Interim report (1) Whether fuel poverty is a distinct problem

1. Getting the measureof fuel povertyFinal Report of theFuel Poverty ReviewProfessor John Hills15 March 2012

2. SLIDE 2 Approaching the Terms of Reference • Interim report • (1) Whether fuel poverty is a distinct problem • (2) If so, how fuel poverty is best measured and does the current • approach to measurement capture problems effectively? • Final report • Final conclusions on (1) and (2) above AND • (3) Implications of measurement for the way we understand the • effectiveness of the range of policy approaches to • reducing it

3. SLIDE 3 The Review so far Poverty • Fuel poverty as a distinct problem • We found that fuel poverty is a distinct • issue and of concern from at least • three different perspectives. Fuel • poverty is an additional problem • for some low-income households. Health Carbon / Energy • Unequal ability to convert cash to warmth • - Pushed into poverty by high costs • - Poor pay more • High rate of EWDs and morbidity issues in general • - Mental health and social well-being • - Social isolation • Capital investments out of reach for some • Potential obstacle • to carbon mitigation • policy delivery, • especially where • costs go on bills

4. SLIDE 4 THE REVIEW SO FAR • Warm Homes and Energy • Conservation Act 2000 • “A person is to be regarded as living “in fuel poverty” if he is a member of a household living on a lower income in a home which cannot be kept warm at reasonable cost.” • The Act establishes a duty to produce a strategy setting out how the following objective will be met: • “As far as reasonably practicable persons in England or Wales do not live in fuel poverty.” SLIDE 4 • This definition correctly focuses on the overlap of low income and unreasonable cost but this is not what we currently measure.

5. SLIDE 5 THE CURRENT OFFICIAL INDICATOR • What we currently measure SLIDE 5 A fuel poor household is one that would need to spend more than 10% of its income on adequate warmth. • The indicator is rightly based on modelled needs. But it is fundamentally flawed because it misrepresents trends, includes some households that are not low income, does not show policy impacts very clearly and is sensitive to technical issues.

6. SLIDE 6 THE CURRENT OFFICIAL INDICATOR • What we currently measure SLIDE 6 The current definition captures some relatively well-off households with high costs, especially as prices rise. The answer is not simply to put an income threshold into the current official indicator.

7. SLIDE 7 THE CURRENT OFFICIAL INDICATOR • RECOMMENDATION • We therefore recommend that the Government should change its approach to fuel poverty measurement away from the current ‘10 per cent’ ratio indicator. SLIDE 7

8. SLIDE 8 LOW INCOME HIGH COSTS INDICATOR AND FUEL POVERTY GAP • Our alternative: Low Income and High Costs indicator and the fuel poverty gap SLIDE 8 A fuel poor household is one that has both high modelled costs and low income. The fuel poverty gap is the required reduction in modelled costs to take a household out of fuel poverty. Together, the indicators show both the extent and depth of fuel poverty (rather than conflating them)

9. SLIDE 9 LOW INCOME HIGH COSTS INDICATOR AND FUEL POVERTY GAP • Setting the thresholds for low income and high costs SLIDE 9 Each threshold is adjusted annually, making the indicator relative over time. It tracks the position of each household compared to current norms and creates a kind of moving target. The extent of fuel poverty depends on how costs change for all households not just the fuel poor. This approach captures the risk that the poor could lose ground as housing improves in general.

10. SLIDE 10 LOW INCOME HIGH COSTS INDICATOR AND FUEL POVERTY GAP • Reaction to our proposed indicator SLIDE 10 • Our interim report was a consultative document. • There was broad support for: • our conclusions on the causes • and impacts of fuel poverty • our view that the core problem is • correctly identified in WHECA • the general approach represented • by LIHC indicator and the fuel • poverty gap • how to set the income threshold • under any LIHC approach • There were strong concerns about: • the way we measured required • costs, especially how we adjusted • costs for household size • the level of the costs threshold • the relative nature of the costs • threshold In preparing our final report we have considered these criticisms very carefully.

