Energy Prices

5.1 Energy prices are a key driver of fuel poverty. The rise in the number of households in fuel poverty during 2006 is due to increases in consumer energy prices. The overall cost of energy to domestic consumers rose by 22% in real terms between 2005 and 2006, with gas prices rising by 29% and electricity prices rising by 19%. This means that overall energy prices in 2006 were higher in real terms than at their very low point in 2003 with gas prices rising by around 50% and electricity prices by around a third.

5.2 All six major suppliers to the household electricity and gas markets announced reductions in tariffs in the first or second quarter of 2007, as a result of the falling wholesale gas prices over the previous six to nine months. However, prices rose in early 2008 by an average of around 15% for gas and 13% for electricity. Subsequently, they rose again during the summer of 2008, by an average of around 30% for gas and 14% for electricity.

Retail Prices Index: Real gas and electricity price index, 1996=100

      1996 1997 1998  1999  2000  2001  2002  2003  2004 2005 2006 2007

n Gas            n Electricity

5.3 The main factors behind these increases were high wholesale gas prices, driven by high oil prices, and high international coal prices. Wholesale gas year-forward prices have increased by more than 65% and coal prices by more than 85% between January 2007 and March 2008. These increases in fuel prices have in turn put strong pressure on electricity wholesale prices.

5.4 UK wholesale gas prices are increasingly linked with continental prices because of a decline in indigenous resources and a gradual replacement by imports. Continental gas prices are in turn strongly influenced by the price of oil. Strong oil demand growth and tight production and refining capacity have kept crude oil prices high. Gas transportation charges also rose in 07/08.

5.5 Policies to reduce carbon emissions such as the EU Emissions Trading Scheme, the Renewables Obligation and the Carbon Emissions Reduction Target,  have also played a part in increasing the cost of energy to consumers. However, over the longer term these policies are expected to reduce costs for consumers; and the Carbon Emission Reduction Target benefits a “priority group” of poor, elderly and vulnerable householders (see chapter 3).

5.6 Market liberalisation across Europe would reduce transmission costs, improve transparency and competition, leading to savings for consumers in the UK and on the continent.

The Government therefore strongly supports the liberalisation aims of the European Commission’s third legislative package on the internal energy market published in September 2007.

5.7 Increased gas storage can also help to reduce future pressures on UK gas and electricity prices. There are now 10 gas and Liquefied Natural Gas storage projects in the UK that have already gained consent and are under construction or awaiting it. The Government is taking steps to improve and streamline the regulatory regimes for constructing gas storage facilities through the Planning and Energy Bills.

Ofgem’s Social Action Strategy

5.8 Ofgem has a key role to play in ensuring the competitive energy market works for all customers and in particular for low income and vulnerable households. Ofgem’s Social Action Strategy was launched in October 2005. It sets out how Ofgem will seek to meet its social obligations and help the Government to tackle fuel poverty.

5.9 The Strategy identifies four key areas of work for Ofgem:

• · Securing compliance with regulatory obligations and effective monitoring and reporting by the companies;

• · Encouraging best practice among energy suppliers, using research to identify effective ways to address fuel poverty and help vulnerable customers;

• · Influencing the debate about measures to help tackle fuel poverty, working with other stakeholders, helping to promote a joined up and holistic approach; and

• · Informing consumers about ways to lower their energy bills.

5.10 Annual updates to the Strategy are published by Ofgem, which report on its activities in the past year and set out its work programme for the coming year⁷. The 2008/9 update was published in July.

5.11 Fuel poverty is part of a wider problem of poverty and social exclusion caused by a combination of high energy prices, low incomes and poor housing conditions. Given such wider causes, there will inevitably be a limit to the role that the regulator and industry can play in tackling fuel poverty.

5.12 In February 2008, Ofgem launched a Probe in response to mounting consumer and public concern over the competitiveness of the gas and

electricity markets for households and small businesses. Using its powers in the Enterprise Act, Ofgem is taking a close look at the retail market to ensure it is working effectively for all consumers, in particular vulnerable consumers, at a time of rising prices. Probe involves in-depth examinations of the energy market structure, price developments, consumer and competitor behaviour in different segments of the markets. Ofgem will report its initial findings in October. The Government welcomes Ofgem’s action, and in particular its interest in ensuring that all groups of consumers benefit from competition in the markets.

