Eat or Heat? Fuel Poverty in Scotland A challenge paper by Scottish Labour

Scottish Conference 2014 21

th – 23

rd March

Perth Concert Hall

Printed and promoted by Ian Price, Scottish General Secretary, on behalf of the Scottish Labour Party, both at John Smith House, 145 West Regent Street, Glasgow G2 4RE

putting Scotland first

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Foreword - Johann Lamont MSP, Leader of the Scottish Labour Party

It's a choice no one should have to face - to heat their home or put food on the table.

We know that the last Labour Government made tackling fuel poverty, particularly among

pensioners, a priority. The central heating scheme and the winter fuel payments were just

two policies which ended the freeze for low income Scots while our relentless focus on

tackling poverty made the cost of living a great deal easier.

But sadly our proud record on this issue did not consign fuel poverty to history and we face

going back to those dark days when pensioners and families face making unthinkable

choices with household budgets. A combination of out of control energy prices and welfare

attacks by the current UK Government have meant that once again families are struggling to

heat their homes.

Labour has again taken on this agenda with a promise to freeze prices and reform the

energy market, boldly taking on the vested interests which benefit from the misery of low-

paid families while our political opponents turn the other way.

But what more can we do to ensure people can be guaranteed this most basic right - to live

in a warm home.

Fuel poverty is rightly now the focus of our Social Justice Sounding Board, led by our social

justice spokesperson Jackie Baillie and chaired by anti-poverty campaigner Ewan Aitken. The

Social Justice Sounding Board has become the forum in Scottish politics where concerns and

worries of the poorest Scots are being discussed, analysed and policies to tackle them

developed

This work is key to making the fairer, better Scotland we want. And in this Scotland, there is

no place for fuel poverty.

I look forward to seeing the work they produce on this serious issue and I shall ensure it

shapes our approach when we tackle this in our manifesto.

Johann Lamont MSP Leader, Scottish Labour Party March 2014

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Preface – Ewan Aitken, Chair of the Social Justice Sounding Board

One of the benefits of being chair of Scottish Labour’s Social Justice Sounding Board is that it

reminds me why I joined the Labour Party over 30 years ago. It also reminds me how much

there is still to do to bring about the world we believe is possible.

Because the task of achieving social justice is still so enormous, our journey is one step at a

time, looking at one issue in some depth and grappling with potential solutions. That is not

to say that we ignore the many crossroads with other issues on the way. The subject of this

paper is fuel poverty but it refers extensively to a wide range of other issues, all of which

impact on, or are impacted by the tyranny of fuel poverty. That is the job of the Sounding

Board; challenging Scottish Labour to think big and make connections that will bring new

synergies to old problems.

The Sounding Board reinforces our principles of caring for others not just ourselves; having

compassion for the those who are struggling, a commitment to need not greed; reminding

us all that politics is first and foremost a moral, human activity built on deep relationships

with our neighbours and with strangers. Its’ policies should tell that story.

Any manifesto needs to feed the heart as well as inspire the mind. It needs to speak of a

deeper story than simply how much will be spent on what – it needs to say this is what

matters because of the lives that will be changed and the communities that will be nurtured

– and it matters for everyone, not just those directly affected

This paper is not just about the challenges of fuel poverty, it is about what motivates

Scottish Labour, what it believes in and what shapes those beliefs. It is about what Scottish

Labour believes should be the basis not just of the party, but of the nation.

The task of the Sounding Board is to dig under the strategic thinking and political responses,

questioning the conclusion of Scottish Labour’s views, ideas, evidence and assumptions,

using the huge range of experience that the members of the board bring to the table.

Our role is independent of the internal decision-making structures. We are free to say what

we think about their thinking. That alone is our role. It is Scottish Labour’s task to decide

what to do about what we have said when they reach their conclusions.

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It says a great deal about the ethos of Scottish Labour today that it wishes to build its major

policies out of debate, discussion, experience and even disagreement. This process values

diversity as a starting point for a new direction. That is why it is different. That is why I think

that it will work.

I am grateful to my fellow Sounding Board members for their work so far and also to all

those who have contributed to the process. There remains much to be done but the journey

has begun and I continue to be excited by its potential.

Ewan Aitken Chair, Social Justice Sounding Board March 2014

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SOCIAL JUSTICE SOUNDING BOARD

• Rev. Ewan Aitken (Chair)

• Aileen Colleran

• John Dickie

• Graeme Downie

• Pam Duncan

• Peter Kelly

• David Manion

• Jim McCormick

• Lucy McTernan

• Norman Kerr

LEAD SHADOW CABINET MINISTER

• Jackie Baillie MSP (Shadow Cabinet Secretary for Social Justice Equalities and

Welfare)

• James Kelly MSP (Shadow Cabinet Secretary for Infrastructure, Investment and

Cities)

• Mary Fee MSP (Shadow Minister for Housing)

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CONTENTS

Executive summary 8

Part 1: Introduction 11

A Creation of the Sounding Board 11

B External engagement 11

C How this report fits into Scottish Labour’s future plans 12

Part 2: Fuel poverty: what it is and why it matters 14

A Introduction 14

B Who is most at risk of fuel poverty 15

(i) People on low incomes

(ii) Rural communities

(iii) Older people

C Current levels of fuel poverty in Scotland 17

Part 3: The cost of energy 18

A A broken and rigid energy market 19

B Pricing structures: more complicated than the train 20

C Wholesale costs 23

D Impact on housing 24

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Part 4: Approaches to energy efficiency and community energy

programmes 25

A Current programmes to mitigate fuel poverty 25

B Interventions to improve energy efficiency 26

C Microgeneration schemes 28

D Green and social levies 30

Part 5: Recommendations and conclusion 30

A Recommendations at the UK level 31

B Recommendations at the Scottish level 32

C Conclusion 33

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Executive summary

This challenge paper sets out Scottish Labour's policy priorities to address fuel poverty in

Scotland. It forms part of our social justice series, which started with the publication of a

child poverty challenge paper ‘a childhood for everyone?’, launched in April 2013. A further

challenge paper on closing the educational achievement gap in Scotland will be published in

due course.

Scottish Labour believes that access to energy is a basic human right. We need energy to

light and heat our homes and to perform basic everyday tasks such as cooking and washing.

