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Affordable energy in the 21st century whose responsibility

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					          "Affordable energy in the 21st century:
    whose responsibility - government or supplier?"




              Allan Asher, Chief Executive, energywatch
Joint meeting of the All Party Parliamentary Groups for Warm Homes, Debt and
         Personal Finance, Poverty, Disability, Ageing and Older People

                             26th February 2006
Context ............................................................................................................................... 3
Who is responsible for providing affordable energy? .................................................... 3
What are social tariffs?...................................................................................................... 4
Why are social tariffs now essential? ............................................................................... 5
Is the voluntary approach working?................................................................................. 5
Analysis of social tariff and rebate offerings if and when suppliers fulfil the
commitments made following the Energy White Paper shows that:.......................... 6
The way forward – power to the Secretary of State and minimum standards for
maximum impact .............................................................................................................. 7
Conclusions......................................................................................................................... 9
REBUTTAL ...................................................................................................................... 10
Mandating social tariffs would increase bills and tip more people into fuel poverty10
Consumers should switch and save ............................................................................... 11
PPM switching .................................................................................................................. 12
Minimum standards would lead to suppliers doing less .............................................. 13
Social tariff obligations would threaten suppliers’ other voluntary CSR initiatives. 14
Social tariffs would distort the competitive market.................................................... 14
Social tariffs are too difficult to target .......................................................................... 15




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Context
I last spoke at a Parliamentary Warm Homes Group event almost 2 years ago to the day,
following the publication of the Energy Review.

The Review maintained the commitment to ensuring that “every home is adequately and
affordably heated” as a cornerstone of government energy policy. However, against a backdrop
of sustained prices rises having already pushed one million additional households into fuel
poverty in England alone, the Review was lacking the fresh policy initiatives required to contain
the detrimental impact of high energy prices.

With the welcome exception of a challenge to suppliers to offer adequate and proportional
programmes of assistance to their fuel poor consumers and the implicit threat of mandated
social tariffs if they did not (to which I’ll return); and despite escalating prices now pushing fuel
poverty back to levels not seen since the publication of the government’s fuel poverty strategy
in 2001; the Energy White Paper failed to make amends for the Review’s lack of fuel poverty
substance.

And now we have the Energy Bill, which, as presented, is completely devoid of any action to try
and arrest the undermining effect that high prices have had on the government’s fuel poverty
targets.


Who is responsible for providing affordable energy?
Low-income, energy inefficient housing with sub-optimal heating systems and the actual cost of
energy represent the three conspiring causes of fuel poverty triangle. The 2007 Energy White
Paper observed that UK fuel poverty was back at the 4 million household mark – price rises
announced so far this year are likely to have added another half a million to that figure.

Ofgem and certain industry representatives now consistently argue that the wider problems of
poverty and social exclusion are for government to address and require a focus on increasing
incomes and improving housing. This is in contrast to the years prior to 2003 when the same
voices over-emphasised the contribution that the short-lived era of low prices had made to
reduction sin fuel poverty.

Seeking to pass the buck to government conveniently forgets three things:

1) It would be difficult to claim that the government has shirked its fuel poverty responsibilities.
It has implemented policies to drive up the income levels of the poorest in society; and it has
been active in the provision - primarily through Warm Front - of heating and energy efficiency
measures to fuel poor dwellings. Government has literally spent billions of pounds on both
fronts.




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2) The 2001 Fuel Poverty Strategy envisaged the maintenance of a downward pressure on
prices. The benign price environment at the time saw energy prices make a positive
contribution to reductions in fuel poverty. However, since 2003 energy prices have single-
handedly undermined the government’s Fuel Poverty Strategy. Relentless price increases have
undermined government efforts and investment by outstripping income growth and outpacing
the rate at which energy efficiency and heating improvements can be installed in fuel poor
dwellings.

