the media.
4.2.3 Ultimately, as wholesale prices are expected to rise over the coming years, energy bills are likely to
increase with or without the influence of policies. If the UK did not have low-carbon policies our energy bills
may well be higher, as shown by figure 4.2.1. Furthermore, if we didn’t have these policies our energy supplies
would be even more dependent on imports and thus more vulnerable to the volatile global fossil fuel prices,
and to security risks. Therefore whilst polices supporting renewables, such as the RO and FiTs, may add to
costs in the short-to-medium term, in the long-term they work to reduce the vulnerability of UK energy prices
to the unstable global fossil fuel prices.42
42
https://www.gov.uk/policy-impacts-on-prices-and-bills
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4.3 DECC: 2050 Calculator43
4.3.1 The 2050 Calculator shows that the total “cost of the energy system” today is around £3,700 per
person, per year, and that if we do not tackle climate change, the total cost of the energy system could be
£4,682 per person, per year, on average over the next 40 years.44
4.3.2 The calculator also indicates that if the UK did nothing to tackle climate change, the proportion of our
energy we get from imported fossil fuels will rise from around 23% in 2007 to 53% in 2020 and 88% in 2050,
meaning that our spending on net imported fossil fuels would rise from around £10 billion today to £32 billion
in 2020 to £86 billion in 2050. This would leave the UK more vulnerable to fossil fuel shortages and price
spikes. However, if we meet our 80% target, then by 2050 imported fossil fuels could account for only 7–30%
of our energy, at a cost of £8–24 billion.
4.4 McKinsey & Company: Roadmap 205045
4.4.1 A study by McKinsey and Company43 supports what has already been suggested, finding that “[f]inal
energy consumption is lower for the decarbonized pathways across the full energy system (aggregated demand
for power, oil, gas, coal, etc.). This is driven by energy efficiency improvement in the power, transport, industry
and buildings sectors, including gains due to the higher end-to-end conversion efficiency of heat pumps and
EVs compared to what they are replacing. Furthermore, the decarbonized pathways use less oil, a relatively
costly primary energy source” see figure 4.4.1.
4.4.2 The same study further reports that “[s]ensitivity analyses show that a doubling of the fossil fuel prices
depresses the GDP in the decarbonized pathways by 0.3 to 0.5% less than it would in the baseline across the
40 years, showing the benefits of a lower dependency on fossil fuels.” (See page 84).
43
44
45
http://2050-calculator-tool.decc.gov.uk/pathways/11111111111111111111111111111111111111111111111111111/primary_energy_
chart
Results based on 2050 Calculator
http://www.roadmap2050.eu/attachments/files/Volume1_fullreport_PressPack.pdf
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Figure 4.4.1
MCKINSEY & COMPANY: ROADMAP 2050, (PAGE 82)46
4.5 European Commission: “The Commission’s Energy Roadmap 2050 Press Release”, 15 December 201147
4.5.1 “The analysis shows that [the] costs [of decarbonising the EU energy supply] will be roughly at the
same level as if we were not to do anything. If we continue current policies, the total energy system cost—
including fuel, electricity and capital costs, investment in equipment, energy efficient products—could represent
14.6% percent of European GDP in 2050 (compared to 10.5% in 2005).”
4.5.2 “[Electricity prices] rise until 2030 because capital, grid and fuel costs rise and auctioning payments
will increase. Until that year, the increase of electricity prices is roughly the same in all scenarios, regardless
whether we stick to our current energy mix or go for decarbonisation, eg high renewable share.”
5.0 Conclusions and final comments
5.1 We are confident that, with support today, some renewable energy technologies are likely to be
competitive with grid energy prices before the end of this decade. Mass market technologies like solar power,
are likely to have a broader transformational effect on the market. Consumers will increasingly be able to
choose between autogeneration with onsite renewable sources of energy and purchasing energy from suppliers/
the grid. This will enhance competition, providing broader consumer benefits. The UK stands to greatly benefit
from the redefinition of the market and consumer choice, given our electricity sector is highly consolidated.
5.2 There is a lot of public commentary and media speculation that shale gas will transform the cost of
energy in the UK. In the REA’s experience there is a lack of reputable research on which to base these claims.
We understand the US experience is distinct, for example because of the lack of export infrastructure which
led to a lower price for domestic consumption. The REA has no in-principle objection to shale gas and indeed
cheap gas could help aid the transition to a low-carbon system. However, there is a danger that the promise of
cheap gas could act to slow the transition to renewable energy, particularly by decision-makers who are opposed
to renewable energy, or to climate or carbon objectives for ideological reasons.
46
47
http://2050-calculator-tool.decc.gov.uk/pathways/11111111111111111111111111111111111111111111111111111/primary_energy_
chart
http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/11/914
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5.3 Benefits of renewable energy investment for householders
5.3.1 It is a perennial frustration for the REA that while the costs of renewable energy are routinely
quantified, the benefits are not subject to systematic quantification. Benefits include balance of trade benefits,
employment, exports, security (including defence), price stability and HMT tax revenues.
5.3.2 The only assessment we are aware of, of broader benefits was by DECC on the wider economic
benefits for the UK economy of reducing reliance on volatile fossil fuels with the reduction of price-shock
risk. Oxford economics.
February 2013
Reference
i
According to a written Parliamentary questions answered by Charles Hendry on 19 June 2012 the estimated
average amount added by the RO/FITs directly to a household electricity bill in 2010–11 is “£18 for the RO
and 20p for FITs.”
Please note that the RO/FIT 2010–11 period runs from April 2010 to April 2011. It was not possible at this
stage to obtain data for exactly the same period as above July 2010–July 2012 to compare directly to renewables
support. This is therefore an approximate of increases in renewables support over a similar period.
To read Charles Hendry’s answer in full, visit:
http://www.publications.parliament.uk/pa/cm201213/cmhansrd/cm120619/text/
120619w0002.htm#1206202000086
Ofgem anticipates that the RO/FITs will add £22 to electricity bills this year (2012). This will comprise £21
for the RO and less than £1 for FITs. See “Updated household energy bills explained”, 31 May 2012, p. 3.
Available at: http://www.ofgem.gov.uk/Media/FactSheets/Documents1/household-bills.pdf
Written evidence submitted by Caroline Flint MP
Executive Summary
1. Improving the perception that profits are fair is essential for increasing consumer engagement with the
energy market.
2. Prices and levels of profits should be set by a properly functioning competitive market. But there are
strong grounds for believing that liberalisation has not led to a properly functioning competitive market.
3. To make sure people are paying a fair price for the energy they use, we need to tackle the root cause of
the problem, and to do that we need a radical overhaul of the energy market. We believe that radical action
needs to be taken to reform the energy market to make it more transparent, more liquid, to overhaul the
regulatory system to ensure it is fit for purpose, and to protect those most at risk of fuel poverty. In the
policy review document Real Energy Market Reform, published in October 2012, we set out a number of
proposals, including:
(a) Requiring the energy companies to pool the power they generate and to make it available to
any retailer, in an attempt to open the market and to put downward pressure on prices.
(b) Replacing Ofgem with a tough new energy watchdog with a new statutory duty to monitor
wholesale and retail energy prices, and the power to force energy suppliers to pass on price
cuts when the cost of wholesale energy falls.
(c) Requiring energy companies to put all over-75s on their cheapest tariff, which could save as
many as four million pensioners as much as £200 a year from their annual energy bills.
4. Energy bills are soaring, driving up inflation and contributing to the cost of living crisis affecting millions
of families. At a time when families are facing record fuel bills and energy companies are enjoying huge
profits, we believe that the government has a responsibility to step in and support families.
5. But research by IPPR says that ECO combined with the Green Deal, will make only a limited contribution
to either of these goals.48
6 And Government proposals on the cheapest tariff do not address the key problem of lack of transparency
and liquidity in the energy market, particularly in the forwards market—the cheapest tariff in an uncompetitive
market will still not be a good deal for customers.
Prices and Profits
7. Improving the perception that profits are fair is essential for increasing consumer engagement with the
energy market.
48
IPPR, (2012) Energy Efficiency, Who Pays and Who Benefits?http://www.ippr.org/images/media/files/publication/2012/12/
energy-efficiency-whopays-whobenefits_Dec2012_10051.pdf
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8. The launch of the inquiry into energy prices, profits and poverty makes reference to the Committee’s
findings that public trust in energy companies is low, and that there is a lack of transparency around energy
company prices and profits. I agree with this analysis, and believe that there is an urgent need for reform of
the energy market and the way it is regulated in order to restore that trust.
9. Unlike most retailers, energy companies sell us a product that we all have to buy; people cannot choose
to opt-out of buying energy. There is, therefore, a strong case for arguing that energy needs regulation of a
different order to almost all other goods and services, and that even consumers who do not wish to engage
with the market, should be protected from being ripped off.
10. At the moment, any attempt to accurately estimate the true costs of energy supply is hampered by the
lack of publicly available information. Electricity companies can either trade bilaterally (ie directly between a
generator and a supplier) or on the open market through power exchanges. The vast majority is currently traded
bilaterally. The details of these bilateral deals are never made public, so we do not know how much energy
suppliers are paying generators (or the generation arms of their own businesses). This means that the wholesale
energy market is only an indication of energy prices, not a definitive guide, because most trades are not
made publicly.
11. In addition, there is currently no obligation on either generators or suppliers to make their sales or
purchases on the open market or to sell outside their business (eg a vertically integrated company is free to
trade between its generation and supply businesses). Current transfer pricing (ie the prices at which different
parts of the same company sell things to each other at) may allow for the movement of profit around the group
(eg from supply to generation)—any assurance that transfer pricing methodologies are fit for purpose are
meaningless as the outcome of that transfer remains publicly invisible.
12. At worst, the complexity and lack of transparency in the way energy is bought and sold leads to the
suspicion that a wholesale price movement can be found to support pretty much any retail energy price
change—whether up, down, big or small—and that energy companies can, therefore, use wholesale prices as
an excuse for inflating customer bills unnecessarily.
13. Prices and levels of profits should be set by a properly functioning competitive market. But there are
strong grounds for believing that liberalisation has not led to a properly functioning competitive market.
14. The domination of the market by six businesses does not, in itself, indicate that competition in that
market is ineffective. However, the fact that since liberalisation no new entrant has achieved anything like the
scale of operations to challenge the “Big Six” suggests there are significant barriers for newcomers.
15. Energy companies frequently assert that electricity and gas prices in the UK are among the lowest in
Europe. However, this is only true when tax is included (because UK tax levels for gas and electricity are
comparatively low), and tax is a government instrument, not a feature of market efficiency. When tax is not
included, the UK compares much less favourably. In 2011, UK electricity prices (in pence per kWh) were
5.3% higher than the EU-15 and G7 median and 19.1% higher than the EU-27 median. UK gas prices (in
pence per kWh) still compare favourably, although in 2011, for the first time, the UK gas price was above the
EU-27 median.49 Although international comparisons are an imperfect measure of market efficiency, they do
suggest there may be scope for greater efficiencies.
16. If pricing is competitive wholesale cost falls should be passed on as quickly as cost increases. In 2011,
Ofgem themselves found evidence that energy suppliers were slower in passing on reductions in wholesale
energy costs than they were increases.50 Analysis by the consumer watchdog Consumer Focus has also found
a gap between the price energy companies buy electricity and gas at, and what they sell it to the public for.
Their research shows that even though the wholesale prices of electricity and gas have both fallen since 2008,
retail prices for both are still significantly higher in 2012 compared to 2008.51
17. In a competitive market, operational costs should converge. In their report on the energy market earlier
this year though, IPPR found that operational costs for energy suppliers had in fact diverged, which again
suggests a lack of competitive pressure on suppliers.
18. To make sure people are paying a fair price for the energy they use, we need to tackle the root cause of
the problem, and to do that we need a radical overhaul of the energy market. We need to open up the market
so that there is more competition and greater transparency.
19. Energy companies should be required to pool the power they generate and to make it available to any
retailer, in an attempt to open the market and to put downward pressure on prices.
20. Energy companies always cite wholesale prices as the reason for bills going up, but bills never seem to
get reduced to a similar extent when the wholesale price falls. One of the reasons energy companies can get
away with this is because of the complex and opaque way in which energy is sold. At the moment, most
energy is bought and sold through secret bilateral deals between energy companies. As a result, no one really
knows what the true wholesale cost of energy is.
49
50
51
Department for Energy and Climate Change [DECC] (2012) Quarterly energy prices, London.
Ofgem. (2011). Do energy bills respond faster to rising costs than falling costs?
http://www.ofgem.gov.uk/Markets/RetMkts/rmr/Documents1/Price_Asymmetry.pdf
http://www.consumerfocus.org.uk/policy-research/energy/paying-for-energy/wholesale-retail-prices
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21. Requiring energy companies to put all the power they generate into a pool, allowing any retailer to bid
for that energy and sell it on to the public, will make the market more transparent. It will stop the secret deals
and prevent energy companies selling power to themselves before selling it on to the public. The pool will
allow other companies to become suppliers of household energy, increasing competition which in turn should
help to drive down prices.
22. This does not necessarily mean going back to the old pool. When the pool was last in operation, there
were effectively just two generators and the pool was one-sided with only generators placing bids. But the
market has changed—today there are many more generators, so the issues we saw with the dominance of
National Power and PowerGen in price-setting would be much less of a problem.
23. There are a number of different energy pools currently in operation including in Ireland and Singapore
and the Nord Pool in Northern Europe, which is two-sided with both buyers and sellers able to bid into it.
24. A new regulator should be established with a statutory duty to monitor wholesale and retail energy
prices, and the power to force energy suppliers to pass on price cuts when the cost of wholesale energy falls.
25. Requiring all energy companies to put all the power they produce into a pool, which anyone could bid
to retail, will allow us to establish a clear wholesale reference price for energy, which could be used as
benchmark to measure any increases or decreases. With this information, the new energy watchdog could
establish when wholesale prices are rising and falling, and accurately monitor the relationship between
wholesale and retail prices, which is effectively impossible at the moment. This would enable a regulator, with
the right powers, to either (a) force energy suppliers to reduce their retail prices in line with wholesale cost
reductions or (b) take some enforcement against suppliers that failed to pass on reductions in wholesale costs
in a timely manner.
26. Ofgem is not fit for purpose. It created and drove the market structure we now have, which is failing
consumers. It is so closely aligned to the old model of unaccountable markets that it is incapable of taking the
action needed to get fair prices for consumers.
27. Just giving Ofgem new powers is not the answer—because Ofgem isn’t using the powers it already has.
Four years ago Ofgem found that some customers were being charged different prices for using the same
amount of energy and that these differences were not representative of the suppliers’ costs. A licensing
requirement52 was introduced for suppliers stipulating that the tariffs they offer for customers who use different
payment methods must be “cost reflective”. But energy companies are still using predatory pricing tactics to
lure new customers.
28. Ofgem has failed to enforce the reforms it has already introduced. In 2008, Ofgem launched reforms
aimed at supporting consumers, addressing barriers to growth for smaller suppliers and ending discriminatory
unfair-pricing practices. According to Ofgem’s own evaluation in 2011 these reforms have failed.53 Across 16
indicators, 12 showed no improvement or deteriorated, three slightly improved and only one, relating to the
cost reflectivity of tariffs, was considered to have improved, although even this last verdict is questionable.
29. Time after time, Ofgem has ducked the opportunity to get tough with the big energy companies. In
August 2011, OFGEM commissioned BDO, the accountancy firm, to conduct a forensic investigation and make
recommendations on how to improve transparency in the energy market. By May 2012, OFGEM had quietly
dropped six out of the eight BDO recommendations, and “varied” the remaining two. This included a
recommendation to require the energy companies to report on the results of their trading functions.
30. To protect some of the most vulnerable, energy companies should be required to put all over-75s on their
cheapest tariff, which could save as many as four million pensioners as much as £200 a year from their annual
energy bills.
31. Elderly customers are among those least likely to investigate cheaper tariffs and switch suppliers, with
the lowest levels of IT literacy and awareness of the savings they could make in their bills by switching
providers. Research by Ofgem has shown that pensioners are less likely to switch supplier than average
consumers.54
Fuel Poverty
32. Energy bills are soaring, driving up inflation and contributing to the cost of living crisis affecting millions
of families. At a time when families are facing record fuel bills and energy companies are enjoying huge profits,
government needs to step in and support families.
52
53
54
Standard license condition (SLC) 27.2A stipulates that any difference in terms and conditions between
payment methods for paying charges for the supply of electricity or gas shall reflect the costs to the supplier of the different
payment methods. The license condition clarifies that price is included in the definition of “terms”
Ofgem (2011) The Retail Market Review—Findings and initial proposals , London
Ofgem. (2008) Energy Supply Probe—Initial Findings Report
http://www.ofgem.gov.uk/Markets/RetMkts/ensuppro/Documents1/Energy%20Supply%20Probe%20%20Initial%20Findings%20Report.pdf
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33. The most sustainable way people can cut their bills is by reducing their energy use. But the end of Warm
Front means that this will be the first administration since the 1970s not to have a Government-funded energy
efficiency programme.
34. The aim of ECO is to reduce carbon emissions and fuel poverty. But research by IPPR says that ECO
combined with the Green Deal, will make only a limited contribution to either of these goals55.
35. Up to 60% of the funding available under ECO could end up going to people who are not in fuel poverty.
Out of this year’s ECO budget of £1.3 billion, just £540 million will go to people in fuel poverty (this includes
Affordable Warmth andthe Carbon Saving Communities Obligation (CSCO) target). That is less than the budget
for people who can afford to insulate their own homes, and less than half the support available last year.
36. According to the Government’s impact assessment, ECO is forecast over the next 10 years to lift just
250,000 households out of fuel poverty—50,000 fewer than fell into fuel poverty this winter alone.
37. Government proposals on the cheapest tariff do not address the key problem of lack of transparency and
liquidity in the energy market. The cheapest tariff in an uncompetitive market will still not be a good deal for
customers. In order to make sure customers are paying a fair price, we need to reform the energy market as
outlined above.
February 2013
Written evidence submitted by the Government’s Fuel Poverty Advisory Group for England
The Fuel Poverty Advisory Group is a non-departmental advisory body, which consists of a chairman and
senior representatives from the energy industry, charities and consumer bodies. Each member represents their
organisation, but is expected to take an impartial view. The role of the Group is to:
— Consider and report on the effectiveness of current policies aiming to reduce fuel poverty;
— Consider and report on the case for greater co-ordination;
— Identify barriers to reducing fuel poverty and to developing effective partnerships and to
propose solutions;
— Consider and report on any additional policies needed to achieve the Government’s targets;
— Encourage key organisations to tackle fuel poverty, and to consider and report on the results of
work to monitor fuel poverty.
Note
The diverse nature of the Group’s membership may, on some occasions, prevent unanimity on some of the
following points.
Fuel Poverty Context
1. The Government has a legally binding target to eradicate fuel poverty by 2016.56 FPAG, as the
Government’s statutory advisory body on fuel poverty, wants to ensure that Government policies are doing all
that is reasonably practicable to meet this target.
2. The Government’s own estimate indicates that in 2012 there are 3.9 million households in England in
fuel poverty;57 however some members of FPAG have calculated that with the 2011 energy price rises this
could now be as high as five million.58 Almost 50% are pensioners and overall some 80% can be categorised
as vulnerable.
3. The Government’s Independent Review of Fuel Poverty,59 led by Professor Hills, found that fuel poverty
is a distinct and important issue. As part of the Review’s conclusions, they established a “Fuel Poverty Gap”
which measures the average and aggregate depth of fuel poverty expressed as the difference between costs
faced by the fuel poor and typical costs of achieving a warm home. The Review found that fuel poor households
are paying £1.1 billion more for their fuel compared to typical households across England. The fuel poverty
gap clearly demonstrates the enormous scale of the problem.
4. The Marmot Review Team report60 presented evidence on how cold homes lead to multiple health
problems including excess winter deaths, respiratory health problems and mental health problems as well as
an increased likelihood of poor educational attainment among children.
55
56
57
58
59
60
IPPR, (2012) Energy Efficiency, Who Pays and Who Benefits?http://www.ippr.org/images/media/files/publication/2012/12/
energy-efficiency-whopays-whobenefits_Dec2012_10051.pdf
UK Fuel Poverty Strategy 2001
Annual Report on Fuel Poverty Statistics 2012
NEA estimate November 2011
http://www.decc.gov.uk/en/content/cms/funding/Fuel_poverty/Hills_Review/Hills_Review.aspx
The Health Impacts of Cold Homes and Fuel Poverty, written by the Marmot Review Team for Friends of the Earth, published
in May 2011
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Ev w50 Energy and Climate Change Committee: Evidence
5. High energy prices have been the biggest driver in the increase in fuel poverty and the long term trend is
for prices to continue rising. With every one% increase in energy prices, another 60–70,000 households are
added to the number of households in fuel poverty.61
6. The recession, unemployment plus the industries investment plans estimated at c. £200 Billion to 202062
and uncertainty over new generating capacity and energy prices will exacerbate the problem. FPAG remains
deeply concerned that the costs and implication of the UK’s transition to a low carbon economy, has yet to be
sufficiently explored. Meanwhile, the regressive means of collecting costs added to fuel bills to fund a range
of related environmental and energy costs creates consumer inequity should these costs continue to be recovered
in this way and not funded via general taxation.
7. The drastic reduction in funding for Warm Front, the under spend of the budget in 2011–12 and the
scheme’s complete termination in 2013, is particularly disappointing given that heating and insulation
improvements represent the most rational and sustainable approach in addressing fuel poverty. It is, therefore,
essential that the government implement alternative programmes to meet the target of eradicating fuel poverty
by 2016.
8. The Green Deal and ECO could offer a new opportunity to assist both those households off the gas grid.
However, most FPAG members believe that the Energy Company Obligation (ECO) must be dedicated to the
alleviation of fuel poverty and not used to subsidise expensive measures on behalf of “Able-to-Pay” households
whilst so many fuel poor household still require measures to be fully funded upfront.ousehold house
9. The table below illustrates the fundamental difficulties faced by fuel-poor households. Not only are they
economically disadvantaged, they also need to spend more on fuel, in absolute terms, to achieve a warm and
healthy living environment ie those who need to spend most on fuel are least able to do so and live in the most
thermally inefficient properties
Fuel expenditure
as a % of income
<5%
5–10%
10–15%
15–20%
>20%
Total
Number of
households
(thousands)
% of whole
stock
Average full
income (£)
Average fuel
costs (£)
Average SAP
9,900
8,164
2,275
641
620
21,600
45.8%
37.8%
10.5%
3.0%
2.9%
100.0%
41,963
19,832
12,549
9,649
6,567
28,526
1,244
1,338
1,497
1,644
1,954
1,338
59.1
54.0
47.0
42.0
36.0
54.7
Source: Detailed Tables published by DECC in 2012
Prices
1. 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?
