Policy paper

Ofgem’s Affordability and debt in the domestic retail market – call for input CFP response

Published 16 May 2024

Introduction

The Committee on Fuel Poverty (CFP) is an advisory Non-Departmental Public Body sponsored by the Department for Energy Security and Net Zero (DESNZ). We monitor and provide independent, expert advice on Government’s strategy to improve the energy efficiency of the 3.17 million homes of the fuel poor in England to make them more affordable to heat.

The Committee on Fuel Poverty welcomes this call for input to address affordability and debt in the domestic retail market. The paper brings together the challenges, risks and complexities across legal requirements and policies, as well as potential for new approaches and learning. Our comments are mainly focused on fuel poor households and the questions arising from Chapters 1 and 3.

Response and comments

This is an opportunity to affirm and develop Ofgem’s pro-active role in considering and identifying the risks for those in and liable to fall in debt in the net zero transition and to develop a more holistic approach across the work on standing charges, vulnerability and affordability. It also enables stakeholders to look more broadly at the policies and behaviours which impact on bills and bill payers.

In our comments to Ofgem’s Additional Debt-Related Costs Allowance consultation we recognised that if customers default on their energy bills, the supplier does not get paid for energy it has provided to that customer and, in the context of a price cap based on efficiently-incurred costs, there is a role for allowing suppliers to recoup at least some of those costs. However, that should not involve paying suppliers for failing to satisfy the regulator and their customers, which is why the Committee did not support the suppliers’ costs arising from the moratorium on involuntary PPM installation being included in the adjustment to the price cap.

In the Committee’s response to Ofgem’s Call for Input on Standing Charges we sought more discussion on potential emerging risks which would increase bills. Among them, identified in this paper, are unprecedented levels of investment to decarbonize our homes, the grid and accelerate progress in the transition to net zero.

Further investigation on the impact of standing charges and other additional costs on low-income households, before they even consume any energy (looking at annual costs to demonstrate the extent of impact on low- income households), is key to a fair transition to net zero.

The Committee also directs Ofgem to our responses to Ofgem’s Forward Work 2024/25 and the Department for Business and Trade’s (DBAT) consultation on Smarter regulation: strengthening the economic regulation of the energy, water and telecoms sectors for which we commented on matters pertaining to reducing fuel poverty and support for vulnerable customers.

For fuel poor households and those vulnerable to debt, there is a need to be more effective and smarter in preventing people getting into debt, and deepening debt, followed by a way out that both customers and suppliers can realise. We welcome this bigger picture approach to tackling debt.

Energy affordability and impacts on consumers

The Committee on Fuel Poverty recognises, as outlined in the report, the contributing factors to the cost of energy and that upward pressure on bills is likely to continue for some time.

Chart 1.1 shows historical energy prices under the price cap in real terms (adjusting for inflation). The price cap from April 2024 is still 28% higher than pre-crisis (Period 1 in 2019 when the price cap was introduced to Period 7 between October 2021 and March 2022) driven largely by wholesale cost increases. There has been an increase in non-wholesale costs since the introduction of the price cap. This is linked to network costs increases tied to network investment levels and inflation. Policy costs have also increased as the government has supported schemes to drive energy efficiency improvements. Operating costs remain flat but are due to be reviewed this year.

We have reflected on this with regard to the numbers in fuel poverty in England and what this means for the Government’s Fuel Poverty Target in 2030.

In 2010, 22.1% of households in England were deemed to be in fuel poverty. By 2020, this had fallen to 13.2% - 3.16 million households. This shows, there was a steady reduction in official fuel poverty levels – a 40% reduction over a decade.

This clearly shows the capacity of Government-led programmes to make substantial inroads to reduce fuel poverty, even during periods of financial restraint. However, a decade of steady progress has been followed by a virtual flatlining in the levels of fuel poverty.

The current numbers of households in fuel poverty are virtually identical to the figure achieved in 2020 – some 3.17million in 2023. But the depth of fuel poverty – the gap between the household income and what would be required to move out of fuel poverty - has grown.