3) Fuel poverty is the dimension of poverty intrinsically linked to the cost of the service that
energy suppliers provide. In an open, liberalised market government no longer has the means to
set prices. There are therefore inherent responsibilities on any company operating in a market
in essential services, and it is essential that suppliers take those responsibilities seriously.

Clearly then, both government and the energy industry have key, intrinsic responsibilities and it
would be irresponsible for one to try and pass the buck to the other. Effective cooperation is
required between both, and also with those agencies who are working with directly with and
for low-income consumers.

It is also clear that if the government is to stand any chance of meeting even its 2016 target to
eradicate fuel poverty, action must now be taken to ensure that the industry fulfils its
responsibilities by offering energy at a price that is more affordable to the fuel poor.
energywatch believes that an obligation on major suppliers to offer social tariffs in accordance
with minimum standards and on a scale that reflects their market share now represents the
most effective way of achieving this.


What are social tariffs?
Social tariffs should be the lowest rate that a supplier offers – undercutting any tariff available to
its generality of consumers on the open market. This would address the current social injustice
in the energy market, whereby the lowest cost tariffs (internet only direct debit rates) are the
preserve of more affluent consumers – and are on average £382 cheaper than prepayment
meter tariffs and can be as much as £456 cheaper, for example (for those still with legacy
supplier).

Social tariffs should be offered as part of an energy assistance package that complements the
government’s own initiatives to raise incomes and improve the energy efficiency and sub-
optimal heating of fuel poor dwellings. Statutory minimum standards would ensure that all
suppliers offer meaningful social tariffs in a proportionate manner and on a more significant
scale.




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Why are social tariffs now essential?
The maintenance of a downward pressure on prices as envisaged by the government’s Fuel
Poverty Strategy evaporated when bills started to rocket in 2003. There is now a debilitating
vacuum where action on the cost of energy to fuel poor households has to be. Using the
Energy Bill to give the government powers on social tariffs is clearly the most effective way of
addressing this.

Meaningful social tariffs would complement government efforts on and investment in raising
incomes and addressing the energy inefficient dwellings of fuel poor households.


Is the voluntary approach working?
At present, government is encouraging the delivery of a social action solution within a voluntary
framework. It is doubtful whether this is the most efficient approach and it is also seemingly inconsistent
with a market framework. We believe that the interest of the fuel poor is best served by a mandatory
social tariff and this is the only means by which the Government’s 2010 and 2016 objectives can be
achieved. There is no obvious reason why these targets will be delivered within a competitive retail
market..

                           RWE npower response to Ofgem’s Five Year Strategy, September 2007



The Energy White Paper challenged each supplier to offer programmes of assistance to their
fuel poor customers and indicated that legislation would be considered, should the programmes
of support currently on offer be deemed disproportionate and inadequate.

Despite some improvement, the voluntary approach remains riddled with inconsistency:
inconsistency in the nature of assistance offered, inconsistency in the level and quality of
assistance offered, inconsistency in entitlement, and inconsistency in the length of time for
which the product is available to recipients.

Analysis of social tariff and rebate offerings if and when suppliers fulfil the
commitments made following the Energy White Paper shows that:

Independent analysis undertaken for energywatch has shown that:

Even if suppliers fulfil their commitments a gulf will remain in the proportion of turnover each
supplier commits to these initiatives. If targets are fulfilled, British Gas will be committing
0.49% of its turnover to its Essentials social tariff, while RWE npower and Scottish and
Southern Energy will be committing just 0.07% of their respective turnover to their tariffs and
rebates.




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   The commitment of the supply industry as a whole will represent 0.25% of its estimated
   £24.6bn turnover.

   When the 'costs' to the company are divided by all the gas and electricity accounts they supply,
   then British Gas will be contributing at 277p per customer account reducing to 32p for RWE
   npower and 31p for Scottish and Southern Energy.

   The average benefit to gas and electricity social tariff recipients (excluding rebates) ranges from
   £181 per annum (gas and electricity) for Scottish & Southern's Energyplus Care to £98 for
   British Gas's Essentials.