Response
The Government’s current Energy Bill has major implications for the long term structure of Britain’s energy
market, the prices paid by consumers and the extent of fuel poverty in this country. The Government states
that the Bill is designed to instigate the necessary reforms to the electricity market and deliver secure, clean
and affordable electricity for all consumers. Electricity Market Reform (EMR) is central to the Energy Bill and
is expected to secure the £110 billion63 investment needed within the next decade to upgrade Britain’s aging
energy infrastructure to move to a more diverse low-carbon energy mix, while protecting consumers from
escalating energy bills.
FPAG will limit it response to just two of the elements affecting consumers bills, “social costs and green
taxes”. These range from amounts consumers pay to help disadvantaged consumers, to funding energy
efficiency measures for all consumers, to payments to encourage the development of renewable energy etc.
Electricity bills bear the greatest burden, as this is where renewable energy plays a role. Therefore, consumers
who rely on electricity for heating and cooking are likely to be more disadvantaged than those with access to
mains gas. Such levies on customer bills to pay for environmental and social policies make up around 8% (c.
£90) of the total (electricity and gas) energy bill now and this will rise to at least 16% of the bill by 2020.
This latter level is somewhat uncertain due to the level at which the contracts for differences for example,
particularly for new nuclear, will be set. It also remains unclear as to the impact on bills of the new capacity
market and the costs that will be incurred by consumers to facilitate this.
61
62
63
DECC fuel poverty impact assessments 2010
Ofgem Project Discovery
DECC (2012), “Planning our electric future: A White Paper for secure, affordable and low-carbon electricity”
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The Energy Bill seeks to resolve the following issues:
Contracts for Difference (CfDs) CfDs are contracts designed to provide long term electricity price
stability to developers and investors in low carbon generation (eg carbon capture & storage,
renewable and nuclear energy). Generators will receive the price they achieve in the electricity
market plus a “top up” from the market price to an agreed level (the “strike price”). Where the
market price is above the agreed level, the generator would be required to pay back and thus ensure
value for money and greater price stability for consumers.
The CfD is a fundamental part of the Government’s proposals under the Electricity Market Reform
package. The CfD will work in concert with the Capacity Market and the Emissions Performance
Standard to deliver Government’s aims and objectives of decarbonisation while minimising the cost
to consumers and security of supply.
The cost of CfD to consumers has the potential to vary based on the level of the strike prices,
whether they will be fully or partial indexed, if there will be a refinancing clause, and how project
milestones will be set ie length of commissioning windows etc. The subject is seen by some as
controversial as the future of new nuclear generation has been linked to a strike price of sufficient
value.
The Bill also contains provisions for Investment Contracts which take the form of an early contract
for difference with developers. The intention is to transfer any agreed contracts to the CfD
counterparty once it is established.
Capacity Mechanism The Government envisages that the Capacity Market will ensure an adequate
level of security of electricity supply is delivered in a way that is cost-effective and complementary
to decarbonisation policies. It is intended to provide adequate resources by ensuring that there is
sufficient reliable and diverse capacity to meet demand, eg during winter anti-cyclonic conditions
where demand is high and wind generation low for a number of days.
The Capacity Market is considered the best way to mitigate the risk of voltage reductions (brownouts)
and controlled load shedding (blackouts) due to the energy market not bringing forward the
economically optimal amount of capacity. It does this by enabling the System Operator to decide the
level of capacity it judges is appropriate and then contracting for this capacity through an auction
four years ahead.
DECC’s base case analysis shows that a Capacity Market is expected to have a net cost of £1.7
billion64 relative to a scenario of an efficient energy market—ie where the energy price is reformed
to reflect consumer’s value of lost load and where the market is able to invest on the basis of scarcity
rents. Whilst there is a significant range of potential bill impacts, DECC’s central assumption is a
small increase in consumer bills of around £14 per year for an average domestic household. However,
the costs associated with a Capacity Market could vary significantly with an upper benefit of up to
£4.2 billion in DECC’s stress test and a maximum cost of £2.1 billion. This will entail bill increases
considerably higher than £14 per year.
The Levy Control Framework The Government recently agreed to raise the cap on its various low
carbon and social policies to reflect the new contracts for difference and capacity market
arrangements through the Levy Control Framework (LCF) agreed between Treasury and DECC. The
LCF budget for 2012–13 is £2.35 billion. This will increase to £7.6 billion in real terms by 2020–21.
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).
Despite the tripling in size of the LCF, the Government argues that the EMR proposals will lead to
a reduction in consumers’ bills relative to the counterfactual of existing policies. It estimates average
bills will go down by 1% by 2020 and by six to 8% by 2030 compared with existing policies.65 In
brief, the Government considers EMR will reduce bills because CfDs represent a more efficient
policy mechanism, compared to the Renewables Obligation which it will eventually replace, for
encouraging low carbon generation. Also, the overall package is predicted to reduce wholesale
energy costs.
The Government estimated in 2011 that the full range of energy and climate change policies funded through
consumers’ energy bills—namely EMR, Green Deal, ECO, ETS, CPF, Feed In Tariff, smart metering, EU
products policy, Warm Home Discount—will on average by 2020 save £94 (7%) on their energy bills, compared
to what they would have paid in the absence of government intervention.66 This estimate does not take into
account the most recent policy developments, such as the revised LCF agreement. The Government intends to
provide a revised assessment in early 2013.
64
65
66
DECC (2012), Electricity Market Reform—Capacity Market, IA No: DECC0103
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/66037/7468-contracts-for-difference-energy-bill2012.pdf
http://www.decc.gov.uk/en/content/cms/meeting_energy/aes/impacts/impacts.aspx
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The implications for the low income and fuel poor consumer are far from clear
The Government argues that while its energy and climate change policies will put energy prices up,
consumers bills will on average decrease due to the beneficial impact of measures put in place through these
policies, such as energy efficiency, micro-generation and Warm Home Discount. However, the Government
also recognises that the policies will have significant distributional impacts across households, that is, while
all consumers pay for the policies, not all consumers benefit. For example, while all consumers pay for ECO,
the energy efficiency measures installed will reduce energy bills by a much greater amount than the notional
cost of ECO on bills. However, consumers who do not install measures will bear the full cost of the ECO levy
without receiving any benefits.
DECC therefore commissioned the Centre for Sustainable Energy (CSE) to estimate the impact on bills
across different types of household. Its 2011 analysis (set out in—Estimated impacts of energy and climate
change policies on energy prices and bills) primarily looks at the impact of policies on different income deciles
and household types. The analysis suggests that the bottom three income deciles see the greatest benefit of
policies, with energy bills reducing by between 0.4% and 1.2% as a proportion of total energy expenditure.
The comparable figure for the remaining deciles is a reduction of 0.1% and 0.3%. Lower income groups are
considered particularly likely to benefit from ECO and WHD.
The analysis also looks at the difference between those in the bottom three income deciles that benefit from
policies and those who do not. Those who benefit should see their average bill fall by between 1.2% and 3.4%.
However, those that do not benefit will see an increase in bills of between 0.2% and 0.7%. It goes onto argue
that 40% of consumers in the lowest three deciles will benefit from at least one of three possible policy
measures (insulation, micro-generation and bill rebate).
With respect to household types, single pensioners are identified as key beneficiaries due to the targeting of
WHD and ECO Affordable Warmth at this group.
FPAG has a number of concerns with DECC’s analysis
— The current available analysis does not take account of more recent policy developments which will
also have a differential impact on different consumer groups. For example, the increased LCF will
hit those with electricity heating particularly hard, given that the costs will be borne entirely by
electricity consumers (as will the costs of FIT, ETS, CPF and WHD).
— The extent to which Government analysis of the costs and benefits attributed to EMR and other
policies represent a realistic assessment.
— The analysis does not consider alternative, more progressive ways of funding energy and climate
change policies. Research carried out for Consumer Focus by the Association for the Conservation
of Energy (ACE) and Centre for Sustainable Energy (CSE) Past and future trends in environmental
and social levies shows that there has been a substantial shift from taxpayer funding to energy
consumer funding of policies since 1990, a trend that will continue into the future.
— Government assumptions on ameliorative measures could lead to bills going up much higher if the
impact assigned to certain measures is not achieved, eg products policy.
— There is likely to be considerable variation within low income groups, according to, for example:
— the type of property they live in, for example its suitability for ECO measures;
— tenure, eg social housing generally has higher energy efficiency standards than private rented
housing;
— whether they have gas heating;
— whether they claim passport benefits (some of the lowest income households are those that do
not claim benefits to which they are entitled);
— the extent to which they will (or are able to) reduce consumption as a result of feedback from
smart meters;
— the extent to which they are likely to buy new efficient appliances (of the various policy
measures, DECC expects “products policy” to have by far the biggest impact on consumer
bills); and
— the extent to which they are likely to install micro-generation measures.
Achieving greater consumer equity
FPAG believes DECC should explore potential options for achieving greater consumer equity which
should include:
— Suppliers to provide a protected block of consumption upon which policy costs are not levied,
with costs recovered from consumption above the threshold.
— Moving fixed supplier costs onto unit costs (including those not policy-related such as
distribution charges).
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—
Providing social tariffs, for example a national uniform social tariff guaranteed to provide the
best offer.
—
A tax funded compensation payment.
2. 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?
The Government has shown a willingness to intervene on the supply side to develop particular energy
industry policy objectives through the carbon floor price, contracts for differences and capacity payment
proposals. This is to facilitate the construction of low carbon generation such as new nuclear and aid security
of supply. The Government should now show a similar determination on the demand side and investigate
whether low income and vulnerable consumers, unable to have access to the best energy deal, would be better
served by a different arrangement such as “an energy best deal” based on a basket of tariffs in a similar way
to a “fair trade” type arrangement. Furthermore, DECC and Ofgem should also explore the full social and
financial implications of the current regressive mechanism used to recover through consumer’s bills the costs
of social programmes and environmental costs to decarbonise energy as outlined above in question 1—Prices.
3. How effective is Ofgem in ensuring consumers get a fair deal? Are there any areas for improvement?
Ofgem has started to take action in this respect and is welcomed by FPAG. However, this will do little for
particular consumers in being able to afford the energy they need to keep their homes warm and safe. The
price of energy for the fuel poor is not inelastic and rationing is the only option to those of limited means to
manage their energy bills. Adding environmental, social costs etc to bills is regressive.
4. 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?
Ofgem receives detailed segmental analysis of all suppliers’ costs. It should be possible to ascertain if these
costs are being efficiently incurred and promulgated accordingly and the required level of commercial
confidentiality.
5. 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?
Recent analysis such as that published by Ofgem (see below) comparing the European mainland is useful,
however, this would be even more so without distribution costs as this would highlight the particular element
of wholesale competition which is not explicit:
Total Price Rankings (Prices including energy, distribution and
Electricity (all tax included)
Ranking
City
Price (€ cent/kWh)
1 (dearest)
2
3
4
5
6
7
8
9
10
11
12
13
14
15 (cheapest)
Copenhagen
Berlin
Brussels
Madrid
Dublin
Vienna
Average
Stockholm
Lisbon
Luxembourg City
Ansterdam
Rome
London
Heisinki
Paris
Athens
30.46
25.11
23.03
20.91
19.85
19.39
18.99
18.34
18.09
17.84
17.82
16.59
15.32
15.17
13.92
12.95
Source: E-Control and VaasaETT
Profits
1. Many consumers believe that energy company profits are the reason the energy bills have been going up in
recent years. Is this perception fair?
See Answer to question 2 below.
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2. 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?
FPAG understands that the segmental accounts currently prepared by energy suppliers for Ofgem, clearly set
out the profits associated with different parts of the energy supply chain. However, they lack promulgation,
with a narrative, does not enable stakeholders to comment
FPAG believes that the segmental accounts should provide the robust information as to the size and source
of profitability. They were 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. It is also a requirement
that the segmental accounts can be reconciled with audited figures (prepared under International Financial
Reporting Standards) published in Group accounts, and this should also acts as an important safeguard.
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
with energy bills.
3. 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?
It is an indication only and is currently a volatile figure. Greater effort is required to make this more
meaningful.
4. 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?
See answer to 2 above.
5. 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?
See answers to 2 & 3 above.
6. To what extent does the way energy companies communicate profits to the general public influence the
public’s perception of these companies?
The FPAG Non Supplier membership considers the Energy companies as a whole generally do a poor job
of communicating the issue of profits.
Fuel Poverty
1. 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?
FPAG believes that the government is not on track to meet its legally binding target to eradicate fuel
poverty 2016.
FPAG has raised its concern that the withdrawal of all taxpayer funding for energy efficiency assistance to
low-income households in England, while the number of households in fuel poverty continues to rise, calls
into question whether the Government is fulfilling its obligation to do all that is “reasonably practicable” to
eradicate fuel poverty by 2016 as required under the Warm Homes and Energy Conservation Act 2000. FPAG
would suggest that taxpayer funded schemes can deliver better results in terms of lifting numbers out of fuel
poverty. With obligations recovered from energy bills, any success in lifting households out of fuel poverty is
tempered by moving others in due to the added costs on bills.
The new Energy Company Obligation (ECO) that began this year (2013) contains three new elements—
Carbon Target, Affordable Warmth and a Carbon Savings Community Obligation (CSCO). Affordable Warmth
and CSCO will be focused on low income households and will amount to some £540 million per annum of
the new ECO’s £1.3 billion per annum (the cost of which will be recouped from all consumers’ energy bills).
However, for England, this will represent a 44% cut in funding for energy efficiency schemes compared to the
current schemes.67 Government’s own projections indicate ECO alone can only remove between
125,000–250,000 households from fuel poverty by 2023,68 at best a 5% reduction of the current number of
fuel poor households.
Despite the long term potential benefits of Electricity Market Reform consumers’ energy bills will continue
to rise. Consequently, serious measures will be required if the Government is to meet the legally binding target
67
68
“The impact on the fuel poor of the reduction in fuel poverty budgets in England” Association for the Conservation of Energy,
November 2012
DECC (2012), Final stage impact assessment for the Green Deal and Energy Company Obligation
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to eradicate fuel poverty by 2016. If this target cannot now be met, we need an honest conversation with “no
stone left unturned” to make sure all households have access to affordable energy now and in the future.
The Government’s recent Energy Bill announcement69 to allow energy companies to charge households and
small business consumers an extra £7.6 billion until 2020 to fund low carbon energy, plus the ongoing
inexorable rise in world wholesale energy prices, must sound the alarm that time is rapidly running out to
make the homes of the fuel poor, fuel poverty proof, through heating and insulation measures. Where poverty
is the key driver of a cold home, the Government must also be ensuring adequate income measures through
the benefit system are in place.
The average domestic dual fuel bill is now at a record high of £1,365 per annum70 creating severe additional
hardship for some six million UK fuel poor households.71 The problem is even more acute for many living
off the gas grid using Oil or LPG, where average fuel bills are circa £2,100 per annum.72 The Government’s
Energy Market Reform (EMR) has no beneficial impact on bills between now and 2016 and adds costs from
2016 onwards.
Under the current definition of fuel poverty nearly 50% of households are pensioners (10 percent contain a
person over the age of 75 or over), 34% contain someone with a disability or long-term illness, 20% have a
child aged 5 or under.73 Hence the plight of the ever increasing numbers of fuel poor households has never
been more serious than it is today. High energy bills cause stress and misery for many and often ill health as
well for those living in a damp and poorly insulated property.
Those with the lowest incomes are the least able to absorb price rises, as fuel makes up a much more
significant proportion of their incomes than is the case for those on higher incomes. The mean annual income
of fuel poor households in the UK in 2010 was £11,000 compared to an average income of £32,000 for nonfuel poor households.74 In addition, those on the lowest incomes typically pay more for their energy with
households with an average income of £6,500 paying £1,954 for their energy, compared to those earning around
£42,000 paying £1,244 per annum.75 It is clear that a major step change in the energy efficiency of our
housing stock is the only viable and long term solution if we are to have any hope of reducing the financial,
physical and psychological health impacts of the ever increasing cost of energy bills. Such a change will cost
money; more money than any government has been able to commit thus far.
Meanwhile, FPAG notes the Chancellor’s recent decision to recycle some £300 million of the sums to be
received from the carbon price floor (c. £1.4billion to be paid by all consumers) to only industrial energy users
of electricity to soften its impact, yet will not do something similar to protect the most financially disadvantaged
fuel poor consumer in this context.
At the same time as the energy Industry sets course for a low carbon transformation and EMR, the future of
fuel poverty, its measurement, definition, mitigation schemes and the welfare benefits system will all change.
For the first time since 1978 there will no longer be a government funded fuel poverty programme in England.
The devolved assemblies of Scotland and Wales, however, will keep their funded schemes which will be in
addition to a GB wide new energy supplier obligation.
2. 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?
Not as yet; FPAG awaits, with interest, Government announcements in this respect. Meanwhile, FPAG does
have concerns regarding the current status quo. FPAG comprises of representatives of a wide range of diverse
organisations which do not always share a common view or perspective on fuel poverty issues. Consequently,
where a consensus can be identified, we can be confident that this shared view must be worthy of serious
consideration. Such a consensus can be found in the response to specific elements of the Hills proposals for a
new definition of fuel poverty, both positive and negative. However, in the interests of brevity, FPAG wishes
unequivocally to declare its ongoing concerns about some aspects of the final Hills proposals:
FPAG’s main concerns:
— A low income high cost measure does not sufficiently encapsulate the problem.
— Affordability being determined by reference to median household expenditure.
— The perceived interpretation by the Hills review of the Warm Homes and Energy Conservation
Act 2000.
— The large numbers of low-income households no longer being classed as “fuel poor” yet cannot
afford their fuel costs.
— That “reasonable costs” does not reflect affordability.
69
70
71
72
73
74
75
Government agreement on energy policy sends clear, durable signal to investors DECC Press notice 2012/146 .
Ofgem: Electricity and Gas Supply Market Indicators updated 22 November 2012
Consumer Focus 2012
DECC, Fuel Poverty Detailed Tables 2010
Hills Review 2011 2012
DECC (2012) Annual Report on Fuel Poverty Statistics 2012
DECC Fuel Poverty Detailed Tables 2010
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—
—
—
—
Linking high energy costs to median expenditure creates an insensitive fuel poverty measure to
progress and energy price changes.
By including disability benefits such as DLA in the income calculation makes it look like those
households in receipt of disability benefits are on higher incomes and exclude more of them
from the fuel poverty calculation.
The proposal takes no account of the type of occupancy in considering the factors for reasonable
energy costs.
Minimal recognition of the cogent arguments put forward by stakeholders in the final Hills
proposals.
Member organisations of FPAG have undertaken or commissioned extensive research into how the issues in
the proposed new definition might be resolved. They suggest a number of constructive improvements but all
concur that the Hills’ recommendations can only be endorsed provided the “reasonable costs” element is
modified to better reflect our understanding of affordability. FPAG recognises that Hills clarifies the distinction
between Fuel Poverty and Poverty. However, if the problem of poverty is not captured in this context it will
be a dereliction of duty by government not to have clarity of this issue laid firmly at the “door” of the DWP.
Background
In FPAG’s Ninth Annual Report we commented positively on the interim findings from the Hills Review of
the fuel poverty definition and targets. In particular we welcomed the conclusion that fuel poverty is a: “distinct
and serious problem; that it deserves and requires attention as recognised by Parliament in adopting the Warm
Homes and Energy Conservation Act; and that the Act captures the core of the problem as being the overlap
between low income and high energy costs.” We also noted and strongly endorsed Professor Hills’ emphasis
on the detrimental physical and mental health consequences of living in a cold home. Fuel poverty is a
significant public health problem causing considerable sickness and excess winter mortality.
The Hills’ analysis and proposals were overwhelmingly endorsed across a number of areas. Group members
were supportive of the recommendation that the low income element of the fuel poverty formula should follow
the official definition of poverty used in general poverty statistics. This would remove a number of significant
anomalies in the current definition through, for example, use of equivalised income and by calculating income
on an after-housing-costs basis.
However, members of FPAG rejected the key proposal of Hills, that the concept of affordability should be
determined by reference to median household expenditure ie the “reasonable costs” threshold should be based
on the median level of fuel expenditure required across all households.
As noted above, the Hills Review had recognised that the wording of the Warm Homes and Energy
Conservation Act 2000 was: “entirely appropriate: we are concerned with individuals living in a home which
cannot be kept warm at reasonable cost.” However, we believe that this recognition of the Act’s validity in
identifying the core elements of fuel poverty does not result in these elements being transposed to the revised
definition of fuel poverty. 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.
We believe that this unfortunate and unacceptable circumstance results from an erroneous interpretation of
the wording of the Warm Homes and Energy Conservation Act 2000. Professor Hills infers that the term
“reasonable costs” refers to a situation where a household faces energy expenditure no higher than or equal to
median needed spend. Clearly this approach fails to take full account of the low income aspect and the obvious
fact that even lower required expenditure will not be affordable for many financially disadvantaged households.
FPAG fundamentally disagrees that “reasonable costs” equates to affordability.
By linking high energy costs to median expenditure it is inevitable that the incidence of fuel poverty is
subject to minimal variation even where energy costs increase significantly or, conversely, where substantial
improvements are made to energy efficiency standards. We do not believe that this outcome would be
intelligible or credible to stakeholders concerned to ensure that low-income households have access to
affordable warmth. We see little value in an indicator that barely changes over time and does not help track
progress on policy. Failure to address and resolve this issue risks bringing Government fuel poverty policy into
disrepute among observers and stakeholders. Given these strong reservations we were disappointed to find that
the final consultation document published by the Department of Energy and Climate Change proposed adoption
of the Hills recommendations with minimal recognition of the cogent arguments put forward by stakeholders.
In responding to the final Hills proposals, we emphasised the inadequacy of Government policies and
programmes and reiterated our demand for a roadmap showing how we could reach the destination envisaged
in the Warm Homes and Energy Conservation Act—the eradication of fuel poverty. In this respect we welcome
the support of Professor Hills in his reflections on the way forward for fuel poverty policy:
— Energy efficiency policies targeted on low-income households are most effective in addressing
fuel poverty.
— Effective future action requires a reinvigorated fuel poverty strategy and the involvement of
many Government departments.
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—
Greater clarity is needed on: the range of actions necessary for tackling fuel poverty; how they
interact together; who owns each action; the milestones towards 2016; what is going to happen
if these milestones are not reached; and funding.
3. 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?
Numerous comments regarding the previous success or otherwise of the Warm front and its targeting the
fuel poor have been made. However, FPAG maintains the view that Warm Front has been an extremely
successful programme. Since 2000 the scheme has assisted over 2.3 million vulnerable households, with an
average saving of £610 per year on their energy bills, and reducing carbon emissions by six tonnes over the
lifetime of the energy efficiency measures installed. 76
The financial year 2011–12 saw Warm Front re-open with a vastly reduced budget of £110 million compared
to £345 million in 2010–11. It also adopted a much changed eligibility criteria with a number of benefits being
withdrawn from the qualifying criteria and a SAP threshold being introduced.
Despite the significant reduction in the budget of the scheme, 2011–12 saw the first under spend in the
history of the Warm Front scheme, that is to say that not all the allocated budget was spent at the end of the
financial year. DECC’s own figures show that once rebates and other budget adjustments were made “Out of
a total budget of £145 million for 2011–12, £50.6 million was therefore not spent and was returned to the
Treasury.” FPAG estimates that this funding, had it been utilised, would have provided assistance to another
22,000 households.
