A fair deal for poor households

The inevitable short-term increase in energy bills as the UK moves towards decarbonisation calls for careful planning to ensure those households already struggling to pay for fuel do not face extra financial pressure.

In many discussions about how the UK can meet its 2050 decarbonisation obligations, there is often an elephant in the room: who is most responsible and from where should the most change come? Is it from citizens (through home adjustments), government (through levies and taxes), or corporations (through higher bills)?

What is certain is that change will have to come from all of the above. So the next question becomes vitally important: if decarbonisation will increase the costs of our bills in the short term, how will those people least able to pay more for their energy cope with necessary changes to the way they heat their homes?

The rationale for jumping straight to household heat might not be obvious. But Ben Whittle at the Energy Saving Trust has previously noted that home heating accounts for 37 per cent of greenhouse gas emissions, the largest proportion of such emissions in the UK.

Jim Watson, professor of energy policy at University College London, says the British public are willing to accept some increase in their bills (of 9-13 per cent) in the interim period to help finance the future energy transition. However, this willingness, he adds, “is conditional on the parallel commitment of energy companies and the government to help facilitate the increased use of more sustainable energy”.

Fair by Design is concerned about the impact this will have on the growing number of UK households without adequate budgets for more energy cost rises. After housing costs, there are 14 million people in poverty in the UK, and around 4 million children in poor homes.

The recent outlook for consumers hasn’t been great. Ofgem data shows that while there was a reduction in energy prices in 2016, the general trend has been upwards, and this is expected to continue in the near and medium term, due in part to the costs of decarbonisation. Meanwhile, billions of pounds are needed to invest in networks and renewable generation to meet the 2050 target.

This is grim news for all consumers, but for low-income households the wider economic and social context makes energy price rises even more challenging. Not only has average pay fallen for millions of lower and middle-income jobs since 2010, but many low-income households are hit with the poverty premium: a financial penalty that consumers pay simply because they are on a low income.

In the energy market, the poverty premium occurs because some consumers need the control of prepayment meters, which are often a more expensive method of paying for domestic fuel. It also arises because the best tariffs are often available only to people able to spend considerable time “comparing the market”, and who have digital access and the confidence to change energy suppliers – something that tends to favour higher income households. And it’s not cheap: the average fuel-based poverty premium, affecting nearly three-quarters of low-income households, is £233 a year.

A further problem is the so-called cold home premium: energy-inefficient homes that require a significant amount of heat (and cost) before they can be lived in.

All in all, increasing energy costs hit low-income households hardest. And without careful planning, the transition to renewables could add extra budget pressure for those least able to afford it.

More support for households with their energy bills could mitigate this pressure: a good place to start would be maintaining the Warm Home Discount Scheme after 2021 and extending it to more homes. Fair By Design also wants Ofgem to consider a “fair price principle”, where suppliers would be obliged to charge reasonable prices and not overcharge loyal customers.

Fair By Design needs to increase pressure on government to deliver on the aims of the Fuel Poverty Strategy and 2018 Clean Growth Strategy: making sure all housing is up to Energy Performance Certificate Band C by 2030. Households struggling with their energy bills need to be prioritised.

Industry also needs to consider committing to inclusive design principles. Many of the best available energy deals are accessible only online. While this is the way many consumers want to interact with suppliers, some are still digitally excluded from doing so.

Fair By Design wants to work with more energy businesses trialling innovative models, such as time-of-use pricing, and make them suited to the lives of low-income households. We also want to work on more product design events to identify the best ways of switching customers to clean energy sources, introducing customer engagement techniques that work for everyone, while keeping bills low for those least able to pay more.

Change in essential services markets is inevitable. In the energy market it is vital, not least because we have a planet to save. Improvements in energy efficiency and ongoing drops in the price of renewable power will play a major role in reducing bills in the long run. But the impacts these changes have on low-income households today and tomorrow must not be an afterthought.