Off-Grid Energy. An OFT market study. October 2011 OFT1380

Transcription

1 Off-Grid Energy An OFT market study October 2011 OFT1380

2 Crown copyright 2011 You may reuse this information (not including logos) free of charge in any format or medium, under the terms of the Open Government Licence. To view this licence, visit or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or Any enquiries regarding this publication should be sent to us at: Marketing, Office of Fair Trading, Fleetbank House, 2-6 Salisbury Square, London EC4Y 8JX, or This publication is also available from our website at:

3 CONTENTS Chapter/Annexe Page 1 Executive Summary 4 2 Introduction 9 3 Overview of the off-grid market 13 4 Heating Oil 56 5 Liquefied Petroleum Gas (LPG) Microgeneration Conclusion and recommendations 200

4 1 EXECUTIVE SUMMARY 1.1 Four million households in the UK are not connected to the mains gas grid and therefore use other fuel sources for their heating. These 'offgrid' fuels include kerosene heating oil, liquefied petroleum gas (LPG), coal, wood and electricity, with microgeneration technologies, such as solar panels, increasingly playing a role. 1.2 In the winter of 2010/11 some heating oil customers experienced high prices and delays in supply, causing some commentators to question how well the markets for heating oil and off-grid fuels more generally were working. In January 2011 the OFT brought forward planned work into off-grid energy supply and launched a market study to assess whether and how the competition and consumer protection regimes could bring about better outcomes for consumers. Off-grid customers and fuels 1.3 The off-grid community is large, geographically dispersed and diverse: it covers all social grades, urban and rural communities, households in fuel poverty as well as households that are not, and embraces a wide range of fuels. 1.4 The markets in England, Wales and Scotland are broadly similar, with between 12 and 25 per cent of the population off-grid, and with heating oil and electricity being the main fuels used. Northern Ireland is very different. Fully 80 per cent of households are off-grid and around 80 per cent of these use heating oil. However, a higher proportion of the offgrid population in Northern Ireland has the option to connect to mains gas. This reflects the relatively recent roll-out of mains gas networks. 1.5 There is limited potential for most consumers to switch between different fuels the cost of converting boilers means that such switching is likely only when central heating systems are upgraded or replaced. This means that the different fuels provide only a limited competitive constraint on one another. There are therefore separate OFT1380 4

5 markets for each fuel and the issues arising in each market are largely distinct. 1.6 Our report focuses primarily on the markets for heating oil, LPG and microgeneration; our key findings for each of these are set out below. Heating Oil 1.7 Most complaints about heating oil concern high prices. Retail margins only account for around 10 to 15 per cent of the price level, out of which distributors cover their own costs, and some profit. Of the variation in prices over time, over 90 per cent is explained by movements in the price of crude oil. 1.8 Unexpectedly early, heavy snow in December 2010 triggered a sharp spike in demand (40 per cent up on the previous year) at the same time as hampering deliveries. Prices also spiked. To some extent this reflected the increased costs of supply in tough conditions, but firms may also have taken profit during this peak period. However, retail margins over the year as a whole do not appear excessive these margins are generally high in the winter but low or even negative in the summer. 1.9 Our analysis of the market strongly suggests that competition is generally working well. Almost all (97 per cent) of off-grid households live in a postcode district served by at least four known suppliers. Barriers to entry are low, and the industry is fragmented the largest player accounts for less than a fifth of the market and there are many small players including relatively recent entrants. We found no evidence of collusion between suppliers, and a variety of evidence that rival suppliers compete on price We found higher concentration in supply in a small number of remote areas less than 0.3 per cent of off-grid households live in a postcode district with access to only one or two suppliers. High concentration is an issue for the supply of many products and services in such locations due to sparse populations and access issues this is not a finding unique to heating oil. OFT1380 5

6 1.11 We have, therefore, found no evidence of a competition problem that would require either Competition Act enforcement or intervention to regulate prices in this market We did, however, find grounds for concern about compliance with consumer law. We found evidence of some heating oil websites making claims that implied that they were independent or were comparing prices from different suppliers, when this was not the case. We have already taken action to address this We also received complaints that some heating oil suppliers were charging a different price on delivery from that quoted when the order was taken, particularly during the severe weather last December. Carmarthenshire County Council took a successful case against this practice in August of this year. 1 The OFT is now examining this and related practices. LPG 1.14 Our initial assessment of the Competition Commission's Orders in the bulk LPG market is that they have resulted in more customers switching and some new entrants to the market: annual switching rates have risen from 0.5 per cent at the time of the Competition Commission investigation to 3.7 per cent in 2010/2011. The Orders have only recently taken effect and we will continue to keep this under review We received some complaints about contract terms in bulk LPG, including around limited termination rights in the face of sharp price rises during the two year maximum lock-in period permitted by the Orders. This is of particular concern for customers who are offered low but temporary introductory rates as an incentive to switch. We are pursuing this matter with the industry. 1 OFT1380 6

