Written evidence submitted by the MCS Foundation (WIN0024)

  1. About us

1.1   Our vision is a world where everyone has access to affordable and reliable renewable energy and zero carbon technologies – for the benefit of our environment, our communities, and the general public.  As a Foundation we work to increase public confidence, awareness, and access to renewable energy and zero carbon solutions across the UK.

1.2   In addition, the Foundation oversees the Microgeneration Certification Scheme (MCS CHARITABLE FOUNDATION) which defines, maintains, and improves quality standards for renewable energy at buildings scale.

 

  1. Our reason for responding

 

2.1   Last winter provided valuable lessons, but at the expense of the most vulnerable households in the UK. It exposed the UK’s vulnerability to global spikes in gas markets and highlighted the social urgency to transition to a domestic, clean, and secure energy system.

2.2   Despite the reduction in the Energy Price Cap in recent months, the termination of the Government’s Energy Price Guarantee (EPG) subsidy in July is estimated to have left 6.6 million households in fuel poverty.[1] With gas wholesale prices predicted to remain high throughout the next decade,[2] the Government must implement long-term and permanent strategies to reduce energy demand and secure consumer bills. It is imperative to provide ample support for low-income households throughout this transition to achieve a balanced and equitable energy future.

2.3   Although we fully support the Government’s choice to subsidise fuel bills this year, this has cost taxpayers over £30 billion and if continued next winter could cost a total of £140 billion.[3] Instead, Government must use this as an opportunity to advance the transition to net zero, through the implementation of a suite of policies including:

 

  1. What role did the UK grid play in the high domestic prices of winter 2022-23?

3.1   The recent high domestic prices this winter were caused by the UK’s reliance on global gas markets, which spiked as a result of the Covid pandemic, exacerbated by Russia’s war on Ukraine. However, the situation has been made far worse in the UK compared to other European countries by the fundamental issues of our leaky and inefficient building stock, which has further exposed households. There are three common themes that have emerged to explain the high domestic energy prices in both winter 2021-22 and 2022-23.[4],[5]

1.  The primary driver of the rise in bills is the wholesale cost of gas, which accounts for roughly 80% of the increase.

2.  Electricity bills are rising less than gas bills as the UK energy mix is made up of gas, nuclear and renewables, with renewables helping insulate UK electricity costs from the full impact of the gas price rises.

3.  Levies and policy costs on bills are actually decreasing as a total proportion of the overall bill as a result of the price rises, falling from around 16% of the total energy bill to around 7% winter 2021-2022.[6] This decreased to 0% in winter 2022-23 as the government temporarily subsided all levies through the Energy Price Guarantee (October 2022-July 2023).[7]

 

3.2   The rise in wholesale gas prices exacerbated the higher energy bills which occurred as a result of the collapse of energy supplier Bulb. The Supplier of Last Resort event, in which existing energy tariffs and credit were levied on consumer bills, is estimated to have increased bills by £94 per customer,[8] disproportionately affecting the most vulnerable households.

 

3.3   The definition of fuel poverty according to the NEA is when a household spends 10% or more of their income on fuel bills.[9] It is caused by several interlinked factors, such as a low income, inefficient housing, high energy prices, poor quality rented houses and high housing prices.[10] Demand for social housing in the past decade has far outstripped availability, meaning that people who most need security, affordability, and protection often have no alternative but to live in private rented accommodation.[11] The cruel irony is that often the most vulnerable in society find themselves in the ‘hardest to heat’ homes.[12]

 

 

  1. What more could have been done to prevent price shocks being passed to consumer bills?

4.1   Four policy options emerge from the causes of the price rise that would have a direct, positive impact on fuel poverty in the UK:

  1. Use less gas – through improving energy efficiency and demand reduction measures, including the rapid deployment of renewables and new insulation grant schemes in both public and private sector housing.
  2. Reform the way gas and electricity are priced – such as introducing social tariffs and addressing the high cost of electricity through the Reform of Electricity Market Arrangements (REMA).
  3. Move environmental levies and other policy costs into general taxation to lower the price of electricity.
  4. Introduce a windfall tax on gas and oil companies to fund energy efficiency improvements.

