Warm home discount traps consumers into ‘poverty premium’

The Warm Home discount (WHD) scheme, only available via the larger suppliers, traps low-income households into bad energy deals a new report has claimed.

Independent think-tank, Social Market Foundation’s (SMF) report ‘Eliminating the Poverty Premium in Energy’, found that the £140 discount could be responsible for discouraging customers on lower incomes from switching, heightening the risk they pay a “poverty premium” – estimated at £394 a year in the worst cases – or face losing their entitlement to the concession.

Calling for reform, it recommends the WHD be made available across all energy suppliers and that the government reimburses the costs for smaller providers. Eligibility should, it said, be standardised, along with payments made automatically to claimants. This would help customers on low incomes to switch to better deals and increase competition in the energy market.

The SMF stressed the WHD’s importance, as Ofgem uses the mechanism for targeting its vulnerable customer safeguard tariff.

A break down of the so-called “poverty premium” might include customers paying £308 for not being on the best energy tariff, £80 for using a pre-payment meter, £10 for receiving paper bills and £76 for not paying by direct debit.

SMF research director, Nigel Keohane and co-author of the report, said: “Reforming the Warm Home Discount, whilst introducing mechanisms to automatically switch consumers onto better tariffs, would ensure that low-income consumers are better able to afford to heat their homes.

“Low-income consumers are being ripped off in the energy market and introducing a price cap addresses just one part of the problem and only in the immediate term.”

In addition the foundation, which also notes that only 42 per cent of low-income consumers were prepared to have a smart meter installed, has called for major changes to the energy market and policy. It has proposed:

• Introducing an automatic switching mechanism to move customers on poor value standard variable tariffs for several years onto better value tariffs. Consumers would be automatically enrolled in the scheme unless they opted out.
• Forcing suppliers to offer the same deals to prepayment customers
• Ending the practice of suppliers who charge more for those receiving paper bills
• For the energy price cap to be time-limited and, if removed, for lower-income households to be able to access a better deal

It suggests state-owned suppliers may have an “important role” to play in raising switching confidence among consumers. Backed by regional and city mayors, such suppliers could also help address area-specific problems, such as the high use of prepayment meters in London.

Campbell Robb, chief executive at social policy research and development charity the Joseph Rowntree Foundation (JRF), said: “Inflation in fuel costs and the freeze on benefits is also reducing the real incomes of low-income families, locking families in poverty.

“It is high time we redesign the way the economy and the energy markets work for people on low incomes. The fact that many are pushed further into poverty by this premium is just not right.”

Robb added that low-income families spend a larger proportion of earnings on essentials such as energy, with the poorest fifth spending almost twice as much on heating as an average household.