7 1.16 Our review of the supply of cylinder LPG brought to light some concerns about the contractual arrangements between suppliers and dealers. However, domestic heating represents only a small part of a wider market for cylinder LPG (including industrial and commercial customers). We may revisit this matter in the context of this wider market. Microgeneration 1.17 Microgeneration is a relatively young industry and currently accounts for only a very small proportion of off-grid energy supply. Take-up is expected to grow substantially, encouraged by a combination of financial incentives, other Government policy, rising costs for conventional fossil fuels and a growing degree of environmental awareness. The development of this market over the medium term should provide an option for off-grid customers to switch away from fossil fuels However, there are several features of the industry that make mis-selling a particular risk: not all technologies are suitable for all properties; the technology is complex, so customers are dependent on an expert assessment to make a decision; salespeople tend to specialise in one technology and hence may not provide an assessment of the best technology overall; there is little independent assessment available; and prices are high so if mis-selling occurs the problems are significant Our evidence suggests that at present problems are not widespread, but complaints started to increase over the summer. We expect most of these complaints to be resolved by installers, and are confident that the arrangements in place through the REAL Assurance Scheme Consumer code of practice, will support this. It is crucial that such problems do not undermine consumer confidence and thus the development of this market. Alongside Local Authority Trading Standards OFT stands ready to investigate specific allegations with a view to enforcement action as necessary to stop unfair commercial practices in this market. OFT1380 7

8 Next steps 1.20 OFT is actively examining a number of practices and engaging with industry to ensure consumer law compliance, as set out above. We are also working with trade bodies to ensure that their members are fully aware of their obligations under consumer law, and that when things go wrong consumers obtain adequate redress We welcome the recent campaigns by consumer and industry organisations to advise households about the measures they can take to buy early and reduce their exposure to risks Our study presents an evidence base on the off-grid population and its experiences that we hope will be useful to relevant policy-makers, notably DECC, Defra, the Scottish Government, the Welsh Government and the Northern Ireland Executive. While by no means all off-grid consumers are vulnerable, there is a proportion of the off-grid community that is particularly vulnerable to high prices both in the short term and the longer term, notably the subset of consumers in deep rural locations with little choice of suppliers, poor housing stock, and low incomes. Our view is that targeted assistance to the most vulnerable is more appropriate than measures addressed at the markets more widely, as in many respects the markets appear to be working reasonably well. Thank you 1.23 Finally, we would like to extend our thanks to the many stakeholders in the private, public and third sectors who generously contributed their time and information to this study. OFT1380 8

9 2 INTRODUCTION 2.1 On 25 January 2011, the Office of Fair Trading (OFT) announced its intention to undertake a market study into the off-grid energy sector in the United Kingdom (UK). 2 This study was brought forward from the OFT's 2011/12 programme of work in light of consumer experiences in winter 2010/2011 of high and volatile prices and difficulties in receiving supply, particularly in respect of heating oil, giving rise to concerns that competition and consumer protection aspects of the market might not be working well for consumers. Following a short consultation on scope, the market study was formally launched on 15 March Scope of the study 2.2 The scope of the study relates to the domestic supply of energy to offgrid consumers for their heating needs. 4 For the purposes of the study, we define off-grid consumers as those households that are not connected to the mains gas grid. This includes both those households that are not connected to a mains gas supply but may be able to obtain a connection, as well as those for which the mains gas grid is too distant for connection to be either practically or economically feasible. 2.3 The following heating sources are commonly used by off-grid households: Heating oil. Liquefied petroleum gas (LPG) supplied both in bulk and in cylinders. 2 The press release is published at: 3 The press release is published at: 4 More information on the market study is available on the OFT website: - including full details of the study scope at: OFT1380 9

10 Solid fuels, in particular wood (in the form of chips, pellets or logs) and mineral forms of solid fuel such as coal and coke. Mains electricity (storage, immersion and portable room heaters). Microgeneration technologies directly providing heat, in particular ground source and air source heat pumps and solar thermal water heating as well as biomass boilers or stoves that typically burn wood. Other microgeneration technologies that can indirectly generate heat by producing electricity to operate heaters, in particular photovoltaic panels and wind turbines. 2.4 The study focuses primarily on the supply of heating oil and LPG because, apart from electricity which is already regulated by the Office of the Gas and Electricity Markets (Ofgem) in Great Britain (GB) and the Northern Ireland (NI) Authority for Utility Regulation (the Utility Regulator) in NI, these are among the main energy sources for domestic off-grid central heating. 2.5 The study considers whether the markets for these sources of domestic energy are working well for consumers, taking into account both competition and consumer issues. 2.6 The study also considers the potential role of alternative heating sources such as microgeneration technologies, electricity and solid fuel. Our initial interest in considering this arose because a wider cross-fuel choice if available would create competitive pressures that could act as important constraints on suppliers across all substitutable markets, including heating oil and LPG. 2.7 However, our work has identified a limited degree of substitutability among off-grid heating sources, primarily because of high switching costs. In light of these costs, heating system replacement tends to be infrequent and driven by major events such as housing changes or boiler replacement. OFT