   The number of recipients of tariffs and rebates expressed as a proportion of each supplier's
   customer base varies from 4.67% for British Gas to just 0.34% for Scottish and Southern Energy
   if and when all commitments are fulfilled.

   If the commitment each supplier has demonstrated is measured against their respective market
   share the disparity that exists is further emphasised:


                                          Current               Post EWP target
                                 Market   Social  Package Market     Social  Package
                                 Share    commitment      Share      commitment
British Gas                           33%             59%      33%               71%
EDF Energy                            11%             13%      11%                6%
RWE npower                            14%              0%      14%                4%
E..ON UK (if Staywarm is
included)                              16%                       21%          16%                    10%
Scottish and Southern Energy           16%                        1%          16%                     6%
Scottish Power                         11%                        5%          11%                     4%
Total                                 100%                      100%         100%                   100%


   If suppliers fulfill the commitments they have made in light of the White Paper, social tariffs will
   only be available to, at best, 1 in 6 fuel poor energy accounts (currently 1 in 15). Minimum
   standards that set suppliers a target relative to their market share on the number of social tariff
   accounts to offer would increase this ratio substantially and ensure a proportionate
   contribution from all suppliers.

   It must also be taken on board that an inherent risk of backsliding is hardwired into the
   voluntary approach: either through suppliers reneging completely on commitments, or through
   the best scaling back their activities if there is no incentive on the rest to scale up.

   EDFE’s ambiguity over the form its social tariff will offer post-March 2009 implies that a scaling
   back could take place; as do indications from British Gas that it will review the level of
   assistance it offers if other suppliers fail to match its commitments.



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Statutory minimum standards will ensure that all suppliers offer social tariffs in a proportionate
manner and on an adequate scale.


The way forward – power to the Secretary of State and minimum
standards for maximum impact
Given the reversal of progress towards eradicating fuel poverty and the limitations and
disparities of the current approach to social tariff provision, the government must use the
Energy Bill to at the very least grant the Secretary of State the necessary powers to have the
powers necessary to require energy supply companies to offer social tariffs in accordance with
minimum standards. This is necessary following the failure by the industry as a whole to meet
the white paper challenge.

Paddy Tipping MP, supported by Dr. Brian Iddon and Dr. Alan Whitehead, has tabled a vital
amendment to the Energy Bill (new clause 16) that would give the government the powers
necessary to oblige suppliers to offer social tariffs and designate, the minimum standards that
would have to be fulfilled. The onus is now on government to demonstrate that it remains
committed to ensuring “every home is adequately and affordably heated” and run with the
amendment as the logical way forward.

energywatch and a range of other stakeholders fully support the amendment, which, if adopted
would enable the government to:

•     Set out the framework by which the obligation to offer social tariffs will be expressed as a
target for each supplier to then fulfil. As with the existing Energy Efficiency Commitment,
statutory targets guard against market distortion and ensure no supplier is unduly disadvantaged
by the obligations, thus ensuring proportionality and, crucially, driving up the number of social
tariffs being offered.

•     Eligibility: The amendment would see government, in consultation with interested parties,
determine which group(s) will be eligible to receive social tariffs. Once decided upon, the same
eligibility criteria must be adopted by all suppliers.

•    Recruiting eligible consumers: the Department for Work & Pensions and HM Revenue and
Customs should be obliged to develop a mechanism whereby their data is utilised to facilitate
the successful identification and targeting of eligible consumers (which can be location rather
than person specific), and which verifies eligible consumers and enables them to self-present to
suppliers.




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•     Price: social tariffs must be the lowest cost tariff rate that a supplier offers and should be
available to eligible consumers regardless of payment method. The social tariffs rate should be
indexed against suppliers’ tariff prices in the open market, thereby reflecting each supplier’s
overall competitiveness and providing further safeguards against market distortion and the
erosion of competitive positions (i.e. NOT a single, ‘universal’ social tariff being imposed on all
suppliers as the ERA seems to think).