 

4.2   Home efficiency is a long-term and permanent investment, which not only lowers energy demand and consumer bills, but also addresses the wider strains on society; illnesses associated with fuel poverty is estimated to cost the NHS £2.5 billion per year.[13] This year the government has spent over £30 billion on short-term, temporary solutions to the cost-of-living crisis, including fuel subsidies. [14] Whilst we understand this was a necessary policy to protect consumers, there needs to be valuable investments to permanently reduce energy bills. With fossil fuel prices predicted to remain high until at least 2030,[15] we believe this is further reason to end our reliance on gas, through investment in energy efficiency and renewable energies. Modelling from Cornwall Insights predicted that implementing the Energy Price Guarantee for next winter could result in overall costs of the EPG reaching between £70-140 billion.[16]

4.3   More stringent energy efficiency standards are required in the Private Rented Sector. The Government has been delaying the introduction of a Minimum Energy Efficiency (MEES) standard of EPC C for all rented properties by 2025. In 2021, the PRS had the greatest concentration of fuel-poor households, with 38% of all fuel-poor homes living in privately rented homes.[17] Two year later, at least one quarter of the approximately 4.6 million private rented households in the UK are living in fuel poverty.[18] Private renters are particularly susceptible to rising energy prices due to their lack of autonomy surrounding energy providers, tariffs, building fabric and heating systems. Recent research from citizens advice found that 31% of feel unable to heat their homes to a comfortable level, with 1.6 million children in privately rented homes living in cold, damp, or mouldy homes.[19]

4.4   We urge the Government to take immediate action in legislating Private Rented MEES in the current Renters Reformer Bill and Energy Bill. This must be paired with better monitoring and enforcement to ensure compliance. Analysis undertaken by the Energy and Climate Intelligence Unit has found that renters could by up to £1 billion more on electricity and gas bills as a direct result of delays to this regulation.[20]

4.5   The Government must increase grant funding for both the ‘able-to-pay’ market and fuel poor homes, whilst addressing the structural design issues with the scheme. Whilst the Government’s Energy Security Strategy recognised the need to improve energy efficiency[21], we do not find the proposals to address the issue proportionate to the scale and urgency. Funds committed to the Local Authority Delivery Scheme, the Home Upgrade Grant, and the Public Sector and Social Housing Decarbonisation Funds are £2bn short of pledges made to these schemes in the 2019 Conservative manifesto – addressing this would significantly boost the impact of these schemes.

4.6   We warmly welcome the continuation of the Energy Company Obligation with the announcement of ECO4, as well as the additional Great British Insulation Scheme (GBIS), which will reach a wider volume of households, providing low-cost measures. However, despite the launch of these schemes, the number of energy efficiency measures dropped by 55% in 2022 compared to 2021,[22] despite the energy crisis. This is in part due to design issues with the schemes, as well as a lack of public awareness and Government publicity around these schemes.

4.7   The ECO scheme has been invaluable in the past at support fuel poor homes to install new boilers, heating controls, and insulation measures. ECO has saved low-income customers £17.5 billion in lifetime energy bills since 2013, and saved the average home treated £290.[23] However, the new iteration of ECO, ECO4, has seen a significant drop in uptake for the scheme due to structural design issues. This includes difficulty in finding homes that meet the criteria or ‘Minimum Requirement’ to be eligible for the scheme. One of these requirements is for the homes treated to improve by a minimum of two SAP bands, which for homes with a lower EPC (G or E) is too costly. These design issues must be addressed moving forward.