11 2.8 Given the limited cross-fuel switching observed, off-grid energy represents a collection of separate energy markets rather than a cohesive market in its own right. Therefore, while there are some themes common across these markets, it is appropriate to consider the competition and consumer issues in each of these markets separately. 2.9 Accordingly, our report commences by describing the nature of the offgrid population and the common themes it faces. The report then discusses each of the heating oil and LPG markets, which represent the focus of our study, in more detail individually. We also include a discussion of the microgeneration market which, despite not currently representing a strong constraint on the heating oil and LPG markets due to its small installed base, is of particular interest given its early stage of development and hence potential for continued growth. A discussion of other alternative energy sources is annexed to the study We conclude with a summary of our key findings and our recommendations. We do not propose to refer the heating oil retail distribution market to the Competition Commission and we are consulting on this provisional non-reference decision. Activities and data sources 2.11 In the course of our study we engaged with a wide range of relevant parties: consumers; consumer organisations; industry representatives, including trade associations and companies of diverse sizes; central, devolved and local government; sector regulators; and interested third parties including those with relevant sector expertise Our evidence base was assembled by: A call for submissions by the OFT at the time of the study launch, following which a number of relevant parties provided submissions and information to the OFT. 5 A list of key contributors to this market study is provided in Annexe P. OFT

12 Data provided by industry following information requests by the OFT to a sample of suppliers across the relevant industries. Bilateral discussions and correspondence with relevant parties. Eight roundtable sessions held across the UK (two in each nation) in May and June 2011 bringing together a broad range of stakeholders to contribute their experiences and views of the off-grid market. Other correspondence with relevant parties The OFT also commissioned UK-wide consumer research from the market research firm SPA Future Thinking (SPA). This comprised: Qualitative research with off-grid consumers (8 focus groups and 46 depth interviews across the UK). A quantitative survey with 400 heating oil consumers in the UK. A mystery shopping exercise obtaining telephone quotes for heating oil and cylinder LPG in locations across the UK as well as using a sample of five heating oil websites. A report by SPA on the consumer research findings is available on the OFT website (the SPA Report) The OFT supplemented the above information through additional desk research drawing on public and other third party data The remainder of this report summarises our findings from the above discussions, research and analysis. 6 The SPA main report is published at: Data tables for the main report are published at: Screener data for the main report are published at: OFT

13 3 OVERVIEW OF THE OFF-GRID MARKET Summary 3.1 This chapter considers the characteristics of the off-grid population (meaning households not connected to the gas grid) and the common issues they face. Our key findings are that: 15 per cent of UK households are off-grid, with large variation between the four nations: 80 per cent of homes in NI are off-grid, compared with only 12 per cent of homes in England. Proportionally more off-grid households are single occupancy (in GB) and/or house a person over the age of 60 (in the UK). There are large urban off-grid populations in addition to rural off-grid populations. In GB, electricity is the most common fuel for off-grid households in urban locations; heating oil is most common in rural locations. In NI, heating oil is the most common fuel regardless of location. The UK average cost of heating a typical three bedroom house is around 50 per cent higher with heating oil and 100 per cent higher with LPG than with mains gas. UK average heating costs for both heating oil and LPG have risen over the last four years. Over this period LPG has been consistently the most expensive and heating oil has been the most volatile. Switching between fuel sources is expensive and may make sense only when boilers or central heating systems are replaced. Where available, connection to the mains gas grid may be the best option. In particular we note that 30 per cent of off-grid households in NI may be within 50 metres of a gas connection. Microgeneration technologies also represent an increasingly viable alternative. For many households, however, improvements to home energy efficiency may be the best way to improve affordability in the short term. OFT