However, the rising cost of energy means that for some households, these things can no

longer be taken for granted. Instead, many individuals and families are now being forced to

choose between heating and eating. It is utterly unacceptable that anyone should have to

make such a choice. It is widely accepted that low indoor temperatures can adversely affect

educational achievement and physical and emotional wellbeing. We are committed to doing

everything we can to alleviate fuel poverty in Scotland. This is not just about the cost of

living, fuel poverty is a societal injustice which must be eradicated.

The number of those affected by fuel poverty has substantially increased over the last

decade. Energy security is a global concern, and the recent energy price rises enacted by the

“Big Six” energy companies illustrates the extent to which we are beholden to the wishes

and whims of multinational corporations.

This paper will provide a brief overview of fuel poverty in Scotland and consider the scale

and scope of the challenge we face in addressing it. We have arrived at this staging post in

our policy journey after a period of mature reflection with experts on the energy market and

a wider field of those concerned with social justice. The objective of this paper is not to lay

out a final version of our conclusions, but to show the progress we have made, invite further

discussion and set out what we believe to be the right direction of travel to tackling fuel

poverty in Scotland.

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A. Recommendations at the UK level

At the UK level a Labour Government would take a number of key actions to reset the

energy market that have been detailed in the paper ‘Powering Britain: One Nation Labour’s

plans to reset the energy market’ which includes the following:

At the last Labour conference, Ed Miliband announced that an incoming Labour

Government would impose a 20 month price freeze on all energy companies to 2017,

pending wholesale reform of the energy market. Labour estimates that such a freeze

would save consumers £120, and businesses £1,800. This would constitute the most

direct intervention in the energy market since Labour’s windfall tax on the privatised

utilities following the 2007 election.

Labour has also pledged to scrap Ofgem and form a tough new regulator that would

force energy companies to pass on price cuts to UK households. In a recent interview

on GMS, Finance Secretary John Swinney was unclear as to whether an independent

Scotland would have a separate regulatory regime.

If elected, Labour would also seek to break the power of the Big Six by requiring

energy companies to pool the power they generate and make it available to any

retailer, in an attempt to open the market and force down prices.

B. Recommendations at the Scottish level

At the Scottish level we focused our actions on improving energy efficiency and enshrined

our ambition to abolish fuel poverty in legislation. The Housing (Scotland) Act 2001 set an

ambitious of abolishing fuel poverty ‘as far as reasonably practicable' by 2016. With fuel

poverty currently sitting at about 900,000 households this will not be achieved by the SNP

Government. We will work with others to set a new and challenging target that faces up to

the scale of the action that will be required to make progress in this area.

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Scottish Labour’s policy priorities are:

1 Review the investment required to improve the energy efficiency of homes

across Scotland, with a renewed focus on hard to treat rural properties.

Whilst we know that meeting the Scottish Housing Quality Standard by

2015 will improve the fabric of some homes, persistent problems remain

with the housing stock in rural Scotland.

2 We will work with local authorities, housing associations and installers to

support local area based schemes, ensuring that the process is better

streamlined to deliver projects much quicker on the ground.

3 We will retrofit existing properties as well as building in energy efficiency

measures to an ambitious house building programme that will see an

increased number of homes across Scotland.

4 We will consider how best to improve energy efficiency in the private

rented sector where often poor standards in the quality of accommodation

are pressing.

5 We will consider how we can further develop and encourage micro-

generation schemes, so that alternative energy supplies are more

accessible.

6 We will consider the evidence that suggests that a new regulator ought to

take rurality and domestic fuels into scope.

7 Across Government we will take action to introduce the living wage to all

public sector contracts, raising household income for those experiencing in

work poverty.

8 We will work with energy companies to review the cost of energy for the

very poorest households, such as those using pre-payment meters.

9 In taking action we will seek to ensure that the perspective of the person

experiencing fuel poverty is at the centre of our policy and we will work in

partnership with all stakeholders to ensure that we can in future meet our

ambition to end fuel poverty in Scotland.

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Part 1 – Introduction

A. Creation of the Sounding Board

1. Johann Lamont has laid out the challenge of creating greater fairness and social

justice in Scotland. In her first speech to Scottish Labour Conference, following her

election as Party Leader, she said:

“A world where what you can be is more important than where you come from. And

I mean a world where a politicians’ budget matches their claim to care. I mean a

world where caring for your loved ones is regarded as a common good to be

supported not a welfare benefit to be cut.”

2. To help meet this challenge, a Social Justice Sounding Board was established to take

forward a programme to develop Scottish Labour’s plans to make Johann Lamont’s

words a reality. It began with the issue of child poverty in Scotland.

3. It was believed that a truly radical and innovative approach to establishing a

Sounding Board was needed. It should be a forum in which ideas would be created

with the intention of enabling Scottish Labour to test its ideas and to receive

feedback from those with experience and passion for their area of expertise.

4. The next step was to appoint a Chair of the Sounding Board, who would play an

independent role in shaping Scottish Labour’s approach, and help inform the

development of our approach to social justice. We were pleased that Ewan Aitken

agreed to fulfill this role. Following this, experts in the field were approached to

participate in the work of the Sounding Board, and it was made clear from the outset

that they would do so in an independent capacity.

B. External engagement

5. The Sounding Board is itself an exercise in external engagement. This engagement is

an integral part of developing an understanding of the policies required to address

issues of social justice.

6. After a successful seminar on child poverty in January 2013 and a seminar on

educational achievement in October 2013, a third seminar on fuel poverty was

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organised. It was decided that, in order to get the most out of the event, there

should be a balance between professional opinion and frontline expertise at the

meeting.

7. Representatives from the following organisations attended the event: Consumer

Futures, Changeworks, sps envirowall, the Scottish Federation of Housing

Associations, Energywise, Clackmannanshire Council, Whiteinch & Scotstoun Housing

Association, Dundee City Counicl, SSE, Eco Energy, EverWarm, Energy Scotland, CHAI

advise, Cambium, ES Pipelines, Fife Council, Energy Savings Trust, Citizens Advise

Scotland, Scottish Renewables, Consumer Futures Scotland Committee, Children in

Scotland, Joseph Rowntree Foundation, Calor Gas, Energy Action Scotland, Ofgem,

Elizabeth Finn Care, Turn2us, Dumfries & Galloway Housing Partnership and Scottish

Power

8. The seminar was divided into three sections:

i. Energy market and costs: This session revolved around questions such as:

How can we change the energy market? How can we improve regulation?

