Examining fuel poverty

The aim of the  Fuel Poverty Task Force was to raise the profile of fuel poverty and provide a means of enhancing knowledge and understanding, while creating a forum for the exchange of ideas and solutions.

The Task Force commissioned Professor Catherine Waddams to conduct a research project designed to survey low income households, with a disproportionately high number supplied via a prepayment meter. Representatives from external groups covering Ofgem, energywatch, DTI, Eaga, NEA and energy suppliers were invited to participate in the research steering group under the chairmanship of Tony Jackson of SEEBOARD.

The project objectives were:

  • To identify and analyse the pattern of gas and electricity consumption in households vulnerable to fuel poverty and to provide independent information on the impact of different payment methods and policies towards debt recovery.
  • To identify patterns of self-disconnection amongst prepayment meter users.
  • To identify patterns of self-rationing (if any) amongst credit consumers with the same socio-economic and demographic characteristics as prepayment users.
  • To assess the likely effects of a range of tariff differentials on consumption patterns.
  • To identify the benefits and costs to consumers of different metering and payment schemes and attitudes to their current payment scheme.
  • To identify and assess company policies and practices toward social action and payment methods.

More than 3,400 low income consumers throughout the UK and over 40 managers from electricity and gas suppliers were interviewed in the spring and summer of 2000. The project was completed in January 2001.

PREPAYMENT METERS 

Key facts

  • The vast majority of low income households taking their electricity or gas supplies (or both) from a prepayment meter were happy with their payment method.
  • Almost 90% of prepayment meter customers would choose to use a prepayment meter, with only 3% saying they would choose to pay by direct debit.
  • Prepayment meters are popular with low income households because they allow for financial control.
  • Around 50% of those interviewed could think of no disadvantages. Of those that did, the main drawback was that the meters could run out of credit.

Analysis and comment
Satisfaction with prepayment was highest among low income households, suggesting the importance of the budgeting element. The lowest level of satisfaction was for standard quarterly credit payments for one or both fuels, particularly when prepayment was used for the other fuel. Managers in energy supply companies recognised that consumers liked prepayment meters, while acknowledging that this preference may conflict with the regulator's desire to see fewer such meters being installed.

Most prepayment consumers realised that this method was more expensive than others, but still preferred it to the alternatives. Most consumers found that the location of charging points was convenient; of the few who did not, a high proportion were pensioners or had children or a disabled person in the family.

SELF-DISCONNECTION

Key facts

  • Self-disconnection is not a problem for the majority of households with a prepayment meter.
  • For those that did self-disconnect – about one in four households – most did so unintentionally and were off-supply only for short periods.
  • Less than 10% of households self- disconnected as a result of poverty in general.
  • Where self-disconnection was for financial reasons, the household often included at least one unemployed adult, or children.
  • Households with occupants receiving a state pension or disability benefit disconnected the least.
  • Most customers were aware of the emergency credit facility and how to use it, but pensioners were least aware.

Analysis and comment
Only a minority of prepayment meter users had self-disconnected in the past year – just under 25% of electricity consumers, and just over 25% of gas consumers, had self-disconnected at least once. Most self-disconnections were for less than seven hours.

Use of the emergency credit facility was much more common than self-disconnection. Nearly 75% of electricity and over 60% of gas prepayment consumers had used emergency credit during the previous 12 months, usually because of forgetting to charge the card. 

RATIONING AND ECONOMISING

Key facts

  • Most households surveyed try to economise on energy in some manner. More than one in ten turned down the heating lower than they would like.
  • Around 80% of households surveyed (both prepayment meter and credit meter) reported no adverse results with self-rationing.
  • There is, however, a small group of customers (one in 12) for whom self-rationing is causing significant comfort/ environmental problems.

Analysis and comment
Most consumers economise on their fuel. For gas, more prepayment than credit consumers tried to economise; for electricity the position was slightly reversed. Turning off the heating is more common among households with prepayment meters, for both types of fuel. Pensioners did not say they could not afford fuel to any greater extent than the other low income households in the survey.

Consumers were asked how their spending might change in response to hypothetical changes in the price of energy and their weekly income. 17% of electricity consumers and 20% of gas users said they would increase their consumption if the price were to fall, rising to more than 25% among gas prepayment consumers. However, much smaller numbers said they would increase their use of gas and electricity if incomes were to rise, sugg-esting other priorities. A higher proportion of households would increase consumption of the fuel for which they are using prepayment meters than for the group as a whole.

