Written evidence submitted by Citizens Advice (WIN0026)

 

1. Executive summary

 

        Although energy prices are thankfully now falling, bills remain significantly above historically average levels, and this is resulting in significant consumer distress. The Government should put in place additional support for energy bills this winter, targeted at those on the lowest incomes. One way to do this would be to provide additional support through the Warm Home Discount scheme.

        With the prospect of high bills remaining in place for a sustained period, the Government should look to introduce long-term targeted price support for consumers on low incomes with high energy usage.

        Some consumers with non-smart prepayment meters missed out on support under the Energy Bill Support Scheme as not all eligible households received vouchers. Future support schemes should be applied automatically, and these households should be prioritised in the rollout of smart metering.

        Improving the energy efficiency of our housing stock should also be a national priority.

        We would like to see Ofgem learning the lessons from other regulators in terms of ensuring that consumers are at the heart of their approach. The Consumer Duty in financial services regulation requires financial firms to put the interests of the customers first. We think that there is a place for this duty in energy regulation, and would like to see further work from Ofgem which goes towards incorporating this shift in approach with an explicit and consistent focus on outcomes for energy consumers.

 

2. About Citizens Advice

 

2.1 Citizens Advice gives people the knowledge and the confidence they need to find their way forward - whoever they are, and whatever their problem.

 

2.2 Our network of independent charities offers confidential advice online, over the phone, and in person, for free.

 

2.3 Last year we helped 2.6 million people in person, by phone, email or webchat. Our advice website had over 25 million visits, with 34 million pages viewed (based on pageviews of at least 30 seconds).

 

2.4 We provided support in 2,588 locations in England and Wales delivered by over 22,000 volunteers and 7,000 staff.

 

2.5 We use our evidence to show how things can be improved for people.

 

3. Submission

 

Protecting customers this winter

3.1 As we head into winter 2023, energy prices are now falling and it may be tempting to declare the energy affordability crisis over. But that would be a big mistake. Our data suggests that millions are facing a winter as bad, or even worse, than last winter.

3.2 The current price cap remains 60% higher than in winter 2021,[1] and once we take into account the removal of direct Government support for energy bills, the amount the average household pays for their energy this winter will be similar to last winter.

3.3 Many households simply cannot afford to pay energy bills at this level. In the first 6 months of 2023, 7.8 million people have had to borrow to cover their energy bills and 1.2 million children live in households which have had to go without heating, hot water and electricity.[2] If the Government doesn’t step in, we expect to see these numbers rise this winter.

3.4 So far 2023 has been the busiest year ever for Citizens Advice. The number of people we have seen with energy debt, and the amount of debt they owe, is at record levels and rising. At £1,711 average energy debts for our debt clients are nearly a third higher than in 2019.

3.5 People have already cut back their household spending to the bare minimum, while the cost of other essentials has risen sharply due to rapid inflation. As a result, a growing number of people are living on empty. Over 50% of the people Citizens Advice help with debt advice are now in negative budgets, meaning they have more essential spending going out than they have income coming in.[3] These households have nothing left to cut.

3.6 The next six months could tip many households over the edge and the trends in our data predict another winter of unwelcome records - so far we have already helped nearly twice as many people who couldn’t afford to top up their prepayment meter as we had by this point in 2022.[4] The Fuel Bank Foundation estimates that it will support half a million people by the end of 2023 with emergency vouchers to top up their prepayment meters, up from 291,000 in 2022.[5]

3.7 It is very worrying that the Government has not yet put adequate support in place to ensure that households can safely heat and power their homes through the winter. The Government must not stand by while disaster unfolds. At a time of constrained public finances, support should be targeted at those who need help the most. However, the Government may need to consider a broader based package of support if targeted help is not meeting the scale of need as winter bites.

3.8 One way to deliver targeted support would be to expand the Warm Home Discount (WHD), which currently provides a discount of £150 on the electricity bills of eligible households. Additional support could either be provided through a one off increase in the existing WHD payment, or by using the data matching and payment model through which WHD is delivered to provide a targeted version of last winter’s Energy Price Guarantee to the households who need it most.

3.9 Not all low income households in need of support are eligible for the WHD, so the Government should also look at ways to expand eligibility of the WHD or other means of getting support to these households. The additional costs of expanding the scheme should be covered by the Treasury, not struggling bill payers.

Protecting customers against future price shocks

 

3.10 Consumer energy bills are driven by the price they pay per unit, and the volume they use. They will be helped by any policy that reduces either of these two variables.