14 3.2 This chapter sets out in more detail the characteristics of households off the gas grid, and discusses the possibility of gas connections and the wider context and issues for off-grid consumers. Who is off-grid? 3.3 Around four million UK households are not connected to the mains gas grid. 7 This varies substantially across the UK, as shown in Table 3.1 below. Among the nations, NI has a unique majority reliance on non-gas fuels since natural gas was only relatively recently introduced there in For more details of the derivation of Table 3.1, refer to Annexe A. Table 3.1: Off-grid populations by nation Mains gas availability Off-grid England Scotland Wales NI UK 2, ,966 ('000 households) Off-grid as a percentage of total households 12% 21% 19% 80% 15% Sources: OFT analysis of Consumer Focus Report data; Welsh Government data; NI Utility Regulator data and NI House Condition Survey 2009 data. Refer to Annexe A for more details. 3.4 Unless otherwise indicated, all off-grid statistics cited in the remainder of this chapter 8 are: 7 This is a conservative estimate, preferred as it is based on detailed breakdown figures referenced elsewhere in the report. Other estimates range up to 4.7 million. Refer to Annexe A for details. 8 Please note that the OFT has not undertaken any significance testing when referring to statistical data from the Consumer Focus Report or the NI House Condition Survey. Differences between groups are presented for information only and may not be statistically significant. OFT

15 For GB based on a report on off-gas issues to be published by Consumer Focus 9 (Consumer Focus Report) which draws on GB survey data. 10 A more detailed breakdown of differences by nation within the GB data can be found in the Consumer Focus Report. For NI based on the closest comparable data, where available, from the NI House Condition Survey 2009 published by the NI Housing Executive. 11 We caveat that neither of the above reports provides statistics that are an exact match to our study definition of the off-grid population as set out in paragraph 3.1. Hence, the off-grid statistics cited in this chapter refer to the closest available proxy from the above and should be understood as estimates. The relevant proxy is, for GB, the statistics for homes that do not use gas as their main heating fuel 12 and, for NI, the 9 Off-gas consumers: Information on households without mains gas heating, to be published by Consumer Focus. 10 The Consumer Focus Report is based on analysis of data from the 2008 English Housing Survey (EHS), the 2007/09 Scottish House Condition Survey (SHCS) and the 2008 Living in Wales Survey (LIWS). The sample base for each survey is 15,523, 9,394 and 2,741 households respectively. For more details, please refer to the Consumer Focus Report and Annexe A of this report. 11 This survey is based on a sample base of 3,000 dwellings. Refer to Please note that some of the NI House Condition Survey 2009 statistics refer to dwellings and some refer to households. In this report, where we refer to statistics from the NI House Condition Survey, we have used both terms interchangeably, as where figures relating to households are not available, figures relating to dwellings are the closest available proxy. For example, the off-grid percentage of NI households presented in Table 3.1 is more precisely the off-grid percentage of NI dwellings. 12 Not identical to our study definition, as some of these homes are, despite not using gas for their main heating, connected to a gas supply. OFT

16 statistics for households with non-gas central heating or no central heating The OFT definition of off-grid households, for the purposes of this study, covers both homes that do not use gas but lie within a gas postcode 14 ('potentially connectable' homes with respect to gas supply) and homes that do not use gas and do not lie within a gas postcode ('likely nonconnectable' homes). The possible circumstances and solutions for households in each of these categories clearly differ and we will highlight some of these differences in this chapter for interest. 3.6 The following figures show postcode areas that are not on the mains gas grid in each map these areas are outlined in black. We refer to these as off-gas areas, which are likely to capture mainly the likely nonconnectable proportion of the off-grid population. We show these off-gas areas overlaid against fuel poverty, 15 rural and urban classification and general deprivation indicators, 16 in that order. This gives some idea of where the off-grid population lives, how spread out it is and some 13 Not identical to our study definition for the following reasons. Categorisation is by use of gas rather than connection to gas; and 'gas' includes LPG. Also, the data specify a particular off-grid fuel usage only where this occurs with central heating systems; off-grid use of standalone stoves or heaters is not broken down by fuel. Finally, a separate category of dual central heating is identified which covers both gas fired and off-grid fuels. Where we do not have a breakdown of dual central heating by type of fuel, we have excluded these households from the calculation and state so in accompanying footnotes. 14 Defined as a postcode where at least some households within that postcode have been recorded as having a gas supply. 15 For more details of the definitions of fuel poverty applied, which vary across the UK, please refer to Annexe B. We note that for England, the fuel poverty definition and its associated targets are currently being considered by an independent Review led by Professor John Hills. Refer to: 16 Because fuel poverty and deprivation are measured differently and at different points in time in each nation of the UK, these maps are not directly comparable across nations. For example, the most deprived area in England cannot be compared to the most deprived area in Wales. OFT

17 indication of its likely vulnerabilities. Details of the sources for and methodology underlying these maps are in Annexe B. OFT

18 Figure 3.2: Map of UK off-gas areas by fuel poverty Source: OFT mapping analysis based on Xoserve and other source data; refer to Annexe B OFT

19 Figure 3.3: Map of UK off-gas areas by rural/urban classification Source: OFT mapping analysis; based on Xoserve and other source data; refer to Annexe B OFT