There were a combination of factors behind this under spend, including a lack of marketing activity around
the re-opening of the scheme to new applications, a tighter eligibility criteria and doubts amongst local
authorities and community bodies about the future of the scheme. These lessons must be learned for ECO and
AW etc.
Meanwhile ECO and Affordable warmth has yet to completely establish itself. Hence, it is difficult to answer
some aspects of this question in the new context. However, Government’s own projections indicate ECO alone
can only remove between 125,000—250,000 households from fuel poverty by 2023;77 at best a 6% reduction
of the current number of fuel poor households.
FPAG and other stakeholders are concerned that some groups of households will be worse off under the
move Warm Front to ECO. ECO Affordable Warmth is designed to encourage suppliers to provide a minimum
package of measures at lowest cost. This will primarily consist of loft and cavity wall insulation and gas boiler
replacements. The latter is encouraged by a new heating costs reduction target and is unique to the Affordable
Warmth element of ECO. Suppliers are therefore likely to focus activity on large concentrations of eligible
households who live in properties suitable for these low cost measures. Under Warm Front, households without
gas were entitled to a larger grant (£6,500, compared to £3,500) than those with gas, in recognition of the
additional costs of providing suitable heating measures. Warm Front also included “hard to reach” and “hard
to treat” targets. There is no equivalent requirement under Affordable Warmth. FPAG is therefore concerned
that rural households living in difficult to treat homes will lose out under the move to ECO.
ECO also includes a Carbon Saving Communities Obligation (CSCO) element, estimated to equate to an
annual expenditure of £190m. 15% of this element must be targeted at households in rural areas. CSCO is
similar to the current CESP programme in that help is targeted at low income areas—the 15% most deprived
areas as defined by the Index of Multiple Deprivation (CESP set a 10% requirement). CSCO is likely to
represent an improvement on CESP in that it does not entail the same complex scoring system as CESP, there
is more flexibility over the boundaries of areas helped and the rural safeguard will mean more rural households
will benefit than was the case with CESP. However, unlike Affordable Warmth, there is no heating cost
reduction target to accompany the CSCO carbon targets. Thus, suppliers are unlikely to provide heating
measures to households in CSCO areas.
Benefit take up and ECO
In 2009–10 up to £12 billion in means tested benefits were unclaimed, nearly 25% of all available benefits
expenditure.78 In addition, up to £3.9 billion in Child Tax Credits and £4.4 billion in Working Tax credits
went unclaimed.79 The proportion of benefits remaining unclaimed remains largely in line with previous years
for each of these categories.
Of those in fuel poverty in the UK, 75% are either unemployed (11%) or economically “inactive” (64%).80
This, alongside the concentration of fuel poor households in the lower income deciles makes it reasonable to
conclude that at least a proportion of those in fuel poverty are not claiming at least some of the benefits they
are entitled to and would therefore profit from benefit take up initiatives.
76
77
78
79
80
Warm Front Annual Report 2010/11
DECC (2012), Final stage impact assessment for the Green Deal and Energy Company Obligation
DWP (2012) Income Related Benefits: Estimates of take-up in 2009–10
HMRC (2012) Child Benefit, Child Tax Credit and Working Tax Credit Take-up rates 2009–10
DECC (2012) Annual Report on Fuel Poverty Statistics 2012
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FPAG would, therefore, like to see Benefit Entitlement Checks (BECs) incorporated as part of ECO targeted
at fuel poor households. 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; making a life-changing difference to low-income vulnerable households in the greatest
need. DECC’s decision not to continue with BECs as part of Warm Front from May 2011 and now ECO is a
decision which FPAG finds hugely regrettable.
FPAG is not aware of the Government having yet conducted an impact assessment of welfare reform on fuel
poverty. Indeed, in response to a Parliamentary Question from Alex Cunningham MP in September 2012 the
Minister for Energy and Climate Change, Gregory Barker stated that the impact of the introduction of universal
credit on levels of fuel poverty will first be assessed in 2015.81 In our view this is far too late. The Government
should conduct an impact assessment on the likely impact of the welfare reforms on fuel poverty at the
earliest opportunity.
4. What support is available for fuel poor households living in solid-wall and hard-to-treat properties? Could
this be improved?
The Green Deal and ECO Affordable Warmth do provide an opportunity to establish an effective framework
that can deliver against the twin objectives of eradicating fuel poverty and significantly reducing carbon
emissions from the housing stock. Establishing the solid wall industry is a key part of the Green deal strategy.
However, to assist the alleviation of fuel poverty more generally and for those affected by solid walls in
particular will require:
— the bringing forward of the current 2018 date by which all private rented properties must be
brought up to a minimum energy efficiency standard rating, making it unlawful to rent out a
house or business premise that does not reach this minimum standard.
— for the bulk of the ECO to be devoted to the Affordable Warmth target and those fuel-poor and
low-income households should also be prioritised for assistance under the carbon target (eg
solid wall insulation).
— some of the Governments “environmental” revenues to be reassigned to an ambitious energy
efficiency programme including solid wall insulation.
Over the next 15 years £63 billion will be added to consumer energy bills through the carbon floor price
and EU Emissions Trading System (ETS). That is an average of £4 billion a year not available for consumers
to spend keeping warm, or for companies to invest in cleaner generation and smart grids. It also removes
consumer spending power more generally which is more keenly felt in deprived communities. If we were to
add this £4 billion towards ECO we could make many more fuel poor homes warmer, more affordable to heat
and take a giant step towards the Government’s legally binding fuel poverty and carbon reduction targets.
This is the approach being taken by the French Government. It recently announced it will be insulating
one million existing homes per year partly funded from the proceeds of auctioning its allocation of EUETS allowances.82
The Australian Government introduced a carbon tax in July 2012.83 More than half of the revenue raised
will be used to help households. The assistance will be delivered in the form of tax cuts and increased welfare
payments. The Australian Government claims that nine out of ten Australian households will receive some
form of assistance, and of that figure, the Government claims that many low income households will receive
greater assistance than the impact of a carbon price.
5. Will the Government’s proposals to ensure that consumers are on the cheapest tariff have any impact on
fuel poverty?
The moving of all consumers to a supplier’s cheapest tariff will inevitably benefit those who are currently
paying a high price for their energy. However, whilst any reduction is welcome, it is understood that Prof John
Hills and his team calculated that if all fuel poor households were on the best energy deal fuel poverty numbers
would be reduced by circa 15%. However, on the assumption that energy supplier’s profits would remain
around the current level of circa 4% and then having moved all consumers to their cheapest deal, prices are
likely to rise, to some degree, in order to recover to the previous profit levels. FPAG remains of the view that
the only long term sustainable solution to eradicating fuel poverty is to fuel poverty proof the homes of the
fuel poor.
6. To what extent do fuel-poor households engage in switching? What are the barriers to greater levels of
switching from these groups?
The fuel poor household is unlikely to switch due to several reasons. These include age, exclusion, general
poverty and living in rented accommodation and are not IT savvy or internet connected etc. Under the current
81
82
83
Hansard Citation: HC Deb, 3 September 2012, c26W
http://www.gouvernement.fr/gouvernement/systeme-d-echange-de-quotas-d-emission-de-gaz-a-effet-de-serre-periode2013–2020–0
summary of the australian government's climate
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definition of fuel poverty nearly 50% of households are pensioners (10 percent contain a person over the age
of 75 or over), 34% contain someone with a disability or long-term illness, 20% have a child aged five or
under.84 Many fuel poor households do not have access to the internet. Non fuel poor households with
access to the internet are more than twice as likely to change supplier compared to those that do not have
internet access.
7. To what extent do fuel-poor households current take advantage of energy efficiency schemes? Could
anything be done to increase uptake?
The Warm Front scheme demonstrated that with the required level of support, reasonable criteria and
marketing, fuel poor households can participate in energy efficiency schemes.
However, a breakthrough to assist targeting and participation is possible but will require political
intervention. FPAG understands that for the digital TV switchover Government did facilitate, with the necessary
safeguards, DWP data being available to target customers on an age related basis with the offer of additional
help. This inevitably assisted many elderly viewers to a smooth transition to digital TV reception. It is assumed
that with this data, overlaid with other benefits data could save significant sums in targeting potential recipients
and speed up the insulation of more fuel poor homes.
February 2013
Supplementary 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.85 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.86 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;87 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
84
85
86
87
Hills Review 2011 2012
Centre for Sustainable Energy Bristol 2012
“The impact on the fuel poor of the reduction in fuel poverty budgets in England” Association for the Conservation of Energy,
November 2012
DECC (2012), Final stage impact assessment for the Green Deal and Energy Company Obligation
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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.88
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.89
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.
88
89
DWP (2012) Income Related Benefits: Estimates of take-up in 2009–10
HMRC (2012) Child Benefit, Child Tax Credit and Working Tax Credit Take-up rates 2009–10
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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
Supplementary written evidence submitted by the UK Government’s Fuel Poverty Advisory Group
1. At the same time as the energy Industry sets course for a low carbon transformation and EMR, the future
of fuel poverty, its measurement, definition, mitigation schemes and the welfare benefits system will all change.
2. For the first time since 1978 there will no longer be a government funded fuel poverty programme in
England. The devolved assemblies of Scotland and Wales, however, will keep their funded schemes which will
be in addition to a GB wide new energy supplier obligation.
3. The Government is not on track to meets its legally binding target to eradicate fuel poverty by 2016.
4. Of the UK’s circa 6M fuel poor households as currently measured—a few figures:
— 50% are pensioners (10% contain a person 75 or over), 34 % have a disability or long-term
illness, 20% have a child aged 5 or under;
— 32% live in properties built prior to 1919;
— 30% have a very old boiler;
— 20% have no boiler at all; and
— 20% have a condensing boiler of some kind.
5. Over 1.5 million Fuel Poor households in GB in 2011, (22% of all FP households), lacked access to
mains gas:
— 40% of all oil consumers are fuel poor; and
— 60% of all solid fuel consumers are fuel poor.
6. Energy price rises in real terms since 2000:
— a 50% increase if you have access to mains gas, a 102% increase if you use oil;
— Annual mean income of the fuel poor consumer £11,000 per annum; and
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—
Average income for the non-fuel poor consumer £32,000 per annum.
7. Those who need to spend most on fuel are least able to do so and live in the most thermally inefficient
properties as the table below clearly shows:
Fuel
expenditure
as a % of
income
<5%
5–10%
10–15%
15–20%
>20%
Total
Number of
households
(thousands)
% of
whole
stock
Average
full income
(£)
Average
fuel costs
(£)
Average
SAP
9,900
8,164
2,275
641
620
21,600
45.8%
37.8%
10.5%
3.0%
2.9%
100.0%
41,963
19,832
12,549
9,649
6,567
28,526
1,244
1,338
1,497
1,644
1,954
1,338
59.1
54.0
47.0
42.0
36.0
54.7
Source: Detailed Tables published by DECC in 2012
8. How a bill is made up according to British Gas;
9. Government costs added to bills and perceived benefits:
— The LCF will increase from £2.35 billion today, to £7.6 billion per annum by 2020.
— FPAG believes this will cost a dual fuel customer £241 per annum from its current £94 per
annum.
— The LCF excludes for example—ECO, CPF nor EUTS.
— Despite EMR bills will continue to rise.
— EMR is estimated to reduce bills by 1% by 2020 compared to no policies.
— Further reductions are estimated of 6 to 8% by 2030.
— Government makes no estimate of what bills might be in 2020 or 2030 hence nor can mitigating
strategies be developed.
— EMR is also expected to reduce wholesale costs.
— With coal generation now closing sooner and more expensive gas being required what is the
sensitivity to wholesale prices?
— All consumers pay for ECO but not all will benefit.
— Only c.6% will be lifted out of fuel poverty through Affordable Warmth etc.
— Current DECC analysis of distributional impacts of government policies does not include the
new LCF nor the impact of Welfare Reform.
— The increased LCF will hit those with electricity heating particularly hard, given that the costs
will be borne entirely by electricity consumers (as will the costs of FIT, ETS, CPF and WHD).
— More progressive means of recovering LCF are not considered by DECC.
— DECC analysis suggests that the bottom three income deciles see the greatest benefit of policies,
with energy bills reducing on average by between 0.4% and 1.2% as a proportion of total
energy expenditure. The comparable figure for the remaining deciles is an average reduction
of 0.1% and 0.3%. Lower income groups are considered particularly likely to benefit from ECO
and WHD.
— However, FPAG is concerned about averages as there is likely to be considerable variation
within low income groups receiving measures, according to, for example:
— the type of property they live in, for example its suitability for ECO measures;
— tenure, eg social housing generally has higher energy efficiency standards than private
rented housing;
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—
whether they have gas heating;
—
whether they claim passport benefits (some of the lowest income households are those that
do not claim benefits to which they are entitled), hence, the need for BECs;
—
the extent to which they will (or are able to) reduce consumption as a result of feedback
from smart meters;
—
the extent to which they are likely to buy new efficient appliances (of the various policy
measures, DECC expects “products policy” to have by far the biggest impact on consumer
bills); and
—
the extent to which they are likely to install micro-generation measures.
10. FPAG believes DECC should explore potential options for achieving greater consumer equity which
should include:
—
Suppliers to provide a protected block of consumption upon which policy costs are not levied,
with costs recovered from consumption above the threshold—Smart meters could facilitate this.
—
Moving fixed supplier costs onto unit costs (including those not policy-related such as
distribution charges).
—
This would be an incentive for all consumers to use less energy and be in concert with the
principle of the polluter pays.
—
FPAG estimates that 85% of the fuel poor would benefit from such a development.
—
For those Fuel Poor households using electric heating a special measure would be required.
—
Providing social tariffs, for example a national uniform social tariff guaranteed to provide the
best offer.
— A tax funded compensation payment.
11. The Hills review and FPAG’s main concerns:
—
A low income high cost measure does not sufficiently encapsulate the problem.
—
Affordability being determined by reference to median household expenditure.
—
The perceived interpretation by the Hills review of the Warm Homes and Energy Conservation
Act 2000.
—
The large numbers of low-income households no longer being classed as “fuel poor” yet cannot
afford their fuel costs.
—
That “reasonable costs” does not reflect affordability.
—
Linking high energy costs to median expenditure creates an insensitive fuel poverty measure to
progress and energy price changes.
—
By including disability benefits such as DLA in the income calculation makes it look like those
households in receipt of disability benefits are on higher incomes and exclude more of them
from the fuel poverty calculation.
—
The proposal takes no account of the type of occupancy in considering the factors for reasonable
energy costs.
—
Minimal recognition of the cogent arguments put forward by stakeholders in the final Hills
proposals.
12. Suppliers profits:
—
The waters are muddied by the media and suppliers—customers need clarity and honesty.
—
Retail profits tend to be modest with some making no profit at all in retail.
—
Generation profits and transfer pricing is not transparent to consumers.
—
Suppliers will have made good profits in generation particularly coal and old nuclear. Old
nuclear will get even better profits after the CFP.
—
The low price of coal has accelerated the run hours of coal generation.
—
Does Ofgem need additional powers for greater depth of visibility of generation profits?
—
Some European Suppliers are going to run generation on a Pan European basis’ does this
reinforce the visibility requirement?
March 2013
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Written evidence submitted by Barnardo’s
Introduction
1. Barnardo’s works directly with over 200,000 children, young people and their families every year through
over 800 projects across the UK. We use the knowledge gained from our work with children to campaign for
better policy and to champion the rights of every child.
2. Alleviating poverty is an inescapable element of nearly all of our services. Many of the families we work
with are in financial difficulty, many have debts and are struggling to pay bills, and a number are already living
in fuel poverty. The substantial rise in energy prices in recent months along with many families feeling the
effects of government welfare cuts, means we are now working with large number of families who are
struggling to pay their fuel bills—in a recent survey of our services over 90% of respondents reported working
with families who are in debt to their gas or electricity supplier.90
Summary
3. Barnardo’s is concerned that the number of children living in fuel poverty looks set to rise, this is primarily
due to raising fuel bills, although reduced incomes (primarily caused by government welfare cuts) is also likely
to have an impact. We do not believe that current policies in this area are adequate, and are concerned that
there has not been enough focus on how this issue impacts on families with children. Barnardo’s has experience
of working with families experiencing fuel poverty. Some of our services provide practical support for families
who are having difficulty with fuel debt, for example by helping support families to access social tariffs, or to
access energy efficiency schemes.
4. In 2012 we published a report “Priced-Out”.91 This report included a survey of 80 of our services across
England that deliver direct support to vulnerable children, young people and families. The survey was a
snapshot of some of Barnardo’s services and demonstrated some of the issues related to fuel poverty that our
workers were experiencing.
5. This submission highlights evidence from our “Priced Out” report which we believe is particularly relevant
to the Committee’s enquiry. It draws particularly on the survey of Barnardo’s case workers conducted for that
report as well as case studies and comments gathered from service users experiencing fuel poverty. As our
expertise is particularly in relation to fuel poverty—rather than changes to the energy market in general—we
have confined our answers to the third section of the Committee’s enquiry notice.
6. We believe there needs to be a review of policy initiatives on fuel policy, with particular focus on the
following issues, which we know are key for families struggling to pay fuel bills:
— A focus on working with energy companies to review their price bands for pre-payment meters
to bring them in line with other forms of payment.
— Initiatives aimed at working with banks and the post office to improve access to bank accounts
which offer families direct debit facilities and thus ensuring that more families have access to
lower cost payment methods for their fuel bills.
— Substantial increases in the funding available for energy efficiency schemes through using the
money generated through carbon taxes (rather than money generated through increased energy
bills) to fund an ambitious scheme with the aim of making homes in the UK super energy
efficient.
— Working to bring forward requirements on landlords to ensure all homes in the private rented
sector meet minimum energy efficiency requirements.
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?
7. Barnardo’s believe that the Government is not on track to meet its target of eliminating fuel poverty by
2016. The rises in the rates of fuel poverty in recent years have been well documented. Rates of households
in fuel poverty rose every year from 2003 to 2010. In relation to children, families living in fuel poverty
increased significantly during this time period from one in 50 in 2003, to one in 10 by 2009.92 While the
slight fall in fuel poverty rate in 2010 was welcome we are concerned that the main reasons for this was rises
in incomes and this reduction is unlikely to be sustained in the coming years.
8. With particular regard to children living in poverty, figures due to be released at the end of February 2013
on behalf of Energy Bill Revolution, of which Barnardo’s is a member, are expected to show that the number
of children living in fuel poverty is now rising again. This does not take into account any change to definition
of fuel poverty which could be implemented as a result of the Hills Review. If a new definition of fuel poverty
90
91
92
Barnardo’s policy, research and media department (2012). Priced Out, available on line at http://www.barnardos.org.uk/
pricedoutreport.pdf
Barnardo’s policy, research and media department (2012). Priced Out, available on line at http://www.barnardos.org.uk/
pricedoutreport.pdf
Department for Energy and Climate Change (2011). Trends in Fuel Poverty in England 2003–2009.DECC, London. Refers to
families with at least one dependent child.
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was to be adopted the number of children affected could be expected to increase quite substantially (possibly
even double).
9. We feel that reduced government spending in this area is likely to have a profound impact. We particularly
urge the Committee to consider government policy not just in relation to fuel poverty but also government
policies towards low income families in general. The combination of policies which reduce spending on fuel
poverty, at a time when other policies are likely to push those reliant on welfare benefits further below the
income poverty line are likely to have a devastating effect on some families.
10. In relation to fuel poverty spending we believe that the Government’s decision to cut government funding
on energy efficiency completely to be highly problematic. The entire obligation for funding energy efficiency
measures now sits with energy companies and their consumers—this is a highly regressive model. As a result
all families will see an increase in their energy bills, yet poor families may well not benefit from the measures
and will be more likely to struggle to pay the premium—expected to be as high as £88 per year, rising to £120
per year in 2020.93
11. The problem of reduced funding is exasperated by the substantial reductions to the welfare budget in
recent years—the most recent proposal being to limit increases to benefits to only 1%—meaning a real term
cut for most claimants. Living with a low income generally is a known risk factor for a family being in fuel
poverty—33% of the poorest fifth of households are in fuel poverty.94 Such cuts are therefore highly likely to
impact upon families’ ability to pay for fuel increasing fuel poverty rates still further.
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?
12. Barnardo’s did not submit a response to the Hills review although we share concerns that focus on fuel
poverty should be on action to address the issue, rather than on how the measure is defined. We do however
feel there is merit in a fuel poverty measure which would “equivalise” incomes for household size and
composition—so a family of four will no longer be considered equally as well off as a single person if the
income coming into the household is the same. This is consistent with the method used to assess income
poverty and would better reflect the realities of families who struggle to pay their fuel bills. If this was done
we anticipate that many more families would be defined as living in “fuel poverty” than currently.
13. However while the increased recognition of the plight of families and children contained in the Hills
review is welcome, we have seen little impact when it comes to policies in this area. We feel that policy in a
number of areas is failing to fully recognize the needs of low income families struggling with high fuel bills.
In particular the Warm Homes Discount (which replaces social tariffs) will only be given automatically to
those receiving pension credit. Families with children under 5 are in the broader group and although many will
be eligible they will not automatically receive it. The money is at the discretion of energy companies, and is
likely to be given on a first come first served basis, since there will not be enough money to help all of those
who need it.
Will the Government’s proposals to ensure that consumers are on the cheapest tariff have any impact on fuel
poverty?
14. We are supportive of the Government policies to introduce a simpler range of tariffs. Restricting energy
companies to only four tariffs, plus requiring them to provide individual statements on the best tariffs for each
customer (as well as establishing a network of voluntary organisations to deliver advise to vulnerable
customers) will go a long way to alleviate our concerns that the current system is too difficult to negotiate.
15. However, a key concern will remain that those on prepayment meters will still miss out on discounts
provided to those who opt for “lower cost payment methods” ie those who are able to pay by direct debt. Such
discounts will still be allowed under the new system. Research has found that vulnerable households in or on
the margins of poverty are forced to pay an extra £1.1 billion a year through energy bills above those on high
incomes95 and the fact that they often have to opt for higher cost payment method is a key reason for this.
For example Barnardo’s works with many families and young people who use pre-payment meters for their
gas and electricity. Such customers are much more likely to be in low income households, yet an annual dual
fuel bill for a customer would be £1,255 per year for someone on a pre-payment meter compared to £1,176
for someone paying by direct debit96.