SWITCHING ENERGY SUPPLIER AND COST SAVINGS

Key facts

  • Households that had switched supplier reported saving money as the main reason for switching.
  • The main reason for not switching was lack of confidence in alternative suppliers.
  • Prepayment meter customers were the least likely to switch.
  • Pensioners and those in receipt of disability benefit were also less likely to switch.
  • Some people who did not switch supplier achieved savings by changing payment method.
  • Few customers believed they could not switch (for whatever reason).

Analysis and comment
The survey showed that 17% of the sample had switched electricity supplier and 28% gas supplier, about the national average at the time of the interviews. However, switching rates were much lower for prepayment meter users for both fuels. Those with prepayment electricity meters showed about an average rate for switching gas suppliers. 

Companies supported evidence from the consumer survey that the ability of suppliers to prevent switching among consumers who are in debt was not a major obstacle to the development of competition. Further, the removal of debt blocking would not be enough to encourage switching. Here, both company and consumer evidence indicated that the lack of attractive offers in the market represented a barrier for prepayment meter users and that regulatory action was the appropriate remedy. 

ENERGY INDUSTRY PERSPECTIVES 

Key facts

  • Energy suppliers see their social responsibilities as both an appropriate and necessary consequence of activity in the supply market.
  • Whilst social welfare is primarily for governments to manage, energy suppliers understand the need to discharge their social responsibilities and to strengthen customer relationships.
  • Suppliers realise that for certain people a prepayment meter is the preferred method of payment and there is a desire to continue to provide that service.
  • Companies are working to serve all customer segments as far as the constraints of the competitive market will allow.

Analysis and comment
Companies had varied responses to the social agenda. Overall four different templates were identified:

  1. ‘Embracing' social initiatives
  2. Business as usual
  3. Management deliberation
  4. Commercial conflict.

There was no suggestion that any of these approaches was better than any other. It was expected and natural to see a variety of approaches in a developing market of this kind. Examination of the effect of company culture and history on management attitudes proved inconclusive.

CONCLUSIONS AND STEERING GROUP RECOMMENDATIONS

Prepayment meters
Restricting the number of prepayment meters would curtail the options available to a group whose choices are already severely income-constrained. There clearly remains an issue about meeting the full costs of such devices, which presents itself (amongst other places) in the competitive market.

Since most prepayment meter customers prefer this method of payment, alternative methods need to provide financial control and a means to budget in order to be attractive. Energy suppliers should continue efforts to keep the extra costs of prepayment meters as low as possible, but suppliers believe they should not be required to restrict their use where these meters are preferred for budgeting purposes.

Self-disconnection and self-rationing
Measures to prevent self-disconnection and self-rationing need to be carefully directed at the minority of low income users for whom these are a (sometimes major) problem, in order to avoid restricting choices for the majority who perceive little difficulty.

The problems of self-disconnection affecting households in financial difficulty should not be treated by adopting blanket policies for the whole prepayment meter population. Policies which seek to reduce the number of prepayment meters may not be welcomed by most users. More specific help is needed for households experiencing self-disconnection for reasons of poverty.

Switching energy supplier and cost savings
Caps on incumbents' prepayment prices have dampened the scope for competitive offers, which deter consumers from switching because of the poor savings opportunities open to them. The removal of caps from prepayment gas prices should alleviate this, although the pro-competitive effect will be dampened by the temporary link between prepay and direct debit prices. Increasing competitiveness in the prepayment market seems inevitably to involve higher prices in the short term, to counteract the effect of particularly close regulation in this market in the recent past.

All parties (suppliers, Ofgem and energywatch) should consider how the benefits of switching supplier can be promoted. Various products have been introduced which can benefit certain groups of less advantaged customers.

Energy industry perspectives
The government and regulator should give clearer guidance to companies about the nature and scope of their social obligations if they want to develop a well targeted and consistent policy across the nation.

The problems of fuel poverty are broad and complex. Actions by suppliers, and the collaborative efforts of the EA Fuel Poverty Task Force, have resulted in the introduction of a wide range of initiatives for tackling fuel poverty. However, suppliers cannot be expected to provide all the solutions for its elimination. There is a broader social agenda, which needs to recognise that these poverty issues should be dealt with through a range of welfare, taxation and incomes policies.

Definitions & Abbreviations:
DTI - Department of Trade & Industry
Eaga - Energy Action Grants Agency energywatch - the trading name of the Gas and Electricity Consumer Council
Fuel poverty - describes those who spend, or need to spend, 10% or more of their income on energy
NEA - National Energy Action
Ofgem - Office of Gas and Electricity Markets

The full text of the report Affording Gas and Electricity: Self Disconnection and Rationing by Prepayment and Low Income Credit Consumers and Company Attitudes to Social Action can be found on the Electricity Association's website at www.electricity.org.uk