20 Figure 3.4: Map of UK off-gas areas by multiple deprivation indices Source: OFT mapping analysis; based on Xoserve and other source data; refer to Annexe B OFT

21 Off-grid rural/urban split and associated fuel use 3.7 In GB, there are clear differences in the off-grid population in urban compared to rural locations. However, in NI, where the natural gas market (introduced in 1996) is much less established, there remains a prevalence of off-grid households across both urban and rural areas and the differences between the two areas are less marked. 3.8 We therefore consider GB and NI separately below, making a distinction between rural and urban locations only for the former. GB 3.9 In GB, 51 per cent of off-grid households are in rural 17 areas compared to 15 per cent of on-grid households. The higher than average rurality of off-grid households reflects the higher costs of installing mains gas infrastructure in such locations (due to, for example, the greater distance to reach households, topological complexities and there being fewer households over which to spread costs) However, almost half of off-grid GB households are in urban areas. This may in part be due to health and safety regulations prohibiting mains gas from being installed in certain types of buildings. Following the partial collapse of the high-rise Ronan Point apartment building in London in 1968 due to a gas explosion, building regulations were changed to ensure that new buildings over five storeys tall were constructed to resist an explosive force such as a gas explosion. 18 Gas supply was banned from existing buildings that 17 Rural and urban definitions vary for each housing survey. For England and Wales, we have estimated 'rural' data by combining the 'town and fringe', 'village' and 'hamlet and isolated dwellings' categories OFT

22 did not meet these criteria, resulting in a number of high rise blocks switching to electricity. Some landlords may also be unwilling to take on onerous gas installation and maintenance regulations Because of the different circumstances affecting the urban and rural offgrid populations as described above, the two populations are also quite distinct in nature, with substantial differences in particular with respect to the types of fuels used. This is illustrated by Figure 3.5 which show the use of different off-grid fuels in urban and in rural areas: Urban off-grid households rely largely on electricity (90 per cent use this as their main heating fuel in GB). The reasons set out above are likely to factor into this. Other possible reasons include: - Flammable and contaminable fuels with relatively high levels of emissions are less favoured (or may not be allowed by regulation 20 ) in densely built up areas and are also less easy to deliver door-to-door given the size of the delivery vehicles. - Urban homes are also less likely to have the outdoors space available to accommodate storage tanks or solid fuel stockpiles Based on discussions with some stakeholders. For details of applicable regulations, refer for example to: 20 Under the Clean Air Act 1993 and the Clean Air (NI) Order 1981, smoke control areas have been introduced in many large towns and cities in the UK and in large parts of the Midlands, North West, South Yorkshire, North East of England, Central and Southern Scotland. In these areas, it is an offence to emit smoke from a chimney of a building, from a furnace or from any fixed boiler. (Source: smokecontrol.defra.gov.uk/background.php#smoke) 21 This seems a reasonable general assumption but, for illustration, the English Housing Survey Housing Stock Summary Statistics Tables, 2009, show that the average floor area for a dwelling in a city centre is 71 square metres compared to 153 square metres in a rural area. Refer to Table SST1.1 in OFT

23 Rural off-grid households have fewer such constraints and rely much more on delivered fuels, in particular heating oil which is the main heating fuel for 53 per cent of GB rural off-grid households. Figure 3.5: Main heating fuel by location and nation for GB off-grid households Urban Rural 100% 100% 90% 90% 80% 80% % off-grid households 70% 60% 50% 40% 30% % off-grid households 70% 60% 50% 40% 30% 20% 20% 10% 10% 0% 0% England Scotland Wales England Scotland Wales LPG & Bottled Gas Solid Fuel Heating Oil Electric heating Source: Consumer Focus Report As shown in Figure 3.5, there are also considerable variations by nation. Notably, the proportion of off-grid households using electricity is lower in Wales than elsewhere in GB, in both urban and rural areas. Conversely the proportion of off-grid households using heating oil or solid fuel is higher in Wales than elsewhere in GB, in both urban and rural areas (although the difference is less marked in the latter). 22 For urban areas, the number of households is 1606 (England), 288 (Scotland) and 40 (Wales note the small size). For rural areas, the number of households is 1509 (England), 253 (Scotland) and 229 (Wales). OFT