11. SLIDE 11 LOW INCOME HIGH COSTS INDICATOR AND FUEL POVERTY GAP • Adjusting modelled costs for household size and composition SLIDE 11 We want to adjust modelled costs so that we can compare all households in England against the threshold. BUT the way we adjusted for household size in our interim report was wrong. We also received a carefully-developed suggestion to measure costs as unit costs (£/m2) as a way of side-stepping the need to adjust for household size. On balance we prefer the equivalisation approach and have derived specific new factors to improve the calculation. One reason for preferring our equivalisation approach is that it more closely correlates with SAP. Another is that it is fairer to small households. Equivalisation Unit Costs

12. SLIDE 12 LOW INCOME HIGH COSTS INDICATOR • Setting the costs threshold SLIDE 12 Concerns Threshold is too low This level is driven by the high levels of energy inefficiency in the housing stock Threshold is too high It is very difficult to ensure that zero low-income households have higher-than-typical costs Response We consider a range of different ways of setting the threshold, including absolute and relative approaches. Although after careful reflection we retain our initial approach, the analysis is set out for those who would prefer an alternative. Before After Target setting The key indicator should be the scale of the fuel poverty gap. If this is reduced to a low level then no household can be left very far above the threshold. This is preferable to using a fixed standard that is easier to beat, but becomes out of date.

13. SLIDE 13 LOW INCOME HIGH COSTS INDICATOR • Fuel poverty under twin indicators, • 1996-2009 SLIDE 13 Under the LIHC indicator, the number of fuel poor households has remained broadly stable over this period. The fuel poverty gap increased by three-quarters between 2003 and 2009.

14. SLIDE 14 LOW INCOME HIGH COSTS INDICATOR AND FUEL POVERTY GAP • RECOMMENDATION • The Government should adopt a new indicator of the extent of fuel poverty under which households are considered fuel poor if: • - they have required fuel costs that are above the median level; and • - were they to spend that amount they would be left with a residual • income below the official poverty line. • The Government should count the number of individuals in this position as well as the number of households they live in. • The Government should adopt a new indicator of the depth of fuel poverty as represented by the average and aggregate fuel poverty gap, defined as the amounts by which the assessed energy needs of fuel poor households exceed the threshold for reasonable costs. SLIDE 14

15. SLIDE 15 Applications: Finding the fuel poor • Characteristics • The LIHC indicator lends itself to understanding the distribution of fuel poor households by household and dwelling characteristics. • The example here shows EPC rating. It can be seen that the majority of fuel poor households occupy EFG homes – and account for 90% of the fuel poverty gap.

16. SLIDE 16 FINDING THE FUEL POOR • Proxies • Understanding household characteristics is only part of the picture. • In practical terms, proxies are needed to identify specific households for assistance. Proxies will hit some of the right people and some of the wrong ones. • The chart shows the hit rate of means-tested benefits as an eligibility criterion. 62% of LIHC households are on such benefits representing 62% of the fuel poverty gap.

17. SLIDE 17 FINDING THE FUEL POOR • Using the fuel poverty gap • The fuel poverty gap can provide a bridge between targeting and the measurement of fuel poverty. • Importantly, the fuel poverty gap also helps identify those who are deepest in fuel poverty who are priorities for assistance. Just over 50 per cent of the 2009 fuel poverty gap was accounted for by recipients of means-tested benefits living in houses with solid fuel heating or off the gas grid or solid walls or built pre-1945. Of course, some houses showing these characteristics are not fuel poor.

18. SLIDE 18 Applications: Understanding policy ≈ Warm Front • Principles The impact of a given policy on fuel poverty will depend on three factors: The type of policy (i.e. whether it addresses energy efficiency, income or prices) Who pays for the policy (i.e. customers or taxpayers) Who benefits (i.e. fuel poor households or all households) ≈ CERT ≈ Winter Fuel Payments

19. SLIDE 19 UNDERSTANDING THE IMPACT OF POLICY • Existing climate and energy package • Current policy spans the three key drivers of fuel poverty. • The picture is changing between 2009 and 2016 as shown. 2009 2016(2009 prices) Taxpayer-funded Consumer-funded

20. SLIDE 20 UNDERSTANDING THE IMPACT OF POLICY • Winners and losers • The net effect of a policy and group of policies on fuel poverty will depend on precisely who benefits and who pays. There is also a distributional impact. • This kind of trade-off is a live issue with ECO (see Figure) which is currently expected to have a regressive impact. To remove this, one would have to spend more than half (rather than one quarter) of ECO on Affordable Warmth.

