Targeted price support to the poorest households will helpby Jonathan Derbyshire / November 9, 2015 / Leave a comment
In July, a report published by the Competition and Markets Authority (CMA) found that competition in the energy market was being hindered by the “extent to which consumers are engaged in [that] market.” Market engagement, or the lack of it, is a particular problem, the report went on, in the poorest households. The average household spends around £1,200 on energy each year. In the poorest 10 per cent of households, energy bills account for around 10 per cent of total expenditure. Yet around 70 per cent of customers are on their supplier’s “default standard tariff,” despite cheaper fixed-rate deals being available.
What, then, should we do about energy affordability for “sticky,” vulnerable consumers? This was the question on the agenda at a recent Prospect/Citizens Advice roundtable held at the magazine’s Westminster HQ, where Audrey Gallacher, Director of Energy at Citizens Advice, led a wide-ranging discussion with key stakeholders from the energy industry, government and other consumer groups.
“For a long time,” Gallacher said, “Citizens Advice has felt that vulnerable consumers in the market need some additional protections.” Before going on to set out some proposals designed to help the most vulnerable, Gallacher emphasised the scale of the problem of “stickiness” or lack of engagement in the market and its impact on energy affordability. “Vulnerable groups,” she said, “are 10 per cent less likely to switch [energy suppliers] than others. Among the lowest-income consumers, only 12 per cent are on the cheapest deals with their suppliers. This is compared with 70 per cent of the highest earners being on the suppliers’ cheapest deals. We know that 74 per cent of low-income consumers have never switched, compared with 29 per cent of high earners.”
Recent research done by the Institute for Public Policy Research showed that there is a price differential of £330 between sticky and engaged consumers. “This ingrains disadvantage in society and has a regressive effect on income disparity,” Gallacher noted.
What, then, can be done to help vulnerable consumers who don’t engage in the market? All the participants in the meeting agreed that the long-term solution lies in energy efficiency, but in the interim, there are measures that can be taken to help the most vulnerable. As one of them put it: “The general trajectory that we can all agree on should end in energy efficiency. The problem is the gulf between what it is we are aiming for and the kinds of measures we are undertaking at the moment.”
Gallacher argued that, in addition to trying to engage consumers (Citizens Advice launched a new price comparison tool to this end), extra help in the form of targeted price support can also be offered. “This is not a remedy to address the adverse effects [of lack of engagement] on competition,” Gallacher noted. “It’s not an admission that competition isn’t working. We’re very much interested in engaging consumers. This is just about some extra help.”
Gallacher said that a research project set up by Citizens Advice had looked at a range of potential solutions for price support, including an extended Warm Home Discount and a backstop tariff. In her remarks, she focused on the latter. “We looked at who the recipients of this should be and came up with a cold-weather payment recipient group. Around 3.2m households would be eligible for this—or 12 per cent of the market. By targeting non-switchers and putting them on their suppliers’ cheapest deal, we could save them £100+ a year. Overall, this would cost energy suppliers around £400m. It would be a practical solution that would ensure that the most vulnerable members of society can live in comfort in their own homes. Currently, we have an energy market in which there is a cross-subsidy from poor to rich. We have to redress that balance.”
One of the participants argued that this cannot be done in isolation from other forms of vulnerability. “We need a more holistic view of social impact,” he said. “If someone is a vulnerable customer of an energy company, he or she is almost certainly a vulnerable customer of a water company, a bank or a telecommunications company. They are probably also under-claiming benefits and have debt problems. The cumulative effect of that on the customer is astronomical.”
Gallacher endorsed this analysis and pointed out that Citizens Advice has been tailoring the kinds of help it offers to poor or vulnerable consumers. “When we talk to someone about engaging in the [energy] market, we will also do benefit health checks, advise them on them on their council tax and so on. Smart meter advice, for example, should be tailored to the economic circumstances of the consumer. There is a great deal more we can do in terms of holistic support, and also in terms of how we identify vulnerability and take account of people’s circumstances more widely.”
This article is drawn from a roundtable discussion chaired by Prospect’s Jonathan Derbyshire on 22nd October and supported by Citizens Advice.
You can read an article setting out the key themes of the discussion here.