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Energy Insight: Fuel poverty in the UK
How to define fuel poverty?
Fuel poverty is a pressing, complex problem in the United Kingdom that involves a wide range of economic, social and environmental issues. Overall, the fuel poverty status of a household is determined by three interacted elements: household income, its energy requirement and energy prices.
Using the low income, high cost’ (LIHC) indicator, the problem is defined as having higher than typical energy costs that would leave the household below the official poverty line, if it spent the required money to meet those energy costs.
Fuel poverty is a devolved issue, with each nation in the UK having its own policies and measures. Hence, the devolved governments in Scotland and Wales are using a slightly different definition, which states that a household which needed to spend 10% or more of its total income to heat the home to an ‘adequate level of warmth’ was in fuel poverty, while anyone required to spend more than 20% was considered to be in severe fuel poverty.
Who is affected by fuel poverty?
As of 2016, fuel poverty in England has been estimated at around 11.1% of homes (approximately 2.5 million households), 26.5% (approximately 650,000 households) in Scotland, 23% (approximately 290,000 households) in Wales and 22% (approximately 160,000 households) in Northern Ireland. Overall, around 3.6 million households in the UK are in fuel poverty – doubling in comparison to a number of fuel poor households in 2002.
The Annual Fuel Poverty Statistics Report: 2018 (2016 data) revealed that households in fuel poverty tended to be ones in older dwellings with poor insulation. 19.4% of households in the private rented sector were in fuel poverty compared with 7.7% in owner occupied properties. Multi person households were in greater fuel poverty than single occupancy, but the highest prevalence of fuel poverty was found for lone parents with dependent child(ren) (26.4%).
Less than 10% of these privately-owned properties achieve an energy efficiency rating of Band C or better.
How domestic energy bills impact fuel poverty in the UK?
The annual standard electricity bills (in real terms) rose by nearly 7% per from 2017 to 2018, while gas bills rose by 0.5% over the same period. It is likely that price increases will continue in the imminent future.
Source: BEIS, December 2018
The average proportion of expenditure spent by each household on gas and electricity decreased continuously from 4.8% in 1993 to 2.9% in 2004. After that, it has increased rather continuously up to 5.1% in 2013. Since then it has been reduced to levels similar to those of the early 1990s, reaching 4% in 2016.
Source: Energy spend as percentage of total household expenditure (UK); data: (Ofgem, 2017) based on ONS family spending in the UK data
The share of expenditure of each household spent on fuel and power varies significantly among income groups: In 2016, almost 10 per cent (8.4%) of expenditure was spent on energy by households in the lowest income decile compared to just 2.6 per cent for those in the highest income decile. Additionally, the share of expenditure varies over time to a much higher extent in percentage points for the poorest households than for the average household.
Reports about potentially high profits of energy companies have gained a lot of media attention in recent years. In 2016, a study by PWC for Energy UK expected costs and revenues of big electricity and gas suppliers in the UK suggested profit margins of up to 28% per dual fuel bill, instead of the 4% claimed by the industry and used by Ofgem. In July 2017, Citizens’ Advice estimated that network companies such National Grid would be making unjustified profits of £7.5bn over a period of 8 years, which would correspond to a 19% profit margin.
The Competition and Markets Authority (CMA) has concluded in 2016, that Ofgem lacks requisite information to assess generation and retail profitability. It identified a lack of financial transparency due to the complexity of big energy companies’ operations and their reporting practices as well as differing accounting regimes between companies, which had been recognised before by parliamentary committees, consumer groups and Ofgem. Consequently, the CMA proposed a reform package for the financial reporting requirements for energy suppliers.
The big 6 energy providers have a market share of 75% of the domestic gas market and 76% of the domestic electricity market. The majority of customers of those companies are on standard variable tariffs (SVT), ranging from 41% (at Scottish Power) to 71% (at SSE).
Standard variable tariffs are the basic and default tariffs offered by energy companies to their customers, who haven’s chosen any other energy plan or if their plan expires. This tariff is called “variable” since the price per kWh can be changed any time (customers have to be noted in advance though). It is usually more expensive than the other tariffs offered by suppliers. Ofgem estimates that around 13 million customers are on standard variable tariffs in Britain (as of September 2017). In a survey by the CMA, 56% of respondents had never switched their supplier. The survey concluded that in 2015, domestic energy customers as a whole paid £2bn more than they would have in a competitive retail market. The CMA identified significant obstacles for particular customer groups, especially customers on prepayment contracts, which include poorer households, to engage in the market and thus benefit from competition. However, it also concluded there were no major barriers for the majority of domestic consumers to switch suppliers and tariffs and pointed to complexity of bills, lack of comparability of tariffs and a perception of energy being taken for granted as possible explanations.
What policy bodies are responsible for tackling fuel poverty?
- The Department of Business, Energy and Industrial Strategy, specifically Minister of State for Energy and Clean Growth is responsible, amongst other duties, for energy efficiency and heat, including fuel poverty.
- Ofgem as the independent energy regulator, protects the interest of existing and future gas and electricity consumers. It publishes an annual report on how suppliers treat their customers in vulnerable situations, including those who are in debt and at risk of being disconnected.
- Committee on Fuel Poverty is a non-departmental public body sponsored by BEIS. The Committee advises on the effectiveness of policies aimed at reducing fuel poverty and encourages a greater co-ordination across the organisations working to reduce fuel poverty. They published their third annual report in November 2018.
- Northern Ireland: Department for Communities
What are the main strategies and policies designed to combat fuel poverty?