21. SLIDE 21 Applications: Projecting fuel poverty Prices and incomes projections are uncertain, so we show a range. We cannot allow for higher unemployment or tax/benefit reforms since 2009 – so may be over-optimistic. • LIHC indicator and fuel • poverty gap Our projections show an increase under both indicators by 2016 – but one that is lower than it would be in the absence of policies. On our central projection, the fuel poverty gap is more than 50% higher in 2016 than in 2009 and nearly three times what it was in 2003. This is 10% lower (but only 10% lower) than it would be in the absence of policies.

22. SLIDE 22 Applications: Projecting fuel poverty Prices and incomes projections are uncertain, so we show a range. We cannot allow for higher unemployment or tax/benefit reforms since 2009 – so may be over-optimistic. • LIHC indicator and fuel • poverty gap Our projections show an increase under both indicators by 2016 – but one that is lower than it would be in the absence of policies. On our central projection, the fuel poverty gap is more than 50% higher in 2016 than in 2009 and nearly three times what it was in 2003. This is 10% lower (but only 10% lower) than it would be in the absence of policies.

23. SLIDE 23 PROJECTIONS OF FUEL POVERTY • The impact of • individual policies • The projections provide details on the impacts of individual policies. • Some (shown in red) move in the wrong way from a fuel poverty perspective either in terms of the fuel poverty gap of the headcount measure or both. Others (shown in green) move in the right way. • The overall effect is in the right direction but the scale is disappointing. Note: vertical axes have been adjusted.

24. SLIDE 24 PROJECTIONS OF FUEL POVERTY • Comparing indicators • Compared to the official indicator, the LIHC indicator is much more stable in the number of households affected and less unduly sensitive to fuel price assumptions. • The fuel poverty gap (as shown previously) is sensitive to price changes, like the current indicator. This seems appropriate. The main impact of sharp price rises is to deepen fuel poverty rather than make the core problem much more widespread.

25. SLIDE 25 Applications: Making further progress • Policy archetypes • - Bill rebate* • Narrowly-targeted energy efficiency policy* • Broadly-targeted energy efficiency policy* • - Increase in means-tested benefits • Increase in Winter Fuel Payment • * For these policies we have modelled both Exchequer- and supplier-funded variants • Modelling • We spend £500 million on each intervention in 2016. • These are stylised scenarios with standardised inputs to allow comparison of effects against key indicators.

26. SLIDE 26 MAKING FURTHER PROGRESS • Results - eligibility by household status This is analogous in some ways to ECO affordable warmth. This is analogous in some ways to ECO carbon. Narrowly targeted supplier-funded energy efficiency archetype Broadly targeted supplier-funded energy efficiency archetype Energy bill rebate Winter Fuel Payments

27. SLIDE 27 MAKING FURTHER PROGRESS • Results – fuel poverty gap impacts • The results show that narrowly targeted energy efficiency policies have the biggest life-time effect. • In the short term, rebates can make a difference. But these only have one-off value.

28. SLIDE 28 MAKING FURTHER PROGRESS • Results – carbon emissions and cost benefit analysis • The results show that energy efficiency policies have the best impact on carbon emissions. Bill support leads to increased emissions. • The highest net returns come from narrowly targeted energy efficiency policies when equity-weighted. Even without such weighting, all energy efficiency policies provide substantial net benefits to society.

29. SLIDE 29 MAKING FURTHER PROGRESS • Results of analysis of interventions

30. SLIDE 30 Conclusion • Fulfilling our ToR We also make a number of technical recommendations.

31. SLIDE 31 CONCLUSIONS AND RECOMMENDATION • RECOMMENDATION The Government – not just DECC but also other Departments – should set out a renewed and ambitious strategy for tackling fuel poverty, reflecting the challenges we lay out in the review’s reports and the framework we have set out for understanding them.