“I pay [gas and electricity] in cash… I get charged £280 a year more for having them there meters
[card/key]... People that pay by direct debit get a discount. But I pay in cash... I never get a bill so
I should get a discount... But it’s like speaking to a brick wall speaking to these people... They get
93
94
95
96
Oilfiredup (2011). Time To Reconsider UK Fuel And Energy Policies? www.oilfiredup.com/site/news/item/1448
Marmot Review Team (2011). The Health Impacts of Cold Homes and Fuel Poverty. Friends of the Earth and the Marmot
Review Team, London.www.foe.co.uk/resource/reports/cold_homes_health.pdf
Hills, J (2011). Fuel Poverty: The problem and its measurement. Centre for Analysis of Social Exclusion,London.
www.decc.gov.uk/assets/decc/11/fundingsupport/fuel-poverty/3226-fuel-poverty-review-interimreport.pdf
Figures are based on GB Average Medium User Gas and Electricity consumption of 16,500kWh and an average Electricity
consumption of 3,300kWh per annum. Based on Consumer Focus Data, GB Average Medium User Gas, Electricity and Dual
Fuel, 1 October 2011.
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the poor people all the time. People that can’t afford to pay standing orders because they haven’t
got bank accounts, they’re the people who get shafted.”97 (Barnardo’s service user)
16. Barnardo’s is concerned that the Government’s plans to simplify the charging system will still allow fuel
companies to charge higher prices for those who pay for their electricity and gas through pre-payment meters
rather than by direct debit. While energy companies have argued that the costs of providing and servicing prepayment meters are higher than other payment methods, the relatively reasonable cost of the Northern Ireland
keypad shows that pre-payment meters do not necessarily need to have a large premium and demonstrates what
can be done through innovative and rigorous regulation.98
17. Barnardo’s would like the Committee to recommend that the Government puts pressure on energy
companies to review their price bands for pre-payment meters to bring them in line with other forms of
payment.
To what extent do fuel-poor households engage in switching? What are the barriers to greater levels of
switching from these groups?
18. We are constantly told by the families that we work with that they do not engage in switching. There is
frequently scepticism that switching can save money in the long term as well as well as concerns that switching
suppliers could result with them being faced with a big bill. When incomes are tight families often do not have
the flexibility to alter their payments even if this will result in savings in the long term.
“you do get people knocking on the door claiming if you go with them it will be cheaper but it
isn’t!—it may be cheaper for a little while but not for long!” (Barnardo’s service user)
19. Families scepticism in relation to switching is exacerbated by difficulties in getting sufficient information
to understand the consequences of switching providers. A report from the Office of Fair Trading (OFT) found
that 40% of the public believe the energy market is too confusing and believe it is too difficult to calculate the
amount due, with 61% finding it difficult to choose a supplier.99 We know this can be a particular problem
for many of the families we work for. In our survey many services reported that the families they work with
did not have access to the internet to understand information about tariffs and were generally confused about
the different tariffs and support which was available to them. This is confirmed by other research which shows
that vulnerable families and young people are the least likely to know about or be able to access the best deals
as many do not have access to the Internet or bank accounts.100 In the past fuel debts have also been a
significant barrier to switching with customers feeling tied into a specific supplier until the debt was paid off.
OFGEM raised the amount of debt that can be transferred between suppliers from £200 to £500 in November
2012 which we welcomed. This policy will need careful monitoring to assess whether or not it is successful in
enabling those in energy debt to switch suppliers.
20. One in 10 low income households do not have a bank account which means that they cannot take
advantage of the cheapest direct debit tariffs.101 As recommended in Barnardo’s report—A vicious cycle,102 the
UK Government should adhere to the commitment in the Coalition Agreement and extend access, through the
Post Office Card Account (POCA), to accounts which allow payment of bills by direct debit. Barnardo’s would
like the Committee to recommend that work is done with the banks to ensure that anyone can open a bank
account with proof of an address.
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? And to
what extent do fuel-poor households current take advantage of energy efficiency schemes? Could anything be
done to increase uptake?
21. Targeting the energy efficiency of fuel poor households by permanently reducing energy consumption is
one of the most effective ways of tackling fuel poverty. However, evidence from Barnardo’s services
demonstrates that despite the wide number of schemes in this area—including Warm Front, the Carbon
Emissions Reduction Target (CERT) and Community Energy Savings Program (CESP) accessible information
and advice about energy efficiency schemes is very limited. In Barnardo’s survey almost 70% of respondents
reported that families do not know what support is available, such as the Home Heat Helpline, free insulation
or energy company grants, whilst almost 60% of respondents reported that families rarely know how to make
their homes more energy efficient.
22. Overcoming this lack of knowledge and awareness is going to be a key challenge if the ECO program
is to deliver improvements where other schemes have failed. However we see problems from the outset.
97
Barnardo’s policy, research and media department (2012). Priced Out, available on line at http://www.barnardos.org.uk/
pricedoutreport.pdf
98
Boardman, B (2010). Fixing Fuel Poverty. Earthscan, London.
99
Office of Fair Trading (OFT) (2010). Annexe H: A consumer’s view of the advertising of pricing. Office of Fair Trading,
London. www.oft.gov.uk/shared_oft/market-studies/AoP/Annexe-H.pdf
100
A third of low income households have access to the Internet compared with 60 per cent of the population as a whole.
www.oft.gov.uk/shared_oft/research/OFT1268.pdf
101
DWP (2010). Family Resources Survey. DWP, London.
102
Mathers I and Sharma N (2011). A Vicious Cycle: The heavy burden of credit on low income families, available on line at
http://www.barnardos.org.uk/a_vicious_cycle_report_online.pdf
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Funding for the ECO scheme is woefully inadequate if it is to reach the most vulnerable. We expect that given
a focus on profit, many energy companies will focus their ECO resources on those vulnerable households
which are easiest to identify, rather than spending large amounts of time and effort trying to identify and get
information to some of the hardest to help which may well be those in the greatest need.
23. Barnardo’s is calling on the government to change the preferred funding model for energy efficiency
schemes, so these are funded by the government through the use of carbon taxes, rather than from energy
companies. Over the next 15 years the Government will raise £63 billion in carbon taxes. If this was recycled
to households it could help to insulate millions of homes and lower energy bills.
24. In addition to problems with inadequate funding, there is also likely to be a problem engaging with those
in the private rented sector. Private rented housing is often some of the lowest Standard Assessment Procedure
(SAP) rated housing stock with the highest rates of fuel poverty. However, we know that there are few
incentives on landlords to increase the energy efficiency of their properties and over 50% of respondents to
our survey thought this was not a priority for landlords. In fact many tenants feel their position is so vulnerable
that they report fear of eviction as a reason for not complaining.
“Private landlord homes are much less efficient and much more costly for young people and families
to run. Very little is ever done to improve the heat efficiency in private homes.” (Barnardo’s worker)
25. The government is looking to increase responsibilities on landlords. From April 2016 private residential
landlords will not be able to unreasonably refuse requests from tenants for consent to energy efficiency
improvements and from 2018, all private rented properties must be brought up to a minimum energy efficiency
standard rating. However, the lead in time for this policy does appear to be excessively long, particularly when
you consider that energy companies will begin to spend their ECO money from later in 2013—three years
before there is any obligation on landlords to accept money if offered.
26. Barnardo’s is calling on the UK Government to bring forward the new regulations on private residential
landlords so that families living in substandard accommodation can benefit from energy efficiency
improvements.
February 2013
Written evidence submitted by Stephen Littlechild
Executive Summary
1. There are concerns that the complexity of the retail energy market prevents many customers from receiving
the full benefits of competition. The Labour Party and the Prime Minister have suggested that suppliers should
put vulnerable customers—or even all customers—on their best tariffs. Ofgem and DECC propose to simplify
the market by limiting suppliers to only four tariffs per fuel, and by banning many of the competitive offers
available today.
I. The Proposals to Simplify the Retail Energy Market would Increase Prices
2. These proposals are well-meaning, but they fail to look at the implications for energy prices. They would
lead to the withdrawal of the best prices and other offers and discounts. They would squeeze out tariffs with
no standing charges. They would effectively prevent innovation. This would reduce competitive pressure on
other prices.
3. The simpler tariff proposals would encourage “coordinated effects” by suppliers. Because they inhibit the
price reductions that attract customers, the proposals would reduce rather than increase customer engagement
and switching. This reduction in competition would lead to further increases in prices and retail profits. All
customers would be worse off, including those whom it is particularly intended to help.
II. Ofgem has been here before
4. In 2008 Ofgem was concerned that suppliers were offering lower tariffs to gain customers outside their
previous monopoly areas, and charging higher tariffs to their existing in-area customers who were in general
less active in the market. In order to secure lower in-area prices, in 2009 Ofgem introduced a non-discrimination
condition to require that passive in-area customers were not charged more than active out-of-area customers.
5. The policy failed: instead of lowering in-area prices, suppliers responded to the condition by increasing
out-of-area prices. Retail profit margins increased.
6. Ofgem promised a review of the impact of the licence condition. It failed to do so. Ofgem’s own figures
show that the reduction in competition caused by its non-discrimination condition has been associated with
increased net retail profit margins of nearly £2 billion per year over the three years 2010–12. This was at the
expense of customers.
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7. During 2012, most of the major suppliers responded to Ofgem’s call for simpler tariffs. This can be
expected to increase prices and profits. Ofgem’s projections already suggest that suppliers’ net retail margins
will increase by a further £1 billion in 2013.
8. This makes a total of some £10 billion that Ofgem’s restrictions on retail competition seem to have
transferred from customers to suppliers since 2007. Perhaps there are more accurate calculations or better
explanations. Ofgem has not provided any. Nor indeed has it even investigated this. Yet if the Ofgem/DECC
restrictions on prices were put into effect, one might expect further and greater increases in prices and retail
profits at the expense of customers.
III. The Way Forward
9. To address the concern about passive or vulnerable customers, the focus should be on assisting such
customers to take advantage of the competitive market. It might be possible to provide more appropriate
information, as suggested by Ofgem. DECC’s suggestion to facilitate collective switching and providing advice
on individual switching deserves further consideration. The aim should be to work with the competitive market,
not to sabotage it.
1. Introduction
After studying the retail energy market for several years, Ofgem has come to the conclusion that the main
problem is not the structure of the market or even the conduct of the suppliers, but the limitations of energy
customers themselves. The aim of its Retail Market Review (RMR) is “to encourage and equip consumers to
engage effectively in the market”.103
To this end, Ofgem proposes a package of measures that “require suppliers to provide consumers with
simpler choices; clearer information about products, prices and available savings; and fairer treatment in all
their interactions with them”. (p 8)
Others have proposed that suppliers be required to switch particular customers from one tariff to another.
The Labour Party has proposed that energy companies should be required to put all over-75s on their cheapest
tariff.104 The Prime Minister has said that “we will be legislating so that energy companies have to give the
lowest tariff to their customers”.105 The meaning of this remains obscure.
The Department for Energy and Climate Change (DECC) has endorsed Ofgem’s proposals, proposes to
legislate them into effect, and in some respects goes further than Ofgem.106 It also explores possibilities along
the lines of the Prime Minister’s suggestion, and considers additional measures to protect consumers and
promote customer engagement.
This paper examines these various possible approaches. The aim is not to challenge the perception that the
retail energy market is complex—evidently it is, although most other markets are complex too. Rather the aim
is to consider the consequences, and hence the suitability or otherwise, of the different proposed remedies
for this.
The general point I seek to make is that those policies that seek to protect customers by restricting or
distorting competition in the market will have unintended consequences: they will make customers worse off
rather than better off. They will also make energy suppliers more profitable. In contrast, there are other policies
that seek to enable customers to take better advantage of the competitive market. They are not without
difficulties, but some of them have greater prospect of being helpful to customers.
I. The Proposals to Simplify the Retail Energy Market would Increase Prices
2. Putting customers on the best tariff
Proposals to require suppliers to put some or all customers on their best tariff are based on an elementary
economic fallacy: the assumption that the range of tariffs available in a competitive market—or at least the
“best” tariffs in that range—would remain unchanged if new obligations of the kinds proposed were introduced.
Patently they would not. For example, if a supplier were required to put all its customers on its lowest-price
tariff, it would probably find it more profitable simply to withdraw that “best” tariff.
To illustrate, it has been suggested107 that the average annual dual fuel bill is about £1,300 and the cheapest
dual fuel tariff is about £1,165, a difference of about £135. It is also said that roughly 75% of customers are
on standard tariffs and 25% on cheaper ones.
Consider a major supplier with 3m customers on standard tariffs and 1m customers on cheaper ones. Which
would be more profitable: to cut prices by £135 to 3 million customers, at a loss of revenue of £405 million
103
Ofgem, Retail Market Review (RMR)—Updated domestic proposals, Consultation, Reference 135/12, 26 October 2012, p 7.
Labour’s Policy Review, Real Energy Market Reform, 24 October 2012.
105
Hansard, answer to Q3 [122162] 17 October 2012, column 316.
106
Ensuring a better deal for energy customers, DECC Discussion Document, URN:12D/437, 20 November 2012.
107
The Times, Friday Nov 2 2012.
104
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per year? Or to withdraw the cheap tariffs and lose 1m customers that were of only borderline profitability?
This is a no-brainer.
Would it be viable to put only specified vulnerable customers on the cheapest tariff? Consider the proposal
to require energy companies to put all over-75s on their cheapest tariff.108 At first, this sounds more reasonable.
And it is claimed that this “could save as many as four million pensioners as much as £200 a year from their
annual energy bills”. Where those figures come from is not explained. But let us do the calculations using the
figures from The Times.
Suppose customers aged over 75 account for 5% of a supplier’s four million customers. Then on the assumed
tariff figures, the supplier’s loss of revenue from transferring all of them from its standard tariff to its cheapest
tariff would be 0.05 x 4 million x £135 = £27 million. In other words, continuing to compete for the barely
profitable low-price customers will cost the supplier £27 million. It would still seem to make more economic
sense for the supplier to avoid this cost by withdrawing from competition and limiting itself to supplying the
3 million customers on its standard tariff.
Such proposals are effectively a tax on competition. They would drive the major suppliers out of the
competitive market, along with their lowest prices. Active customers would be worse off without making
vulnerable customers better off.
But worse: over time this reduction in competitive pressure caused by the absence of the low-price offers
would allow increases in standard tariffs. And increases in retail profit margins. Then all customers would be
worse off, including the vulnerable ones. But the suppliers would benefit.
3. Ofgem/DECC proposals to simplify tariffs
Ofgem proposes to limit each supplier to four tariffs per fuel and per payment type; to “put an end to
complicated multi-tier tariffs”; to prohibit “dead tariffs”; and to standardise or prohibit a range of other
discounts and tariff options. DECC goes further: it proposes to specify the nature of two of these four
allowed tariffs.
On the surface, Ofgem’s present proposal sounds more moderate than its previous proposal, which allowed
only one tariff per payment method.109 However, that proposal applied only to standard variable tariffs: the
new proposal applies to all tariffs. This is particularly repressive. It prevents the kind of competition in fixedprice fixed-term contracts and temporary offers that was able to develop after Ofgem imposed its nondiscrimination condition (see below). Even “white label” products provided for supermarkets are counted
within the limit of four.
A multitude of additional restrictions are now proposed. For example, suppliers can only offer discounts for
online or dual fuel purchases if they offer the same discounts on all tariffs, and expressed in pounds rather
than percentages. But a discount that might be economic to offer to a large customer might be uneconomic to
offer to a small one. If forced to set the same discount to all customers, a supplier might well find it more
profitable to reduce or withdraw the discount.
4. Multi-tier tariffs and tariffs with no standing charge
The Ofgem proposal is likely to mean the end of tariffs with no standing charge. This will be very unpopular:
I well recall the demand for such tariffs from many older customers who resented having to pay a standing
charge even if they used little or no electricity. Indeed, the Select Committee has recently recommended that
Ofgem might need to consider allowing only tariffs with no standing charge.110
The new proposals will not actually prohibit a supplier from offering a tariff with zero standing charge. But
the initial per unit charge on such tariffs has to be higher in order to recover the supplier’s fixed costs. At
present, a supplier can reduce its unit charge for higher levels of consumption, once it has recovered its
fixed costs. This maintains the tariff’s attractiveness to small-to-medium customers, and thereby maintains the
tariff’s viability.
Under Ofgem’s proposals, multi-tier tariffs are to be prohibited. This means that a supplier is no longer
allowed to reduce its unit charge once consumption exceeds a specified level. This means that the tariff with
no standing charge will have to embody higher prices to customers above this level. Even though they might
prefer a tariff with no standing charge, these customers will gradually shift to other, cheaper, tariffs. Tariffs
with no standing charge will become unviable.
One might ask: is it not possible to design a viable tariff with no standing charge that is not multi-tier? I
suspect that it might be. If suppliers were not limited in the number of tariffs they could offer then they would
certainly consider this. However, with only four tariffs available, a tariff with zero standing charge is unlikely
to be as profitable as other more popular options. It will get squeezed out.
108
Labour’s Policy Review, Real Energy Market Reform, 24 October 2012.
Ofgem, The retail market review—domestic proposals, 1 December 2011. For my critique of that previous proposal, see Stephen
Littlechild, “Ofgem’s Procrustean Bed”, Oxera Agenda, February 2012, 1–5.
110
Select Committee on Energy and Climate Change—Fifth Report, Consumer Engagement with Energy Markets, 18 December
2012.
109
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5. Dead tariffs
Ofgem proposes that customers on “evergreen” tariffs (those with no fixed termination date) that are no
longer open to new customers (so-called dead tariffs) must be migrated to the cheapest live evergreen tariff.
This may sound like sensible tidying up, and in the process giving customers on dead tariffs a better deal.
But wait. If closing a tariff to new customers (rendering it dead) means that all existing customers on this
tariff have to be transferred to another cheaper tariff, this will simply lead suppliers not to close that tariff.
And if they are not allowed to keep the higher price and the lower price tariffs running in parallel, perhaps it
would be more profitable not to introduce the cheaper tariff. Or to delay offering a lower price tariff as long
as possible. Thus, in an attempt to protect some customers, the restriction makes other customers worse off.
Again, there is the same fallacy as with the requirement to put customers on the best tariff. Requirements to
switch customers between tariffs will change the tariffs that are available in the first place, and in general
remove the better offers.
6. Innovation and smart metering
Ofgem and DECC have emphasised the importance of innovation. Yet the proposed restrictions on the
number and type of tariffs would effectively preclude innovation. New products are costly and risky, and likely
to have a small and uncertain market initially. Like companies in general, suppliers are better able to bear the
costs and risks of introducing new products if they do so on a small scale alongside their established highvolume product lines.
But now it is proposed that a supplier could only introduce a new tariff if it withdrew one of its four
existing ones. What sane company would sacrifice about a quarter of its sales to bet on an uncertain and
unfamiliar product?
Ofgem and DECC have emphasised the advantages and importance of smart metering. A very expensive
programme of equipping all customers with smart meters is already underway. These meters will allow—
indeed, require—suppliers to provide customers with much more detailed and complex information than at
present. It is explicitly envisaged that suppliers will offer a much broader range of tariffs, some quite different
from those available in the market today. This in turn will encourage customers to use energy differently, in
more efficient and environmentally sensitive ways.
The proposed policy of limiting the number of tariffs would hinder, rather than facilitate, the evolution of
smart metering. It would dull rather than develop the customer skills and attitudes that this technology will
call for. It would reduce, if not outweigh, the hoped-for benefits associated with smart metering.
Ofgem has indicated that it will consider applications for exceptions and derogations. This is a dangerous
way to try to encourage innovation. It will invite lobbying, political influence and worse. It will lead to
allegations of favouritism, placing Ofgem at the centre of controversy.
7. Impact on small suppliers
If the Big Six suppliers are constrained by the new proposals, will that nonetheless advantage the smaller
independent suppliers, so that competition might in fact increase rather than decrease?
In some respects smaller suppliers could benefit—for example, the reduction in competition would lead to a
general increase in tariffs, which would assist them. The four tariff restriction means that the big suppliers
would no longer be able to offer niche products of interest to small numbers of customers. Green energy would
be a prime example. This might not sound a sensible policy from the environmental perspective, but smaller
suppliers specialising in green energy could benefit.
However, the four tariff rule would apply to all suppliers, small as well as large. This means that new
entrants would be prevented from offering a wide range of niche products to compete with the high-volume
incumbent suppliers. And if they wanted to extend beyond a small range of niche products to attract more
customers, they would have to give up their niche products.
The costs of complying with Ofgem’s proposals—in terms of changes to IT systems—would also be heavy.
Set-up costs of new IT in the millions of pounds are being mentioned. This would weigh more heavily on
smaller suppliers than on larger ones.
Ofgem too would incur substantial costs. Its earlier consultation documents spelled this out. It makes
reference to this “very substantial project” in its latest Forward Work Programme.111 These costs would be
included in higher licence fees to suppliers which in turn would be passed on to customers.
Small suppliers and new entrants make an important contribution to the energy market, not only in terms of
price but also in terms of innovation and customer service. At present, suppliers below a specified size are
111
“As described in this Forward Work Programme, there are some very substantial projects planned for 2013–14. These include
a major programme of work to implement our Retail Market Review (RMR) proposals for a package of simpler, clearer and
fairer measures to improve the competitiveness of the retail market…..” Ofgem, Forward Work Programme FY2013–14,
Reference 166/12 18 Dec 2012, p 16
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exempt from certain obligations. Estimates of the cost of this range from £60 to £90 per customer per year. As
retail margins have increased, more small suppliers have entered the market. It is to be hoped that they continue
to enter and grow. But to date, small suppliers even in aggregate have not accounted for more than about 1%
of the domestic energy market. Even if small suppliers manage to grow faster than ever, despite the restrictions
that the proposed policy will put on them, it cannot be argued that they will offset the adverse effects of the
Ofgem/DECC restrictions on competition in the market as a whole.
8. Price reductions or price increases?
Ofgem’s focus is on enabling consumers to engage effectively in the market. All its criteria for assessing its
policy are geared to that end.
“Within the overall aim of improving customer engagement, we are looking to achieve three
objectives with our proposal:
— make the market simpler …
— make the market clearer …
— make the market fairer ….”112
The Summary of impacts on consumers has seven measures: supplier cheapest deal, Tariff Comparison Rate,
tariff simplification, clearer and simpler information, Standards of Conduct, protecting consumers on fixed term
offers, and market cheapest deal. Ofgem evaluates these proposals against four criteria: Aware of alternatives,
access market information, assess alternative offers, confidence and incentives to act.113 The Summary finds
that the proposals will have either neutral or positive impacts on all criteria.
However, this assessment generally takes as given the tariffs, discounts and other options that are available
in the market. It does not ask what impact the proposals might have on the availability of such tariffs.
Surprisingly, given the importance of energy prices to most customers, Ofgem does not ask what the impact
of the policies might be on prices. It seems not to be interested in this. In fact, out of 700 pages of
documentation of its proposals, only four paragraphs—less than one page—are devoted to a discussion of the
impact on prices.
Ofgem does not claim that its proposed policy will reduce prices to customers. It only raises this issue in
order to address the possibility that its proposals might increase prices. Its response to these concerns does not
provide much reassurance.
It acknowledges two possible reasons why prices might increase.
“We recognise that there is scope for ‘coordinated effects’. Firstly, with fewer tariffs in the market
coupled with the TCR [Tariff Comparison Rate] and other simplification measures, suppliers may
find it easier to monitor each other’s prices and/or bundled products and services. Over time, it might
be that this greater transparency allows suppliers to respond more easily to rivals’ strategies, thereby
reducing the differentials that exist between them.