 

Price

 

3.11 Gas is traded internationally, and the UK does not control the price that it pays for it - international markets do. These markets initially became elevated as international demand recovered after the Covid pandemic, going on to spike after the Russian invasion of Ukraine. While prices have reduced significantly from their peaks, the average household energy bill remains around 60% above its historic average. Some forecasts suggest that wholesale prices - the biggest single component of energy bills - may remain elevated for the remainder of this decade.[6]

 

3.12 The price of electricity is currently tied to the price of gas because the marginal wholesale price of electricity is usually set by gas fired power stations. This may limit the extent to which consumers can benefit from the lower cost of renewable generation. Because of this, some have advocated that the wholesale market should be split into low and high carbon markets, to reduce the extent to which power prices are determined by gas prices. Splitting wholesale markets in this way could benefit consumers if it keeps costs down, but is relatively untested and may take time to implement. A quicker way to reduce consumer electricity bills may be to expand the Contracts for Difference (CfD) scheme, noting that this has been paying back to consumers during the recent high prices. We explored these issues in more detail in our recent report, ‘Splitting opinion: is splitting the wholesale market the best way to deliver an affordable energy system.’[7]

 

3.13 While noting that CfDs provide a good mechanism for reducing future consumer bills, it is concerning that there have been several allegations that generators have either delayed the commencement of trading under CfD terms[8], or have altered the running pattern of plants to avoid using units backed by CfDs[9], in order to avoid returning money to consumers. There is no suggestion that any such behaviour breaks the rules, but it is arguably against the spirit of what the policy intended - that consumers should be able to benefit from these contracts at times of high prices. The Committee may wish to consider whether any changes are needed to future CfD terms to prevent consumers from being exposed to downside risk, but locked out from upside gain.

 

3.14 Another component of recent bills has been the mutualised costs arising from the failure of 28 energy suppliers since 2021, most of whose customers had to be moved to new companies. The costs arise from purchasing energy at short notice for customers whose supplier fails and protecting their credit balances, as well as covering the supplier’s unpaid industry fees. They are then recovered from all customer bills through a levy on network costs. This was estimated to total around £2.7bn, or £94 per household.[10] The majority of these costs were recovered between April 2022 and March 2023, though they still make up a small component of current bills. There is also the potential for some costs to be recovered from consumer bills related to the failure of Bulb Energy and its special administration in future, though the level is currently unclear.[11]

 

3.15 Though these costs are dwarfed by the impact of rising wholesale prices, they nevertheless added pain for consumers at a very challenging time. A more resilient energy market, in which suppliers were well capitalised and adequately hedged, would have been better placed to withstand rising prices. Ofgem has subsequently introduced significant reforms designed to improve supplier resilience - had these been in place before the crisis then the cost of supplier failures could have been significantly reduced.

 

3.16 The Government brought forward a significant package of support to help household consumers with energy bills in 2022 and 2023, through the Energy Price Guarantee (EPG), the Energy Bills Support Scheme (EBSS) and the Alternative Fuel Payment (AFP).

 

3.17 The EPG caps the maximum unit rate that consumers pay for electricity and gas, although its level is usually expressed in terms of what it means to the notionally average customer. For that customer, the EPG was set at £2,500/year for the period from October 2022 to June 2023, then at £3,000/year for the period from July 2023 to March 2024.

 

3.18 Prices are now below the level set by the EPG, meaning that the scheme is effectively inactive. But during earlier parts of the crisis, the EPG held down bills considerably. The average annual bill would have exceeded £4,000 over winter 2022/23 had the EPG not been in place.[12]

 

3.19 The EBSS gave every household a £400 discount on their energy bills for winter 2022/23, paid in six monthly instalments from October 2022 through to March 2023.

 

3.20 The AFP provided a £200 one-off payment to people that are not connected to the gas grid and so use alternative fuels, such as oil or liquid gas.

 

3.21 The EPG, EBSS and AFP provided hugely welcome relief from high energy prices, but came at a significant cost given their universal nature. The National Audit Office has suggested the total cost of these schemes may total around £50bn.[13]

 

3.22 Unfortunately, some consumers missed out on some support due to the design of the EBSS. Support for people with non-smart prepay meters was generally provided via vouchers, which have technical limitations (eg each voucher can only hold a maximum of £49), require consumer action to redeem, and relied on suppliers holding reliable data on customers, though this is a group with relatively less engagement in general. Citizens Advice raised concerns regarding this approach, particularly as a previous government rebate scheme had seen only ~70% voucher redemption rate.[14] In practice the use of vouchers was found to be a significant challenge with this scheme too, with only 9.93m vouchers redeemed out of the 11.97m payments due this group (~83%).[15] The part of the scheme that supported people who don’t have a domestic supply contract (such as care home residents or who live in park homes), which required people to apply for help, had an even lower rate of take up. 