24 3.13 A clear majority of GB off-grid households rely on a mix of fuels to heat their home (80 per cent use secondary fuels, with the figure higher among households using heating oil and LPG as their main fuels and lower among households using electricity as their main fuels). The SPA research corroborated that a high level of secondary use exists, with 75 per cent of GB heating oil consumers surveyed using a secondary heating fuel. Mains electricity (which we assume means portable heaters) and/or 23 wood were each used by around 40 per cent of GB heating oil consumers, followed by coal/coke (25 per cent) and cylinder LPG (seven per cent). NI 3.14 In NI, a clear majority (around 80 per cent) of the population is off-grid per cent of urban households are off-grid and 99 per cent of rural households are off-grid About two-thirds of all NI households (68 per cent) use heating oil as their primary heating fuel, 25 rising to 81 per cent of off-grid households. Electricity heating used by five per cent of off-grid NI households is much less common in NI than in GB and is associated mainly with urban areas and apartment buildings Respondents could select multiple responses in this question. 24 Please note that the percentage of off-grid households derived from NI House Condition Survey 2009 data (84 per cent) differs slightly from the percentage of off-grid households in Table 3.1 (80 per cent). We assume this may be because some households with a gas supply do not use it for central heating. 25 NI House Condition Survey 2009, data provided by the NI Housing Executive. Please note that fuel use is recorded according to central heating (CH) type and there may be additional oil, solid fuel or electricity use within the categories CH Dual/Other and Non CH. 26 According to the NI House Condition Survey 2009 Report: ' over two-thirds (67%) of all dwellings with electric central heating were flats/apartments The majority of dwellings with electric (92%) central heating were located in urban areas, partly reflecting concentrations of OFT

25 Table 3.6: NI off-grid fuel use by location % of off-grid households 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% All Urban Rural CH Oil CH Solid Fuel CH Electricity CH Dual/Other Non CH Source: NI House Condition Survey Note that 'CH' refers to central heating The SPA research showed that a high level of off-grid secondary use exists, with 65 per cent of NI heating oil consumers surveyed using a secondary heating fuel. Mains electricity (which we assume means portable heaters) and/or 27 coal/coke were each used by around 30 per cent of NI heating oil consumers, followed by wood (20 per cent) and cylinder LPG (14 per cent). This suggests that, among heating oil consumers, coal/coke is preferred to wood as a secondary solid fuel in NI whereas this is reversed in GB; and secondary cylinder LPG use is also higher in NI than in GB. Off-grid housing stock 3.17 Off-grid households face some particular challenges in respect of housing stock, which may make off-grid housing on average harder to treat. Housing Executive dwellings.' 27 Respondents could select multiple responses in this question. OFT

26 3.18 Off-grid households generally seem to be less energy efficient: In GB, 59 per cent of off-grid households (mainly electricity users) do not have central heating as their main heating system. However, this is not similarly a factor in NI where less electric heating is used. A higher proportion of GB off-grid households have the lowest F and G Energy Performance Certificate (EPC) 28 ratings (49 per cent compared to 10 per cent on-grid). Similar data were not readily available for NI Among those who are off-grid in Scotland and Wales, and within segments of this population in England, there is on average a higher proportion of households with solid wall construction which indicates that these households will less readily be able to reduce their energy needs through cavity wall insulation. Similar figures are not available for NI. In Scotland and Wales respectively, 28 per cent and 34 per cent of off-grid properties have solid walls compared to 20 per cent and 26 per cent of on-grid properties. In England, data from the English Housing Survey suggest that the incidence of solid walled properties is greater in more remote areas (hamlets and isolated dwellings) Households living in rental accommodation are at a further disadvantage in terms of energy use, as they have less control over improvements to their housing stock. On average, a slightly higher proportion of GB offgrid households are in rental accommodation compared to GB on-grid households (38 per cent compared to 31 per cent). However, this differs 28 'Every home which has been on the market should have an Energy Performance Certificate (EPC) which rates the home for energy efficiency. Energy Performance Certificate Ratings run from A (very efficient) to G (very inefficient). The average rating in the UK at the moment is D.' Source: OFT

27 by nation: notably, in Scotland the difference is more marked (46 per cent to 34 per cent). In Wales the position is reversed (21 per cent to 28 per cent). Similarly, in NI, a higher proportion of off-grid households own their homes (66 per cent) than on-grid households (45 per cent). 29 Off-grid demographics 3.21 When comparing the income distribution for off-grid households compared to on-grid households, the picture across the different nations is mixed. Each nation presents income distributions in a slightly different way and so they cannot be directly compared with each other. Broadly, however, there appears to be variation in the income profiles for households using different off-grid fuels Notwithstanding this, a higher proportion of GB off-grid households are in fuel poverty 31 (32 per cent, compared to 15 per cent of on-grid households; while NI experiences the highest levels of fuel poverty in the UK 32 at 44 per cent overall 33 ). This implies that features of the housing 29 These NI figures are calculated excluding dual fuel use. 30 In GB, a higher than average proportion of solid fuel and electricity consumers are in the lowest three income bands surveyed and a higher than average proportion of heating oil consumers are in the highest three income bands surveyed. Refer to the Consumer Focus Report for more details of the GB statistics. In NI, 25 per cent of off-grid households in the top income bracket recorded earn more than 30,000, compared to 17 per cent for on-grid households. 31 The definition of fuel poverty varies slightly across the nations. Please refer to Annexe B for more details; however for example in England: 'A household is said to be in fuel poverty if it needs to spend more than 10% of its income on fuel to maintain a satisfactory heating regime (usually 21 degrees for the main living area, and 18 degrees for other occupied rooms)'. ( 32 As cited on page 5 of DETINI's 2010 Strategic Energy Framework. 33 No corresponding data for the off-grid and on-grid segments are readily available from the NI House Condition Survey. However, 46 per cent of rural NI households are in fuel poverty compared to 43 per cent of urban NI households and 99 per cent of rural households are offgrid. Furthermore, according to the 2009 NI House Condition Survey Report (page 63), NI households using off-grid central heating fuels such as electricity or solid fuel have higher levels OFT