How can energy costs be reduced? Are current budget levels sufficient?

ii. Approaches to energy efficiency: This session looked at questions such as:

How can we improve standards and make homes more energy efficient? How

do we address fuel poverty in the private rented sector? What measures are

having a positive/negative impact?

iii. Community: The final session addressed questions including: How can we

address rural fuel poverty? Are area based solutions best? Should we target

older people or wider group of people? What alternatives can be developed

to reduce fuel poverty?

C. How this report fits into Scottish Labour’s future plans

9. This challenge paper is the culmination of activity so far – as such, it is not so much

an end-point as a staging post. The objective is to show the progress we have made

to date, invite further discussion, and set out what we believe to be the right

approach to tackling fuel poverty in Scotland. In doing so, Scottish Labour seeks to

promote and develop a better understanding of fuel poverty. This understanding is

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shaped by our commitment to the values of social justice, the major challenges that

we face, and lay out the direction of our policy priorities.

10. In the subsequent chapters, the following is set out: (i) an overview of what fuel

poverty is and why it matters; (ii) the cost of energy; (iii) approaches to energy

efficiency and community energy programmes; (iv) recommendations and

conclusion.

11. We believe that social justice and a strong economy are different sides of the same

coin. Inequality ultimately encumbers economic growth and hurts our neighbour in

the process. A more equal society means pulling and sharing our resources to create

the opportunity for economic growth that makes the best use of all of our talent and

potential. The pursuit of social justice should underpin everything that the political

process seeks to achieve. This paper will serve as a platform for the next phase of our

work, and feed into our other economic and social policies.

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Part 2 – What is fuel poverty and why does it matter?

A. Introduction

12. Just like child poverty and educational inequality, fuel poverty has no place in a

civilised first-world country. A warm and dry home is a necessity and a basic human

right. The Universal Declaration of Human Rights makes explicit reference to this.

Nobody should have to make the invidious choice between heating and eating.

13. Those most at risk of fuel poverty are the most vulnerable in society: those on low

and fixed incomes; children and the elderly; or those suffering from illness. Also at

particular risk is Scotland’s large rural population. Energy Action Scotland (EAS)

estimates that there are approximately 900,000 households in Scotland living in fuel

poverty; given that there are around 2,400,000 households in total and almost

5,300,000 people in Scotland 1, this means that over one third of Scottish households

are in fuel poverty.

14. A household is considered to be in fuel poverty if it is required to spend more than

10% of its disposable income (including housing benefit or income support for

mortgage interest) on fuel to keep their home in a “satisfactory condition.” A family

is judged to be in “extreme” fuel poverty if the cost of fuel exceeds 20% of household

income.2 The main factors influencing fuel poverty are incomes3, energy efficiency

and fuel costs. Energy efficiency is the only area where the Scottish Government has

direct influence and this is where policy measures have been focused. However, the

Scottish Government does have the authority to ensure that employees working on

public sector contracts, including those responsible for the delivery of measures to

tackle fuel poverty are paid the living wage. This will ensure that they are not

contributing to poorly paid jobs that require employees to claim benefits whilst

working. The Scottish Government has the power to improve incomes by ensuring

that the living wage is paid.

15. The World Health Organisation (WHO) has published guidance on acceptable

temperatures for homes. Temperatures between 18 Degrees Celsius and 24 Degrees

1 Scotland’s Census 2011 http://www.scotlandscensus.gov.uk/ods-web/standard-outputs.html

2 Scottish House Conditions Survey 2012 - Key Findings

http://www.scotland.gov.uk/Publications/2013/12/3017/290984 3 It is important to note that this represents ‘before housing costs’

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Celsius fall within what is generally regarded as a heating “comfort zone” which

poses little or no risk to health. Over the past 40 years, evidence has accumulated

that suggests indoor temperatures below 16 Degrees Celsius can have an adverse

impact on the physical and mental health of the household occupants.4

16. Although it affects households throughout the UK, rates of fuel poverty are higher in

Scotland, despite the fact that Scotland has the fourth highest household income of

any of the 12 UK regions. This seeming disparity between income and fuel poverty is

in part due to Scotland’s colder climate, but can also be attributed to the greater

proportion of people living in rural areas, where isolation and exposure can limit

access to the energy grid and increase the cost of household heating and insulation

despite a seemingly stable income. It is also important to note, given the particular

susceptibility of elderly people to fuel poverty, that Scotland’s population is ageing at

a faster rate than the rest of the UK’s. It is estimated that there will be 80% more

elderly citizens in Scotland in 2010 to 2060 with the greatest rise occurring in the

next 25 years.5

B. Who is most at risk of fuel poverty?

17. Certain sections of society are more likely to fall into fuel poverty than others. Three

groups particularly at risk are those on (i) low and fixed incomes, those living in (ii)

rural communities, and (iii) the elderly.

(i) People on low incomes

18. Given that fuel poverty is measured according to the percentage of household

income spent on energy, the lower your household income, the more likely you are

to be in fuel poverty. The strong association between income and fuel poverty is

illustrated by the Scottish House Condition Survey, which shows the vast majority of

fuel poor are in lower income bands.6 The current programme of welfare reform has

undoubtedly had a negative impact on many household incomes and led to more

people falling into fuel poverty; however, fuel poverty does not only affect

4 Fuel Poverty 1991-2012, Ryan Walker, Harriet Thomson and Christine Liddell http://fuelpoverty.eu/wp-

content/uploads/2013/03/Fuel-poverty-anniversary-booklet.pdf 5 Costs of State Pensions in Scotland, David Bell http://esrcscotecon.com/2013/05/06/costs-of-state-pensions-

in-scotland/ 6 Scottish House Conditions Survey 2012 - Key Findings

http://www.scotland.gov.uk/Publications/2013/12/3017/290984

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unemployed households struggling on benefits. The level of in work fuel poverty is

