“The government is wedded to market solutions.

1. Tackling Fuel Poverty in Competitive Energy MarketsCatherine WaddamsESRC Centre for Competition Policy and Norwich Business School

2. “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 to issues 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 Group Sixth Annual Report, published March 2008

3. Fuel poverty and competitive energy markets • Fuel poverty • Instruments used and proposed • Intervention, competition, distributive concerns and the environment

4. 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)

5. 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

6. Effect of Winter Fuel Payments • Pensioner with low income (£8,000 pa) and average fuel consumption (£1000 pa) Ratio of fuel expenditure to income is If £250 added to income, ratio becomes If £250 subtracted from expenditure, ratio becomes

7. Regulator’s plan • Support to provide better advice for vulnerable customers: informational remedy (tax and cross subsidy) • Increase spending by companies to help vulnerable (cross subsidy) • Cap tariff differentials for prepay (cross subsidy) • Enable better targeting through data sharing on households (cross-subsidy, data privacy regulation ~legislation required)

8. Extra charges per year for prepayment compared with direct debit(med user, Norwich, July 08) Average bill around £1000 per annum Ofgem estimates costs are £85 pa more for both fuels Enormous variety; implications for competitiveness? capping would affect 3 of 6 firms

9. Would these measure affect competition? • Informational remedies positive (market already transparent to firms); problems with efficacy/trust • Increased social tariffs probably neutral; if targeted through benefits may lay ‘poverty trap’. Is this the best instrument to alleviate high prices? • Capping tariff differentials equivalent to reintroducing ex ante regulation; potential for distortions, access to ‘pay as you go’ • Data sharing to improve targeting: would enable price discrimination; but big issues for privacy

10. Fuel Poverty in a wider context Prices effective signal to consumers; low income most price responsive Lowering their price would reduce benign effect on environment Indicates focus on housing and incomes Fuel 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?