28 stock and the relatively higher costs of off-grid fuels as shown later in Figure 3.7, together clearly affect the average energy spend of an offgrid household Among off-grid households (comparable NI statistics are only shown where of interest): A higher proportion of GB off-grid households are single occupancy (41 per cent compared to 27 per cent on-grid) although in Wales there is no substantial difference (26 per cent compared to 25 per cent on-grid). A higher proportion of GB off-grid households house a person over the age of 60 (22 per cent compared to 15 per cent on-grid). The same applies in NI, where 31 per cent of off-grid households house a person aged 60 years or older, compared to 21 per cent of on-grid households. 34 A lower proportion of GB off-grid households house a couple with dependent child(ren) (15 per cent compared to 23 per cent on-grid). The first two cases may be more vulnerable to fuel-related concerns, for example because those in older age groups are more likely to be in retirement with fixed incomes. Switching across off-grid fuels 3.24 This section considers the potential benefits to households from switching between off-grid energy alternatives and the extent to which barriers to switching may exist. Our analysis of potential benefits focuses on costs, because the SPA research and the correspondence we have received both indicate that costs are a major concern for off-grid of fuel poverty (69 per cent and 63 per cent respectively) than households using heating oil and mains gas central heating (41 per cent and 43 per cent of whom are fuel poor respectively). 34 These NI figures are calculated excluding dual fuel use. OFT

29 consumers and a main driver of their purchasing behaviour. But we recognise that myriad other factors such as environmental considerations, ease of handling and ease of buying also affect household fuel choices Off-grid fuels are generally a more expensive option than gas. This is illustrated by Figure 3.7, which uses data from Sutherland Tables 35 to illustrate the comparable costs for heating an average-size threebedroom house with different types of fuel. 36 For example, in July 2011, the latest period for which comparable data is available from Sutherland Tables, the UK average cost 37 of heating an average-size three-bedroom house was 47 per cent higher for oil and 107 per cent higher for LPG, in each case compared to gas. 35 Information about Sutherland Tables can be found on their website: 36 This is based on data from Sutherland Tables that are 'intended to be used to compare different domestic fuels and the costs of using them under similar conditions. Their primary purpose is not the prediction of actual operating costs in any particular dwelling, although they will of course give an indication of this' (Sutherland Tables, Introduction to the July 2011 Tables). 37 For consistency with Figure 3.7, where calculating UK averages based on Sutherland Tables data in this report, we have followed Sutherland Tables's methodology of a simple average across the six UK regions (South East, South West and Wales, Midlands, Northern England, Scotland and NI) for which they provide cost data. OFT

30 Figure 3.7: Comparative Domestic Heating Costs United Kingdom National Averages, July 2011 Source: Sutherland Tables, July Data from Sutherland Tables show that, among the fuel types shown, the costs of all fuels, but in particular of LPG and of heating oil, have risen over the past four years. In this period, LPG has been consistently the most expensive off-grid option followed by, on average, heating oil which has been the most volatile in terms of costs. However, we note OFT

31 that the comparable heating cost based on a standard electricity tariff 38 exceeds the costs of both LPG and heating oil There is also variation in heating costs by region, as would be expected in light of temperature differences. Scotland is the most expensive region while the South-West of England and Wales 40 appears to be the least expensive region, for most fuels. However, ' sometimes these variations are not systematic in terms of climate. For example, heating and hot water costs with wood pellets are much cheaper in NI than in Scotland or the North of England, while figures for solid fuels are cheaper in South West England and Wales than in the South East of England. In these cases, local economics appear to prevail over climate conditions.' 41 In our view, the differences may also reflect geographic features leading to higher establishment and transportation costs for supplying the relatively higher number of outlying areas in Scotland compared to other UK nations. For NI, the Sutherland Tables data 42 also show that: Standard gas heating costs appear higher in NI than in GB, so that the cost disadvantage of being off-grid is reduced for the former particularly as the NI heating costs for heating oil, which is used by the majority of off-grid households, are also lower than in GB. 38 According to the SPA research, a standard electricity tariff, rather than more economical special tariffs like Economy 7, is used by a minority of the off-grid households sampled who use electricity for heating. These sampled households should be seen as representative of electricity use only in the areas surveyed. Further details are provided in the screeners to the SPA Report. 39 Heating costs using standard electricity to run radiators (rather than storage heaters) were one per cent higher than the heating costs using LPG based on a UK average from Sutherland Tables data for July Costs for the South West of England and Wales are not reported separately and are represented only as a combined cost in Sutherland Tables's standard cost tables. 41 Sutherland Tables: Commentary on April 2011 Tables. 42 Sutherland Tables, July 2011 data. OFT