Secondly, it is possible that suppliers remove their cheapest deals from the market if our proposal
result(sic) in raising the prominence of those deals. Suppliers may decide that there is too great a
risk of consumers moving to the cheapest deal in high numbers and reducing their ability to maximise
revenues and profits.
We recognise the possibility that our proposal could lead to a short-term reduction in the availability
of deeply discounted deals.”114
These are indeed the arguments that have been made above. “Recognising the scope” for closer price
differentials and “recognising the possibility” of the lowest prices being withdrawn are about as close at a
regulator normally gets to admitting that its policy will in fact lead to price increases.
So what reasons are given why this will not be the case?
9. Deterring or promoting coordinated effects?
Ofgem says that there are already coordinated effects in the market.115 It continues “on balance, we consider
that a more engaged consumer base will help to reduce these effects and will outweigh any incentive for firms
to coordinate their actions”.
Suppose for the moment that the policy proposals did indeed lead to a more engaged consumer base (though
I argue shortly that they won’t). How will this outweigh any incentive for firms to coordinate their actions?
112
Ofgem, Draft Impact Assessment, para 2.1, p 13.
Ofgem Draft Impact Assessment Figure 1 p 12.
114
Ofgem, Draft Impact Assessment, paras 4.9, 4.11, 4.12
115
By coordinated effects, Ofgem means “similar business strategies which in particular mean that suppliers tend to put their prices
up at similar times by similar amounts”. It instances the range of dual fuel bills: at the end of 2006 the annual bill for a typical
consumption level varied by £200 from highest to lowest supplier, but during 2009 and 2010 it fell to less than £40 and in
March 2011 to £22. After recent price increases the range will be £24. Ofgem, Updated domestic proposals, para 2.51 p 39
(para 2.54 and Fig 6, pp 40–41)
113
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Ofgem’s explanation is that “a more engaged consumer base, one which is better able to assess tariff options,
will look to see where the best deal lies across the supplier spectrum”. (para 4.10)
However, Ofgem seems not to realise just how effectively its proposals would constrain the suppliers and
lead them to coordinate their actions, thereby removing or reducing the availability of such “best deals”. Indeed,
it is quite remarkable how precisely Ofgem has developed its retail policy over the last three years, and
designed its present proposals, so as to maximise the likelihood of coordination between suppliers. If suppliers
wished to be required to coordinate, it would be difficult to design a more effective regulatory policy. Appendix
1 explains in more detail why this is the case.
Ofgem then says that this more engaged consumer base “will have greater awareness of small and
independent suppliers and may be more willing to explore the deals that these suppliers offer”. (para 4.10)
Suppose that is true. But I have argued above that the small and independent suppliers will also be constrained
by the proposals. And even if they expanded greatly from their present 1% of the market, their overall impact
on competition and the prices available would be severely limited, at least for some years.
10. Deeply discounted deals and efficiency savings?
What about the removal of the deeply discounted deals? Ofgem basically accepts that this will happen.
However, it says that “over the longer term, a more engaged customer base should help to increase competitive
pressure on suppliers and force suppliers to look for efficiency savings. We expect that if these cost savings
are passed on to consumers, it will result in generally cheaper tariffs.” (para 4.12)
There are several qualifying, conditional and hypothetical steps in this argument. “Over the longer term”
essentially means: lower price deals would indeed be removed from the market now, so prices in general would
increase, but at some time in the future, perhaps in a matter of years, when customers are more engaged, there
would be pressures leading to lower prices.
Let us assume, again, that a more engaged customer base would increase competitive pressure on suppliers—
although Ofgem says only that it “should help”—and force them to look for efficiency savings. But how much
scope is there for efficiency savings that is not already being explored by the suppliers?
Ofgem says that it sees “little evidence of suppliers looking to reduce controllable costs”, and “we have no
evidence to suggest that suppliers have become more efficient over time or are actively seeking to minimise
the procurement costs of wholesale energy”, and “there has been no evidence of a meaningful reduction in
indirect costs, which have increased in recent years, potentially contrary to what one might expect in a
competitive market”.116 These comments seem to be based on a brief comparison of four main components of
costs over three years, then total costs over another two years. But it is not an obviously plausible argument:
whether or not there is pressure to pass cost savings on to customers, there is no advantage to suppliers in
failing to reduce their own controllable costs. Has Ofgem seriously looked for such evidence, and tried to
control for other possible determinants of cost? It would not be at all surprising if indirect costs have increased
in recent years, even for very efficient suppliers, given the significant increase in government and regulatory
obligations that suppliers have been required to deal with.
Finally, Ofgem does not seem confident that any cost savings resulting from a more engaged consumer base
would indeed find their way to customers. It says only “if” these costs savings are passed on to consumers, it
will result in generally cheaper tariffs.
In sum, Ofgem essentially seems to accept that its proposals to increase customer engagement will lead to
more coordinated effects and the withdrawal of lower priced offers. It claims that, “in the longer term”, such
price increases will be offset by the effects of a more engaged consumer base. I argue that these arguments are
unpersuasive, even if the customer base were more engaged. But is there any reason to believe that Ofgem’s
proposals would indeed stimulate customer engagement in the first place?
11. Stimulating customer engagement
Ofgem cites the OFT as noting three requirements for customer engagement leading through to a switch
of supplier.117
“Engagement requires consumers to be able and have an incentive to:
— Access relevant market information,
— Assess the offers available to choose what is best, as well as
— Act on their assessment of the information.”
Ofgem adds that “effective engagement also requires consumers first to be Aware that they could find a
better deal if they take trouble to shop around”.
These are valid factors, especially Ofgem’s critical point about the prior need for awareness. Ofgem describes
how various elements of its package address these four factors. So how comprehensively does Ofgem’s package
116
Ofgem, Updated domestic proposals, paras 2.51, 2.62, 2.66 pp 39, 42, 44. See also Energy Supply Probe—Initial Findings
Report, paras 7.83–7.86 and Fig 7.11 p 96.
117
Ofgem, Updated domestic proposals, paras 1.31, 1.32, pp 16, 17, also para 2.15 pp 17–18.
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provide or improve the critical incentive to be aware of beneficial opportunities to shop around? Ofgem says
that “our RMR package focuses on ensuring that customers are aware of choices”. But then it says that “We
are not looking to address the incentive consumers have to engage in the market to the extent that this is driven
by factors such as consumers’ sensitivity to prices and brand loyalty”.(para 1.32 p 17)
This is most odd. Ofgem wishes to increase customers’ ability and incentive to engage in the market, but it
looks only at factors such as information and complexity, and not at factors such as sensitivity to price and
brand loyalty. What do we know about the relative significance of these two sets of factors?
12. Information and complexity, or price and advertising?
Ofgem provides extensive references to its behavioural and other consumer research. It documents that many
customers find the energy market complex and would like more simple choices. Whether Ofgem’s proposals
would be perceived by customers as simplifying the situation is actually debateable—with four tariffs per fuel
times two fuels times three payment methods times 13 present suppliers, customers would still have 312
different tariffs to worry about. (And with 14 different regional areas, there would be up to 4368 tariffs in the
GB market as a whole.)
Even if customers did perceive the tariff situation as less complex, would that be sufficient to promote
greater engagement? Ofgem claims that complexity is significantly hindering switching. However, its customer
research does not seem to support this. Of those customers that chose not to switch in 2011, no less than 78%
gave as their principal reason, “I’m happy with my current supplier(s)”.118 22% said, “Switching is a hassle”.
None of the customers in that survey are reported as saying that complexity of tariffs was a reason for not
switching. Ofgem’s proposals for tariff simplicity would simply not address the reasons that customers in that
survey reported for not switching supplier.119
A recent piece of experimental work may throw some light on this. It finds that “The complexity induced
by product bundling, non-linearity and number of tariffs has an important role, but this is overstated if the
explanatory power of inattention is neglected.”120 It also comments that “even restrictive regulatory measures
forcing tariffs to be linear and only four—with the potentially distorting effects on competition that such
restrictions may have—would still only help partially, as consumers would need to pay attention to the choice
of tariffs and many of them simply would not”. (p 28)
This concept of attention is consistent with economic analysis of the competitive market process.
“…mere availability does not does not guarantee that those needing information will have it. Even
if information is staring them in the face they may simply not notice it, and remain unaware that
there is anything further to be known. It is therefore necessary for producers, intent on winning the
profits from innovatively serving consumer preferences, also to alert consumers to the availability
and the qualities of goods.”121
What then makes customers aware of a better deal and pay attention, and alerts them to the relevance of
information, and in turn leads them to engage in the market and to switch? Empirical evidence is that customers
are more likely to switch the greater the gains to be made.122 Surely to ignore this is to rule out of consideration
perhaps the most important single factor that influences consumers’ incentives to be aware of relevant
opportunities and to engage in the market.
Ofgem itself has carried out econometric research on this topic, and was able to explain over 80% of the
switching (churn) rate. It concluded:
— “the largest single factor affecting a supplier’s churn rate is its relative price; however
— churn rates are affected by a far wider range of factors than relative prices; and
—
the level of marketing expenditure is very similar to price in its effect on a supplier’s churn
rate—the more it spends on advertising, the lower its churn rate.”123
Note, however, that it is not just a matter of spending money on advertising: the advertising needs to be
effective in attracting the attention of customers. The previously cited economic analysis of the competitive
market process, and the need to alert consumers, continues as follows.
118
Ipsos Mori, Customer Engagement with the Energy Market—Tracking Survey 2012, A report prepared for Ofgem, 12 April
2012, pp 7, 22.
119
I have discussed the limitations of the Ofgem research at greater length in Ofgem’s Procrustean Bed. For a more extensive
critique, see also Oxera, Economic appraisal of Ofgem’s domestic tariff proposals: an appropriate intervention to increase
consumer engagement?, prepared for Scottish Power, March 2012.
120
Stefanie Sitzia, Jiwei Zheng and Daniel John Zizzo, “Complexity and Smart Nudges with Inattentive Consumers”, CCP Working
Paper 12–13, University of East Anglia, November 2013, Abstract.
121
Israel M Kirzner, How Markets Work: Disequilibrium, Entrepreneurship and Discovery, IEA Hobart Paper No 133, 1997, p 55,
available at www.iea.org.uk.
122
“Our model predicts well the factors which motivate activity for the consumers in our sample, and underlines the importance
of anticipated gains as a major stimulus …”. Catherine Waddams Price and Catherine Webster, “Effective empowerment:
Empirical estimates of consumer switching behaviour”, ESRC Centre for Competition Policy, University of East Anglia, February
2012, p 22.
123
Ofgem, Energy Supply Probe—Initial Findings Report, 6 October 2008, para 4.14 pp 49–50.
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“Clearly there is a role for advertising beyond ‘providing information in response to consumer
demand’. There is, in addition, a role for advertising to grab the attention of potential consumers
and direct them both to the information and to the goods that are available. … [I]n a world of
complexity, change and uncertainty, it is inevitable that consumers are imperfectly aware of the
qualities and promise of the multitudes of goods. The need to alert consumers to what they do not
know that they do not know, is very real. … From the mainstream perspective, advertising makes
sense only as a weapon in the arsenal of the monopolist. From the perspective on advertising
described here, however, advertising is plainly a tool with which to compete. … The producer who
judges more correctly what kind of dramatic advertising message will best awaken consumer interest
has the more successfully served those consumers.”
Ofgem has thus put itself into an awkward situation. It proposes to reduce tariff complexity in order to
increase customer engagement. I and others have suggested that its evidence for the effectiveness of this
approach is questionable. In its previous work it has explored the factors determining the extent of customer
awareness and engagement in the market. Consistent with economic analysis and research by others, it has
found that price and advertising are the most important factors. Yet now, when it explicitly seeks to increase
customer engagement, it focuses only on reducing tariff complexity and ignores its findings on the impact of
price and advertising.
13. Whose judgement should be trusted?
On this critical issue, whose judgement should be trusted? Who is likely to be best placed to understand
actual customer behaviour? Ofgem has now spent a year or so on the tariff complexity issue, having “sought
input from expert advisers on linguistics, semiotics and information design”.124 It has also carried out customer
research. However, the reliability of the stated customer intentions is again questionable. For example, Ofgem
reports that only 6% of its customer survey respondents said they would probably choose a variable price tariff:
in reality about 75% do.
In contrast, the whole British retail energy sector has spent some 15 years in active competition to devise
methods of attracting the interest of customers and persuading them to switch. In addition, a dozen switching
sites have competed to provide the collection, analysis and presentation of information most relevant to
customers. The survival of all these businesses depends upon their ability to predict how customers actually
behave. It is surely fair to say that, in their view, price savings and advertising considerations are paramount.125
And, to repeat, this is consistent with Ofgem’s own empirical research.
There is one final point to make here. The significance of tariff simplicity in driving customer awareness,
engagement and switching is as yet a hypothetical conjecture. In contrast, the significance of price savings is
a demonstrable fact. Yet Ofgem is not only focusing on tariff simplicity as a driver of customer engagement
to the exclusion of price savings, it is doing so at the expense of price savings. That is, in order to achieve the
hypothetical benefit of tariff simplicity, Ofgem is accepting that the low price opportunities that have been
demonstrated to drive switching will have to be sacrificed. Customers must suffer in order to test Ofgem’s
hypothesis.
The empirical evidence suggests that there can only be one outcome. The net effect of the proposals to
reduce tariff complexity would be less customer awareness, less engagement and less switching, not more. In
consequence, there would be less competitive pressure in the retail energy sector, not more; prices and retail
profit margins would increase, not decrease; and customers would be less satisfied, not more.
II. Ofgem has been here before
14. Ofgem’s non-discrimination condition
In 2009, Ofgem expressed concern that incumbent suppliers were charging higher prices to their “in-area”
customers—that is, customers in the areas where the supplier was the monopoly supplier before the market
opened to competition—than to their “out-of-area” customers. Ofgem was concerned that the in-area customers
were generally less actively engaged in the market, and a higher proportion of them were vulnerable customers.
With the aim of securing the lower out-of-area prices for the in-area customers, Ofgem introduced its nondiscrimination condition to prohibit such price differentials for three years, by means of standard Licence
Condition SLC 25A.
Ofgem’s subsequent publications show what actually happened. The major suppliers did indeed equalise
their prices, as required—but as ought to have been expected they did not do so by lowering their in-area
prices. Instead, they raised their out-of-area prices. The licence condition did not increase the effectiveness of
competition, it reduced it.
124
125
Ofgem, Updated domestic proposals 3.28.
I have heard it said, for example, that the lowest price supplier on any website ranking can expect to attract as many customers
as it wants, the second and third ranked supplier can expect a dozen acceptances, and lower ranking suppliers no response at
all. Whether or not this is literally true, there is no doubt that suppliers and switching sites have a deep knowledge, based on
experience, of what drives customer switching.
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Figure 1
THE IMPACT ON PRICES OF THE NON-DISCRIMINATION LICENCE CONDITION
Professor Richard Green drew attention to this in response to an earlier Ofgem consultation.126 Professors
Hviid and Waddams Price have since studied the theory and impact of the non-discrimination condition more
thoroughly.127 They conclude that “the most likely net result of prohibiting geographical discrimination on
prices is to raise them all, as predicted by the theoretical literature … Although price differentials have fallen,
the rising levels of both gross and net margins since the clauses were introduced provide evidence that this has
occurred.” They also note that Ofgem “found many indicators that competition had deteriorated in its 2011
Retail Market Review. These would follow from the weakening competitive threat from the entrants in each
region.”
15. The impact on switching
One of Ofgem’s indicators of weakening competition was the declining rate of customer switching from one
supplier to another. Ofgem argues—correctly—that this reduces the competitive pressure on suppliers. But
when did this decrease in switching start and why did it happen?
Figure 2 shows the extent of customer switching over the last 10 years. The number of electricity plus gas
transfers between suppliers increased rather steadily from 568,000 customers per month in first quarter 2003
to 877,000 customers per month in fourth quarter 2008. In the four years since then the number has fallen back
to an average of 440,000 per month in the first two quarters of 2012, a reduction of more than 20% on the
number in early 2003, and a reduction of 50% on the peak in late 2008.
126
R Green, Response to Ofgem consultation, 10 April 2012. He submitted the present Figure 1, drawing on two Ofgem figures,
noting “a large increase in the level of the average bill at almost exactly the same time that companies started to reduce their
cross-region differences”.
127
M Hviid and C Waddams Price, “Non-discrimination clauses in the Retail Energy Sector”, The Economic Journal, Vol 122,
August 2012, 236–252.
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Figure 2
THE INCREASE THEN DECREASE IN CUSTOMER SWITCHING128
1,600,000
Domesc Electricity and Gas Transfers in Great Britain
1,400,000
Number of Customers
1,200,000
1,000,000
800,000
600,000
400,000
Electricity Transfers
Gas Transfers
200,000
Q1 2012
Q2 2012
Q3 2011
Q4 2011
Q1 2011
Q2 2011
Q3 2010
Q4 2010
Q1 2010
Q2 2010
Q3 2009
Q4 2009
Q1 2009
Q2 2009
Q3 2008
Q4 2008
Q1 2008
Q2 2008
Q3 2007
Q4 2007
Q1 2007
Q2 2007
Q3 2006
Q4 2006
Q1 2006
Q2 2006
Q3 2005
Q4 2005
Q1 2005
Q2 2005
Q3 2004
Q4 2004
Q1 2004
Q2 2004
Q3 2003
Q4 2003
Q1 2003
Q2 2003
0
Quarter
What caused this remarkable reversal of the trend in customer switching? Energy price movements might
have played a part, but they varied over the period, and there is no established link between price changes and
switching. The cessation of doorstep selling by major suppliers—which Ofgem strongly encouraged—may be
relevant, since the major suppliers had found doorstep selling the most cost-effective means of attracting
customers. But it was July 2011 before the first supplier abandoned doorstep selling, by which time the decline
in switching was well underway, and it was a year later before the last supplier ceased doorstep selling. A
more likely explanation for the reduction in switching is a rational response by customers to the removal of
attractive switching opportunities as suppliers raised their out-of-area prices.
The evidence thus suggests that Ofgem was primarily responsible for the significant reduction in customer
switching over the last four years. This in turn reduced competitive pressure on the major suppliers, with the
impact on prices and profit margins that have been mentioned above and documented further below.
16. The impact on vulnerable customers
Even though customers in general suffered from Ofgem’s policy, can it be argued that vulnerable customers
have nonetheless benefited? Unfortunately not. Hviid and Waddams Price specifically examine this question.
They note that there has been an impact in relative terms—but only in the sense that other customers have
been made worse off. This is an “equal misery” policy that Ofgem would presumably not seek to defend.
Vulnerable customers themselves are in fact worse off insofar as some of them will have been deprived of
the lower price offers. “… almost a quarter of households with at least one ‘vulnerable’ characteristic will have
lost immediately from the reform, as they are with an electricity entrant who has raised prices (out-of-area) to
reduce their differentials.” (p F246)
Furthermore, “firms’ responses to the non-discrimination clauses may have generated further detrimental
distributional effects”. This is because the major suppliers responded to the restrictions on in-area versus outof-area competition by competing more actively in other respects, for example by offering lower discounts for
online tariffs. “…since the introduction of the non-discrimination clause the average offline tariffs have
increased but the size of the discounts offered against these for online tariffs by the main players has increased
dramatically”. (p F247) Unfortunately, “vulnerable customers generally have lower access to broadband, raising
concern for those who may find it difficult either to access these offers or to understand their temporary nature”.
More recently the size of these discounts has reduced.
17. Alternative theories of competition
Why did Ofgem wish to prohibit price differentials? And why did its predictions turn out not to be right? It
is important to understand Ofgem’s thinking and the full impact of the non-discrimination licence condition,
because the same failure to understand how the market works is now leading Ofgem to propose restrictions on
competition that will have a much greater adverse effect on customers.
128
DECC, Transfer statistics for the gas and electricity markets in Great Britain, 29 March 2012.
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Ofgem has not espoused the argument that differential prices are undesirable per se.129 Its analysis has
focused on price discrimination from an economic and market perspective, with particular reference to the
exploitation of market power. Suppliers in the market charge lower prices to those customers with more elastic
demand, that is, the active customers that are liable to go elsewhere. Meanwhile they can charge higher prices
to those customers with less elastic demand, the passive customers that are unlikely to move.
But does this mean that prohibiting price discrimination will improve the situation? Ofgem’s thinking seems
to have reflected what might be called a cargo-cult theory of competition.130 Ofgem reasoned that under perfect
competition, there would be no discrimination in prices between different customers. It observed that there
was such price discrimination, therefore competition was not perfect. It concluded that if it prohibited price
discrimination, this would represent a useful step towards perfect competition by making competition more
effective. In the event, despite the equal prices, this perfect competition did not arrive. In fact, the prohibition
made competition less effective.
In the present British energy sector, perfect competition is not a relevant or helpful benchmark. It is not a
realistic alternative. The reality is that incumbent suppliers inherited a proportion of customers who are not
active switchers. Hviid and Waddams Price review the modern economic literature on competition, and analyse
how a non-discrimination rule would play out in such a situation.
In very simple terms, incumbent suppliers will charge a price to their in-area customers that covers their
overhead costs, perhaps a bit more. This price would be above their incremental cost of serving additional
customers in other markets. If they were allowed to attract other customers at a price below their average cost
but above their incremental cost, they would find it profitable to do so. But if they were required to charge a
uniform price to all their customers, it would be more profitable for them, and less risky, to focus on their
home markets. In other words, if they were allowed to charge differential prices they would compete, if they
were required to charge uniform prices they would not.
If suppliers do compete, their lower prices out of area force the other incumbent suppliers to reduce the
prices to their own in-area customers, so as not to lose them. So not only out-of-area customers gain from this
process, in-area customers are protected too.
In other words, differential prices do not indicate the absence of competition. In the circumstances of the
British energy sector they are the very means by which incumbent suppliers compete with each other. In such
circumstances, prohibiting differential prices is tantamount to prohibiting a central means of competition.
18. Competition and complex prices
A similar line of argument applies to the concern about complex prices. Yes, the energy sector is indeed
characterised by a great variety of different options, at different prices and on different terms. Yes, it can indeed
be confusing for customers to know what is best for them. The behavioural economics literature that Ofgem
references has indeed suggested that this complexity and confusion can lead to various problems and limitations
in customer decision-making. It is understandable that customers say “Electricity and gas are simple products,
we just want the best price.”
However, it does not follow that the best solution is to try to abolish complexity by constraining suppliers
to charge only simple prices. There are reasons why prices are complex even in a fully competitive energy
market. Different prices for different products are means of competing, not of preventing competition. To try
to simplify prices and products is to risk making customers worse off, and tantamount to preventing rather
than promoting competition. Appendix 2 sets out this argument in more detail. Appendix 3 shows that Ofgem’s
focus on a few main tariffs comes at the expense of customers of minority products and innovation, thereby
discouraging developments that could benefit all customers over time.