rising and these households must be included in any measures to alleviate fuel

poverty. The fastest growing group in fuel poverty are indeed the working fuel poor,

that is to say people in very poorly paid occupations. This highlights why not just a

minimum wage but a living wage is vital. Moreover, whilst average household spend

on energy has risen significantly in recent years – from 3.3 per cent in 2002 to 5.1 per

cent in 2012 – the vast majority of this rise occurred between 2004 and 2009, pre-

dating the Government’s welfare reforms.7

(ii) Rural communities

19. About one fifth of Scottish households live in rural or remote rural areas.8 Rural

consumers encounter the dual problem of energy inefficient homes and expensive

energy. Somewhat strangely, given that the majority of power generation in the UK

is located in rural areas, the consumers living in these areas pay significantly more

for their fuel than those living in urban areas. In addition to this, the type of housing

stock in rural areas poses problems when it comes to tackling fuel poverty.9 The

higher proportion of people living in exposed areas and housed in older, stone built

accommodation with insufficient or non-existent insulation makes refitting houses to

secure greater energy efficiency difficult and expensive. Many people in rural areas

are not on the gas grid, and are therefore reliant on more expensive forms of energy

such as Liquid Petroleum Gas (LPG) and also oil and solid fuel whose industries

remain unregulated, On top of which transmission charging in the North of Scotland

exaggerates costs even further. Whilst there are many households in Scotland that

use electric heating systems, some 400,000 households operate systems which use

dynamic tele switching. This poses challenges and opportunities for depositing

excess energy. Taking all of this into account, analysis from EAS would suggest that a

new regulator perhaps ought to take rurality and domestic fuels into scope.

7 Household Energy Spending in the UK, 2002-2012, ONS http://www.ons.gov.uk/ons/rel/household-

income/expenditure-on-household-fuels/2002---2012/full-report--household-energy-spending-in-the-uk--2002--2012.html 8 Scotland's People Annual Report: Results from 2012 Scottish Household Survey

http://www.scotland.gov.uk/Publications/2013/08/6973/2#table2.5 9 Rural Scotland Key Facts 2012 http://www.scotland.gov.uk/Publications/2012/09/7993/3

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(iii) Older people

20. Unsurprisingly, older people are also particularly vulnerable to fuel poverty. Lower

fixed incomes and greater susceptibility to cold and cold-related illness has resulted

in elderly people accounting for around 50% of those classed as in fuel poverty. It has

been recommended that older people require a minimum temperature of 20

Degrees Celsius, with older people with health conditions potentially requiring a

minimum temperature of 24 Degrees Celsius.

C. Current levels of fuel poverty in Scotland

21. The incidence of fuel poverty is measured and recorded in the Scottish House

Condition Survey.10 The survey operates on a one year delay, so the most recent

figures are for 2012. The latest round of statistics, published in December 2013,

show that:

Approximately 647,000 households (27.1% of all households) were estimated

to be fuel poor in 2012, with required energy costs exceeding 10% of their

income.

This represents 74,000 fewer households (3.4% of all households) compared

to October 2011, when around 721,000 (representing 30.5% of all

households) were fuel poor.

Around 170,000 households (7.1%) were estimated to be in extreme fuel

poverty in 2012, with required energy costs exceeding 20% of their income.

This was a similar level to 2011 (8%).

22. However, it should be noted that these statistics do not account for the most

recent series of energy price rises.

23. The Labour-led Scottish Executive set out a legislative target in the Housing

(Scotland) Act 2001 of eradicating fuel poverty by 2016.11 The evidence shows that

this target is unlikely to be met.

24. The table below, taken from the Scottish House Condition Survey, shows recent

trends in levels of fuel poverty in Scotland. As we can see, levels of fuel poverty rose

10

Scottish House Conditions Survey 2012 http://www.scotland.gov.uk/Publications/2013/12/3017/0 11

Housing (Scotland) Act 2011 http://www.legislation.gov.uk/asp/2001/10/section/88

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sharply between 2003/04 before peaking in 2009. Since then, levels have remained

relatively stable around an average of about 28%.

Source: Scottish Government

25. There is a close correlation between the cost of energy and the incidence of fuel

poverty. Both have risen exponentially in recent times. Whilst the most recent fuel

poverty figures, published in the Scottish Household Survey, suggest a slight fall in

the overall level of fuel poverty, the survey does not take into account any of the

price increases that have occurred from mid-2012 onwards. The Scottish

Government has estimated that for every 5% increase in energy prices as many as

46,000 households (2% of households in Scotland) are pushed into fuel poverty.12

We can therefore expect that actual levels of fuel poverty are significantly higher

than these figures indicate. Indeed, Energy Action Scotland has estimated that the

true figure could be as high as 900,000 households.13

Part 3 – The cost of energy

26. The escalating cost of energy is something that effects everyone – some more

directly than others. Rising costs are often associated with increases in the wholesale

price of energy, or to energy insecurity, especially given the UK is now a net importer

of gas.

27. The price of domestic gas and electricity has been on an upward trajectory for much

of the past eight years. In the winter of 2012, all of the big six energy suppliers

12

Progress Report on the Scottish Fuel Poverty Statement 2002 http://www.scotland.gov.uk/Publications/2010/11/23134646/1 13

http://www.eas.org.uk/key_issues_statistics_and_trends.php

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increased gas and electricity prices by between six per cent and 11 per cent. This was

followed by another series of price increases in the autumn of 2013, as can be seen

in the graphic below. For households already in the grip of a cost of living crisis, the

pressure of rising energy costs on household budgets is becoming unsustainable. In

the following sections, we investigate the underlying reasons for these price rises.

Source BBC News online http://www.bbc.co.uk/news/business-24562930

A. broken and rigid energy market

28. The full privatisation of the UK energy market in the closing decades of the 20th century was

without international precedent. According to the tenets of free market liberalisation, it was

supposed to introduce a new era of empowered consumers, competitive firms, and low

prices. The received wisdom was that customers would be free to switch between

whichever supplier offered the most competitive rate, and that increased competition

between multiple players would lead to improvements in infrastructure and efficiency.

However, 30 years on, the reality is very different.