32 NI heating costs for some solid fuels and for electricity have risen less relative to the four-year average than in other regions (and indeed, for wood pellets, have reduced) The wide range and variability of off-grid fuel costs observed shows that the mix of fuels used can have a significant impact on heating costs for the average off-grid household. This suggests that some off-grid households could benefit from switching to another off-grid fuel To illustrate this, Table 3.8 summarises, for each off-grid heating source: The relative estimated upfront costs of installation. The annual savings relative to heating oil. OFT

33 Table 3.8: Relative upfront and heating costs of off-grid fuels Heating oil LPG 43 Microgeneration Solid fuels Electricity Upfront costs (installation and equipment) 3.5k - 8k k - 6k 45 Wide range depending on technology but typically between 2k - 23k c. 0.5k- 7k 46 c. 2k 47 Average annual heating costs relative to heating oil +41% -100% to -54% -22% (wood pellets) -23% (coal) 48-40% (anthracite) 49-22% (economy) +42% (standard) Source: OFT research and supplier estimates. Information on the relative costs of microgeneration technologies can be found on the EST website. 50 Other average relative heating costs are calculated by the OFT from Sutherland Tables data for July 2011, for an average size three-bedroom house in the UK, and assuming the use of conventional boilers for oil and LPG. 43 The annual savings figures provided relate to bulk LPG, which suppliers have informed us tends to be more economical than cylinder LPG OFT desk research and information provided by the Solid Fuel Association. 47 See and 48 Housecoal gp A(1). 49 In the form of peas / grains OFT

34 3.30 We note, however, that Figure 3.7 and Table 3.8 provide a historic view of annual heating costs that may change over time depending on the relative development of the different sectors. For example, while heating costs using oil are currently more expensive than heating costs using electricity, when averaged over a four-year period these costs have, at least in some nations (Scotland and NI) been on a par; 51 and going forward, gas and electricity suppliers have recently announced substantial increases in their standard rates. 52 Furthermore, a comparison of whole-life costs taking into account potential differences in upfront costs, average replacement life cycles and average maintenance costs among different heating systems may yield different outcomes for different households depending on their individual circumstances than a comparison of relative annual running costs We also note that cost is only one factor in a household's determination of the best off-grid heating source for its circumstances ease of use, quality of heat, emissions, efficiency and security of supply are examples of other factors that may be relevant. Different fuel types offer quite diverse purchasing and usage experiences, so that consumers would need to research the features of different options, the availability of local suppliers and other relevant factors carefully to determine which type is most suitable for their individual circumstances before taking any decision to switch In any case, the possible cost or other benefits that may derive from switching between different heating sources, including as a result of 51 Sutherland Tables data, July For more information refer to: px _price_rise_announced_by_phoen OFT

35 increasing competition and choice across the market for off-grid fuels as a whole, are only available where switching is readily feasible This is not the case for off-grid consumers, as our study has identified considerable barriers to switching between different fuel types These barriers largely arise because such a switch typically requires the replacement of the boiler and central heating system. The upfront cost of installing a new central heating system throughout the home is generally the main barrier to switching. However, the disruption that this would entail, given that the system is often embedded in the infrastructure of the building to some extent, is also a strong deterrent. Other barriers relate to lack of information and awareness about different fuels and their relative costs. In some cases (for example in rental accommodation), consumers are constrained by having little choice over the form of heating used. In some cases, bulk LPG consumers can face additional fuel switching costs related to charges for the removal of their LPG storage tank where this is owned by their supplier Accordingly, off-grid opportunities to switch fuel type tend to be eventdriven: for example, by changes in housing circumstances (moving home, or refurbishment), or aligned with the life cycle of a boiler (around 12 years) Replacement in the latter case tends to arise only when the heating system breaks down, which by nature represents a distressed situation in which a household may make a replacement decision more for reasons of expediency (in which case a like-for-like replacement is most straightforward and therefore probable) than long-term efficiency. Households may also be guided in their decision-making at such times by 53 OFT