4.8   Government must implement social tariffs to protect vulnerable customers. Whilst the EPG succeeded in shielding some vulnerable homes, it is still predicted that millions of homes were in fuel poverty last winter. The scheme could not protect all vulnerable homes but did benefit the richest households in the UK as well. This is not the most efficient use of Government funding. The UK Government have stated on numerous occasions that they plan to consult on the introduction of social tariffs in Summer 2023, to implement in April 2024. We are already halfway through August and as of yet, there has been no consultation – this worries us. In any case, a social tariff in April 2024 does nothing to protect vulnerable households in this coming winter. We believe that the UK Government must urgently look to implement social tariffs to protect vulnerable households next winter. We have certain recommendations:

    1. All energy companies should be mandated to provide the social tariff, it should not be voluntary.
    2. Low-income, vulnerable households should be auto enrolled on the scheme to ensure that it is easily accessible.
    3. Household eligibility should be determined by living-wage threshold, worked out by leading fuel poverty charities including the NEA.
    4. This should be funded through Government taxation. It is paramount that it is not levied on electricity bills.

 

  1. How should energy companies respond if customers cannot pay their bills?

 

5.1   The latest research estimates that more than a quarter of households in the UK are in debt with their energy suppliers.[24] With high energy bills expected to continue into next winter with the ending of the Energy Price Guarantee, households are at risk of falling even further into debt.

5.2   Energy companies should play an active role in trying to help customers reduce their debt. This requires effective communication and collaboration with customers, helping put in place affordable debt repayment plans. MCS Foundation would advise the implementation of a repayment matching scheme, where for every £1 paid by the customer, the energy company pays £1. Where customers are still unable to afford arrears there should be Government debt repayment support scheme, funded through general taxation.

5.3   In 2022, over 94,000 Pre-Payment meters were forcibly installed in households under warrant according to Government data.[25] Recent research carried out by Citizen’s Advice found that in 2022, 3.2 million people were cut off from electricity supply because they could not afford to top up their Pre-Payments Meters.[26] Disconnection was found to be at least a monthly occurrence for 2 million people. Nearly 18% of households who ran out of credit on their pre-payment meters went on to spend two days or more without any energy supply, leaving them unable to turn the heating on or cook a hot meal. 

5.4   This is affecting highly vulnerable people for whom PPMs are an inappropriate method of managing energy payments. 64% of prepayment meter households are lived in by a vulnerable person, and 51% are lived in by a disabled person or someone with a long-term health condition.[27] The PPMs scandal uncovered by the i Paper and the Times revealed that energy firms were not following the rules set out to protect vulnerable customers from being forced onto PPMs.[28]

5.5   Energy firms have recently signed up to a new voluntary code of conduct, designed to govern the forced installation of prepayment meters. However, MCS Foundation does not feel that this goes far enough to protect highly vulnerable groups or help tackle rising energy debt. While the Secretary of State was supportive of a ban on forced installations earlier this year, the UK Government did not have the power to do so unilaterally and had to rely on Ofgem to do so. We are therefore calling for the Secretary of State to be given the powers to intervene and introduce an all-out ban on the forced transfer to pre-payment meters. The proposed ban will not affect the voluntary installation of PPMs by customer request.

 

  1. Has Ofgem got its priorities right in addressing customer protection? & Is the legislative framework on pricing controls suitable for protecting consumers?

 

6.1   MCS Foundation understands that Ofgem’s role in setting the Energy Price Cap results in a balancing act in ensuring that energy suppliers have a sustainable business model, whilst also protecting consumers from high energy bills.

6.2   Nonetheless, we feel that Ofgem failed to achieve the right balance last winter, as British Gas announced record first-half profits of almost £1 billion as a result of the increase in the Energy Price Cap.[29] We would argue that Ofgem has prioritised the energy supplier this winter, at the expense of consumers, over 6 million of whom were suffering from fuel poverty.

6.3   With wholesale gas prices expected to remain high throughout the late 2020s, we strongly advocate that Ofgem do more to protect consumers in future and review their methodology for calculating the EPC.