While fuel poverty is a devolved issue, each nation in the UK having its own policies to tackle the problem as well as statutory targets, for example:
- England’s fuel poverty targets were set up in the Government’s ‘Cutting the cost of keeping warm: a fuel poverty strategy for England’, published in March 2015. It has been the first fuel poverty strategy since 2002. The main target is to ensure that as many fuel poor homes as is reasonably practicable achieve a minimum energy efficiency rating of Band C of the Energy Performance Certificate (EPC), by 2030. In the Clean Growth Strategy published in October 2017, the Government pledged around £3.6 billion of investment to upgrade around a million homes through the Energy Company Obligation (ECO).
- Scotland’s fuel poverty targets are laid out in Fuel Poverty Strategy for Scotland 2018 and aim that by 2040, no more than 5% of households in Scotland will be in fuel poverty. Among the planned policies to achieve the targets are e.g. investment in making warmer, greener and more efficient homes, a review of the scheme eligibility for Warmer Homes Scotland or establishment of a public energy company to contribute to tackling fuel poverty and supporting economic development.
- Wales’s most recent fuel poverty strategy was published in 2010 and aimed at eradicating fuel poverty, as far as is practical, in all households by 2018. The key policies aimed at contributing to the delivery of this strategy include the Nest and Arbed schemes (still in operation as of January 2019) which focus on increasing the energy efficiency of a property.
- Northern Ireland’s ‘Warmer Healthier Homes - a new Fuel Poverty Strategy for Northern Ireland’ was published in 2011. A primary aim of this strategy was to target available resources on those vulnerable households who are most in need of help, with the eradication of fuel poverty as a core goal of the NI Government’s efforts. Policies pledged in the strategy include funding improvement of the energy efficiency of the housing stock or launching a boiler replacement scheme.
The UK Government has been also committed to deliver state-level policies tackling the problem. The main measures include:
- Energy Company Obligation (ECO), is a government energy efficiency scheme to help reduce carbon emissions and tackle fuel poverty. Under ECO, medium and larger energy suppliers fund the installation of energy efficiency measures in British households.
- Warm Home Discount Scheme launched in April 2011, it has provided assistance with energy costs to over 2 million low income and vulnerable households in Great Britain each year. Since its launch, the scheme has provided over £2 billion of direct assistance to low income and fuel poor households. The Government has committed to continuing the scheme until 2021 at current levels of spending - £320m per year rising with inflation.
- Minimum Level of Energy Efficiency Standards (MEES) from April 2018 that prohibits private landlords from renting properties with energy performance certificates below band E in England and Wales.
- Winter Fuel Payment introduced in 1997 provides pensioners with an annual tax-free payment of between £100 and £300 to assist them to pay their energy bills. However, only a portion of households entitled to WFP are in fuel poverty.
- Extension of the safeguard tariff in February 2018 for most vulnerable households on prepayment meters. This energy price cap increases better off of those in fuel poor households who are also on the worst energy deals, typically standard variable tariffs (SVTs).
- Introduction of a market-wide domestic energy price cap, for all domestic customers who are on poor value default deals, from 1 January 2019. The Domestic Gas and Electricity (Tariff Cap) Bill that has been designed for about 60% of UK households on SVTs, which generally offer poor value compared with shorter-term fixed rate tariffs, could save them up on average around £76 a year. The scheme will apply until the end of 2020, while later Ofgem will recommend to the government whether it should be extended.
- Enhancement of increased competition in the household electricity and gas market. Ofgem has been encouraging energy consumers to regularly compare available tariffs, to make sure that the best gas and electricity deals are secured. Hence, in July 2017 Ofgem launched energy supplier comparison site, which help consumers to make suitable and confident decision about switching suppliers or tariffs. It is believed, that enhanced competition in the energy market could be one of the most effective weapons against fuel poverty.
How effective have been the policies designed to combat fuel poverty?
Despite the continues decrease in fuel poverty gap since 2012, i.e. the difference in pounds between the required energy costs for each fuel poor household and the nearest fuel poverty threshold, the number of households in fuel poverty in England and across the rest of the UK has been increasing since 2015.
Energy Institute members, i.e. energy professionals who live and work in the UK, continue to rank policies around fuel poverty as the least effective among energy polices in the UK. This is according to the results of the annual Energy Barometer surveys in 2017 and 2018.
According to the Institute for Public Policy Research’s report, based on current rates of the installation of energy efficiency measures, the government will miss a key fuel poverty target by around 6 decades, as elevating all fuel-poor households to EPC band C will not be achieved until 2091 at the very earliest.
Sources and further reading:
Beyond ECO. The future of fuel poverty support, Institute for Public Policy Research
Clean Growth Strategy, 2017
Definitions of fuel poverty: Implications for policy, Richard Moore, Energy Policy, Volume 49, October 2012, Pages 19 26
Energy Market Investigation. Final report, CMA, June 2016
Fairness in Retail Energy Markets? Evidence from the UK, UKERC, 19 October 2018
Fuel Poverty methodology handbook, BEIS, July 2018
Fuel poverty trends 2018, BEIS, June 2018
Sub-regional fuel poverty data 2018, BEIS, June 2018
Tackling Fuel Poverty: Report to the Committee on Fuel Poverty, Centre for Sustainable Energy, May 2018,
The Clean Growth Plan: Tackling Fuel Poverty, Energy Saving Trust
UK Fuel Poverty Monitor 2015 – 2016. A review of progress across the nation, National Energy ActionFuel Poverty (Targets, Definition and Strategy) (Scotland) Act 2019