Report examines fairness in UK retail energy market and fuel poverty

19 Oct 2018

A major study is published today on fairness in the retail energy market and fuel poverty.

Download the report

The report, by the University of East Anglia’s (UEA) Centre for Competition Policy, presents findings from a two-and-a-half-year project carried out as part of the UK Energy Research Centre (UKERC) research programme.

Entitled, Fairness in Retail Energy Markets? Evidence from the UK, the report’s five broad themes cover the long-term context for fairness in the retail energy market; the increasing complexity of the relationship between policymakers and institutions; the way in which people purchase energy; the detailed experiences of those at risk of fuel poverty; and how data and statistics can be improved.

Key findings include:
  • Low-income households spend a much higher proportion of their expenditure on energy than high-income households, and this gap increases as energy prices increase;
  • The current focus of fuel poverty policy on improving the energy efficiency in households does not address all the factors leading to energy affordability difficulties;
  • Regulatory independence has diminished in recent years as government’s duties for the regulator have proliferated and government-regulator communication has increased;
  • Increased government–regulator communication has led to greater opportunities for the government to informally ‘pressure’ the regulator.

Catherine Waddams, professor of regulation at UEA’s Norwich Business School, said:

The book demonstrates why energy markets are so relevant, both politically and to individual households; it explores a broad range of issues, from institutional arrangements to individuals’ lived experience in social housing, all backed by independent academic research.

Economists, legal scholars, human geographers and a policy analyst have worked together on this research. It draws on comprehensive data including a 45-year time series of electricity bills, interviews with social housing tenants and policy makers, and survey data from UK households followed over multiple years.

Dermot Nolan said:

The Centre for Competition Policy’s work on fairness in energy markets is particularly important and timely. As UK energy prices have risen over the last 10 years, public concern over the impact of this has also risen. Politicians, regulators and companies emphasise that prices must be fair, that there must be fair competition between different technologies, and that they must receive a fair hearing.


Prof Watson added:

This report is timely, placing these recent debates and policy interventions in context. It presents new data, evidence and analysis which will, we hope, be of significant value for policy makers and regulators who need to protect consumers whilst driving the transition to a low carbon, secure energy system.

This is a key output from the UK Energy Research Centre (UKERC) research programme, and one of several on the equity implications of energy system change. This essential research strengthens UKERC’s ability to consider equity alongside other key objectives of energy policy.


The report was edited by David Deller and Catherine Waddams Price with contributions from Elizabeth Errington, Amelia Fletcher, Tom Hargreaves, Michael Harker, Noel Longhurst, David Reader and Glen Turner.

David Deller said:

This report brings together a wide range of academic evidence to explain why the energy market has attracted so much political attention and the potential consequences of this politicisation. The evidence we present not only considers how energy expenditures have evolved over the long-run, but also includes interviews with tenants struggling to afford energy and interviews with senior members of the regulatory community. We suggest that the independence of the energy regulator has evolved over time, and the official fuel poverty statistics likely do not capture all aspects of the affordability challenges facing many households.

 
Key points from the research are:
Chapter 2: A Long Term View Of Energy Affordability and its Political Salience
  • Household spending on energy and electricity bills have shown sustained rises since low levels in the early 2000s
  • There are significant variations in electricity bills across regions, dating back to at least 1970;
  • Low-income households energy costs are nearly two and a half times that of high income households – with low income households spending 15.9% of their income on energy compared to 6.6% of income for high income households;
  • Energy costs form a much larger component of household expenditure for low income households than water, telecoms or transport

Chapter 3: Institutions and Policymaking – A Tale Of Increasing Complexity
  • Regulatory independence has diminished in recent years as government energy policy has evolved and its involvement in regulation has increased.
  • The government needs to communicate explicitly its trade-offs between its different policy goals, and which goals the regulator should prioritise.
  • The work of organisations that support householders facing fuel poverty is potentially made more complex because of the variations in Fuel Poverty (FP) policy across the UK nations

Chapter 4: Engagement with Energy Purchases has Many Facets
  • Policymakers need to be aware that engagement can take a variety of forms
  • Householders with affordability challenges may show considerable practical and emotional engagement with the management of energy consumption, even if they do not switch suppliers or tariffs
  • For those on very low incomes the control and predictability of expenditure is key: pre-payment meters may be preferred and switching may be viewed as too risky
  • Engagement with the policymaking process can be problematic. Resource restrictions may limit the ability of charities representing consumer and ‘vulnerable’ groups to engage
  • Identifying persistent non-switchers from basic survey questions may be problematic
  • Measures of engagement for micro and small businesses (MSBs) need to recognise multi-year contracts are prevalent; ‘optimal’ engagement by MSBs is likely to be different to that for households
  • Some MSBs dislike the quantity of communications received from intermediaries, suggesting direct regulation of intermediaries could have benefits
  • Developing statistics and policy around an ‘ideal’ form of consumer engagement may not address the real-world issues facing particular groups

Chapter 5: Fuel Poverty – Characterising a Complex Problem
  • The current focus of fuel poverty policy, improving the energy efficiency of dwellings, does not address many of the factors leading people to struggle with energy affordability
  • The official Low Income High Cost fuel poverty statistic may underestimate the proportion of social housing tenants struggling to afford warmth;
  • Greater weight should be placed on measuring and addressing households’ observable problems rather than the official fuel poverty statistics

Chapter 6: Improving Data and Measurement to Optimise Decision Making
  • Policymaking would be better informed if raw anonymised survey data from sector regulators was publicly shared by default to enable analysis by groups beyond the regulator
  • Prior to 2013, average energy spending by households with prepayment meters will be under-estimated by a large margin if a significant measurement issue in the Living Costs and Food Survey is left uncorrected

ENDS

NOTE TO EDITORS

  • A copy of the research is available here.
  • The Centre for Competition Policy Senior Research Associate Dr David Deller can be contacted on 01603 591617, email david.deller@uea.ac.uk or mobile 07941 958236 for interviews.
  • Dr David Deller is a Senior Research Associate at the Centre for Competition Policy. His research comprises three core themes: (i) consumer behaviour in regulated markets, (ii) affordability and distributional issues in liberalised markets, and (iii) considering the institutions of the ‘Regulatory State’. He has mainly explored these themes through the prism of the UK energy market. His key interests include industrial organisation, regulated industries, and empirical and applied microeconomics.
  • Professor Catherine Waddams is Professor of Regulation in the Norwich Business School at the University of East Anglia and was the founding director of the Centre for Competition Policy. Her main research interests are in the area of Industrial Organisation, and she has published widely on privatisation, regulation and the introduction of competition, especially in energy markets. She is particularly interested in the distributional impact of regulatory reform, and consumer choice in newly opened markets, both in the UK and elsewhere. From 2001 – 2009 she was a part-time member of the Competition Commission, and from 2013 has been a non-executive director of Ofwat. She is a member of the UK Regulators Network expert advisory committee and of Ofgem’s Academic Panel. C.Waddams@uea.ac.uk