 

  1. How effective is the Government's approach towards supporting the sector and delivering a functioning energy market?

 

7.1   The Government stepped in last winter with various fuel subsidy schemes, to shield customers from the peak Energy Price Cap of £4729.[30] Whilst this was clearly paramount for certain households, even with Government’s support, it is estimated that 6.7 million households were in fuel poverty this winter.[31] Clearly, it is undeniable that the Government’s approach has not been effective and we are equally disappointed by the inaction this summer. The Government is not doing enough to bring about permanent change to support the sector to deliver a functioning energy market. This has detrimental impacts of the UK’s energy security, but also our net zero targets.

 

7.2   The latest Climate Change Committee progress report for net zero found that policy for energy efficiency was significantly off-track.[32] For this reason, we strongly advocate a 10-year locally led retrofit scheme funded by general government spending, to go alongside ECO.

 

7.3   Improving the energy efficiency of our housing stock is key to driving down energy costs and addressing fuel poverty. For example:

7.4   We are also concerned that there has not yet been a consultation regarding the Review of Electricity Market Arrangements (REMA). 80% of the increase in energy bills over the past two winters has been as a result of the increase in wholesale gas prices.[34] At the same time, the UK has seen historically cheap renewable energy prices. The cost of wind power generation has decreased at a much higher rate than was predicted by the CCC. In their 2011 Renewable Energy Review,[35] they projected the cost of offshore wind at £52-124/MWh for 2040, but recently offshore wind projects have signed contracts for £57.50/MWh.[36] Solar and wind power generation is now cheaper than nuclear and incumbent fuels,[37] and it is likely to continue decreasing as investment in renewables increased by a record 30% in 2020.[38]

7.5   The UK has seen record energy generation from zero carbon, cheap renewable energy sources - 46% in April 2023.[39] Paradoxically, electricity in the UK is nearly four times the prices of gas per kW/h.[40] Before the energy crisis, this was in part due to the high percentage of social and environmental levies placed on electricity compared to gas (around 25%, compared to 2%).[41] The Government have been essentially subsidising these levies through the Energy Price Guarantee, however as this ceases, consumers could be expected to begin paying these levies. At a time when the Government should be encouraging the electrification of heat, and with renewable energy generation at all time low cost, the market must be modified to reflect this.

August 2023

 

 


[1] https://www.nea.org.uk/news/uk-government-energy-support-ends-for-over-20-million-households-tomorrow-leaving-6-6-million-in-fuel-poverty/#:~:text=Campaigns-,UK%20Government%20energy%20support%20ends%20for%20over%2020%20million%20households,6.6%20million%20in%20fuel%20poverty&text=Tomorrow%20(1%20July)%206.6%20million,schemes%20come%20to%20an%20end.

[2] https://www.cornwall-insight.com/press/drop-in-power-price-predictions-up-to-2030-but-prices-to-remain-above-pre-pandemic-levels-for-next-decade/

[3] https://www.cornwall-insight.com/press/energy-price-guarantee-could-cost-the-government-between-72bn-140bn/

[4] https://ember-climate.org/commentary/2021/09/21/fossil-gas-uk-electricity-prices/

[5] https://eciu.net/insights/2022/out-with-the-old-gas-crisis-blows-up-conventional-wisdom-about-household-bills

[6] https://www.carbonbrief.org/analysis-cutting-the-green-crap-has-added-2-5bn-to-uk-energy-bills

[7] https://www.gov.uk/government/news/government-announces-energy-price-guarantee-for-families-and-businesses-while-urgently-taking-action-to-reform-broken-energy-market

[8] https://www.citizensadvice.org.uk/Global/CitizensAdvice/Energy/Market%20Meltdown%20-%20Dec%202021_v2%20(1).pdf

[9] https://www.nea.org.uk/what-is-fuel-poverty/#:~:text=The%20definition%20of%20fuel%20poverty,maintain%20a%20satisfactory%20heating%20regime.

