Energy Action Scotland Response to the Energy and Climate Change Select Committee Inquiry into Energy Prices, Profits and Poverty

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1 NK/9349 Energy Action Scotland Response to the Energy and Climate Change Select Committee Inquiry into Energy Prices, Profits and Poverty 1. Introduction 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. Suite 4a Ingram House 227 Ingram Street Glasgow G1 1DA Tel: Fax: Fuel Poverty in Scotland 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 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. 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. 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 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

2 miss out on the 130 rebate given by the Warm Home Discount if they moved to one of these smaller suppliers. (iv) (v) (vi) 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. 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. 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. 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. 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

3 wholesale market and allow access to cheaper fuels to all players and not just the Big Rising Block Tariffs 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 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 (iv) (v) 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: EAS believes that the definition proposed by Professor Hills is flawed to a considerable degree. 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. 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. 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

4 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) (vii) (viii) (ix) (x) (xi) 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. 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. 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. 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. 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. 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 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.

5 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. 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. 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.

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