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Energy Insight: Fuel poverty in the UK

EI Knowledge; 02/08/2021
In this Energy Insight:
- What is fuel poverty?
- Who is affected and what are the impacts?
- How are we tackling fuel poverty?

How is fuel poverty defined?

Fuel poverty is a pressing, complex problem in the UK that involves a wide range of economic, social and environmental issues. Overall, the fuel poverty status of a household is determined by three different, interconnected elements: 
  • household income
  • household energy requirements (related to energy efficiency)
  • fuel prices
The traditional definition: a household is in fuel poverty if it needs to spend more than 10% of its income on fuel/energy. Spending more than 20% of income means a household is in extreme/severe fuel poverty.

Fuel poverty is a devolved issue, with each nation in the UK having its own policies and metrics for measurement. See below for more details on this.

Anyone can be affected by fuel poverty, but it commonly impacts on single parent households, and people who are unemployed or have a low income. Living in a cold, damp home, or struggling to afford energy for heating and cooking can be extremely stressful, and often leads to negative health outcomes, such as exacerbation of asthma, heart conditions and respiratory issues.

England
England previously used the low income high cost (LIHC) indicator to determine fuel poverty. This considers a household to be fuel poor if:
  • they have required fuel costs that are above average (the national median level)
  • AND, were they to spend that amount, they would be left with remaining income below the official poverty line.
As of February 2021, England has switched to use a new indicator, as set out in the Sustainable Warmth strategy. The low income low energy efficiency (LILEE) indicator considers a household to be fuel poor if:
  • they are living in a property with a fuel poverty energy efficiency (EPC) rating of band D or below
  • AND, when they spend the required amount to heat their home, they are left with remaining income below the official poverty line.
See the Sustainable Warmth strategy for an explanation of the reasoning behind the switching of metrics.

Scotland
Scotland passed a Fuel Poverty act in 2019 which defines fuel poverty as the following:
  • after housing costs have been deducted, more than 10% (20% for extreme fuel poverty) of their net income is required to pay for their reasonable fuel needs; and
  • after further adjustments are made to deduct childcare costs and any benefits received for a disability or care need, their remaining income is insufficient to maintain an acceptable standard of living, defined as being at least 90% of the UK Minimum Income Standard (MIS).

Wales and Northern Ireland
Wales and Northern Ireland still use the traditional definition for fuel poverty (see above). 

Who is affected by fuel poverty?

There are over 4mn households in the UK affected by fuel poverty. While it is difficult to compare directly between nations, due to different population sizes and definitions, the data below provide an overview of the situation.

 Home Nation% of homes in fuel poverty No. of households in fuel poverty Fuel poverty definition 
 England (2019 data) 13.4 3.18mn LILEE
 Scotland (2019 data) 24.6 618,000 Adjusted 10% indicator
 Wales (2018 data) 12.0 155,000 10% indicator
 N. Ireland (estimate for 2018) 18.0 131,000 10% indicator


Households in fuel poverty tend to be ones in older dwellings that are poorly insulated. In England, 26.8% of households in the private rented sector were in fuel poverty, compared with 8.2% in owner occupied properties. Single parent households are the most likely to be fuel poor (28%); for comparison, just 6% of couple under 60 households are fuel poor. 

Fuel poverty targets

Each nation in the UK has its own fuel poverty targets:

 Home nationTargetsYear set for achieving target 
 England (target set 2014)
  •  Ensure that as many fuel poor households as possible achieve a minimum energy efficiency rating of band C
  • Interim targets of band E by 2020, band D by 2025
2030 
 Scotland (target set 2019)
  •  No more than 5% of households in Scotland in fuel poverty
  • No more than 1% of households in extreme fuel poverty
  • Median fuel poverty gap is no more than £250 (adjusted)
2040
 Wales (target set 2021)
  •  No households in severe or persistent fuel poverty
  • No more than 5% of households to be living in fuel poverty at any one time
  • Number of households 'at risk' of falling into fuel poverty to be halved compared to 2018 estimate
2035
 Northern Ireland
  •  No statuatory target
N/A 


England
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. The EPC rating is a measure of current and potential energy costs, alongside the performance of energy related features in the home, such as the walls, roof, windows and heating system. 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) (see below).

Scotland
Among the planned policies to achieve the targets are 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
Wales’s most recent fuel poverty strategy was published in 2021 and aims to eradicate fuel poverty, as far as is practical, in all households by 2035. The key policies aimed at contributing to the delivery of this strategy include the Nest and Arbed schemes which focus on increasing the energy efficiency of a property.

Northern Ireland
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.

Which policy bodies are responsible for tackling fuel poverty?

What are the main strategies and policies designed to combat fuel poverty?

The UK Government is committed to delivering state-level policies tackling the problem of fuel poverty. 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 at least 2022. 

  • 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.

  • Green Homes Grant was a government scheme that contributed towards the cost of installing energy efficiency improvements to homes (up to £5000). However, it was scrapped after less than a year.

  • 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 between £75-100 per year. The price cap has continued into 2021, but a rise in wholesale energy prices has pushed it up by £96 to £1138. 

The impact of domestic energy bills on fuel poverty

The share of expenditure of each household spent on fuel and power varies significantly among income groups: In 2019, 7.5% of expenditure was spent on energy by households in the lowest income decile compared to just 2.7% 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.

Source: Energy spend as percentage of total household expenditure (UK); data: (Ofgem, 2021) based on ONS family spending in the UK data

Energy prices have a big impact on fuel poverty, and there are concerns that energy companies have boosted profits by placing customers on expensive variable tariffs by default. The ‘variable’ part of the tariff means that the price per kWh can be changed any time (although customers do have to be noted in advance). 

Source: Annual domestic energy bills, Dept. for BEIS, July 2021

In 2017, Ofgem estimated that around 13 million customers are on standard variable tariffs in Britain. 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.
Ofgem have been working to enhance competition in the household electricity and gas market. They encourage energy consumers to regularly compare available tariffs and launched an energy supplier comparison site in 2017 which helps consumers to make informed decisions about switching suppliers or tariffs in order to save money. In July 2021, the Government announced a trial for automatic switching for customers on expensive default energy tariffs.

One area of success has been the diversification of the domestic energy market. In 2011, it was completely dominated the ‘big six’ energy companies - British Gas, SSE, E.ON, nPower, Scottish Power and EDF. In the decade since, this dominance has been shattered.


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) concluded in 2016 that Ofgem lacked the 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.

How effective have fuel poverty policies been?

Tracking changes in fuel poverty across the UK is challenging, due to different and changing definitions of what fuel poverty actually is. Based on the LILEE metric, England has seen the number of fuel poor households fall in all but one year since 2010. The median fuel poverty gap (the difference in pounds between the required energy costs for each fuel poor household and the nearest fuel poverty threshold) has also fallen.

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 from 2016 - 2021.
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




Energy Insight details

Subjects: Policy and Governance, Fuel poverty, Energy policy