Sustainability Committee

Report on the Committee’s consideration of fuel poverty in Wales

Introduction

1. The Welsh Assembly Government defines a household as being in fuel poverty if, in order to maintain a satisfactory heating regime, it would be required to spend more than 10 per cent of its income (including benefits) on all household fuel use. According to the Welsh Assembly Government’s report 'A Fuel Poverty Commitment’, published in 2003, "the cost of fuel is one of three primary factors that influence fuel poverty in Wales (the others being income and dwelling energy efficiency)”.

2. As part of its inquiry into carbon reduction in Wales, the Sustainability Committee heard evidence from energywatch Wales to suggest that around 20 per cent of all Welsh households were fuel poor and that Welsh customers were paying more than the Great Britain average for their electricity (1). The Committee monitored developments in this area, with a view to returning to these issues when time allowed.

3. In March 2008, the Committee agreed to hold an evidence session on fuel poverty in Wales at its next meeting on 10 April. The Committee invited energywatch Wales to present its latest findings on energy pricing in Wales and asked the six largest energy supply companies to give evidence on the nature and effectiveness of their policies and projects aimed at combating fuel poverty in Wales. energywatch Wales, British Gas, Scottish Power, Scottish and Southern Energy, e-on UK and RWE n-power attended the evidence session. EDF Energy was unable to attend but provided a written submission.

4. On 4 June 2008, the Committee scrutinised Jane Davidson AM, Minister for Environment, Sustainability and Housing, on the evidence it had gathered on fuel poverty in Wales. The Minister was accompanied by Claire Bennett, Head of Climate Change and Water Division and Julia Williams, Head of Energy Efficiency and Sustainable Buildings.

5. This report summarises the issues raised during each evidence session and makes a number of recommendations for consideration within the context of the Ofgem investigation into the markets in electricity and gas for households and small businesses. Ofgem has confirmed that it is happy to consider a late submission from the Committee, to allow further consideration of the Welsh perspective.

Issues raised with energywatch Wales

6. At the Committee’s meeting of 10 April, Wendy Davies, Director of energywatch Wales, opened her evidence session by presenting some of the latest findings arising from research commissioned on the energy pricing structure in Wales. Issues raised by energywatch Wales during the evidence session are summarised below:

In Wales, around 22 per cent of households were in fuel poverty;
Approximately 40 per cent of Welsh households with electricity as their main fuel were considered to be 'fuel poor’;
Welsh customers were paying up to 10 per cent more than the Great Britain average for their electricity;
Incidence of fuel poverty in north Wales was substantially higher than in south Wales, due to a lack of access to mains gas and a large proportion of hard-to-heat homes;
Welsh customers were less likely to switch energy suppliers;
Findings suggested higher grid charges were a contributing factor to at least some of the premium paid by Welsh electricity consumers, especially those in south Wales, who were paying around £20 per year more for their services than average levels elsewhere in Great Britain. However, these higher charges only accounted for around half of the premium paid by Welsh consumers;
Social tariffs, which were aimed at those in fuel poverty, were sometimes higher than the lowest available tariffs offered by the same energy company;
Tariffs needed to be simplified to allow customers to understand and compare their bills and to switch suppliers more easily;
If all energy companies matched the spend of British Gas as a percentage of turnover, another £72.3 million would be spent in total on fuel poverty;
The future of the Home Energy Efficiency Scheme (HEES) was uncertain, following the Welsh Assembly Government’s decision to cap spending;
People living in mid and north Wales needed to be targeted with HEES, yet the majority of HEES spending was in south Wales;
Where suppliers were using the internet to promote their best deals on switching, the elderly population were more likely to miss out;
Installation of smart meters could simplify billing for customers;
Those with debts of more than £100 could find it difficult to switch suppliers and therefore miss out on any potential savings; and
Customers on prepayment meters often paid more than customers who paid by other means, including direct debit schemes.

Issues raised with energy supply companies

7. At the second evidence session on 10 April, the five energy companies provided details of their policies and projects aimed at tackling fuel poverty in Wales.

Issues raised by the energy companies during the evidence session are summarised below:

The need for data-sharing with government departments, to enable energy companies to identify and more effectively target their vulnerable customers;
A full examination of distribution and transmission charges was required to determine whether the United Kingdom as a whole had a fair pricing structure;
Government support was needed for a universal roll-out of smart metering;
Dispute of claims that energy companies were making huge profits at the expense of those struggling in fuel poverty, as there was little profit to be made within their retail arms;
Opposition to any form of mandatory social tariff, which they believed could stifle innovation and prevent the best solutions being found (British Gas and Scottish Power);
Suggestion that the winter fuel payment could be paid directly to suppliers so that they could offset this against energy bills (British Gas);
Improvements in the energy efficiency of housing could be the most effective and sustainable method of lessening the burden of rising prices for low income and vulnerable customers and eradicating fuel poverty in the longer term (e-on UK)
Applying equal pressure to each of the drivers - quality of housing, household income, and energy prices - was key to addressing fuel poverty (Scottish Power); and
Voluntary organisations, such as the Citizens’ Advice Bureau, had a significant role to play as trusted intermediaries in raising awareness and take-up of benefit entitlements.