5.13 Aside from the Probe mentioned above, Ofgem hosted an Energy Summit on Tackling Fuel Poverty in April. Its objective was to identify practical, cost effective ways to make real improvements as quickly as possible to the lives of vulnerable energy consumers and those in fuel poverty. The Summit was attended by Government Ministers, major energy supply companies and many of those who are actively involved in the fuel poverty area. Summit participants agreed to a number of commitments culminating in a programme of practical action to improve the targeting of existing help to those in fuel poverty and to help more vulnerable energy consumers participate more effectively in the energy market. The outcomes from the Summit are discussed in more detail below.

Tackling tariff differentials

5.14 Around 18% of the fuel poor pay for electricity by a pre-payment meter and around 12% of the fuel poor pay for their gas by pre-payment meter. Households that use pre-payment meters typically pay around £55 more for their energy than customers paying by standard credit and £144 more than those who pay by direct debit.

However, pre-payment meter customers do cost more to service than customers using other payment methods, because of the cost of the meter itself and the

administrative infrastructure that supports it. Ofgem estimated in its Domestic Retail Market Report in June 2007 that the costs to companies of servicing pre-payment meter customers for both fuels is £85 more than the costs for a direct debit customer.

5.15 The Ofgem Probe is also examining the costs of different payment methods. The premiums paid by both pre-payment and standard credit customers over direct debit have, on average, increased significantly in recent years, raising the question of whether such differentials do indeed now reflect costs. Ofgem is also seeking evidence of pre-payment customers switching to more expensive providers and possible actions that could be taken to address this. Ofgem intends to take a decision on whether further action is required in due course.

5.16 In the meantime, to ensure that suppliers comply with existing licence and other obligations on marketing their services, Ofgem has:

• required suppliers to provide a clear explanation (on websites and in the information provided to their customers), of the advantages and disadvantages of using prepayment meters, including that this method of payment may be more expensive than others.⁸

• announced a formal investigation into a potential breach of the marketing licence condition by npower and made clear that any other possible instances of mis-selling, in particular involving vulnerable customers will similarly be taken very seriously.

5.17 The Government announced in the Budget 2008 that the Secretary of State for BERR was prepared to use his existing statutory powers with a view to reducing any unjustifiable differential between the price of energy paid by prepayment customers and other forms of payment. Since then a number of suppliers have reduced the differential between their pre-payment meter and direct debit tariffs.

5.18 As part of a Probe into the energy market, Ofgem is currently investigating the reasons for tariff differentials charged for gas and electricity, also looking to establish to what extent they might vary according to the payment method. Should the Probe establish disadvantaged customer groups are being treated unfairly through tariff differentials the Government will look to Ofgem and the suppliers to come forward with proposals to reduce this disadvantage.

5.19 EU Directives require that any difference in terms and conditions for different  payment methods should reflect the costs to the supplier of the different payment systems. In light of the emerging evidence on payment differentials, BERR and Ofgem are considering how this requirement could be better reflected in suppliers’ licences.

5.20 On 11 September, we also announced that we will work with energy companies and banks to increase the number of people on direct debits. We have asked the Financial Inclusion Task Force to work individually with the energy suppliers, Ofgem and other stakeholders to develop new ways to encourage greater use of direct debits. The Taskforce has been asked to report back in December with recommendations to ensure that more people can benefit from direct debit payments and to make bill payments easier and more affordable for vulnerable customers.

Debt and disconnection protection for consumers

5.21 In January 2008, Ofgem published its best practice review on debt and disconnection⁹. The focus of the review was to examine how suppliers deal with their customers, particularly low income and vulnerable customers, in relation to debt and disconnection, to ensure they have an appropriate level of protection.

5.22 This work, under Ofgem’s Social Action Strategy, complements licence obligations on suppliers and Ofgems wider work to meet its statutory duties relating to vulnerable customers. The review identified best practice among suppliers and set benchmarks for suppliers’ performance in this area. It included strong messages for businesses to step up to the mark to ensure customers, particularly vulnerable customers, have adequate assistance to help them manage their energy bills. It included consumer research to examine consumers’ experiences of debt and disconnection and an assessment of suppliers’ communications with customers in debt and at risk of disconnection.