 

3.23 These challenges demonstrate the importance of delivering support to eligible households automatically wherever possible, to ensure customers don’t miss out. For consumers on traditional prepay this can be achieved by installing a smart meter, as they can have credit loaded remotely by suppliers. We’ve called for these customers to be prioritised in the rollout, given the more significant benefits of the technology relative to their existing meters.

 

3.24 We remain concerned regarding the experience of domestic customers on non-domestic contracts, who can miss out on other government support schemes like the Warm Home Discount, as well as not having access to the same help from their supplier as if they were on a domestic contract. We are engaging with DESNZ on options to improve outcomes for this group, and we welcome the call for evidence it recently published.

 

3.25 The EPG, EBSS and AFP are all temporary measures but it currently looks likely that bill pressures may remain acute for a number of years, and we know that many people were already struggling even when bills were much lower. We think the solution to these problems are to put in place an enduring system of targeted price support, focused on those who need the help most.

 

3.26 We have put forward proposals for the introduction of targeted price support, focusing on helping those on low incomes and with high energy usage.[16] Households on below average incomes would qualify, even if they were not in receipt of benefits, in recognition of the scale of the problem. Over 12 million households would be helped. The average payment to an eligible household would be around £400 a year. As our recent Living on Empty[17] report highlighted, these payments could be transformative for struggling households - leaving the average person seeking our help with debts able to cover their ongoing bills.

 

3.27 Through clever matching of energy consumption and income data, we think it is possible to create a system that gives different amounts to different households depending on their needs, so the very poorest, and those with the least energy efficient homes, receive more support than others. Recognising that it might take some time to set up a data matching system, we’ve also suggested a simpler system that would provide the same payments to all eligible households.

 

Volume

 

3.28 If reducing prices is one key way to improve affordability, reducing the volume of energy that households need to use to live comfortably is the other.

 

3.29 The UK has some of the least thermally efficient housing stock in Europe[18], yet the installation rate of energy efficiency measures reduced sharply in the last years of the Coalition government and has remained low since.[19]

 

3.30 In our Fairer, Warmer, Cheaper report[20] our primary recommendation on energy efficiency is therefore that the ECO regime be further enhanced with significantly wider ambitions. Such ambitions could encompass the aim of carrying out loft and cavity wall insulation improvements for all fuel-poor households. We estimate this would carry an aggregate capital cost of £1.1 billion and deliver average annual bill savings of more than £550 for a fuel poor household where both loft and wall improvement is carried out, as well as reducing those households’ need for bill support payments over time.

 

Supplier conduct

 

3.31 In a context of rapidly rising energy consumer debt, it is vital that energy suppliers are aware of the needs of their customers, particularly where their debt collection practices could exacerbate existing vulnerabilities. At the same time, uncontrolled increases in bad debt will inevitably lead to higher prices that all customers will have to bear. It is vital that suppliers proactively engage customers who are struggling with bills at an early stage and offer tailored support that meets their needs. We have seen some good practice from energy suppliers with regard to debt collection processes, especially in terms of recent actions to set affordable repayment plans for customers who are struggling to pay for their ongoing usage. Ofgem’s recent Market Compliance Review on Customers in Payment Difficulty[21] has seen some success in terms of providing helpful clarity about the inappropriateness of minimum repayment amounts. 

 

3.32 Ultimately, we want to see energy suppliers respond compassionately and comprehensively to customers who cannot afford to pay their bills. We would like suppliers to make every possible effort to contact customers in payment difficulty through channels which work for them, and to arrange debt repayment plans at an affordable level. In the context of rapidly rising levels of energy debt, it’s clear that this issue will not vanish overnight.[22]

 

3.33 We are conscious that suppliers cannot fix the issue of energy affordability by themselves, and that while proactive regulation can ensure consumers aren’t left behind, it is also not the only solution. In the longer term, we envisage a social tariff for energy would make a substantial difference to energy affordability for those consumers who would be eligible, and would make debt management processes more accessible for them.