29. Privatisation led to the creation of regional monopolies based upon the former electricity

regions. For example, formerly, Scotland was geographically divided between two electricity

boards, the North of Scotland Hydro Board and the South of Scotland Electricity Board. The

North is now dominated by Scottish and Southern Energy, which holds an 85 per cent market

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share, whilst the South is dominated by Scottish Power, which holds an 82 per cent market

share.14 This domination is replicated across the UK’s integrated energy market: 99 per cent

of households get their energy from Scottish Power, British Gas, EON, SSE, EDF, or Npower –

colloquially known as the ‘Big Six’. Any notion of competition is, then, largely illusory.

30. The energy industry is predicated upon a culture of non-transparency. The big energy

companies both generate and sell energy. Technically, a “Chinese wall” is supposed to exist

between “vertically integrated” companies (those that both generate and supply energy).

However, most energy is bought and sold through secret bilateral deals between energy

companies. As a result, no one really knows what the true wholesale cost of energy is.

Having said that it accounts for around 50% of the average household energy bill which

strongly suggests that greater transparency and savings could be hugely cost effective in this

area. This monopolisation of the energy market and consequent lack of competition has led

to an escalation in household energy bills. A recent report by IPPR suggests that with more

competition in the market, bills could be as much as £70 less per year.15

B. Pricing structures: more complicated than the trains?

31. The way energy is retailed is similarly complicated. Although unlimited choice is often

presented as a self-evident good, in the energy market it has resulted in confusion and

paralysis. Between them, the Big Six have devised a bewildering 900 energy tariffs. Since

2008, the number of people changing energy supplier has fallen by over 50%, and consumer

transfers between energy supplier are now at the lowest level on record (see graph below).

This has led to around 75% of consumers on expensive tariffs paying more than they need

to, a collective overpayment of approximately £3.6bn annually, or £136 per household.16

14

Powering Britain: One Nation Labour’s plans to reset the energy market, Table 2 http://www.yourbritain.org.uk/agenda-2015/policy-review/policy-review/energy-green-paper 15

IPPR, The true cost of energy: How competition and efficiency in the energy supply market impact on consumers’ bills http://www.ippr.org/publications/55/9040/the-true-cost-of-energy-how-competition-and-efficiency-in-the-energy-supply-market-impact-on-consumers-bills 16

Powering Britain: One Nation Labour’s plans to reset the energy market, Figure 1 http://www.yourbritain.org.uk/agenda-2015/policy-review/policy-review/energy-green-paper

21

Source Powering Britain: One Nation Labour’s plans to reset the energy market, Figure 1 http://www.yourbritain.org.uk/agenda-2015/policy-review/policy-review/energy-green-paper

32. As this suggests and research from Ofgem confirms17, the vast majority of consumers do not

comprehend the energy market and are therefore unable to effectively differentiate

between, and take advantage of, the range of tariffs on offer. If the market was operating

correctly, than competition would be driving prices downwards. However, and similarly to

the rail franchises, a combination of regional domination and opaque pricing has enabled

energy companies to harmonise price rises.

33. Another major problem is the lack of any price control. As Which? observed, although

consumers have a choice of energy supplier in most EU member states, electricity prices are

regulated in 16 of the 26 countries and gas prices are regulated in 12 of the 24 countries

with open gas markets. In the UK, however, price controls placing a limit on the maximum

amount that suppliers could charge were removed in stages from 2000 onwards, as Ofgem

felt the market was sufficiently robust to ensure that prices remained competitive.

34. The removal of price controls triggered a marked rise in energy prices. Gas prices fell

consistently during the late 1980s and 1990s. By 2000, prices were one-third lower

than in January 1987 in real terms. The main reasons for this were price controls

imposed by the regulator (Ofgem) and, more latterly, competition. However,

following the incremental removal of price controls prices began to rise, steadily at

17

Ofgem, Retail Market Review https://www.ofgem.gov.uk/gas/retail-market/market-review-and-reform/retail-market-review

22

first, and then exponentially. By 2007, prices had increased by 87 per cent above the

late 2000 low. 18 Prices dropped slightly in the following years before sequential price

rises in autumn 2011 and the winters of 2012 and 2013 saw prices exceed their

previous peak level (in winter 2008/09).

35. Citizens’ Advice Scotland has estimated that between October 2010 and September

2013, price rises from the big six energy firms were eight times higher than the

increase in average earnings.19 CAS estimated that by January 2014, the big six

suppliers had increased their prices by around 37%, completely outstripping the rises

in inflation (10.2%) and average earnings (4.4%). Additional research from the

Department for Energy and Climate Change indicates that household bills have

increased by over £300 since 2010, whilst small businesses have seen their energy

bills rise by over £3,000 (see table below).

36. The average household energy bill is now £1,267 per annum, and is expected to rise

to £1,331 by 2020. As the graphic below illustrates, almost 50% of energy bills are

made up of wholesale energy costs. A large percentage of the wholesale energy costs

are affected by global energy rates and it is difficult to influence change in

international markets. The rest of consumer bills are made up of a mixture of

network costs, supplier costs/profit, VAT and energy, climate change and social

levies.

18

House of Commons Library note, Energy Prices 31 January 2014 http://www.parliament.uk/business/publications/research/briefing-papers/SN04153/energy-prices 19

http://www.citizensadvice.org.uk/press_20131117

23

C. Wholesale costs

37. During the latest round of price increases – winter 2013 – energy companies

highlighted the green and social levies as a key contributing factor to escalating

household energy bills.20 However, as we have already seen, these levies are

negligible in comparison to the portion of bills made up of wholesale costs. It is fair

to conclude, then, that the price of domestic energy is largely determined by the cost

of wholesale energy. Moreover the daily standing charge has grown beyond belief

and many now exceed 36 pence (which equates to approximately a 22 pence rise in

the last few years) compared with only a rise of a few pence per unit energy in

wholesale costs. Again highlighting the need for a far more transparent energy

market in order to address pricing issues.