8. The 'big six’ energy companies have since agreed to voluntarily triple their collective annual spend on 'social assistance’ to £150 million by 2011(2).

Issues raised with the Minister for Environment, Sustainability and Housing

9. At an evidence session on 4 June, the Minister for Environment, Sustainability and Housing updated the Committee on the four themes agreed at the Fuel Summit on 23 April 2008, which was attended by government Ministers from the devolved administrations, the voluntary sector, energywatch Wales, and energy companies:

Government to consider legislation so customers’ data can be shared more effectively to target help to fuel poor;
Energy suppliers to step up targeting of their social programmes;
Pilot schemes for 3,000 vulnerable customers to ensure they are on their suppliers’ best tariff; and
Government to fund joint Citizens’ Advice Bureau and Ofgem campaign to help low income customers improve energy choices.

10. Other issues raised during the evidence session are summarised below:

Energywatch Wales’ figures suggesting that the number of households in fuel poverty in Wales had increased from around 240,000 in 2006 to 270,000 in 2008 was accepted as a "reasonable estimate”;
Discussions between the Minister and energy retailers on the differential pricing in Wales were planned;
Tackling fuel poverty and reducing carbon emissions would require the Welsh Assembly Government to bring together a wide range of policies and initiatives across many portfolios;
Ofgem had been asked both by the Minister for Environment, Sustainability and Housing and the Secretary of State for Wales to specifically examine Welsh prices within the context of its current review;
Consultation on the national energy efficiency and savings plan would take place in the autumn, which would include consideration of new regulations to increase the legislative flexibility of HEES;
For optimal results on fuel poverty, Welsh Assembly Government policies would need to combine with activity at UK level on tariffs, the energy market and the benefits system;
Wales was to be part of a £1 million UK-wide pilot project aimed at installing micro-generation heating units in low-income households, as part of the low-carbon buildings programme;
Discussions between the Minister and social justice colleagues were due to take place on ways in which the Communities Next programme could be maximised to alleviate fuel poverty;
Work was underway on development of a strategic bid under the new convergence programme, which could be focused on community-scale energy generation;
The Minister was keen to take advantage of opportunities in wind, water and the marine environment, to enable Wales to become self-sufficient in electricity within 20 years, thereby sustaining fuel prices in Wales; and
The Welsh Assembly Government supported feed-in tariffs to enable people to move away from traditional energy mechanisms and into micro-generation.

Recommendations

11. The Committee welcomes the Minister’s commitment to tackling fuel poverty in Wales and to the four themes arising from the Fuel Poverty Summit in April. In doing so, the Committee makes a number of recommendations aimed at complementing the actions of government, Ofgem, and energy suppliers in this area.

Recommendation 1:

The Committee was deeply concerned that around 22 per cent of households in Wales were currently in fuel poverty and that 40 per cent of households that have electricity as their main fuel were considered to be 'fuel poor’. In welcoming the announcement that the 'big six’ energy companies were to voluntarily triple their collective annual spend on 'social assistance’ to £150 million by 2011, the Committee was deeply concerned that this could have minimum impact if energy companies continued to push up prices by unacceptable amounts.

The Committee therefore recommends that Ofgem takes a more proactive role in regularly monitoring and reporting on the appropriateness of energy companies’ pricing policies

Recommendation 2:

The Committee expressed concern that Welsh customers appeared to be paying up to 10 per cent more than the Great Britain average for their electricity. There was also evidence to suggest that households in south Wales paid £20 per year more for grid charges, and in North Wales paid £4 more. The Committee recognises that complex differentials in transmission and distribution charges across Great Britain could be one of the reasons for this irregularity, but is concerned that Welsh consumers seem to be paying a further premium that is not explained by the higher costs of supply. The Committee welcomes the Minister’s commitment to hold discussions with energy retailers on the differential pricing in Wales and would welcome an update on the outcomes of such discussions. The Committee understands that Ofgem has a role in setting distribution and transmission charges and is currently consulting on the Distribution Price Control Review for the period 2010-2015.

The Committee supports the energy companies’ suggestion regarding further research on this issue and recommends that an independent body conducts a full investigation into distribution and transmission charges to determine whether the United Kingdom as a whole has a fair pricing structure.

Recommendation 3:

The Committee heard evidence regarding the importance of smart meters in simplifying billing and enabling customers to reduce energy use within their homes. The Committee shares the witnesses’ disappointment that the UK Energy Bill did not include provisions delivering a universal roll-out of smart metering. Whilst amendments to the Bill provide enabling powers for a universal domestic smart meter mandate to be brought forward at a later time and set out the need to consult before these powers are enacted, the Committee is concerned that there is still no guarantee that smart meters will ever be delivered.

The Committee therefore recommends that the Welsh Assembly Government urges the UK government to review its recent amendments on the UK Energy Bill to ensure that a universal roll-out of smart meters is delivered without delay.

