The hardest hit

William Baker describes new research from Consumer Futures that looks at the cost of government energy policies on households and identifies the likely winners and losers.

The impact of government’s energy and climate change policies on consumer energy bills are being increasingly attacked for driving up fuel poverty levels.

That is not the purpose of our report. It is clear that the principle driver of increased prices is rising global oil and gas prices, with the cost of replacing our aging energy infrastructure being the second main cause. The Government’s energy and climate change policies represent a distant third contributor, having accounted for around 15 per cent of the increased prices since 2010.

Furthermore, Consumer Futures welcomes the fact that the average consumer should be a net winner from current energy policies since policies will lead to a reduction in bills. This is because energy efficiency, micro-generation and bill discounts should dampen down the inflationary aspects of EU ETS, Renewables Obligations and the Carbon Price Floor. DECC calculate that policies will reduce average household bills by £166 in 2020. We are not quite so optimistic – we think the figure is more like £31. However, it is still a net gain.

The problem is that averages only give a partial picture. Consumers are not homogeneous. They are awkward and defy the most determined herding instinct of policy makers. Policy creates winners and losers. Its cost benefit analyses are not always based on well-founded evidence. Mitigation strategies – to the extent they exist at all – often reflect best, rather than worst, case scenarios.

Consumer Futures considers it essential that policy makers understand the distribution of policy impacts on consumers across society. Unlike wholesale energy prices, it is within their gift to direct and shape policy so that those on lower incomes are protected. Working with the government’s Fuel Poverty Advisory Group (FPAG), we therefore sought to identify which households will win and which will lose from energy policy so that the government can better target support. We asked the Centre for Sustainable Energy (CSE) to use its DIMPSA1 tool – which DECC also uses for its own analyses – to identify the winners and losers from energy policy.

CSE’s research, reported in ‘The hardest hit – going beyond the mean’, makes for disturbing reading.

They found that over 2 million consumers on low incomes, often pensioners and in large or rented homes, lose out significantly from energy policies. This is because they use electricity to heat their homes and are not protected either because energy efficiency, micro-generation and bill discounts do not reach them or because they have too little effect when they do. These consumers will pay on average £282 more per year as a result of energy policies – many will pay a lot more.

The reason for this finding is easy to identify. The vast bulk of Government energy policies are paid for through electricity bills and so it is no surprise that those who electrically heat their homes stand to be hit hard. Consumers with electric heating – 11 per cent of all consumers – pay 19 per cent of the total costs of energy policies yet only receive 7 per cent of the benefits. Only 27 per cent of consumers with electric heating receive some form of benefit, compared to 40 per cent of all consumers.

The research also delved into the impact of EU products policy. DECC assigns by far the largest bill reduction to this measure – an estimated £158 per year. The policy also conveniently does not appear to add anything to consumers’ bills, although this does not take into account consumer expenditure on new white goods and electronic products.

We do wonder whether DECC is making some heroic assumptions about products policy. Our research shows that without these benefits the impact of energy policy on consumer bills would be an increase of around £93 by 2020, not a reduction of £31. We are concerned that the assumed benefits are not based on realistic scenarios of consumer demand or the availability and cost of more efficient products. We do not offer a better projection for DECC’s calculations. But products policy does seem to provide a questionable degree of comfort for policy makers.

Consumer Futures is now working with FPAG to identify possible solutions to mitigate the impact of policies on the ‘hardest hit’ consumers. The research itself found that a targeted energy efficiency programme represented a particularly cost effective way of protecting them. So, we now want to establish what sort of energy efficiency measures are required, how much they would cost and what their impact would be on consumers’ bills.

But we also think the government should re-shape a whole raft of its policies to better protect these consumers. Is there a case for re-balancing the distribution of policy costs between electricity and gas consumers? Could government require suppliers to provide a credit to consumers, with an extra credit going to those with electric heating and recovering the cost of this through the unit rate? Is there potential within the new EMR arrangements to engineer demand reduction initiatives that will benefit this group of consumers?

But best of all, surely money could be found from the public purse to protect those consumers who would otherwise have little choice but to pay the full cost burden of government policy? The lucrative revenue government already receives from carbon taxes, and which will increase significantly in future years, provides an obvious source for such funds.

The report ‘The hardest hit: going beyond the mean’ can be downloaded from our website:

1  Distributional Impacts Model for Policy Scenario Analysis