Ofgem has noted that, during 2023, total energy debt had risen from £2 billion to £3 billion, and those in debt or arrears has climbed from 1.9 to 2.3million households. This is not to take anything away from the critical role of Government during the worst of the energy price crisis. At its peak, without Government intervention, households would have faced average energy bills of over £4,000 per annum.

But the Government fuel poverty statistics reveal that in England, in 2023 the average fuel poverty gap has risen by 20% to £417, up from £348 in 2022. Between 2020 and 2023, there was an increase from 18.0 percent to 36.4 per cent in households required to spend more than 10 per cent of their income on energy after housing costs. Fuel costs have a had a large impact on affordability generally, way beyond the 3.17million designated as in fuel poverty by the LILEE metric. An increase of £100 in energy bills would require a £1,000 increase in income (after housing costs) to offset the effect of the increased price.

There remain far too many fuel poor households still living in homes with EPC ratings below C. However, it is an anomaly that a band C rating, automatically excludes a household from being considered as at risk of fuel poverty, regardless of the price of energy, according to the Government’s preferred measure. The Committee’s conclusion is that the English LILEE measure of fuel poverty needs to be addressed thoroughly in the upcoming review of the Government’s 2021 Fuel Poverty Strategy. Ofgem explains in the paper that low-income consumers spend proportionally more on energy than those on high incomes; more bill-payers are getting into debt without a repayment plan; and acknowledges the health harms associated with being unable to afford energy and being in debt. These factors align with the need for a step change in reducing the numbers of households in fuel poverty, as a contribution to reducing debt and improving affordability.

To tackle energy affordability the Committee would suggest the following:

• improvements in targeting and delivery of energy efficiency programmes
• further modelling to understand, not only the impact of the financial cost of standing charges but, also other consumer behaviour to offset bills
• consider mandating provision of a variety of tariffs and obliging suppliers to use data on energy use to put their customers on the best combination of unit rate and standing charge for their energy usage
• further develop discussion amongst stakeholders about the options for payment-support for those low incomes and/or vulnerable households
• best practice expectations for supplier engagement and pathways for customers vulnerable to, or in, debt
• consider the impacts on fuel poor/low-income households, in advance of introducing policies which add to bills
• consider spreading the costs of, for example, new energy investment, to bill payers over longer periods of time
• assess the stark variations, between regions, to evaluate the validity of maintaining differential regional costs
• influence where cost collection through bills should fall, such as through different tariffs/levies for different consumer households
• engage with the Department of Health and Social Care, DWP and NHS on how to support bill payers where energy usage is linked to health needs

Addressing the affordability and debt challenge

The best practice in our view, is for suppliers to do everything they can to avoid customers getting into debt and moving them on to a repayment plan promptly. To that end, suppliers need to know their customers, get support to them quickly and find a repayment plan that works. The rising level of customers in debt, and not on a repayment plan, serves to entrench the problem, leading to redistributing costs through the price cap to tackle bad debt.

The UK and international examples in the paper highlight a range of approaches which might be used in common across the energy sector. A recurrent thread is proactive behaviour by suppliers towards customers including, initiating payment support offers; automatic receipt of any concessions; transferring onto support programmes; and early involvement of community partners to engage with customers locally. Another feature is incentives for customers to engage consistently to repay some of the debt, in order to have past debt bills forgiven.

In principle, the Committee on Fuel Poverty supports the better use of data across regulated services if this leads to improved identification and support for vulnerable customers. However, adding customers to a single multi-sector Priority Services Register must be done with their agreement.

Customers must see a benefit in being on a shared PSR and confident that shared data will be utilised in ways that are beneficial, not punitive. A well-designed PSR could assist in better targeting to tackle the low take up of existing support for energy efficiency schemes; debt management; and income support payments for fuel poor households.

We have commissioned research into understanding the barriers to, and the enablers which, support the fuel poor to make a fair and equitable transition to net zero. This will include consideration of the customer journey and the drivers to engage with programmes. The publication of this research is imminent, but we expect the research findings to assist in understanding how existing affordability and debt support can also be better communicated.