[10] About fuel poverty – End Fuel Poverty Coalition

[11] http://www.nationwidefoundation.org.uk/wp-content/uploads/2018/09/Vulnerability-report.pdf

[12] What is Fuel Poverty? | National Energy Action (NEA)

[13] Fuel Poverty, Cold Homes and Health Inequalities in the UK - IHE (instituteofhealthequity.org)

[14] https://www.cornwall-insight.com/press/energy-price-guarantee-could-cost-the-government-between-72bn-140bn/

[15] https://www.e3g.org/news/investing-in-energy-saving-solutions-could-save-billions/

[16] https://www.cornwall-insight.com/press/energy-price-guarantee-could-cost-the-government-between-72bn-140bn/

[17] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/998436/committee-on-fuel-poverty-interim-report-2021.pdf

[18] UK-Private-Rented-Sector-MEES_E3G-Briefing.pdf

[19] Damp, cold and full of mould (citizensadvice.org.uk)

[20] https://www.cornwall-insight.com/press/drop-in-power-price-predictions-up-to-2030-but-prices-to-remain-above-pre-pandemic-levels-for-next-decade/

[21] https://www.gov.uk/government/publications/british-energy-security-strategy/british-energy-security-strategy

[22]https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1146686/HEE_Stats_Detailed_Release_-_Mar_23.pdf

[23] https://www.e3g.org/wp-content/uploads/Energy-Company-Obligation-Briefing-E3G.pdf

[24] https://www.endfuelpoverty.org.uk/rising-energy-debt-creates-mental-health-crisis-for-households/

[25] https://www.gov.uk/government/news/just-three-energy-suppliers-making-up-over-70-of-all-forced-installation-of-prepayment-meters#:~:text=Data%20provided%20above%20for%20suppliers,warrant%20in%202022%20is%2094%2C201.

[26] Millions left in the cold and dark as someone on a prepayment meter cut off every 10 seconds, reveals Citizens Advice - Citizens Advice

[27] Number of pre-payment meter customers living in cold damp homes revealed - End Fuel Poverty Coalition

[28] Number of pre-payment meter customers living in cold damp homes revealed - End Fuel Poverty Coalition

[29] https://www.theguardian.com/business/2023/jul/27/british-gas-record-profit-price-cap-increase#:~:text=British%20Gas%20has%20reported%20its,the%20same%20period%20last%20year.

[30] ofgem.gov.uk/publications/customers-pay-less-energy-bills-summer 

[31] https://www.nea.org.uk/wp-content/uploads/2023/01/3830_NEA_Fuel-Poverty-Monitor-Report-2022_V2-1.pdf

[32] https://www.theccc.org.uk/wp-content/uploads/2023/06/Progress-in-reducing-UK-emissions-2023-Report-to-Parliament.pdf  

[33] https://www.carbonbrief.org/analysis-why-uk-energy-bills-are-soaring-to-record-highs-and-how-to-cut-them/

[34] https://ember-climate.org/commentary/2021/09/21/fossil-gas-uk-electricity-prices/

[35] https://www.theccc.org.uk/publication/the-renewable-energy-review/

[36] https://www.theccc.org.uk/2017/10/31/five-reflections-dieter-helms-cost-energy-review/

[37] https://www.lazard.com/media/451881/lazards-levelized-cost-of-energy-version-150-vf.pdf

[38] https://www.worldnuclearreport.org/IMG/pdf/wnisr2021-lr.pdf

[39] https://www.nationalgrid.com/uk-hits-major-clean-energy-milestone

[40] https://www.ofgem.gov.uk/information-consumers/energy-advice-households/energy-price-cap

[41] https://www.theccc.org.uk/2022/03/09/taking-stock-of-the-uk-governments-heat-and-buildings-strategy/