 

3.34 We have been pleased to see the installation of PPMs for debt management treated with the appropriate level of seriousness since Ofgem introduced their voluntary moratorium in February 2023. While PPMs are named in the licence conditions as a legitimate approach for consumers who are struggling to repay debt and afford ongoing usage, it is right that energy suppliers should be highly cautious in their installation approaches to prevent customers being put onto PPMs inappropriately. In the wrong circumstances, PPM installations are disconnection by stealth, and it is important that the forthcoming PPM Code of Practice and accompanying licence conditions protect vulnerable consumers from the harms of self-disconnection. The ongoing work to enshrine the Involuntary Installation Code of Practice[23] into enforceable rules is also a welcome contribution from Ofgem and must be completed with urgency.

 

Regulation

 

3.35 We have seen encouraging signs from Ofgem’s programme of work over the course of the last year, in response to evidence raised by Citizens Advice and other stakeholders. We’ve seen meaningful actions and progression on crucial consumer protection issues including prepayment meters, debt journeys and contact ease. These are areas with the potential to cause significant consumer harm during the unfolding cost of living crisis, so it is right that the regulator is paying serious attention to them.

 

3.36 These specific areas have been subject to heightened public scrutiny, particularly in the wake of the recent prepayment meters scandal. Ofgem has conducted Market Compliance Reviews (MCRs) to examine the actions of energy suppliers, and has consulted widely on potential changes to their consumer protection framework as well as specific regulatory approaches, such as the PPM Code of Practice.

 

3.37 We welcome these efforts to monitor and improve the domestic energy retail market, and continue to engage with Ofgem’s attempts to ensure that vulnerable consumers are not exposed to high levels of harm[24]. This level of scrutiny is proportionate to the extent of the risk to the welfare of energy consumers and must be maintained over time. 

 

3.38 We would like to see Ofgem learning the lessons from other regulators in terms of ensuring that consumers are at the heart of their approach. The Consumer Duty in financial services regulation requires financial firms to put the interests of the customers first. We think that there is a place for this duty in energy regulation, and would like to see further work from Ofgem which goes towards incorporating this shift in approach with an explicit and consistent focus on outcomes for energy consumers.

 

3.39 More broadly, there were clearly significant failings in Ofgem’s regulation of the energy retail market in recent years. Many poorly prepared new entrants were insufficiently resilient to rising prices, and in many cases failed to offer decent customer service standards, which were weakly enforced by Ofgem. As set out above, the subsequent failure of these companies led to significant costs to customers. Last year Ofgem commissioned an external review of its approach to identify lessons, and we welcome the changes it has since made to put in place a clearer framework for its decision making around consumer interests, and to improve its enforcement and compliance. Ongoing reforms to improve resilience should reduce the risk of supplier failures in future. However, there are clearly risks that in a more consolidated market with much lower levels of switching companies will not face competitive pressure and consumers will pay higher prices.

 

3.40 In the coming months it will be important for Ofgem to set a clearer path to how competition can return to the market in the near term. One key determinant is the Market Stabilisation Charge - an emergency measure that acts to limit the risk of suppliers being undercut by competitors in volatile, high price wholesale market conditions, but also reduces the potential savings from switching. It is currently in place up to March 2024, while Ofgem thinks the risks of volatility remain high, though the regulator has broad latitude to remove it, extend it or change it to reduce its impact.

 

Government policy

 

3.41 The Government has been generally successful in delivering large scale - if somewhat blunt - support through the Energy Bill Support Scheme and Energy Price Guarantee, the latter put in place at a very fast pace. While the rapidly changing external context was challenging, more timely direction from senior levels of the Government during 2022 could have led to more effective design process and delivery of both schemes, and potentially better outcomes for harder to reach consumers.

 

3.42 More broadly, there has been significant progress by the Government in developing reforms for key areas of energy policy in recent years, including in relation to smarter systems, new energy governance arrangements, and support for new technologies like green hydrogen and Carbon Capture, Use and Storage. Many of these reforms are included in the Energy Bill, which is now progressing through Parliament. However in some key areas related to the retail energy market, policy and delivery has fallen behind:

 

        Retail market arrangements have been under government review since 2019, but remains at an early stage of development, after previous proposals were scrapped in 2022. We are also concerned that the ongoing work is not sufficiently aligned with the concurrent Review of Electricity Market Arrangements which is looking at the non-retail aspects of the market.

        There was a pressing need to reform government schemes as the retail market saw high levels of new entry, in order to expand consumer access and tackle market distortions. However, these changes progressed slowly and were not put in place ahead of the market collapse in 2021. These issues should be largely resolved with passage of the Energy Bill.

        The smart meter rollout has been repeatedly delayed, and significant numbers of consumers are unlikely to have smart meters installed by 2026, even as key market reforms like half hourly settlement which rely on more granular data come on stream.