19. Increasing retail supply margins
To update the Hviid and Waddams Price research, Figure 3 and the accompanying table reproduce Ofgem’s
latest calculation of energy suppliers’ profit margins, net of energy and other costs.131 Until mid-2009, when
Ofgem introduced its non-discrimination condition, the average rolling net margin on a dual fuel bill was
consistently negative. But since then it has been consistently positive. For the year centred on December 2008,
the average net margin for a duel fuel customer was (minus) £25 per year. A year later it had risen to £40. At
present it stands at £70. Ofgem’s latest prediction is an average of £100 over the next year, peaking at £120
over the next three months.
129
Some might argue that it would be unfair if those customers who are active in the market get a lower price than those that are
not. On this basis, fairness would mean that it would be desirable to equalise prices regardless of whether that led to an equalising
down or an equalising up. Others would object to this interpretation, and indeed some have argued that it would be unfair if
those customers who are active in the market were not able to get a better price than those that are not.
130
During World War II, US and Japanese planes delivered or airdropped cargo (including supplies and armaments) to their forces
in the Pacific islands. This ceased at the end of the war. The islanders, who had often indirectly benefited from this cargo but
were uncomprehending as to why it arrived, reasoned that they would attract the cargo if they duplicated the airport facilities
they had seen on the ground. To that end they constructed planes and terminal buildings made of bamboo and straw, then waited
for the cargo to arrive. But it did not come.
131
Ofgem, Electricity and Gas Supply Market Indicators, 19 December 2012.
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Electricity-only and gas-only net margins have increased too, electricity less sharply and gas more sharply.
20. Factors potentially explaining the increase in retail profit margins
What led to the increase in net retail margins? Changes in wholesale costs and regulatory costs would impact
on total prices but not, except temporarily, on net profit margins, at least as a percentage.
Ofgem has already conjectured an explanation for increases in net margins during the first part of the period
shown in Figure 3. Looking at retail prices over the period January 2004 to December 2008, Ofgem indicated
that British Gas was generally the price leader and, except in 2007, was willing to accept a loss of market
share in order to sustain increased prices.132 This is consistent with market share data: British Gas’s share of
the gas market fell from 59% in January 2004 to 44% in June 2008. SSE increased its share of both markets,
but the changes in market shares of other suppliers were relatively small.133
Figure 3
TYPICAL DUAL FUEL CUSTOMER BILL, COSTS AND TOTAL INDICATIVE NET MARGIN FOR
THE NEXT 12 MONTHS
132
“British Gas consistently priced above other major suppliers over this period, until it dropped its prices in early 2007 as a result
of accelerating customer losses. Most other suppliers soon followed by lowering prices, although EDF Energy remained
significantly more expensive. During the first few weeks of 2008, five out of the Big 6 raised prices in quick succession and to
similar levels. In the last round, record price rises have been implemented by the Big 6, with British Gas re-establishing itself
as the highest priced supplier.” Ofgem, Energy Supply Probe, Initial Findings Report, October 2008, para 7.2 p 72.
133
Over the same period SEE increased its market share from 7% to 15%, the other four major suppliers increased their market
shares slightly. In the electricity market, SSE increased its market share from 13% to 19% and there were small changes in the
market shares of the other major suppliers.
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CHANGES IN RETAIL BILLS, COSTS AND TOTAL INDICATIVE NET MARGIN FOR THE NEXT 12
MONTHS—DECEMBER 2012
Dual Fuel
Dec-08
Dec-09
Year
Dec-10
Dec-11
Dec-12
Customer bill
Wholesale costs
VAT and other costs
Gross margin
Operating costs
Total indicative net margin for the next 12
months
Rolling net margin
£1,215
£715
£390
£110
£125
-£20
£1,145
£535
£415
£190
£130
£60
£1,145
£500
£455
£190
£130
£60
£1,345
£620
£510
£210
£130
£80
£1,400
£620
£550
£230
£130
£100
-£25
£40
£35
£40
£70
Notes:
1) Customer bill is for standard tariffs, weighted by payment method and market share. Average figures assume
electricity consumption of 4MWh/yr, gas consumption of 16.9MWh/yr. Figures rounded to nearest £5 and may
not sum due to rounding. Gas and electricity bill values may not equal the dual fuel bill partly reflecting
different market shares for dual fuel and single fuel customers.
2) The indicative net margin for a dual fuel customer may not equal the sum of the gas and electricity indicative
net margins, partly reflecting different market shares for dual fuel and single fuel customers.
During the later period, from mid-2008 onwards, there were no further significant changes in market share.
British Gas had a gas market share of 44% in June 2008, in August 2010 it was still 43% and in June 2012 it
was still 42%.134 British Gas had lost 15% of the market in the previous four years and only 2% in the next
four years. British Gas was no longer ceding market share in order to sustain increases in prices and profits.
Nor were there significant changes in the market shares of other major suppliers. What then was enabling the
significant increase in supplier profitability? Attention necessarily turns to regulatory policy.
Regulatory policy potentially affecting the competitive market and supplier profit margins had three main
components:
—
in February 2008 Ofgem launched its Energy Supply Probe which eventually led to two new
licence conditions effective from 1 September 2009: one requiring any difference in the terms
and conditions of different payment methods to be cost-reflective, the other prohibiting undue
discrimination in any terms and conditions. However it was clear from earlier discussions which
way Ofgem’s thinking was tending. The major suppliers responded, and by October 2008
Ofgem was reporting that the earlier 10% differential between in-area and out-of-area prices
had reduced to about 6%.135 The non-discrimination condition ceased to have effect in
September 2012 but it continued to have influence because Ofgem warned suppliers not to
return to unjustified pricing practices;136
—
from the opening of domestic retail markets in 1997–99 there were complaints about doorstep
selling. Ofgem introduced then extended various rules of conduct. But regulatory and consumer
group pressure increased. In July and August 2011 the two largest suppliers abandoned doorstep
selling. By October 2011 three more suppliers had followed. The sixth followed in July 2012;
and
—
in March 2011 Ofgem’s Retail Market Review Initial Findings expressed concern about the
complexity of tariffs and urged suppliers to simplify their tariffs. In November 2011 the two
largest suppliers indicated their intention to do this. Over the period February to November
2012, five of the six major suppliers implemented some kind of tariff simplification.
The expected advent of the non-discrimination licence condition was broadly coincident with the significant
increase in supplier profitability in mid-2008. The abandonment of doorstep selling in late 2011 was not
coincident with an increase in supplier profitability, but an impact on the price increases the next year cannot
be ruled out. The simplification of tariffs in mid-2012 was broadly coincident with the increase in profitability
at that time.
134
Ofgem, The Retail Market Review—Findings and Initial Proposals, Supplementary appendices, 21 March 2011, Fig 1 p 50.
Ofgem, Energy Supply Probe, Initial Findings Report, para 1.17
136
“SLC 25A was primarily introduced to prevent suppliers from charging higher prices for their incumbent customers, compared
to their non-incumbent customers without objective justification. We were concerned the less active group of incumbent
customers may not be benefiting from competition to the same extent as the more engaged consumers. For example, charging
higher prices for their “in-area” customers compared to their “out-of-area” customers. … While we have decided not to re-insert
SLC 25A for a further period, we will be monitoring very closely the pricing practices of all suppliers as part of our general
market monitoring activities. If at any time we have compelling evidence to suggest pricing practices which are unjustified are
returning to the market, we may commence a full review of this area and consider developing new licence conditions to address
our concerns.” Ofgem, Decision on Standard Condition 25A in the Gas and Electricity Supply Licences, 26 October 2012.
135
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21. Quantifying the increase in net retail margins
What do the increases in indicative net retail margins add up to? Ofgem launched its Energy Supply Probe
in February 2008 and suppliers began to modify their tariffs shortly afterwards. I have therefore taken as the
pre-Probe benchmark the year ending February 2008. This corresponds to Ofgem’s rolling net margin for the
year centred on August 2007, covering the 13 month period February 2007 to February 2008. Table 1 shows
these net margins for August 2007 and for each subsequent year, up to August 2012. I have then used Ofgem’s
forecast rolling net margin for the 12 month period from December 2012 as a forecast for the August 2013
rolling net margin.
With 16.8 million dual fuel accounts nationally, the increase in net profit margin from mid-2007 onwards
has been worth about £1.4 billion per year over the last three years (2010–12). The prospective increase to
£100 will bring the total to over £2 billion per year in 2013. The total for dual fuel accounts from 2007 to date
is £7.4 billion.
For the 9.2 million electricity-only accounts and 4.6 million gas-only accounts, the increases have been
about £0.1 billion and £0.4 billion, respectively, over the last three years, making a total of about £1.9 billion
per year. The projected increases in 2013 (£0.3 billion and £0.6 billion) imply that aggregate net margin next
year will be about £3 billion higher than in 2007. The total increase in retail profits since 2007 will be about
£10 billion.
The nature of the costs included in Ofgem’s data is not entirely clear. It might be argued that higher margins
are needed to cover the costs of financing the increase in wholesale and other costs over this period. In very
round terms, customer bills will have increased by about half over the period from mid-2007 to mid-2013. But
the net margin has increased even as a percentage.137 And even a generous allowance for financing costs would
still leave a substantial increase in net margin to explain.
Table 1
CALCULATION OF VALUE OF INCREASES IN RETAIL NET MARGINS SINCE 2007
Net rolling margin
£
Increase over 2007
£
Value of increase
£m
Dual Fuel (16.8m)
2007
2008
2009
2010
2011
2012
2013 est
Total dual fuel
-35
-25
10
55
45
45
100
0
10
45
90
80
80
135
0
168
756
1512
1344
1344
2268
£7392m
Electricity (9.2m)
2007
2008
2009
2010
2011
2012
2013 est
Total electricity
20
15
10
30
35
30
50
0
-5
-10
10
15
10
30
0
-46
-92
92
138
92
276
£460m
-40
-15
25
45
45
55
90
0
25
65
85
85
95
130
0
115
299
391
391
437
598
£2231m
Year (August)
Gas (4.6m)
2007
2008
2009
2010
2011
2012
2013 est
Total gas
All accounts
137
In March 2011 Ofgem calculated the energy retail margin as a percentage, defined as company earnings before interest and tax
(EBIT) divided by sales. It found that “energy retail margins have averaged 1.6% since 2005. In 2010, energy retail margins
are estimated to have risen to 4.2%.” Ofgem, The Retail Market Review—Findings and initial proposals, 21 March 2011, para
1.5 and Fig 1, pp 40–1.
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Year (August)
Net rolling margin
£
Increase over 2007
£
2007
2008
2009
2010
2011
2012
2013
Total all accounts
Value of increase
£m
0
237
963
1995
1873
1873
3142
£10,083m
Source: Ofgem rolling net margin data
Ofgem would emphasise that the Supply Market Indicator focuses on standard tariffs, is just one indicator,
and is heavily simplified. And, of course, these calculations are very rough and ready. There is a question
whether a negative retail profit margin is an appropriate benchmark, although the suppliers seem to have
survived with an even more negative margin for at least four years before the non-discrimination condition.
Nevertheless, these figures do suggest a very significant transfer from customers to the major energy
suppliers, possibly totalling up to £10 billion over the last half dozen years. Ofgem has not published any more
accurate calculations, nor offered any other explanation for the phenomenon, other than the restrictions on
retail competition that have followed from its policy. At the time of introducing the non-discrimination licence
condition it promised an investigation into the effects within three years, so as to inform the decision whether
to renew it. It failed to carry out this investigation. The reason for the significant increase in profits would
merit further investigation before the same policy is extended further.
22. The implications for future policy
The longer term consequences are even more serious than the increases in prices alone. When such policies
deliver less competition rather than more, and higher prices rather than lower, as would inevitably be the case
if they were implemented, is it likely that Ofgem and the Government will acknowledge that the policies were
entirely misconceived, and repeal them? More likely, it will be said that the policies did not go far enough.
The Energy and Climate Change Select Committee has already expressed this sentiment.
We recommend that Ofgem should be prepared to amend the measures it has implemented under
RMR if there is no evidence after 12 months that they are making it easier for consumers to switch.
In particular, Ofgem should be prepared to reconsider regulating the standing charge, or abolishing
standing charges and introducing a single unit rate.138
For the reasons given above, these measures will reduce competition further and make the situation worse.
There will then be a demand for direct controls on profit margins, on energy purchasing policies, on wholesale
transfer prices and eventually on final retail prices.
If a competitive market is perceived to have failed so comprehensively, what then is the case for continued
private ownership? But without competition and private ownership, who is going to have the ability and
incentive to purchase efficiently in the wholesale energy market? And is the taxpayer ready to fund the £200
billion future energy investment programme that the Government envisages?
These are serious consequences. They follow from the understandable but mistaken belief that enforcing
simple tariffs will increase rather than reduce competition.
III. The Way Ahead
23. Clearer information and fairer treatment
The aim of Ofgem’s Retail Market Review—“to encourage and equip consumers to engage effectively in
the market”—is not in itself a problem. Indeed, it is commendable and consistent with Ofgem’s statutory duties.
The problem lies in the methods that Ofgem has proposed to achieve this aim. Its proposals are to make the
market “simpler, clearer, fairer”. I have argued that those elements of Ofgem’s key proposals that sought to
make the market simpler would restrict energy tariffs and would thereby remove attractive offers that customers
valued, reduce competition, increase prices and work to the disadvantage of customers without encouraging
them to engage effectively.
Of Ofgem’s six key proposals, only two referred to making the market simpler. What about the other
four proposals?
138
Select Committee on Energy and Climate Change—Fifth Report, Consumer Engagement with Energy Markets, 18 December
2012, para 38.
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Three of them aim to provide customers with clearer information. These are:
— “require suppliers to give consumers personalised information of the estimated savings they
could make if they switch to the supplier’s cheapest deal;
— introduce a Tariff Comparison Rate: a common currency to allow customers to compare tariffs
across the market; and
— require suppliers to give all customers a new improved Annual Statement with the personalised
information a consumer needs to engage in the market, and to provide other ‘calls to action’
on bills and in the letter notifying consumers of price increases.”139
Ofgem believes that these measures will give customers more and better and relevant information, thereby
encouraging the confidence and ability to engage more effectively in the market. Critics might question the
plausibility of this belief, and argue that the required measures represent undesirable further steps towards
regulatory micro-management that will be burdensome and costly to suppliers, Ofgem and customers alike.
What will they achieve that previous provisions of this kind did not? Will they create more uncertainty and
problems than they solve? Will they, on balance, yield benefits to consumers that exceed the costs that
customers will end up paying? These issues are matter for debate and discussion with customers, suppliers,
consumer bodies and others. There might also be scope to trial the proposals in conjunction with the suppliers.
The key proposal to make the market fairer is to “introduce new licence conditions to require suppliers to
treat their customers fairly and to embed this principle throughout their business”. This sounds like an attractive
idea—who could be against suppliers treating their customers fairly? In fact, it is very worrying. The concept
of fairness is so subjective and emotive that it is not appropriate as the basis of a licence condition. It puts the
onus on the supplier to guess what the regulator might mean by fairness, then allows the regulator to come
back later and say “That’s not fair, you are in breach, here is your fine”. A licence condition of this kind would
give no tangible protection to customers. But it would increase risk and therefore the cost of capital, which
would translate into higher prices for customers. It would discourage suppliers from innovating. It would
encourage suppliers to coordinate their policies so as not to be exposed to regulatory risk. It is liable to be a
prime example of how a licence condition should not be written.
Ofgem raises various other possibilities. One is personalised market best deal information. This would
“require suppliers to give the least active and most vulnerable consumers direct and personalised information
about the cheapest deals across the whole market”.140 Personalised information could be helpful, and consumers
will want to consider opportunities across the market as a whole. But Ofgem rightly acknowledges that “we
cannot be sure that the measure would succeed in engaging the most sticky and vulnerable consumers in the
market”.141 There are other concerns. If such a scheme is going to be workable it will require considerable
standardisation of prices and terms. Is it really conducive to a more competitive market to require suppliers to
coordinate in this way? And both economic analysis and empirical evidence demonstrate the importance of
appropriate advertising to make consumers really aware of the existence of worthwhile opportunities. Is it
really likely that a supplier that does not wish to lose a customer will market a tariff opportunity as effectively
as a supplier that wishes to attract that customer?
Ofgem discusses the scope for facilitating the role of intermediaries such as switching sites. This could be
helpful, but again there are potential dangers. Ofgem might begin to insist that all switching sites either include
or not include certain kinds of data, or certain kinds of tariffs or terms, or certain methods of comparison etc.
Given Ofgem’s recent record on competition, this would not be in the interests of customers themselves. There
is merit in allowing switching sites the ability to compete by offering different methods of comparison if they
judge this would attract the interest of more customers.
DECC has asked “whether there are any barriers that need to be addressed to allow collective switching and
purchasing to flourish”.142 This is a sensible direction to explore. Perhaps the most promising avenue of enquiry
is DECC’s related question whether “there is benefit in seeking to establish a co-ordinated network of voluntary
organisations and community groups that work proactively with trained energy advisers to support vulnerable
consumers to engage in the energy market”. This would focus directly on the core concern, and would address
it by extending the benefits of the market to a wider range of consumers.
24. Conclusions
The absence of any economic analysis of competitive markets has led Ofgem and now DECC to propose a
set of measures that would be inconsistent with the duty of the Gas and Electricity Market (GEMA) to regulate
wherever appropriate by promoting effective competition. Far from promoting competition, the present
proposals pertaining to tariff simplicity would in fact restrict and distort competition.
This is not just an abstract argument about competition. The restrictions themselves, as well as the consequent
reduction in competition, would increase prices and retail profit margins. In addition, the limitation to four
tariffs would effectively preclude innovation. All customers would be worse off, including those vulnerable
139
Ofgem, Updated domestic proposals, p 8.
Ofgem, Updated domestic proposals, p 9.
141
Ofgem, Frequently asked questions on the Retail Market Review, 19 December 2012, p 6.
142
DECC, Ensuring a better deal for energy customers, p 8.
140
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and less active customers that these proposals are particularly intended to protect. The proposals would
therefore be inconsistent with the principle statutory objective of GEMA to protect the interests of existing and
future consumers. The only potential beneficiaries would be the major energy suppliers, who would be able to
enjoy quieter and more profitable lives unhindered by active retail competition.
A rough calculation suggests that Ofgem’s previous excursion into restricting competition, coupled with the
initial impact of its present proposals, could now be costing energy customers up to £3 billion per year, and
could soon have cost customers about £10bn to date. This needs investigating before the policy is extended.
If the restrictive aspects of the Ofgem and DECC proposals were dropped there would be scope for
discussion as to how better information could be provided to customers in a prudent and not unduly costly and
intrusive way, and how suppliers could be given clearer guidelines on dealing with customers. DECC has
encouraged the concept of collective switching. It now wishes to explore other measures including the potential
benefit of a support network to assist vulnerable customers to engage in the energy market. These and other
measures would work with the competitive market instead of against it, and deserve further exploration.
25. Appendix 1—Coordinated effects
How can we understand what kinds of regulatory actions are likely to give rise to coordinated effects, and
of what kinds? We can learn from a pioneering analysis of oligopoly that began by assuming that the companies
in an industry wished to collude, and asked how they would go about it. What problems would they have to
address and how would they do it? Economic analysis suggested that the key challenge was to design, police
and enforce a collusive agreement.143
Collusion is generally illegal or would be deemed anti-competitive. However, that problem is overcome if
companies are acting in response to a regulatory requirement or request. Regulatory involvement that might
require or lead to coordinated effects could therefore be a means to secure the desired end.
In this vein, suppose, entirely hypothetically, that the major energy suppliers in an industry wished to
coordinate or restrict their pricing and product activities so as to increase their profitability. How would they
go about it?
The first problem is that some suppliers might be keen to coordinate activities in order to limit competition—
perhaps the largest suppliers with most to gain from maintaining the status quo—while other suppliers might
be less keen or opposed—perhaps the smallest suppliers or those who hope or need to increase market share
at the expense of the larger players. Some means must therefore be found of requiring all suppliers to
participate. A regulatory obligation on all suppliers resolves this problem.
The second problem is that, even if all existing suppliers can be persuaded to agree, new entrants might not
do so. So it must be a condition of entering the industry that the restriction is imposed on new entrants. Again,
regulation is a solution.
The third problem is that, even if all existing and future suppliers can be persuaded or required to agree,
some might cheat. For example, if all agree to a common price, some might offer secret discounts. So some
form of monitoring and enforcement is required, to check on the activities of each supplier and to discipline
those suppliers that are found cheating. Another role for regulation.
The fourth problem is to agree the nature of the coordination or restriction. Judgement and realism is called
for. Back in 1998, when each ex-monopoly supplier had only one tariff per payment type, agreement on prices
might have been feasible. But ten years later, with the number of tariffs said to be in the hundreds, this would
be too ambitious. In any case, would a regulator be willing to specify or approve a particular set of prices?
The solution is to go for something achievable, to restrict particular activities rather than to set prices
themselves. So the suppliers might ask themselves: what single competitive activity poses the greatest threat
to us, the activity that as suppliers and mainly incumbents we would most like to prevent ourselves from
doing? Answer: the ability to charge a lower price out-of-area than in-area. If the regulator would just require
all suppliers to charge the same price out-of-area as in-area, that would be the greatest single restriction on
competition we could conceive of.
Along the same lines, it would be possible to make use of the EU obligation to ensure that prices to different
payment methods reflect cost. Highlighting and enforcing that obligation would reduce the scope for suppliers
to cut prices for some methods and not others. Suppliers would then have to compete by cutting prices for all
payment methods across the board. That would be more costly for a supplier and would hence tend to deter
suppliers from competing.
Suppliers might then consider the possibility of coordinated action to limit another competitive activity. They
might ask themselves which selling technique was most cost-effective in attracting new customers, with a view
to limiting or preventing its use. Answer: doorstep selling. If there were sufficient pressure from the regulator
to stop that—for example, if there was evidence of mis-selling even in a very small percentage of cases—then
suppliers could consider renouncing it altogether, and with any luck they could persuade consumer groups to
urge them on.
143
George J Stigler, A theory of oligopoly, Journal of Political Economy, Vol LXXII, No 1, February 1964.
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Buoyed by their success, suppliers might now consider inviting the regulator to assist in further coordinating
their prices, this time by actually setting part of the price. Initially, it would be prudent—and perhaps
sufficient—to limit regulatory involvement to the main product, the standard variable tariff taken by about
three quarters of their customers. It would not be necessary or indeed desirable for the regulator to set the
whole of this tariff: that would mean regulatory control of their profit margins. But if the regulator could be
persuaded just to set a uniform standing charge, that would enable the suppliers to coordinate energy charges
with much less difficulty than coordinating tariffs with two or more components.
This would still be a big step, because the price of such regulatory involvement would be some loss of
control over their own businesses. However, the reduction in their ability to undercut each other would be
sufficiently profitable to outweigh this. Indeed, it would be even better, and easier to coordinate, if the regulator
would require them to get rid of discounts for such things as online purchasing and dual fuel. Although there
are cost and demand differences there which suppliers would otherwise like to continue to reflect, such
discounts have been a significant source of competitive undercutting, so eliminating them would be very
helpful. If they could be require to no longer offer tariffs with no standing charge, that would remove a
particularly thorny and costly issue. Finally, explicit regulatory involvement in price setting could help take
the sting out of future price increases.
