www.ccp.uea.ac.uk

Tackling Fuel Poverty in Competitive Energy Markets

Catherine WaddamsESRC Centre for Competition Policy and

Norwich Business School

“The government is wedded to market solutions. Whilst the FPAG recognises the benefits of the market, this does seem to result in an unwillingness to face up toissues and to assess whether, in particular cases, the market is working badly and what can be done to improve matters. Again there may be some changes here.”

Fuel Poverty Advisory Group (for England)Governmental Advisory GroupSixth Annual Report, published March 2008

Fuel poverty and competitive energy markets

• Fuel poverty

• Instruments used and proposed

• Intervention, competition, distributive concerns and the environment

Fuel poverty

• Need to spend more than 10% of household income on energy, driven mostly by energy prices

• Government pledged to abolish amongst vulnerable households by 2010; others in England by 2016

• challenged by judicial review from grey/green lobby groups (Help the Aged and Friends of the Earth)

• Fell to low of 1.2 m (from 21 m) households in 2003, risen to around 3-4m 2008 (around 15%), likely to rise further

• Main influences: low income, high prices, poorly insulated housing; ‘pay as you go’ electricity (more expensive, used predominantly by low income)

Instruments

• Instruments used since 2001 Plan: – Building improvements targeted on low income

consumers (central tax)– Firms required to deliver carbon emissions

reductions (eg insulation, low energy light bulbs), some targeted to low income (cross subsidy)

– Fuel payments for all pensioners (central tax)

From this year all over 60s receive £250 pa Winter Fuel Payment – just before Christmas

Effect of Winter Fuel Payments

• Pensioner with low income (£8,000 pa) and average fuel consumption (£1000 pa)

1.0125.08000

1000

If £250 added to income, ratio becomes

Ratio of fuel expenditureto income is

0.10.0948000

750

1.012.08250

1000

If £250 subtracted fromexpenditure, ratio becomes

Regulator’s plan

1. Support to provide better advice for vulnerable customers: informational remedy (tax and cross subsidy)

2. Increase spending by companies to help vulnerable (cross subsidy)

3. Cap tariff differentials for prepay (cross subsidy)4. Enable better targeting through data sharing on

households (cross-subsidy, data privacy regulation ~legislation required)

Extra charges per year for prepayment compared with direct debit (med user, Norwich, July

08) gas elecy British Gas (incumbent) 124 25 E.ON (incumbent) 73 25 EdF 27 8 npower 46 44 Scottish Power 34 43 Southern and Scottish 72 19

Average bill around £1000 per annumOfgem estimates costs are £85 pa more for both fuelsEnormous variety; implications for competitiveness?capping would affect 3 of 6 firms

Would these measure affect competition?

1. Informational remedies positive (market already transparent to firms); problems with efficacy/trust

2. Increased social tariffs probably neutral; if targeted through benefits may lay ‘poverty trap’. Is this the best instrument to alleviate high prices?

3. Capping tariff differentials equivalent to reintroducing ex ante regulation; potential for distortions, access to ‘pay as you go’

4. Data sharing to improve targeting: would enable price discrimination; but big issues for privacy

Fuel Poverty in a wider contextPrices effective signal to consumers; low income most

price responsiveLowering their price would reduce benign effect on

environmentIndicates focus on housing and incomesFuel poverty a misplaced target with rising energy

prices and environmental concerns

Change from regulation to competition removes an instrument from government

How best to address distributional concerns (from erosion of cross subsidy or other sources) in such circumstances?