5.23 With rising levels of debt, continuing upward pressure on energy prices and changes to consumer representation, Ofgem has stressed the importance of suppliers retaining a strong focus on this area and continuing to make improvements in implementing the good practice guidelines on preventing debt and disconnection¹⁰.

Switching

5.24 In our last progress report we estimated that for 2004, if all customers were to switch to the best rate available to them, this would lift up to 200,000 households out of fuel poverty in the UK. We have since updated this analysis to examine the position in 2006. This analysis shows that of the 2.4m fuel poor households in England, around 750,000 of them could be removed from fuel poverty by switching to the best deal available to them (usually the cheapest direct debit tariff). The large increase in this measure between 2004 and 2006 is due to a number of factors, the main two being that more households are now “marginally” fuel poor (ie. need to spend just over 10% of income on energy to obtain an adequate standard of warmth) than were in 2004 and that that the savings available from switching can be greater than in 2004.

5.25 As switching can make a real difference to the costs consumers pay for their energy, it is important to understand why vulnerable consumers are often reluctant to switch supplier. Ofgem’s research, as part of its Consumer First initiative, indicates that there are still barriers that prevent vulnerable customers from switching and getting a better deal and highlighted the role that trusted intermediaries could play in supporting vulnerable consumers to find the best tariff available to them.

5.26 To assist in addressing this, Ofgem carried out, earlier this year, a pilot project with the Citizens Advice Bureaux to raise awareness among hard to reach low-income consumers of the savings that can be made by switching supplier and/or payment method, to provide reassurance about and to assist in the switching process. The Government has agreed to fund national roll out of this project during 2008/09.

The Government’s Environmental and Social Guidance to Ofgem

5.27 In June the Government published a consultation document on proposed changes to its Environmental and Social Guidance to Ofgem. The Guidance makes clear that the Government expects Ofgem to take a strong lead, in co-ordinating activity to help consumers vulnerable to fuel poverty benefit from competitive markets, particularly by helping consumers take advantage of the best tariffs available and by monitoring the development of energy companies’ social programmes.

Energy supplier social programmes

5.28 Energy supply companies also play an important role in tackling fuel poverty. They voluntarily provide a range of help to vulnerable customers through their social programmes. Each supplier offers a different form of assistance – for example, social tariffs, assistance with clearing debt, rebates, and fixed tariffs. Energy companies work in partnership with charities and interest groups and some offer ancillary services such as benefit entitlement checks.

The Government is keen to encourage these innovative approaches.

5.29 In the Energy White Paper, published in May 2007, the Government challenged energy suppliers to deliver a proportionate programme of assistance to their vulnerable customers. The energy companies responded by increasing the level of assistance provided to vulnerable customers from £40m to around £56m, which benefited around 700,000 households. In August 2007, Ofgem published a review of the different initiatives undertaken by each supplier to assist their vulnerable and fuel poor customers to shine a light on the help available. This was updated in October 2007 and the Government has estimated that these measures removed around 70,000 households from fuel poverty across G B.

5.30 However, the Government believes that given the rises in energy prices at the start of 2008 coupled with a growing global demand for fossil fuels, vulnerable households need further help. The Chancellor therefore announced in the 2008 Budget that the Government was seeking a voluntary agreement with the energy suppliers to increase the level of assistance they provide their vulnerable consumers to £150m a year. This was delivered in April 2008 when individual agreements were secured with the six large energy suppliers operating in Great Britain to increase the collective value of their social programmes to at least £150m a year by 2010/11. Ofgem published in late July its guidelines about what type of activity would be included under this additional social spend. Depending on how the money is spent, this funding could remove up to around 100,000 households from fuel poverty.

5.31 At the Ofgem Fuel Poverty Summit in April suppliers agreed that there was more they could do to let consumers know about their social programmes and have since provided clear

information on their website and other promotional material setting out the social tariffs and programmes they provide alongside the eligibility criteria for them.

5.32 They also agreed to provide and publish a direct phone number to route trusted intermediaries’ calls to a specialist team to provide help and information for

customers who are vulnerable or in fuel poverty to help them find the best available tariff and to offer any other help to which they may be entitled.