Recommendation 4:

During the evidence session, energy companies repeatedly stressed the need for data-sharing with government departments, to enable them to identify and target their vulnerable customers. The Committee understands that the Welsh Assembly Government has commissioned research on specific electoral ward areas that are in poverty, which will be available in the summer. The Committee also understands that the UK government intends to consider legislation to ensure that customer data can be shared more effectively "to provide targeted help in reducing fuel costs for the poorest pensioners most likely to be in fuel poverty”.

Whilst the Committee strongly supports this move, it recommends that any data-sharing includes the Welsh Assembly Government research on specific electoral wards in fuel poverty, to ensure the most effective approach to targeting all customers in fuel poverty.

Recommendation 5:

The Committee heard evidence that Welsh customers were less likely to switch energy suppliers and therefore often missed out on potential savings on energy prices. Energy suppliers’ tariffs appeared complex and almost impossible to compare across competitors, thereby complicating the customer switching process further.

The Committee therefore urges energy suppliers to make efforts to simplify their tariffs, with a view to allowing customers to understand and compare their bills and to switch suppliers more easily.

Recommendation 6:

The Committee was astonished to hear that some energy suppliers were offering social tariffs - which were designed to help those in poverty - at a higher rate than their lowest available tariffs.

The Committee therefore urges energy companies to address this anomaly as a matter of urgency to ensure that those customers in most need are able to access the most competitive tariffs.

Recommendation 7:

During the evidence session, the Minister discussed her decision to reject a recommendation within the Committee’s residential carbon reduction report, which urged the Welsh Assembly Government to fund a programme of retrofitting of all existing hard to heat homes. The Minister indicated "we would have accepted the proposition had it focused on the fuel poor because we believe that the homes of those people in fuel poverty need to be retrofitted”. Whilst the Committee stands by its original recommendation, it believes that improvements to energy efficiency of housing can play a significant role in eradicating fuel poverty in the longer-term and suggests that fuel poor households would be an appropriate place to start the process.

The Committee therefore recommends that the Welsh Assembly Government funds a programme of retrofitting hard to heat homes occupied by fuel poor households, as part of an ongoing commitment to roll-out the programmes to all hard to heat homes at a later date.

Recommendation 8:

The Committee heard evidence that the future of HEES was uncertain following the Welsh Assembly Government’s decision to cap spending. There were also concerns that, despite higher incidences of fuel poverty in north Wales, the majority of HEES spending appeared to be focused in the south of the country. The Committee welcomed the Minister’s commitment to considering new regulations which would allow legislative flexibility of HEES, as part of the consultation on the national energy efficiency and savings plan.

The Committee did, however, have concerns that this consultation will not begin until the autumn and therefore recommends that the Welsh Assembly Government brings forward the schedule for consultation to allow any new regulations on the HEES programme to be introduced in time for winter 2008.

Recommendation 9:

The Minister told the Committee that a review of "the full range of policies and programmes that can contribute to improving energy efficiency” was being carried out. As well as the review of HEES, the Welsh Assembly Government was looking to drive improvement through regeneration programmes, such as the Heads of the Valleys programme and Communities Next. The Committee was concerned that an emphasis on these programmes would not benefit the large number of households in fuel poverty living in rural areas. The Committee was also concerned that currently the HEES programme was not being targeted to mid and north Wales, where it was needed most. The Committee therefore recommends that in reviewing HEES and other programmes aimed at improving energy efficiency, the Welsh Assembly Government should ensure that these programmes are in future better targeted towards those parts of Wales with the most households in fuel poverty.

Comments

12. The Committee was concerned to hear that customers on prepayment meters who may be experiencing poverty often paid more than customers who paid by direct debit, for example. Evidence presented at the fuel poverty summit found that the average differential between prepayment meters and direct debits had increased from around £80 in 2005 to £125 in 2008. The Committee therefore welcomes Ofgem’s commitment to investigate whether further action is needed to address the biggest differentials.

13. The Committee heard evidence that the elderly population was likely to be disadvantaged where the internet was used to promote the best deals on switching. The Committee therefore welcomes the commitment in the fuel poverty action programme from a market-leading switching site provider to promote its telephone advice services to help customers who do not have internet access shop for a better energy tariff. It also supports the launch by Ofgem of a regional press campaign to highlight savings that customers can make by switching.

14. The Committee heard evidence to suggest that voluntary organisations, such as Citizens’ Advice Bureau had a significant role to play as trusted intermediaries in raising awareness and take-up of benefit entitlements. The Committee therefore welcomes the commitment by suppliers, contained within the fuel poverty action programme, to consider how best they can work with advice agencies on improving training and information to advisers on the help available to customers facing energy debt and in fuel poverty.

Mike German AM,
Chair, Sustainability Committee
June 2008

(1)Transcript of Sustainability Committee meeting, 25 October 2007, SC(3)-07-07 : Transcript
(2)This agreement followed the Chancellor’s announcement in the Budget to secure an increase in the amount of money energy suppliers spend on their social programmes