•    Length of entitlement: Minimum criteria relating to the form of social tariffs, should
prescribe an entitlement of between 12 and 24 months, following which a reassessment should
take place. This would grant the time for energy efficiency and heating measures (through
suppliers’ own obligations and Warm Front and its equivalents), as well as income maximisation
measures, to take effect.




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Conclusions
Both government and the industry have responsibilities. Citizens living in poverty are fuel poor
energy consumers and vice versa. While certain suppliers have made welcome progress in
offering meaningful assistance and are responsible for the lion’s share of the voluntary
initiatives, the industry as a whole has fallen short. If we are to avoid a situation where
affordable warmth becomes a luxury and levels of fuel poverty spiral out of control, then
government must now ensure that all suppliers deliver the adequate and proportionate social
tariff assistance envisaged by the Energy White Paper.

Parliamentarians who are concerned by escalating prices and the impact they are having on
their low-income constituents should support the amendment to the Energy Bill tabled by
Paddy Tipping, and work with colleagues to make sure this power for government goes in and
stays as the Bill passes through parliament.

I would also urge Parliamentarians to send a strong message to government that this course of
action is now essential by signing Early Day Motion 339.




                                                                                              9
REBUTTAL



Mandating social tariffs would increase bills and tip more people into
fuel poverty
This argument - put forward by those who have been sanguine about the effect of double digit
price rises - is a smokescreen that ignores the fact that, even before prices took off there were
around 2mn households in fuel poverty, a figure that will now have doubled. The answer is not
to stand by and do nothing.

Independent analysis undertaken for energywatch has shown that the cost of extending a 20%
saving to 4million accounts (the equivalent of 2 million households where both gas and
electricity is present) would be around 34 pence a week increase on the average bill for
consumers not receiving a social tariff.

If obligations were to go only as far as forcing suppliers to match existing best practice and
deliver proportionate packages of assistance on that basis (much as the Energy White Paper had
hoped for) the increase in bills would be much less.

SSE, for example, has argued that offering a social tariff on a greater scale would threaten its
competitive position as the lowest cost supplier. Analysis shows this would not be the case.
Our calculations (verified by Cornwall Associates) estimate that if SSE were to match BG's
target of 0.49% of turnover being committed to social tariffs, this would add a negligible
(especially when compared to the price rise it is likely to announce in April) £1.94 per annum,
per account to its customers' bills if passed through, yet would result in a significant increase in
the number of social tariff accounts it offers.

Cross-subsidy is rife in the energy industry and it manifests itself in a regressive form: the
poorest consumers are frequently paying the premium prices, while more affluent consumers
access the cut price online deals. Corporate social responsibility initiatives are anyway funded
through cross subsidy, as is the Energy Efficiency Commitment. It is cross subsidy that enables
electricity suppliers to offer a better deal to their ‘out of area consumers’ than they do to their
traditional (and loyal) regional bases.

As demonstrated, the costs of offering social tariffs are relatively modest and need not be
punitive to other low-income consumers, but would result in significant savings for those most
in need. Social tariff costs certainly compare well against the double digit price rises being
inflicted on consumers; as well as the costs of the environmental obligations that suppliers
recover through bills. The second phase of the Energy Efficiency Commitment, for example,
cost households approximately £10 per fuel per year, a figure that has doubled as EEC has
evolved into CERT. This will be compounded by other costs (EU ETS permit auctions, for
example).


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Consumers should switch and save
If people are concerned that they are being charged too much, considering switching is very important,
but I think that I know enough about this subject to recognise that switching is easier said than done for
some of the most vulnerable people, particularly if there is a record of debt payments.

Malcolm Wicks, Fuel poverty adjournment debate 8 Jan 2008

We must ensure that switching works for all customers, but particularly for the vulnerable. If switching
becomes the preserve of an IT generation and is not relevant to many of our vulnerable constituents, it
will be worthless. I have raised that matter with Ofgem and the companies and I shall pursue it further.