20

Media coverage included Guardian, 2 December 2013 http://www.theguardian.com/environment/2013/dec/02/energy-firms-cuts-green-levies, BBC, 12 November 2013 http://www.bbc.co.uk/news/business-24915128 and Telegraph 3 November 2013 http://www.telegraph.co.uk/earth/energy/10424118/Green-tax-to-knock-75-off-energy-bills.html

24

D. Impact on housing

38. The Scottish Government continue to put housing at risk as the Housing Budget has

been slashed by the SNP Government from £534million in 2008/09 to £341million in

2014/15 and a planned £390million cut in 2015/16 . In real terms this equates to the

lowest number of housing built since 1947 (In 2012 only 14,984 houses were built; in

1947 12,149 were built)21 and over 155,000 on the social housing waiting list.22

39. Homes for Scotland are concerned that if the current 25% reduction in house

building continues it will result in shortfall of 160,000 homes by 2035.23

40. As we have discussed, the liberalisation of the market and the abolition of price

controls was intended to promote competition and, in turn, competitive pricing.

However, Ofgem’s most recent analysis states that the wholesale market,

particularly for electricity, “inhibits competition and imposes costs on consumers.”24

Ofgem attributes this to the wholesale market being locked in to what it refers to as

a “low-liquidity equilibrium”; i.e. not enough trading. Poor liquidity acts as a barrier

to competition, making it more difficult for smaller suppliers and generators to enter

the market, and therefore prevents consumers from reaping the benefits of

competition: lower bills, better service and greater choice.25 Which? has identified

introducing greater liquidity and transparency to the wholesale market as “of

fundamental importance in ensuring independent suppliers and new entrants can

mount a credible and sustainable challenge to the dominance of the major six

suppliers.”26

21

http://www.scotland.gov.uk/Topics/Statistics/Browse/Housing-Regeneration/HSfS/NewBuildSummary ] 22

http://www.scotland.gov.uk/Topics/Statistics/Browse/Housing-Regeneration/HSfS/HousingLists 23

http://www.homesforscotland.com/253/article.aspx?Site=1 24

Powering Britain: One Nation Labour’s plans to reset the energy market, Figure 1 http://www.yourbritain.org.uk/agenda-2015/policy-review/policy-review/energy-green-paper 25

https://www.ofgem.gov.uk/ofgem-publications/39303/liquiditydraftia120613.pdf 26

Which?, The Imbalance of Power, July 2013 http://press.which.co.uk/wp-content/uploads/2013/08/The-Imbalance-of-Power-Wholesale-Costs-and-Retail-Prices-LOW-RES-July-2013.pdf

25

Part 4 – Approaches to energy efficiency and community energy programmes 41. Energy efficiency is one of the three stimulants of fuel poverty and it is widely

acknowledged that it is one of the most accessible areas through which to mitigate

its effects. Indeed, one of the most cost and outcome effective means of tackling fuel

poverty is improving home insulation- ensuring that extra heating doesn’t drag up

bills in the first place- Community programmes enable spending attention to be

targeted towards those who need it most by prioritising areas.

A. Current programmes to mitigate fuel poverty

42. To begin with, the main community energy programme operated by the Scottish

Government is the Home Energy Efficiency Programme for Scotland (HEEPS).

Introduced in 2013, HEEPS replaced the previous Energy Assistance Package,

Universal Insulation Scheme and Boiler Scrappage Scheme. The Energy Savings Trust

manages its delivery through the Home Energy Scotland hotline, on behalf of the

Scottish Government. Included in the HEEPS programmes are:

Affordable Warmth (AW) – AW is offered to households which are vulnerable to fuel

poverty as defined by the Affordable Warmth Group, and paid for through the

Energy Company Obligation.

Area Based Schemes (ABS) – ABS is an area-based approached with initial focus on

the most deprived areas, as defined by indices of multiple deprivation, child poverty,

and heat mapping. ABS is funded directly by the Scottish Government (£60m in 2013-

14), with half given to local authorities and half kept back to be applied for by

authorities where fuel poverty is a particular concern. The scheme usually funds

energy efficiency measures match funded through the Carbon Emissions Reduction

Obligation (CERO) and Carbon Savings Community Obligation (CSCO) streams of the

Energy Company Obligation (ECO – see below), concentrating on internal, external

and “hard to treat” cavity wall insulation.

26

Energy Assistance Scheme (EAS) – EAS is available to households who are most

vulnerable to fuel poverty but are not eligible for Affordable Warmth or resident in a

current ABS area, this delivers grants of up to £4,000 to home owners or private

sector tenants aged 60 or over for insulation and heating measures. It is delivered by

Scottish Gas with £16m of Scottish Government funding (2013-14).

Gas Infill – this provides loan funding for gas infill projects and gas grid extension

projects, targeting specific areas, particularly those close to existing gas grid. The

Scottish Government has provided £4m of funding for 2013-14.

43. The Scottish Government budget includes a dedicated fuel poverty line. The figures

in the table below, produced by the Scottish Parliament Information Centre (SPICe),

relate to expenditure against the Scottish Government’s fuel poverty budget line.

They exclude expenditure on the Warm Homes Fund, Gas Infill Loans Scheme and

Domestic Energy Efficiency. It is worth noting that the Scottish Government expects

£130m to be spent on fuel poverty mitigation from the UK-wide Energy Company

Obligation (ECO). It is clear that this is an aspirational figure as there is little evidence

of spend to anywhere near that level.

Year SPICE REPORT

£ m

SCOTTISH GOVERNMENT

ACCOUNTS

2006/7 51.4 51.4

2007/8 55.6 55.6

2008/9 55.9 55.9

2009/10 66.3 66.3

2010/11 67.3* 68.5

2011/12 No data 58.0

2012/13 No data 67.2

Source: SPICE

27

B. Interventions to improve energy efficiency

44. The ECO retrofits properties for greater energy efficiency, targeting harder to treat

properties through the Carbon Emissions Reduction Obligation (CERO). It is divided

into three elements which each have their own particular delivery criteria:

Carbon Emissions Reduction Obligation (CERO) – the Carbon Emissions Reduction

Obligation, has focused on efforts improving “hard-to-treat” homes and measures

that could not be fully funded through the Green Deal. Internal and external wall

insulation and hard-to-treat cavity wall insulation were set as the primary measures

for this obligation. Other insulation measures and connections to district heating

systems were also eligible if promoted as part of a package that included solid wall

insulation or hard-to-treat cavity wall insulation.