But what if the regulator got cold feet and decided not to set a uniform standing charge? Plan B would be
to concentrate on limiting the scope for suppliers to compete. If they could agree to limit the number and types
of tariffs they could offer, this would reduce the number of competitive fronts that they had to monitor and
defend. If all tariffs had to have two components, it would be much easier to coordinate than if some tariffs
had one component and others had three. And if the regulator could specify that suppliers could only offer
lower prices to any new customers if they also reduced their prices to all their existing customers, that would
certainly put the dampers on undercutting, without preventing suppliers from coordinating price rises generally.
Furthermore, if they could have only four tariffs, that would effectively stop suppliers introducing new ones
that might disturb the existing order.
Moreover, a maximum four tariff approach would provide an opportunity to plug a loophole that had emerged
after the regulator had prevented them from competing by offering lower prices out-of-area. Suppliers had
begun to get round this by offering lower prices in other ways—for example by offering all sorts of online
discounts and temporary offers. They could put a stop to this if the regulator were to require all tariffs, not
only variable tariffs, to be included in the four tariff maximum.
This would all look more feasible to suppliers than having the regulator set a uniform standing charge. But
what if the regulator were apprehensive about Plan B too? Could other pressures be brought to bear? Perhaps
get customers to support it? Ha ha, why would turkeys vote for Xmas? So what about politicians—perhaps
they could be brought to see this as a way of blaming the companies for increases in final prices, and punishing
them? Suppliers could find it worth taking a bit of blame if it meant being punished by higher profits. Or
perhaps, on further consideration, a regulatory exhortation to simpler tariffs, even without a licence condition,
would provide sufficient cover for a coordinated reduction in the range of competitive offerings? Just as a
regulatory warning against returning to previous unjustified practices might well be sufficient to restrain price
cuts out-of-area even if they were no longer formally prohibited.
All of this is purely hypothetical. I have no reason to believe that GB energy companies think or act in this
way. But as Malvolio might have said if asked about energy suppliers, “Some are born coordinated, some
achieve coordination, and some have coordination thrust upon them”. Why anyone, having thought this through,
would want to thrust coordination upon energy suppliers is difficult to explain.
26. Appendix 2—Why are energy prices complex?
Popular criticisms, and parts of Ofgem’s argument, reflect a view that tariff complexity is a deliberate device
to confuse and exploit customers, or another way to exert market power by discriminating between more and
less active customers. However, there are at least four reasons why energy prices are complex even in a
competitive market—perhaps especially in a competitive market.
First, although electricity and gas may be simple products, suppliers offer many different ways of pricing
them and paying for them. They may be purchased separately or together (dual fuel). They may be supplied at
a fixed price or a variable price, or a mix of the two. Variable tariffs may or may not have assurances about
no change in prices, and for different periods of time. Or the price might be related to some index such as the
wholesale price or the oil price or the price of certain competitors in the market. It may be paid for upon
receipt of the bill or by direct debit or by prepayment. Communication with the supplier may be offline or
online. Or the electricity might be produced by different types or proportions of renewable energy. And so on.
Why do suppliers offer so many different options? One reason is that neither suppliers nor Ofgem know
what kinds of terms customers would most prefer. Indeed, customers themselves probably don’t know, since
they may not have thought of many of these possibilities before. So suppliers are constantly searching for new
ways to price and pay for energy that they think will keep and attract customers. In doing so, suppliers need
to think about the quality/price tradeoff. If, for example, online billing reduces suppliers’ costs, so they can
offer lower prices, is online billing something that customers are prepared to accept in return for a lower price?
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Similarly, if green energy is more expensive to supply, is that something that customers are prepared to pay
more for?
Competition is thus a discovery process, trying to find and provide what customers want. (At the same time
trying to identify which suppliers are best at this discovery and provision.) One reason for tariff complexity is
that the market has not yet found all the answers. Some of the products in the market today will survive, others
will fall by the wayside. But neither suppliers nor Ofgem yet know which. This will always be the case. Smart
metering will offer a multitude of additional possibilities not yet conceived of.
The second reason for tariff complexity is that customers have different preferences. They do not all want
the same thing. They want electricity and gas but they have different preferences about the terms on which
they want to buy it and the way they prefer to pay for it. This may reflect differences in income, or taste, or
attitudes to risk, or other factors. Similarly, supermarkets stock many different varieties of groceries. The
complexity of tariffs thus reflects the variety of human preferences and circumstances.
Third, there is a competitive aspect. If a supplier is offering only a variable price product, a competitor may
be able to compete more effectively by offering a fixed price product, even though it may appeal only to a
subset of the customers, than by offering the same variable price product at a marginally lower price. It may
not be worthwhile for customers to switch in response to a slightly lower price. It may also be quicker and
easier for the initial supplier to respond by cutting the price of its existing product than by developing a
new product.
Fourth, is the point highlighted in connection with the non-discrimination clause, and discussed above.
Offering different products or terms to new customers compared to existing customers may make it possible
and profitable for suppliers to compete in a way that would not be possible, or not profitable, if they were
required to offer the same price or terms to all their existing customers as to their potential new customers.
In sum, complex tariffs are not an aberration, or a sinister attempt by suppliers to confuse and exploit
ignorant customers. They are an integral feature of a vibrant competitive market. Admittedly they can be
confusing for some customers, and some assistance with coping with the market may be in order. But to force
prices into a simple regulatory straightjacket will reduce, not increase, competition, and all customers will be
worse off.
27. Appendix 3—Ofgem’s attitude to consumer preferences and innovation
Ofgem’s proposals suggest a rather dismissive and short-term attitude to consumer preferences, and to the
above benefits of competition. For example, in discussing its fixed term tariff proposals it acknowledges that
“those consumers who would prefer to be rolled over to a subsequent deal and not engage in the renewal
process could be worse off as a result of our proposal”.144 However, it considers that these are likely to be
“active” consumers for whom the risk of frustration is low. It also acknowledges that “a prohibition on price
increases and other adverse unilateral variations will restrict available tariff types, thereby leading to a loss of
certain tariffs that may be favoured by some consumers (eg tariffs which track other tariffs)”.145 But it quotes
two pieces of its research and concludes “Neither of these findings suggests that customers have a strong
expectation to see non-fixed price fixed term tariffs in the market.”
So, Ofgem’s argument is that if not many customers are likely to be frustrated by removing some existing
tariff options, there is no great objection to doing so. This view gives little or no weight to all the aspects of
the competitive market process set out above. That is, it looks only at how many customers today would be
frustrated by the removal of some type of tariff. It fails to consider that, over time, many more customers
might come to value this type of tariff. It gives little weight to the preferences of a minority of customers if
the majority don’t at present care for it. Needless to say, despite protestations elsewhere in favour of innovation,
it gives no weight at all to the possibility of new types of tariff not yet in the market. It fails to recognise that
offering tariffs that only a minority might choose might nonetheless be an effective means by which some new
entrant suppliers in a market are best able to challenge incumbent suppliers there. This is because these are
products to which the incumbent supplier does not have an immediate answer and/or that do not threaten the
challenging supplier’s own customer base.
In sum, Ofgem has understandably focused on passive and vulnerable customers and the standard products
that they consume today. Unfortunately, in doing so it has failed to appreciate the role that other customers
and other products play in the development of better products for all customers in the future.
March 2013
144
145
Ofgem, The Retail Market Review—Draft Impact Assessment for the updated domestic proposals, October 2012, p 7.16 p 66.
Ofgem, Draft impact assessment, para 7.17 p 67.
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Written evidence submitted by Penelope Draffan
I write to you to express a concern I have in view of the forthcoming simplification of electricity tariffs.
In the countryside, there is no mains gas, so many people use storage heaters, as we do. These only come
on during reduced tariff hours, eg on Economy 7 between midnight and 7 am, or Economy 10, which has 10
reduced hours spread out over the 24 including the afternoon and evening. Unlike central heating using gas or
oil, where the householders can set the timer for the heating to go on and off, with storage heaters it is fixed
by the tariff hours.
I am very concerned that the electricity companies should maintain Economy 10. We use it, and with our
supplier we have midnight—5 am, 1–4 pm and 8–10 pm. This works perfectly. My husband is 74 and I would
like to draw your attention to the fact that if the Economy 10 tariff is not maintained, it is the elderly, those at
home with young children, the sick and handicapped as well as those who work at night, who would find
themselves going from 7 am until midnight without any heat input. The most vulnerable would be most affected
and I do not believe that the electricity companies should be allowed to do away with Economy 10 in the
new tariffs.
Thank you for your attention.
March 2013
Written evidence submitted by Brian Catt
A less well-formatted version of this message was also sent to each committee member by email, with
attachments that further support its positions they are embedded here.
I write concerning the “Energy Prices, Profits and Poverty” ECC select committee on 12 March 2013. I
apologise for this late correspondence, I only became aware of your meeting on this subject on 8 March. I
address the key determinants of energy costs and the best way to keep them down, consistent with all the other
energy policy goals, in a way that I hope will be self-evident at your level of knowledge. The technical details
are based on respected science and economics data sources including the DECC, and the DECC’s own Chief
Scientific Advisor (attached). The links also offer more core data.
Summary
Energy poverty is increasingly the avoidable and direct consequence of energy policy. It is causing generation
to be built that cannot deliver its promises to gain massive subsidies in preference to what can better deliver
the policy objectives unsubsidised.
The excess subsidy cost is already an accelerating £1 billion pa in energy poverty for no benefit.
Alternatives and renewables of current policy simply increase energy poverty for nothing back, because
technically they can achieve none of there promised benefits for their 100 and 200% subsidy increases on price
to the grid.
We can achieve adequate, affordable, controllable, highly then totally decarbonising migration using CCGT
to replace coal plus pervasive nuclear for the long term, when there is literally no choice for a developed
economy. I discuss this in detail in the context of what works.
Instead the law allows so called alternatives to push cheap and efficiently generated electricity off the grid
to force their supply on, at two or three times base load price for 25 years, guaranteed by law. These expensive
parasites are largely useless if the cheap fossil or nuclear energy isn’t there to displace.
Not adequate, affordable, controllable, sustainable or even decarbonising in fact, taken overall energy policy
must increases CO2 emissions. But fortunately, global temperatures have stayed flat while CO2 levels rose
c.2.5% to 400 ppm over the 15 years since the IPCC forecast accelerating CO2 temperature rise from increased
human CO2 emissions.
The only accelerating increase caused by human activity in UK energy policy in fact is in energy poverty
and generator profits through regressive subsidy law. Its time the delusion was dropped and what can deliver
without subsidy was supported, before it is too late.
1. Introduction
1.1 Approach to evidence: Where I use numbers and factors I am using established science and empirical
facts in round numbers, not opinion. Scientific evidence is often treated as opinion, which real science never
should be, and its technological products cannot afford to be. This is particularly true of our core national
energy infrastructure, where GDP is linked 1:1 to energy use. True science has only proven and unproven
hypotheses, the former must have been agreed by multiple independent tests of the data and is as near as we
can get to absolute fact. Technologist’s professional statements also have to be independently justifiable on the
public facts, politicians don’t, nor do the laws that arise from them.
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1.2 Consequence of Ignoring Science Fact: As a direct result of this lack of scientific rationality in our laws,
a growing part of the UK’s energy poverty problem is that laws were drafted to support technically
undeliverable ideology, without regard to the laws of physics and joined up engineering delivery, primarily
designed to maximize lobbyist’s profits from inefficient generation versus the more efficient base load sources
we already had. Worse, they are justified on achieving policy objectives they cannot, but which in fact are
better met using the unsubsidised methods already available. A bad start for energy costs. Our energy policy
is creating accelerating and avoidable energy poverty from its cumulative 25 year grandfathered ROC subsidies,
typically double or treble the wholesale price by law, for nothing back on any measure for bill payers.
This was not unpredicted. On the fundamental science and simple economics these prescriptions cannot and
never could deliver consumers any of what is promised for them by politicians, only avoidable energy poverty
and guaranteed lobbyist profits.
1.3 What Can Work:
1.3.1 Replacing all our coal generation with unsubsidised CCGT gas on grid connected sites would,
on the simple physics:
— Reduce coal fired CO2 emissions by c.50%.
— Increase the efficiency of older gas and coal plant by c.50%, so 2/3 the fuel use.
— Decarbonizes our generating stock by c.30% overall replacing all coal, unsubsidised.
1.3.2 Nuclear energy is still the cheapest on whole life cost as well as:
— Unlimited;
— Sustainable;
— Controllable; and
— Zero carbon.
The only perfect answer to energy policy objectives. All there is when fossil is exhausted and can easily fit
onto existing sites. None of the over subsidised prescriptions of current policy can deliver such substantial
improvements in affordable, controllable decarbonisation for their massive premiums. They simply divert
investment from building what works as above. So are utterly pointless in any rational “mix”.
We can achieve all our objectives with gas and nuclear fuelled generation, without any need for “alternatives”
that don’t do anything claimed for them in substantive fact, or “renewables” that make CO2 emissions worse,
both at double or treble the wholesale price, more later. Simple, easy to check, science fact.
Wind is too Weak to Deliver Our needs and Inherently Expensive and Variable: Wind is a weak and cubically
variable with wind speed energy source, a very expensive and uncompetitive way to generate electrical energy,
put out of business by early steam engines powered by coal. Not free and not zero carbon, only the wind is
free. This deception is one simple cause of our accelerating energy poverty, the only reliable deliverable of
subsidised wind power along with easy generator profit.
Another problem is that most of the “scientific advice” that has got us here is considered in isolation. It
doesn’t get costed and reach joined up business conclusions, such as will it work and how much will it cost?
As an MBA who is also a Chartered Electrical Engineer and Chartered Physicist, I will try, on the basis of
costed science, in ways the non-technical can validate for themselves. Both in this summary, and with more
detailed back up.
1.4 Conservation is Expensively Solving a Problem Increasingly Created by Policy: Many measures are
insignificant and not cost effective when compared to the 100’s of % of price increases removing subsidies
would deliver, and totally unnecessary to achieve policy objectives that are better met by the gas and nuclear
solutions as above. Bicycle sheds.
1.5 Useful Consumption based subsidies are Badly Supported, in particular the big wins of Solar Water
heating, major boiler upgrades and Heat pumps that are significant and worth while are over regulated and
demand multiple and less cost effective insulation, some with much smaller effects, as a condition of the major
gains being supported, etc. Why? We are made to jump through unnecessary hoops to gain support for fiscal
intervention for what clearly can work, but are made to pay generators 2 or 3 times what its is worth for
inefficiently generated electricity that meets none of its claims based on an utterly false justification as to
their capabilities.
Every significant improvement is good. 50% savings from a new boiler are not made less by a few % effect
of a few centimetres more loft insulation or a wall without a cavity. Let people install what works as they can
afford it, with the big wins first. The people who need it most are the poorest. As everywhere else, the rich get
richer at the expense of the poor wherever the law intervenes.
As elsewhere across State Services, ever increasing and unaccountable bureaucracy is adding pointless
overhead and placing counter productive rules in the way of people doing the best thing, as they can afford it.
By law that creates economically regressive, controlling and pointless overhead jobs and costs.
New boilers for old! KISS will give the biggest gains—if policy was really about adequate, affordable,
controllable, sustainable decarbonisation of our energy supply. In reality the law is used to create industries
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that are a legalised burden on the economy for lobbyist profit and government department building, On the
clear science, now self evident fact, and basic logic.
2. To solve the largest part of the Energy Poverty Problem, Change the Energy Poverty Policy
We should be ensuring that what best delivers the stated objectives of energy policy on the real facts can
predominate in a free market—except for the biggest human activity related emitter of radionuclides and toxins
to the atmosphere, unscrubbed coal generation.
nb: nevertheless this will all have a miniscule effect on coal use, as the Third World will be fuelled by cheap
intense coal, burnt probably as cheaply and dirtily as possible. This is much worse than proverbial wetting
yourself in a dark suit. An Australian Cardinal has put it well, a religious man:
2.1 The UK’s Unilateral Policies Cannot and Will Not Affect Climate Change:
Nothing we do will significantly affect global climate change, however caused, because:
— We are 2% of combustion emissions.
— Most large emitters are not reducing emissions, nor planning to.
— In technical fact our energy policy is increasing net CO2 emissions.
Tariff based subsidy created energy poverty is the avoidable and burgeoning 25 year legacy of government
energy policy, imposed on its victims by regressive and anti-competitive parliamentary law, to pointlessly
reward what cannot deliver the claims made for it—on the elementary costed physics.
2.2 Focus on technologies that are known to work.
Low cost easy wins: Energy policy has inhibited new investment in the two generation modalities that in
technical fact are most capable of most rapidly meeting the affordable, adequate, controllable, sustainable and
decarbonising objectives of energy policy—CCGT gas and nuclear fission fuelled generation.
The root cause of current subsidy led energy poverty is that the capable CCGT gas and nuclear fuelled
generation that can deliver us an affordable energy future have been discriminated against in favour of
exploiting the climate issue for easy subsidy profits with the woefully inadequate prescriptions of ideology,
that in fact make things worse than what we already had on the core policy measurements of adequacy,
affordability, controllability, sustainability, decarbonisation
It’s simple to demonstrate that only CCGT gas and nuclear energy can deliver these objectives of policy, in
summary due to:
— Their physical properties of energy density/intensity and controllability hence:
— Lowest costs per unit energy (see DECC Chart below and others); and
— Lowest resource use per unit energy output.
— 50 % better CCGT thermal conversion efficiency vs. traditional open cycle combustion,
— 50% lower CO2 emissions from CCGT versus inherently dirty coal, and
— 10,000 times energy intensity and zero emissions for nuclear generation.
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On several lifetime cost studies over a decade CCGT gas and nuclear fuelled generation have remained the
two cheapest unsubsidised electrical generation methods on a whole life basis, including the DECC’s own
ARUP consultation for 2011 new build (*nuclear 2017). This is also the case for current supply, as below.
LINK: https://dl.dropbox.com/u/1976309/DECC%20Levelised%20Electrical%20Energy%20Costs.pps
WHOLE LIFE COSTS OF VARIOUS MODALITIES ON CONSISTENT BASIS BY AUTHOR
Source
Parameter:
Modality:
Gas CCGT
Gas with CCS
OCGT Gas (Fill in)
Coal w/o CCS
Coal with CCS
Nuclear
On Shore Wind
Off Shore Wind
More Unaffordable
Biomass (limited to
100MW)
Barrage
Wave
Royal Academy of Engineers
OECD
2004
2010
Capital Cost £M/
GW(i)
p/kWh (ii)
p/kWh
Current/Future
Current/Future
DECC ARUP
Report 2011
(for new
build)
p/kWh
300
2.2
3.4–4.5
7.7
330
800
3.4–3.6
3.4
3.0–5.0
1,150
740–630
920–780
2.26–2.44
5.35–4.78
7.19–6.34
4.0–5.5
3.5–11.0
6.0–15.0
9.5
10.9–13.5
7.0
9.0
13.2
1,840
6.76
1400 E
TBD>All Others
TBD>All Others
3. Long Term Guaranteed Tariffs are Economically Regressive and Create Avoidable Energy Poverty—
including Strike Prices
There are a Much Better Ways to Promote What Works while Minimising Energy Poverty:
Now the realities of the physics are manifesting themselves in energy poverty and diminishing
supply, a knee jerk reaction that subsidises generators to build new nuclear or CCGT that can
currently deliver profitably unsubsidised is NOT an economically progressive policy response. To
reduce avoidable energy poverty we need the lowest-cost competitive solutions that meet the other
rational objectives of policy, not the most expensive imposed by anti competitive law.
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3.1 Generators have become the bankers of energy, fixing the tariffs by exploiting technically irrational
ideological beliefs to derive massive bonuses from blackoutmail—for making things worse at our expense.
This bad subsidy habit by law needs to be broken to allow what works best to win.
But the commitment to build what works best should be encouraged. How?
Overall we need to do what works best for our economy, or end up too poor to do anything.
It isn’t hard. What works best is what we have already, and can do better. We simply have to end the deceits
of energy policy’s prescriptions and the delusion there is another way using energy sources that were inadequate
to get an industrial revolution started. We haven’t even started seeing anything like the serious energy poverty
and power cuts that will arise from relying on the generation of significant amounts of alternative energy at
two or three times the price of what can do the job better, by law, grandfathered for 25 years. It needs
stopping. How?
4. How to stop the problem of Avoidable Energy Poverty?:
Simple!
4.1 To minimise energy poverty, while better meeting all the goals of policy, cancel all subsidies and
transition to a competitive lowest-cost preferred regime. Except for dirty coal.
One that levels the playing field for capital investment risk and return profiles. This will in practical fact
decarbonise the generating stock fastest of all, by natural selection of the most intense and efficient, lowest
cost and most decarbonising CCGT and nuclear—in a rational market.
The subsidy-fuelled oligopoly we currently have by law can’t survive in competition and must fail by law,
the real physical and economic laws. Current policy can only deliver accelerating energy poverty, declining
competitiveness and GDP—by politicians’ laws.
4.2 An honest and progressive energy policy would provide debt funding, or secure it for public and private
issue, in a manner that makes generators indifferent to the different fiscal risk and return profile of short and
long-term investments, the stated problem with nuclear payback time scales. Loan repayment can be from
competitive tariffs, when generating.
This would create a free and level market where what works best on all measures will win.
An annual settlement with transparent costings? Another approach is fully transparent cost plus/fixed profit
agreements with a lowest possible floor price and annual independent review, which puts some of the risk on
the tax or bill payer (same thing, different language), but always for what works best, versus subsidies for
expensively inadequate generation that cannot be changed for 25 years, as with ROCS.
There could be a sort of Green deal for generators with government comfort to the funding banks, tied to
the generating facility whoever owns it. BUT NOT guaranteed long-term fixed price tariff support by law,
which is regressive, anti-competitive, borderline dishonest and an increasing factor in avoidable energy poverty.
Legalised fraud.
4.3 Call the generators bluff on nuclear. If new nuclear prices don’t come down accelerate Shale extraction,
expand LNG terminals and storage even more—do that anyway as we are under provided with storage—and
buy more LNG, and build unsubsidised and decarbonising CCGT plant on the grid-connected coal AND
decommissioned nuclear sites. See pre-subsidy Didcot B as a globally recognised pre-subsidy success at coal
replacement by CCGT gas.
We should only build unsubsidised nuclear when the price is right—from multiple bids using multiple
technology suppliers applying advanced safety regimes. Gas buys us time to conduct commercially rational,
lowest bid, competitive negotiations versus bluffers poker “negotiations” on long term Strike Price for a pig in
a poke, a slightly less blatantly regressive “ROC lite”. Old Treasury Economist habits die hard. It might be
OK if the price was agreed to a regularly reviewed formula as above, not for 60 years though.