Malcolm Wicks, Energy regulations and consumer prices adjournment debate 5 Feb 2008

In a number of instances switching can provide a saving and hence play a role in making energy
more affordable.

energywatch have pioneered projects to actively help low-income consumers make the switch
to a better deal wherever that is possible.

In 2007 we piloted a project to make it easier for older people to take advantage of the energy
market through the ‘Are You Missing Out?’ campaign. This project saw energywatch provide
bespoke pricing information and handhold participants along a pathway which made switching
simple.

This year we working on the ground with a Housing Association in the West Midlands to help
tenants who are PPM users take advantage of better deals.

However, these projects have given energywatch unique first-hand experience about the
realities of switching for low-income and vulnerable groups. It has taught us that switching is at
best only a partial answer and that in some cases it’s not the answer at all. Statistics bear this
out:

Only around 50% of consumers have ever switched – many of whom are the “churners” who
make the level of switching seem a lot healthier than it actually is.

In the 65+ age group and in social class D that figure decreases to 33%. It reduces even further
to 25% in social group E. The highest incidence of switching takes place amongst the
professional and managerial ABs.




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Switching to a more advantageous deal is not as straightforward as its most enthusiastic
champions advocate. When the factors that may hinder the process of switching for vulnerable
and low-income consumers are taken into account, the picture becomes even more
complicated.

Conclusions of University of East Anglia research1 on the switching decisions of electricity
consumers found that amongst consumers who had switched suppliers exclusively for price
reasons only up to a fifth had switched to the supplier offering the greatest saving; while up to
one third had actually switched to deal that had left them worse off!

It must also be recognised that in a high price environment where the average bill has broken
through the £1k per annum barrier, a better deal does not equate with affordable energy for
those on low-fixed incomes. The current average combined bill for SSE - the least expensive of
the big six suppliers - is £874 (standard quarterly credit). Even this represents a challenge for
those on low, fixed incomes – it exceeds 10% of the income of a single pensioner dependent on
the Pension Credit guarantee and the Winter Fuel Payment, for example.

It is also somewhat academic to point to the best deals in the market and use these as the basis
on which to calculate the savings that are available to low-income consumers. Personal
circumstances, financial exclusion, market place exclusion and any combination thereof will
mean that in reality, the lowest priced offer – internet only direct debit tariffs - are beyond the
reach of those who would benefit the most from them.


PPM switching
There is a strong correlation between the use of prepayment meters and low-income; and
when fuel poverty is measured on the ‘basic income’ definition (i.e. does not include housing
benefit as there is no discretion on how this can be spent), government data shows that around
a third of the fuel poor are paying for their electricity through a PPM. Although this consumer
segment are living on a budget, and are forced to budget their energy use, they are left paying
the market’s premium prices.

There is only limited scope for PPM users seeking to change supplier through internet price
comparison sites. Some suppliers have an aversion to taking on consumers using certain types
of PPM technology (primarily token meters). The accelerating trend of suppliers installing PPMs
to recover debt means that close to one million PPM users (c. 1in 6) are now chained to their
current supplier.




1   Do Consumers Switch to the Best Supplier? University of East Anglia Centre for Competition Policy, July 2007




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Minimum standards would lead to suppliers doing less
Malcolm Wicks has expressed concerns that minimum standards would result in suppliers
pitching their assistance at the lowest level possible, but this akin to arguing that the minimum
wage drives down pay.

This view is not shared by those suppliers who have made significant progress in voluntarily
offering meaningful assistance to fuel poor consumers:

There should be a common industry approach to offering assistance to the fuel poor.
This would bring benefits such as clarity to consumers, particularly vulnerable ones, and
also to those assessing the effectiveness of social programmes. In addition, it would
create a level playing field which all suppliers would compete equally within this market
segment.

We believe that after establishing the agreed definition, scale and structure, all suppliers should be
required to participate in the scheme. Having led the industry in offering a social tariff we are
disappointed that all industry colleagues have not followed suit, indicating that the
competitive market needs adjusting.

