Green energy costs impact fuel poverty households

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A fairer way to fund the transition to green energy that doesn’t penalise those affected by fuel poverty may be on the cards as the government suggests the possibility of moving the cost from energy bills to taxpayers.

How does energy billing contribute to fuel poverty?

According to Ofgem, 20.44% of your electricity Rbill goes towards what it calls “environmental and social obligation costs”, for gas it’s 1.6%. For a dual fuel bill, the cost works out at 11.34% which is a significant portion of an energy bill for a household affected by fuel poverty.

The money raised helps pay for government schemes to reduce energy usage, lower carbon emissions and encourage the development and adoption of renewable energy.

With the calculations worked out as a percentage of your bill at the same rate for everyone, the most vulnerable to fuel poverty end up spending a greater portion of their income on these schemes than the better-off. About £186 a year is paid from an average consumer’s bill - a significant amount for anyone who is fuel poor.

This adds up to £5.5bn of the total £10bn a year invested in renewable and cleaner energy coming from domestic energy bills.

As the UK increases its investment in green energy to meet its net-zero carbon emissions by 2050 target, such inequality will increase without a change in the system. More than £20bn a year will be needed over the decade according to Centrica, the parent company of British Gas.

The government has announced that the treasury is now “definitely considering the way that costs are distributed."

"This will include how costs may be distributed across different groups to create a fair balance of contributions,” a spokesperson said.

What could fairer green energy charges look like?

The chief executive of Centrica, Iain Conn said less-well-off people who are affected by fuel poverty “are being hit harder” by the current system.

“Before the costs get much higher I would advocate that the government needs to move the funding to income tax, which would mean a typical low-income worker would save £100 a year,” he said.

Such a move would mean another 2p in the pound on income tax.

According to Mr Conn, putting the cost on taxpayers instead of energy bill-payers would not noticeably affect annual costs for average households.

The change in approach was reportedly on the table while the treasury carried out a review of the UK’s climate and energy policies, although with the recent reshuffle and a new chancellor, priorities may well change.

In their December election manifesto, the Conservative Party promised a £9.2bn investment in making homes and public buildings more energy efficient, along with establishing a £3.8bn pot for the reduction of social housing emissions and a further £2.5bn for households in or at risk of fuel poverty.

So far just £10m has been announced for “home retrofit innovation”.

Why do we need to make homes more energy efficient?

While the UK’s overall carbon emissions fell by 2% in 2018, the Committee on Climate Change has highlighted that the country’s housing stock needs a drastic overhaul if the target of net-zero by 2050 is to be met to tackle the climate crisis.

Households contribute up to 15% of the UK’s greenhouse gas output, so making homes more energy efficient is a good place to focus on to reduce the nation’s carbon footprint and more importantly for vulnerable households, energy costs too.

Recently released government figures show that emissions from homes rose by 4% in 2018 solely due to the severe cold snap dubbed the “Beast from the East”.

Britain’s mainly gas-heated and badly-insulated housing stock produced an extra 2.5m tonnes as people cranked up the temperature in their homes pushing their energy bills higher as well. As the climate emergency worsens, such extreme weather events will become more severe and more frequent.

The fuel poverty charity National Energy Action (NEA), has put pressure on the government to fulfil its election pledges in the run-up to the UN climate talks being held in Glasgow in November.

Peter Smith, a director at the NEA, said improvements in insulation and more efficient heating systems are the cheapest way to reduce carbon emissions and fuel poverty.

“But since 2012 investment in domestic efficiency has declined steeply,” he said.

“For the poorest households in the least efficient homes, this investment cannot come soon enough.”
NEA Director of Policy and ResearchPeter Smith

What do the environmental and social obligation costs pay for?

Some of these fuel poverty mitigation programs funded by the environmental and social obligation payments are available through all suppliers, but others only apply to firms over a certain size.

The Energy Company Obligation (ECO) is one such scheme.

It means suppliers which have 250,000 or more domestic customers and provide more than 400 gigawatt hours (GWh) of electricity or more than 2,000 GWh of gas annually must supply households with energy saving measures, for example by installing insulation in the walls and lofts of homes.

As of October 2019, the ECO had allowed 2,620,329 energy efficiency measures to be installed in over 2m households.

Another measure funded by the payments is the Warm Home Discount scheme.

This requires larger energy suppliers with 250,000 or more domestic customers to support vulnerable households at risk of fuel poverty over winter. Some smaller suppliers which do not meet the requirements also offer this assistance.

Eligible customers are supported via an annual electricity rebate of £140.

It can also involve providing such customers with free advice on energy efficiency and help managing energy debts.

The Warm Home Discount has directed £2.46bn towards helping fuel-poor households since it was implemented in 2011. Over winter 2018-2019, suppliers paid £341m to people in need.

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