Carbon Saving Community Obligation (CSCO) – under the Carbon Saving Community

Obligation, energy companies support insulation measures and connections to

domestic district heating systems in areas of low income (in Scotland, the bottom

15% of the Scottish Index of Multiple Deprivation27). This target had a sub-target,

where at least 15% of each supplier’s CSCO target had to be achieved by promoting

measures to low income, vulnerable households living in rural areas.

Home Heating Cost Reduction Obligation (HHCRO) – under the Home Heating Cost

Reduction Obligation, energy suppliers are required to provide measures which

improve the ability of low income and vulnerable households (the ‘Affordable

Warmth Group’) to heat their homes. This could include actions that result in heating

savings, such as the replacement or repair of a boiler for example as well as

insulation measures. Qualification is based on benefits, income and vulnerability

criteria.

45. In addition to this obligation is the Green Deal scheme. This provides loan finance to

install energy efficiency measures (heating and insulation) in domestic and non-

domestic properties. The following are features of the delivery of the Green Deal in

Scottish domestic properties:

27

http://www.scotland.gov.uk/Topics/Statistics/SIMD/FAQ

28

Appropriate measures are recommended through Green Deal advice reports

carried out by registered Green Deal advisors

Organisations known as Green Deal providers prepare a Green Deal plan

covering finance for and installation of measures

Green Deal debt is attributed to the property rather than the household and

is repaid via charges on the electricity bills for the property

If there is a change in occupier, the new occupier takes over the payments

Green Deal finance has to meet a “Golden Rule” whereby the repayments for

the loan finance do not exceed the fuel bill savings that would result from the

measures installed

Households can receive advice at any point during the process from Home

Energy Scotland.

46. Reducing our demand for energy is the only way of ensuring that bills remain

affordable in the long-run. The Green Deal scheme failed to even get off the ground;

5 months after its launch only 4 households were registered on its system as

finalising green deal plans. Yet not a single household had a ‘live green deal plan’

where works have been updated and repayments of energy bills passed on to its

supplier28. With only 750 green deal programmes being delivered in the first year,

Labour would scrap the scheme in its present format to be replaced with one that

will actually deliver to those who can afford to insulate their own homes while

helping those who cannot by continuing programmes funded by the UK Government.

C. Microgeneration schemes

47. The energy market is undergoing significant changes and onsite small-scale

renewable and low carbon technologies - microgeneration - will be an important part

of our energy future so the main challenge for energy companies is to create

affordable and cost-effective low carbon energy solutions that offer real value for

money. The Scottish Government needs to support energy companies by putting in

place measures and financial incentives to drive growth in the microgeneration

sector. The Low Carbon Scotland report set a target of 100,000 homes to have some

form of renewable heat by 2020.

28

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/209097/Statistical_Release_-_Green_Deal_and_Energy_Company_Obligation_in_Great_Britain_-_Mid-June_2013.pdf

29

48. The Microgeneration Strategy for Scotland was published in June 2012. The key aims

of the strategy are:

1 To contribute to Scotland’s transition to a low carbon economy by delivering

carbon emissions reductions.

2 As part of the overall drive for energy efficiency, to provide the opportunity

for householders, businesses and communities to participate in the low

carbon economy, and in particular contribute to taking more households out

of fuel poverty and reducing energy costs overall.

3 To support and create jobs in Scotland, by creating new markets for

businesses, particularly small and medium enterprises, and supporting

business growth29

49. Energy Saving Trust Renewable Heat in Scotland Report estimates that in 2010,

microgeneration accounted for 53 MW of capacity, generating 151,000 MWh of

heat, the equivalent of the average heat use of over 10,000 Scottish homes. Since

2007, the Scottish Government has provided nearly £13 million in grants and loans

direct to householders to help install microgeneration and continues to fund interest

free loans for householders through the Home Renewables and Home Loans

schemes to help them benefit from the Feed in Tariff (FIT) and Renewable Heat

Premium Payments (RHPP).

50. The Scottish Government has made £2m available this year through the Home

Renewables Loan Scheme (money transferred from the Warm Homes Fund) to

prioritise microgeneration for the fuel poor. However, uptake has been low and

much more needs to be done to raise awareness of mircogeneration schemes and to

increase uptake.30

29

http://www.scotland.gov.uk/Publications/2012/06/9678/downloads#res-1 30

SPICe briefing March 2014

30

D. Green and social levies

51. However, during the most recent series of price increases, energy companies cited

the removal of these charges from bills as likely to lead to lower energy bills. In

response, the UK Government announced a “roll-back” of the green levies that it

estimated would reduce the average energy bill by around £50.31 The majority of this

saving will come from “reducing the cost” of the ECO, the insulation scheme for

hard-to-treat properties delivered by the major energy suppliers, through the use of

more “cost effective” loft insulation and cavity wall insulation. This decision has been

roundly criticised by consumer and environmental groups, as well as the chair of the

government’s own Fuel Poverty Advisory Group, who referred to it as a “sticking

plaster and platitudes competition.”32

52. The SNP has also indicated that, in the event of an independent Scotland, it will do

something similar to the UK Government and remove the costs of energy efficiency

measures from energy bills, which it claims will save consumers around five per cent

and result in direct government funding for fuel poverty schemes of around £200

million per year.33 However, whilst the Energy Company Obligation is not operating

as intended, it could be argued that they would mitigate bill increases in the long

term by improving standards of insulation in low income households. Moreover, if

these charges were transferred into general taxation, the impact on consumers

would be wholly dependent on the way any system was implemented. Indeed, one

could argue that, before we consider transferring the green taxes and social levies

out of energy bills, we should work to ensure that the ECO and other energy

efficiency measures are operating as intended. As it stands the ECO and its

forbearers are all deeply regressive after all the First Minister pays the same as a

single pensioner. Whilst the idea of general taxation is a fair one as it removes the

burden from those who do not pay tax, however, the savings to be accrued through

transferring these measures into general taxation pale in comparison to what could

be achieved through wider reform of the energy market.

31

BBC New online, 29 November 2013 http://www.bbc.co.uk/news/uk-politics-25159260 32

Guardian, 2 December 2013 http://www.theguardian.com/environment/2013/dec/02/green-levy-rollback-energy-advisers-uk-government 33

SNP press release, 18 October 2013 http://www.snp.org/media-centre/news/2013/oct/yes-vote-will-deliver-lower-energy-bills

31

53. The continuing prevalence of fuel poverty illustrates that, to varying degrees, neither

the Scottish nor the UK Government’s policies in this area are functioning correctly.