 

3.43 These delays have been in response to various events including the covid pandemic, turmoil in the retail energy market and Russia’s invasion of Ukraine, which have understandably required changes in priorities. However, the overall impact is a current backlog in policy development in some areas vital to delivering net zero and creating a more functional retail market.

 

4. Recommendations

 

4.1 Some consumers with non-smart prepayment meters missed out on support under the Energy Bill Support Scheme as not all eligible households received vouchers. Future support schemes should be applied automatically, and these households should be prioritised in the rollout of smart metering.

 

4.2  With the prospect of high bills remaining in place for a sustained period, the Government should look to introduce targeted price support for consumers on low incomes with high energy usage.

 

4.3 Improving the energy efficiency of our housing stock should also be a national priority. Such ambitions could encompass the aim of carrying out loft and cavity wall insulation improvements for all fuel-poor households. We estimate this would carry an aggregate capital cost of £1.1 billion and deliver average annual bill savings of more than £550 for a fuelpoor household where both loft and wall improvement is carried out, as well as reducing those households’ need for bill support payments over time.

 

4.4 Suppliers should do far more to discuss support with customers and their representatives, including setting affordable repayment plans.

 

4.5 We would like to see Ofgem learning the lessons from other regulators in terms of ensuring that consumers are at the heart of their approach. The Consumer Duty in financial services regulation requires financial firms to put the interests of the customers first. We think that there is a place for this duty in energy regulation, and would like to see further work from Ofgem which goes towards incorporating this shift in approach with an explicit and consistent focus on outcomes for energy consumers.

 

August 2023

 


[1] Ofgem (2023) Default Tariff Cap Breakdown of the default tariff price cap

[2] Based on analysis of an online poll conducted by Walnut Unlimited for Citizens Advice. A nationally representative sample of 4,268 adults aged 18+ in the UK were surveyed. The figures have been weighted and are representative of all UK adults (18+). Fieldwork was conducted between 2nd — 12th June 2023. Walnut’s social research team is a member of the British Polling Council and abides by its rules.

[3] Living on Empty,’ Citizens Advice, 10 July 2023.

[4] Between the start of January and the end of June 2022 we saw 10,334 different people who were unable to top up their prepayment meters. The equivalent figure for January-June 2023 was 20,154 18,980.

[5] Unpublished 2023 projection provided to Citizens Advice by the Fuel Bank Foundation. 2022 total: 290,908. Citizens Advice has a formal partnership in place with the Fuel Bank Foundation that enables us to provide fuel vouchers to our clients.

[6] ‘Increase in energy exports to the continent raises long-term GB power price predictions,’ Cornwall Insight, May 2023.

[7] ‘Splitting opinion: is splitting the wholesale market the best way to deliver an affordable energy system?’ Citizens Advice, February 2023.

[8] ‘Windfarms cash in on contract loophole,’ The Times, 7 May 2022. Orsted postpones cheap energy contract,’ The Times, 8 May 2023.

[9] ‘UK consumers needed energy relief - a loophole cost them millions,’ Bloomberg, 1 August 2023.

[10]The energy supplier market,’ NAO, 22 June 2022.

[11] National Audit Office (2023) Investigation into Bulb Energy

[12]Gas and electricity prices under the Energy Price Guarantee and beyond,’ House of Commons Library, 7 August 2023.

[13] National Audit Office (2023) Energy Bills Support

[14] Citizens Advice (2022) Citizens Advice response to BEIS consultation on the Energy Bills Support Scheme

[15] DESNZ (2023) Energy Bills Support Scheme GB: payments made by electricity suppliers to customers - GOV.UK

[16] Social Market Foundation and Public First for Citizens Advice Fairer, Warmer, Cheaper: new energy bill support policies to help British households in an age of high prices

[17] Citizens Advice (2023) Living on empty

[18] Tado (2020) UK homes losing heat up to three times faster than European neighbours

[19] Carbon Brief (2022) Analysis: cutting the ‘green crap’ has added £2.5bn to UK energy bills

[20] Social Market Foundation and Public First for Citizens Advice Fairer, Warmer, Cheaper: new energy bill support policies to help British households in an age of high prices

[21] Ofgem (2022) Customers in Payment Difficulty Market Compliance Review

[22] Citizens Advice (2023) Cumulative number of people we've helped with energy debts each year

[23] Ofgem (2023) Involuntary PPM - Supplier Code of Practice

[24] Citizens Advice (2023) Citizens Advice response to Ofgem’s consultation on a framework for consumer standards and policy options to address priority customer service issues