Levels of benefit available, and eligibility for benefits should be defined by Government.

                             EDFE response to energywatch social tariff consultation, January 2007

British Gas will review its Essentials tariff model in March 2009. In the meantime it will be seeking
agreement with other suppliers and stakeholders for industry-wide introduction of social tariffs
to broadly common standards which would allow social tariff customers the same choice in the
market as other customers.

                                                                     British Gas press release, 08.02.07

As remarks from EDFE and British Gas on the need for standards demonstrate, unless there is
a level playing field for suppliers, it is the voluntary approach that will see suppliers scaling back
their efforts – where the best become the rest, rather than the other way around.

It is, of course, about where the bar is set. Minimum standards that build on existing best
practice would guarantee the desired levelling up.




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Social tariff obligations would threaten suppliers’ other voluntary CSR
initiatives
Suppliers offer a range of CSR initiatives: trust funds to assist their consumers who are
struggling with debt (either directly through full or partial debt write-off, or indirectly through
the funding of debt advice agencies); work with charity partners and intermediaries to assist
vulnerable consumers; and demonstration projects, such as the provision of energy efficiency
and heating measures to vulnerable and low-income households that would not normally be
helped by Warm Front.

While all are worthy it should be noted that those suppliers who have excelled in terms of
offering social tariffs have also excelled on other voluntary initiatives (BG and EDFE led the way
with and still offer significant trust funds, for example).

Energy efficiency initiatives anyway reflect the obligations that suppliers already have in relation
to providing energy efficiency measures to priority group households in this respect.
Only social tariffs and bill rebates directly assist consumers with the cost of energy. In the
current climate of high energy costs and accelerating levels of fuel poverty it is essential that all
suppliers now offer these on a proportionate scale. The obligation to offer social tariffs as part
of an energy assistance package would see the burden fall fairly on all suppliers – leaving them
free to supplement what would then be a statutory requirement with the voluntary initiatives as
they saw fit.


Social tariffs would distort the competitive market
This would only be the case if all suppliers had a uniform tariff rate imposed on them that paid
no heed to their respective pricing in the open market; and if the obligation expected them to
deliver social tariffs on a scale that was disproportionate to their market scale.

energywatch have argued for neither of these things. We have recommended that the social
tariff each supplier offers should be indexed against their open market rates (a 20% reduction
against open market tariffs, for example), resulting in a situation where each suppliers’ social
tariff is reflective of their overall competitive position. As with the EEC / CERT obligation, a
target mechanism should be utilised to ensure that the obligation falls fairly on each supplier
and in proportion to their market share.




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Social tariffs are too difficult to target

This is a favoured, defeatist argument of those opposed to social tariffs. The accurate targeting
of any non-universal welfare mechanism is difficult, but that does not mean it is impossible. As
the more socially progressive energy suppliers are already demonstrating, there are ways of
identifying and reaching those households in most need – indeed Ofgem have praised them for
this.

EDFE have used social-demographic modelling to identify where their fuel poor customers are
likely to be. Scottish and Southern Energy score potential recipients across a range of criteria
to determine need (akin to the ‘reasonable preference’ approach to identifying need used by
local authorities when assigning social housing) and British Gas have aligned eligibility for its
social tariff with the receipt of certain benefits.

DWP must work with the industry and use (not necessarily share) its data to improve targeting
further.

The circumstances and demographics of the fuel poor will be broadly uniform regardless of
their choice of supplier. Therefore an approach to eligibility and targeting that anticipates the
likelihood of fuel poverty based on the circumstances of the consumer would represent the
most intelligent approach (matching propensity to fuel poverty to actual fuel poverty).
Whatever the eligibility criteria settled on, it is vital that this is adopted by all suppliers in order
to make it easy to understand and publicise – particularly amongst those agencies that would
play an invaluable referral role. The DWP should also develop a certification system so that
eligible consumers can verify their entitlement to their supplier.




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