How to solve a problem like fuel poverty

Let’s be honest.  Current measures to address fuel poverty are failing.  And without action things will only get worse.

Last month Ofgem announced a hike in the price cap.  Average bills will now be 18% higher than they were six months ago.  Projections also show these elevated prices will continue for the rest of the year, with customers paying more next winter than they did this winter.  Ofgem reports that energy debt is already at a record high of £3.8bn, with other analysis, including our own, indicating that the total arrears exceed £6.0bn and in the long-term we expect the pressure on energy costs to continue increasing as we invest in decarbonising our energy system.  Even though the crazy price spikes of the energy crisis are over, for now, we are not out of the woods when it comes to fuel poverty. 

Official estimates now place the number of households in fuel poverty at 4.2m.  Due to the complexity of modelling the various definitions existing across the UK today however, the true scale is unknown.  In a new report we published for So Energy this month, we estimate the true figure is likely closer to 5.4m – or one in every five homes in Great Britain today.

Equally as concerning is the gap that needs to be bridged to pull these people out of fuel poverty – an average of £550 each.  The worst-off households across the country face a gap of more than £1000.  This difference highlights a huge range of need, and also therefore underlines the problem with the current approach of providing a flat rate annual support payment to everyone.  

In the face of such need, if we want to get this right for the winter ahead, we need to act now. 

The two main schemes for addressing fuel poverty today, the Warm Home Discount (WHD) and the Energy Company Obligation (ECO), are insufficient and poorly targeted.  

The WHD supports around 3.1m households with a £150 annual credit; a fraction of the current average fuel poverty gap.  The support offered under the WHD has risen by only £10 since the energy crisis, despite bills doubling. Crucially, our research shows it also misses up to 4m households in fuel poverty due to a flawed targeting mechanism.

The ECO supports around 80k-100k homes per year with funding for energy efficiency improvements, providing a total of £1bn per year in support.  However, we estimate only 40% of households receiving ECO support are fuel poor.

Our report proposes a new approach. We found that re-targeting the WHD to those in the most extreme poverty could reduce the fuel poverty gap by £60 per household.  Expanding the scheme to ensure all households in fuel poverty receive £150 would cost an additional £600m per annum, or an additional £21 per year on the average energy bill.

Better targeting of the ECO scheme could bring 45k households out of fuel poverty per year.  Boosting the ECO scheme to deliver three times the impact could see all fuel poor homes upgraded to EPC C within 10 years, costing an extra £1.3bn per year – but seeing all 2.6m fuel poor homes currently rated EPC D or lower upgraded in 10 years.

With both scale and targeting in mind, we therefore propose a new Warm Homes Support Scheme to provide households with tiered support based on genuine needs.  This means those on the lowest incomes would receive more support than those on higher incomes.  

This would ensure a fairer distribution of funds to those who need it most whilst avoiding cliff edges.  Using this approach, our modelling shows we could cut the fuel poverty gap by 75% and bring 3m households out of fuel poverty with an extra £2.8bn per year, or an additional £100 on the average energy bill.  

And by unifying this with both an expanded ECO scheme and the recently announced Warm Homes Local Grant, more households could permanently be taken out of fuel poverty, reducing the long-term funding requirement by at least a third over 10 years through improved energy efficiency.

We recognise, though, that delivering this at a time of acute fiscal challenges and an ongoing cost of living crisis is difficult.  But this need not all be met through increased energy bill levies nor taxation.  

Scheme design today contributes to inefficiencies.  Installer margins are reportedly high.  We estimate as much as £200m (or 20%) of ECO costs are soaked up by lead generation and search.  By unifying eligibility with the WHD scheme this money could be saved and retargeted towards additional beneficiaries.

Private sector investment and incentives could provide alternative sources of funding.  There are already excellent case studies we can look to including leveraging pension funds to drive investment in housing stock; encouraging private capital to invest in third party ownership schemes; incentivising “able to pay” landlords to upgrade through green loans and equity release schemes; and donating excess energy back to the grid from buildings with renewable installations to help cover the cost of electricity for fuel poor households.

Fuel poverty is a real and pressing issue that blights the lives of millions of households across the country – and without action the problem is likely to get worse.  Our new analysis not only highlights the problem but also how we can come together and solve it once and for all.

Opinion piece by David Watson, Principal at BFY Group. First published by Utility Week.

Addressing Fuel Poverty: Read our full report

Fuel poverty is affecting more households than ever before, yet current government support schemes fail to provide adequate relief. Our report with So Energy, launched in Parliament, presents a comprehensive analysis of the crisis and offers a roadmap for more effective solutions.

Click here to get the full report.