Figures released by the regulator Ofgem towards the end of 2013 revealed that

energy companies had achieved only 16% of what they needed to do to help rural

areas and install district heating systems, and only 25% of the target on measures

that reduce the overall costs of home heating for low-income and vulnerable

households, such as new boilers.34 This is despite companies receiving over £1bn

through the ECO.

54. Meanwhile, the Scottish Government’s Draft Budget in September 2013 revealed a

£10 million underspend in the demand-led Home Energy Efficiency Programme.35

Given that need and demand for these measures is not in question, we must

conclude from this underspend that the programme is being poorly administered.

Part 5– Recommendations and conclusion

55. The focus of this challenge paper has been to look at ways to alleviate fuel poverty in

three main areas: i) through tackling the energy market and costs ii) examining

approaches to energy efficiency and iii) community energy programmes.

56. Labour is united on a Scottish and UK level in its vision for eradicating fuel poverty;

with large-scale initiatives at UK level designed to tackle the broken energy market

head on such as the proposed 2017 price freeze, the scrapping and replacement of

Ofgem and challenging the market domination of the ‘Big Six’ energy retailers being

supplemented by concerted action in Scotland in energy efficiency, reducing

consumption and alternative sourcing.

A. Recommendations at the UK level

57. At the UK level a Labour Government would take a number of key actions to reset

the energy market that have been detailed in the paper ‘Powering Britain: One

Nation Labour’s plans to reset the energy market’ which includes the following:

34

Ofgem, ECO Compliance Update- November 2013 https://www.ofgem.gov.uk/publications-and-updates/energy-companies-obligation-eco-compliance-update-november-2013 35

Finance Committee, Report on Draft Budget 2014-15 http://www.scottish.parliament.uk/parliamentarybusiness/CurrentCommittees/70879.aspx

32

At the last Labour conference, Ed Miliband announced that an incoming

Labour Government would impose a 20 month price freeze on all energy

companies to 2017, pending wholesale reform of the energy market. Labour

estimates that such a freeze would save consumers £120, and businesses

£1,800. This would constitute the most direct intervention in the energy

market since Labour’s windfall tax on the privatised utilities following the

2007 election.

Labour has also pledged to scrap Ofgem and form a tough new regulator that

would force energy companies to pass on price cuts to UK households. In a

recent interview on GMS, Finance Secretary John Swinney was unclear as to

whether an independent Scotland would have a separate regulatory regime.

If elected, Labour would also seek to break the power of the Big Six by

requiring energy companies to pool the power they generate and make it

available to any retailer, in an attempt to open the market and force down

prices.

B. Recommendations at the Scottish level

58. At the Scottish level we focused our actions on improving energy efficiency and

enshrined our ambition to abolish fuel poverty in legislation. The Housing (Scotland)

Act 2001 set an ambitious of abolishing fuel poverty ‘as far as reasonably practicable'

by 2016. With fuel poverty currently sitting at about 900,000 households this will not

be achieved by the SNP Government. We will work with others to set a new and

challenging target that faces up to the scale of the action that will be required to

make progress in this area.

59. Scottish Labour’s policy priorities are:

1 Review the investment required to improve the energy efficiency of homes across

Scotland, with a renewed focus on hard to treat rural properties. Whilst we know

that meeting the Scottish Housing Quality Standard by 2015 will improve the fabric

of some homes, persistent problems remain with the housing stock in rural

Scotland.

33

2 We will work with local authorities, housing associations and installers to support

local area based schemes, ensuring that the process is better streamlined to deliver

projects much quicker on the ground.

3 We will retrofit existing properties as well as building in energy efficiency measures

to an ambitious house building programme that will see an increased number of

homes across Scotland.

4 We will consider how best to improve energy efficiency in the private rented sector

where often poor standards in the quality of accommodation are pressing.

5 We will consider how we can further develop and encourage micro-generation

schemes, so that alternative energy supplies are more accessible.

6 We will consider the evidence that suggests that a new regulator ought to take

rurality and domestic fuels into scope.

7 Across Government we will take action to introduce the living wage to all public

sector contracts, raising household income for those experiencing in work poverty.

8 We will work with energy companies to review the cost of energy for the very

poorest households, such as those using pre-payment meters.

9 In taking action we will seek to ensure that the perspective of the person

experiencing fuel poverty is at the centre of our policy and we will work in

partnership with all stakeholders to ensure that we can in future meet our

ambition to end fuel poverty in Scotland.

C. Conclusion

60. Heating homes, powering lights, cooking food, all of these are absolutely essential

elements of our day to day lives. Gas and electricity that makes these things possible

are essential goods that we have no choice but to consume. So it is therefore of

fundamental importance that we have an energy market that is both fair and geared

towards the needs of ordinary people. However, as this paper has demonstrated,

that is not presently the case; the energy market is not functioning properly.

Consumers are paying more than they ought to in a truly competitive market and

investment in low carbon energy has stalled. Whilst some say that there is a

dichotomy between a market which works for consumers and one that delivers the

investment Britain needs, the opposite is the case. As this challenge paper has

34

argued, it is only by resetting our broken energy market that we can regain the trust

of consumers as well as the confidence of investors.

61. Primarily, these reforms will create a fairer competitive market. Putting them in

place will be a priority for the next Labour Government with the goal being that a

UK-wide led resetting and restructuring of the energy market, complemented with

energy efficiency schemes in Scotland would create a fair and sustainable market for

all across the UK as well as ensuring affordable energy in the future.

62. Labour has always been and remains to be the party of ambition when it comes to

social justice, welfare and fuel poverty. It was Labour that introduced central heating

and house building programmes and its Labour that continues to drive the debate

with initiatives like the ‘living wage’ which would enable far many more households

to avoid fuel poverty by increasing their disposable income. The SNP Government is

presiding over a national scandal but through a connected, and comprehensive

approach between Scotland and the rest of the UK Labour will bring this crisis back

under control. We commit ourselves again to take the action necessary to end fuel

poverty