We can migrate to nuclear via CCGT gas, including using the very cheap shale we have, OR import LNG
from the USA’s new LNG industry, landed at around today’s prices over a nuclear build timescale—not 2 or 3
times current prices bandied about by wind farm lobbysists. We still don’t know the possible contribution of
methane hydrate which the Japanese are actively developing. etc.
nb: most likely gas won’t be close to the totally artificial “benchmark” of £90/kWh by 2030, a pure guess preshale to justify on shore wind before technology changed the economics. Yet this “price point” was clearly
exploited as a rather obvious negotiating position by EDF for nuclear, versus the realities of bottom-up cost
plus approach ARUP have used for the DECC.
4.4 There is nothing to fear in such a change, as allowing CCGT gas and nuclear a level playing field
must deliver the stated objectives of energy supply fastest—adequate, affordable, controllable, sustainable and
including straightforward and guaranteed 20% decarbonisation to 2020 targets—using gas that works, not wind
that cannot.
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Simply replacing coal on site with much less environmentally impactful CCGT can reduce UK CO2
generation emissions by over 30%. And if we need clean coal to meet demand we should burn it, as long as
the technology includes scrubbers. The effect on global emissions will be almost vanishingly small.
4.5 Keeping the lights on while we change to what works at best possible price to consumers is just lawyer’s
work as far as the nonsense EC directives are concerned.
It’s not our fault EC directives prescribed modalities and regressive economics that can’t deliver their own
claims at two or three times the price, in adjudged breach of the Aarhus convention.
4.6 Time Scale:
Building CCGT gas to replace coal on site as well as increased gas storage capacity IS URGENT.
The time scale for nuclear is clear enough, nuclear must become predominant before gas becomes
economically obsolete as a mainstream fuel. That date may be much further away than we expected.
4.7 Who Should Manage This: We have time span of several governments to do this, so it should be managed
by a “CEGB like” body outside politics with a solid grasp of the costed technology through the formation of
its energy industry leaders, charged to deliver what works best.
The National Grid would be great for this
5. Conclusion
To remove the burgeoning energy poverty effects of policy subsidies we simply have to prefer what really
works and stop subsidising what doesn’t, or our economy will be badly damaged, totally avoidably, by the
laws arising from an undeliverable policy that in fact is creating escalating energy poverty to benefit only
lobbysist generators.
We are already committed to over £25 billion into avoidable energy poverty if we agree current subsidies
are running at £1 billion per annum for 25 years. Our billions’ are being 100% wasted by diversion to pointless
ideology for easy private profit by law, and the poorest in society are worst affected. This has to and can change
before avoidable bills of more wasted £billions are added to our personal and national debt. Technologists have
the technology, but government lacks the honesty and political courage to do what works.
The Points in more Detail
6. What does not work and will massively increase Energy Poverty
6.1 “Alternatives”: It has now been clearly explained how direct solar derived alternatives like wind energy
have a marginal effect on CO2 emissions, either slightly positive or negative, in return for their huge100% and
200% grid price subsidies, that’s 2 or 3 times the cost of the reliable and cheaper fossil and nuclear alternatives
depend on working 24/7 to exist, not a few %.
Wind generated electrical energy simply forces efficiently produced and unsubsidised base load energy off
the grid, at two or three times the price by law. Wind generation is totally dependent on its fossil gas host’s
availability and controllability to do this. Hence the gas generation’s emissions continue when it is off the grid
running in “spinning reserve” while the wind energy is there ready to take over when its gone again—hence
little “offset”, if any, when the other CO2 impacts of the wind power’s “backup” are considered.
In joined up delivery fact the claims for wind as free and zero carbon to support its massive cost and
resulting energy poverty are an almost total deception, viewed in the overall context of the joined up outputs
of the electrical energy and emissions arising.
Note that this is gas spinning reserve, twice as emissive coal power cannot respond to variation as fast, so
coal’s 100% higher than gas emissions per MWh are not offset by wind power. Wind power simply swops
cheap gas fuelled power for two or three times as expensive wind power a bit of the time, and can’t be of use
without its fossil host to exploit. Nothing is saved.
So unsustainable, inadequate, not decarbonising and VERY expensive. Not alternative to what we have.
This was never a surprise. We knew how physically weak and highly variable wind energy was before we
started, wind energy falls with the cube of wind velocity so is down to half at 80% of max rated velocity and
1.6% at 1/4. None of this is Nobel Laureate level economics or physics. Sailing ship and factory owners
understood it in the early 1800s. This is what happens when politicians try to legislate the laws of physics.
All the ideologically preferred, near real time, solar powered modalities of energy policy are weak energy
sources—wave, solar PV, wind, even tidal. As an absolute consequence they are inherently expensive to collect,
uncontrollably intermittent and self-evidently 100% dependent on displacing the output of their much cheaper
and controllable fossil “backup” to be a part of the on-demand grid.
Subsidies can’t change these physical absolutes. Wind energy conversion efficiencies are mainly determined
by aerofoil and generator design which are well established technologies, turbines themselves are at least 30
year old technology. So these prescriptions can only ever make their easy 100% and 200% bonuses at our
expense for nothing back except totally avoidable energy poverty, will not be significantly enhanced by
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development, and will all be effectively obsolete when the more effective and cheaper fossil hosts they suck
their value from are gone.
Not decarbonising, not alternative, very expensive, and resource intensive as so much collection equipment
is required per unit energy—and not sustainable in joined up fact, by absolute physical laws.
How Much Avoidable Alternative Energy Poverty?: Each 1GWyear—roughly one fossil power station of
continuous offshore wind power receiving 2 ROCs valued at £50/MWh currently—would waste 1,000MW x
(365 x24) hours x (2 x£50/MWh ROC per annum) annually in subsidy.
That is c.£1B pa per GWYear of totally avoidable energy poverty, versus current CCGT gas or nuclear, for
life by law—by forcing the cheaper power off the grid.
nb: 1 GWYear is c.10TWh. We currently use 330 TWh, and will need double this simply to replace fossil use
in heating and transport alone by 2050. The DECC concur.
So each GWYear of double ROC subsidised generation avoidably adds c. £50 pa to every one of 20 million
household bills in the UK pa at current prices for its maybe 25 year life—and does nothing in return for its
justification of emissions reduction, taken together with its essential gas “backup”.
The other expensively subsidised alternatives of Solar PV and wave energy also make each of energy policy’s
measurements of adequacy, affordability, controllability, decarbonisation and sustainability worse versus the
base load benchmark while increasing energy poverty, for the overtly obvious reasons above, while further
inhibiting the best use of capital to meet our policy objectives. Truly alternative reality.
6.2 “Renewables” clearly increase emissions above that of even coal by burning inefficient carbon based
“bio fuels”, AKA wood here, again at two or three times the price for what is sometimes the same electricity
from the same turbines using a different fuel.
The excuse is that the CO2 is different because the wood can be grown again on a non-geological time scale.
A quick review of that assertion, by placing tree growth in the time scale of the justifying accelerating climate
change disaster hypothesis, shows the logical inconsistency in that—although climate change itself is a
hypothesis not standing up well to the independent test of subsequent empirical data. This is yet more ideology
for profit over logical reality, with the same consequences. Avoidable energy poverty from easy subsidy profit
by law based on scientifically false assertions. Truly money for nothing.
Sustainable? Really? Bio Fuels were an utterly inadequate energy source to fire the early industrial revolution
or steam ships—too bulky and expensive and the forests were disappearing fast. Pure assertion on any
significant scale.
Its obvious we simply don’t need to generate electricity so CO2 intensively while pointlessly doubling or
trebling the price by subsidy. Not affordable, not renewable on the scale required, not really decarbonising.
We already have much better combustion-based generation with escalating reserves in gas, and nuclear which
can support human kind for its short life on Earth with the least effect on our eco system in fact.
6.3 The Best: Overall, CCGT gas and nuclear energy offer much cheaper and more decarbonising energy
supply than Bio Fuel renewables without significantly increasing energy poverty. On examination bio fuel
renewables are again a political deception to justify awarding generators massive bonuses for avoidably
increasing energy poverty and emissions by law, to generate electricity we can generate more efficiently, less
emissively and at much lower cost in other ways. Sound familiar?
6.4 How Much By? DRAX Example: The 2GW Bio Fuel proposal to replace coal at DRAX will produce
electricity the grid must now pay twice the price for from the same turbines and increase emissions, versus its
former coal firing. Burning American wood pellets, not British. How is this justified?
Avoidable energy poverty from DRAX alone? = 2,000MW x (365 x24 )hours x £50/MWh ROC per annum =
£1B pa for life by law to add £50 to every one of 20 million household bills in the UK pa for its life—to
make emissions worse. That’s simply climate changing for profit. Or “Reverse CCS” as one Oxford Professor
recently described it.
7. What works to reduce energy poverty
And Reduce The Cost Of Generation To The UK Economy Overall:
Big Gains From Doing What Works On The Simple Science.
7.1 GENERATION:
7.1.1 Going to CCGT from Coal and Open Cycle gas ASAP will:
— improve the thermal conversion efficiency of the fossil fuelled generating stock by 50%,
hence at roughly 2/3 the fuel consumption per unit output and hopefully cost to the grid.
And:
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—
Reduce coal CO2 emissions 50% where used to replace existing coal fired generation, an
easy option for switching from coal using existing grid connections. Clean CCGT gas can
also be installed on grid connected city sites vacated by old and smaller coal fired power
stations. Replacing all coal-fired plant with CCGT gas will reduce overall CO2 emissions
by over 30%. No subsidies required.
Separate Legal distortions from engineering delivery: This solution can be rolled out at our achievable and
affordable pace, not the EC’s.
Keeping the lights on while we change to what works at best possible price to consumers is just lawyer’s
work. Its not our fault EC directives specified what can’t deliver its own claims at two or three times the price,
in adjudged breach of the Aarhus convention.
LINK: https://dl.dropbox.com/u/1976309/Didcot%20A%20and%20B%20copy.png
7.1.2 Build the inevitable nuclear end game AFAP behind CCGT gas. Several CCGT gas and nuclear
plants can fit onto most coal fired sites because their physically intense energy output requires
much lower use of resources and land.
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SIZEWELL B ON SAME SCALE—NEW NUCLEAR REQUIRES LESS LAND USE
LINK: https://dl.dropbox.com/u/1976309/DECC%20Levelised%20Electrical%20Energy%20Costs.pps
These two modalities offer the lowest overall life time electrical energy costs available per the DECC ARUP
study for 2017 build, and can be unsubsidised.
7.1.3 End the 100% and 200% ROC subsidies for undeliverable prescriptions of generating policy
ASAP, Wind, wave, solar PV, waste incineration, etc., as the pointless political cost they in fact
are, and go for the best approach to meet the stated objectives unsubsidised—level the playing
field with support for repayable CAPEX investment repayable from tariffs, level downwards to
what works, not upwards to what does not!
7.2 Consumption Big Wins:
7.2.1 Use Gas efficiently: Given the price differential between primary gas fuel and refined electrical
energy per unit, and the fact that using gas wastefully is daft, encouraging the use of modern
boilers to conserve cheaper gas for as long as possible in direct heating is important. It’s roughly
65% for and old cast iron boiler, 80% balanced flu, 95% for condensing.
So 50% gain by replacing an old boiler with the latest technology. The Green deal 20 year payback approach
to this property centric capital loan scheme is long overdue and should be as easy to access as possible, NOT
hamstrung with bureaucratic checks that prevent people from gaining the support with meaningless
qualifications about insulation standards. Anyone with such a boiler should be able to access such a loan
scheme.
7.2.2 Heat Pumps for Electrical Heating: Replacing gas combustion with relatively inefficient direct
electrical heating is a very bad use of the pure refined electrical energy—95% efficiency for
direct burn gas vs. 60%, for electricity from CCGT, so <2/3 the efficiency.
And the cost per unit for direct electrical heating will be basically unaffordable for the majority at three or
four times the cost per unit—for our biggest energy use.
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Transition to Heat Pumps for heating can reduce electrical heating costs by 70% per kWh of heat energy*.
Realising this gain in “efficiency” will be crucial to an affordable energy future when all there is for heating
is electricity or firewood.
*The value of the heat output is three times that of the electrical energy used, so electrical heating can be
about the same cost as gas currently.
When gas is gone will have to have replaced most gas heaters nationally. Better get started with heat pumps
to learn what works best for most people. These are good uses for capital grants and support, where major
gains are delivered. We should remove the related bureaucracy and qualifications and encourage everyone
with resistive electrical heating to switch ASAP as a major conservation measure, the factor of 3 bestows a
clear priority.
7.2.3 Solar Hot Water: Can take away a significant part of the water heating energy requirement from
gas and electric immersion heating. This IS a great use of solar energy to reduce electrical and
gas demand for space and water heating by around half, even in the UK, deserving of strong
support. The problems of matching supply to demand are totally manageable for the consumer
using back up heating when necessary, and hot water generation needn’t be instantaneous.
7.3 Consumption Summary: All the above are summarily discussed in Professor David MacKay’s
Sustainable Energy paper synopsis you will probably be familiar with, Pages 6–9 cover big
wins and losses, it is also at the link with two other slightly more absolute but still accessible
and peer reviewed academic papers recommended by Prof Colin McInnes of Strathclyde
University, both very accessible to the numerate non technical.
LINK: https://dl.dropbox.com/u/1976309/Energy%20Intensity%20Papers.zip
It must be far easier for consumers to adopt any of these substantial improvements in isolation without the
artificial complexity, bureaucracy and resulting expense so beloved of civil servants. These solutions are no
less effective in reducing electricity and gas energy consumption standing alone than done together.
Do we want people to make the big savings or not? Get the pointless bureaucrats out of people’s rational
decisions, they are mostly making an economically regressive industry out of over regulation. A simple PX
scheme would give adequate checks for boilers, for example. Regulation is simply adding pointless jobs that
add no value, and in fact are denying people access to support to do what’s best for us all. Again.
LINK: https://dl.dropbox.com/u/1976309/Energy%20Intensity%20Papers.zip
Make it easy to adopt any of these substantial improvements in isolation. They are no less effective in
reducing electricity and gas energy consumption standing alone than done together. Get the pointless
bureaucrats out of people’s rational decisions, its just making an economically regressive industry out of over
regulation. Pointless jobs that add no value, and in fact detract from people doing what’s best for us all. Again.
8. Overall Summary:
The fastest way to reduce avoidable energy poverty and deliver the policy objectives is to scrap its subsidy
prescriptions to push the price down as far as possible for all is:
8.1 Scrap Subsidies, Replace with Generator Green Deal
Prefer a level playing field for all generation modalities with amelioration of CAPEX risks
through repayable loans and guarantees for new build, as is done with the green deal, but
for generators.
Such an effort to deliver core infrastructure over several decades to carry us through the end of
fossil MUST be removed from ideological politics and managed away from current irrational
short term political interference by a matter of fact CEGB-like body, with a full professional
grasp of the costed technology, charged to deliver what works best, and as competent, well
resourced and trustworthy to negotiate with generators and suppliers as our Departments of
State demonstrably are not, across multiple areas of national services. Defense, Transport,
Health, etc.
8.2 The NATIONAL GRID would be a great body to manage this, get politicians and ideology out
of managing our core energy infrastructure. And the EC. We are an Island with our own
problems. One size does not fit all. Especially one exploiting the propaganda machine of
German Eco Fascism.
The economics will then deliver the least energy poverty creating, most decarbonising, all we
can eat, and safest sustainable electricity.
8.3 Maximise support for heat pumps and solar water heating (not Solar PV) to substantially reduce
the consumption of electricity (and gas) to power heating.
Reduce the red tape of current deals. Get rid of the micky mouse eco compliance which denies
people the big eco result because of some other minor eco non compliance with much less
impact on efficiency and is a “must finish your greens before you can eat you meat” level of
jobsworth control.
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Provide Simple support for big single wins, a credit for a swapped out gas boiler or installed
solar water heating, or CAPEX support as with the Green deal repayable over 10 years or
whatever. So loan versus subsidy and a great QE infrastructure opportunity. For everyone as
long as the installation is practical, safe and is signed off by an authorised person.
This will help conserve the gas and oil fossil reserves we have for their essential uses in
transport—air, farming, military, shipping, etc—and oil as feed stock for manufacturing.
Plentiful nuclear energy can also be used to synthesise replacements for fossil derived products
we will no longer have, including energetic liquid fuel for flight, smaller sea and remote/off
road land transport (larger ships will be powered by sealed and passively safe nuclear plants).
As Mendeleev wrote of oil in the mid 19th Century. “This is far too valuable to burn”. But we
needed to burn fossil to get the science that led to the nuclear technology that made the end of
fossil as a mainstream fuel a deliverable objective in the 21st Century, in particular for wasteful
uses like heating.
Plentiful energy at not much higher cost IS possible, if we stop wasting money subsidising undeliverable
ideology. That can only increase the burgeoning and cumulative 25 year ROC debt legacy to no real gain
versus better uses of our money.
We need to apply our money to the advanced science we have taken centuries to build to where we are
today, capturing the maximum energy from the cleanest most intense fossil fuel using a modern gas turbine,
plus the game changing science we won from a disastrous World War that can literally save the human race
from the end of fossil fuel, with all the energy we will ever need.
We are totally dependent on energy use to remain developed, we stopped using wind and water energy
sources because they were—and remain—too weak, expensive, uncontrollable and inconvenient, and wood
unsustainable, to get the first foot on the developed economy ladder, a process and fuel change that dozens of
developing economies will use this century.
The “alternative” of current policy is, in costed fact, the option to waste our remaining credit on a 3rd World
future of expensively inadequate windmills, water mills and wood burning—too weak, variable and
unsustainable to power the early industrial revolution—to enrich a few lobbyists at massive avoidable energy
poverty to our economy.
Hardly a direction in which the responsible government of a technology dependent economy should be
continuing to direct its citizen’s money.
March 2013
Written evidence submitted by Michael Dangoor
There has been a lot coming out in the news media about energy companies overcharging unwary customers.
I would go further and claim that some energy companies are indulging in crooked behaviour. Please let
me explain.
I am somebody who does check if he can save on his energy costs. Three weeks ago, when my existing
company notified me that my gas bill would be going up 20%, I went on to a comparison website. I found that
I could make a saving of 10% by moving to nPower and so I applied to transfer to them. About ten days ago
I heard on the radio that nPower would be increasing gas prices by 9%. Naturally I was concerned about my
new contract. I phoned nPower who informed that my gas unit charge would be going up 29%! I immediately
cancelled. This is disgraceful behaviour. I cannot believe this sort of sharp practice is allowed to happen in a
supposedly regulated market.
For the future I believe it will be a big step forward if the energy companies are required to fix any offer
for at least 12 months. If the consumer cancels within the 12 months he would have to pay £50 charge.
April 2013
Written evidence submitted by George Herragty
I write as an ordinary, member of the public, feeling utterly powerless and ignored, in the face of greedy,
foreign, multinational windfarm developers. I would like to make some pertinent observations:
Backing the Wrong Technology
Has no one noticed the 14,000 abandoned turbines, rusting in the Californian desert? They simply did not
deliver the power promised at an affordable cost. www.naturalnews.com
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Run Out of Space
One only has to glance at the SNH map, Highland council map, or CAWT map of windfarm locations, to
see the disproportionately massive footprint required to supply a tiny trickle of unreliable, intermittent energy.
www.snh.gov.uk www.highland.qov.uk www.cawt.co.uk
Environmental Devastation and Visual Intrusion
The quiet, rural nature of Britain and Scotland’s countryside is being overwhelmed by giant industrial
machinery that is completely out of scale with the environment: bulldozed tracks, pylons, millions of tons of
soil removed, thousands of lorry loads of concrete, whole forests and hillsides, ruined by what is meant to be
a green policy! Our National Parks are being surrounded by industrial turbines!
Damage to Tourism
I have heard many adverse comments about windfarms, made by visiting tourists who come to Scotland for
peace, quiet, scenery and seclusion. Please see attached letter—“I met a German”. Also Mountaineering
Council of Scotland’s 11,000 members, John Muir Trust’s 10,000 members, outdoor enthusiasts, photographers,
and most enlightened environmentalists are appalled by windfarm devastation. Even Donald Trump’s huge
investment in our tourism industry is being stalled!
Subsidy Farming
“A cash crop for farmers” a neighbour of mine commented. Just one glance at the windfarm location
map by CAWT surely indicates that some pretty dubious tactics are being employed by devious developers.
Aberdeenshire farmers can spot a moneymaking scam when they see it! www.cawt.co.uk
Cost to Economy
The escalating cost of paying ongoing subsidies during the recession is quite simply unaffordable.
£25,000,000 to switch off when the weather is too windy is simply outrageous! Even Ofgem “has long standing
concerns”. The Times 18 January 2012
Rogue Develpors
Local residents feel utterly powerless in the face of giant multinationals and rogue developers who repeatedly
and wilfully subvert the planning system. Speak to any resident of Moray or our MSP Richard Lochead for
information on that one! The letters pages of the Scottish press can also be illuminating.
Dictatorship from Holyrood
Local Councils, and democratic decisions against windfarm developers are frequently overturned by
Holyrood politicians, against the will of local people. The planning system is clearly undemocratic, a shambles
and not fit for purpose! Notice how windfarm approvals are sneaked out during the holiday period. Gaelic
names are almost always used to deliberately hide the locations.
Social Cost and Division
Fuel Impoverished neighbours of millionaire landowners feel resentful paying vast subsidies to obscenely
wealthy aristocrats, who are often absentee landlords living abroad, caring not a jot for our environment!
Damage to Health
A clearly specified, national minimum distance from industrial wind turbines is an urgent priority. Growing
international evidence of major health issues are of real concern! The Waubra Foundation recommend at least
10 kilometres.
Damage to Wildlife
Thousands of birds are killed each year by turbines. Surely when we are trying to attract visitors to see our
glorious environment and wildlife we must do better than this.
SOME RECOMMENDATIONS
Slow Down!
Let’s retain existing plant and valuable engineering expertise we have in existing technology a little longer,
to better support development in more reliable, emerging technologies. A single, new, clean gas power station
would save our environment from the devastation of 2,500 turbines, and buy time!
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Renegotiate Targets
Energy is far too important to be a political issue. Trying to meet impossible deadlines in the current
recession is hugely damaging. There would be no disgrace in reconfiguring the targets and much to be gained
from a more modest, more prudent, more affordable timescale.
Switch Subsidies
The vast subsidies for inefficient, intermittent, unsightly windfarms that require backup should be stopped
immediately. Investment should be made in intelligent technologies that deliver reliable, predictable, constant
power.
Support Domestic Schemes
Small scale renewables, hydro schemes, small farmyard windmills, solar panels, energy conservation and
efficiency should be funded entirely by the user concerned and NOT by public subsidy.
Keep Industrial Scale Installations Offshore!
There is no place for vast, industrial turbines on land. The iconic, pastoral nature of our landscapes is
treasured by millions and must be kept that way.
“it is horrifying that we have to fight our own government to save the environment.”
Ansel Adams
Yours, trying to preserve the Highlands
April 2013
The Stationery Office Limited
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