What happens when you privatise energy policy?

CSE’s Ian Preston explores the problems

30 June 2014

What happens when you privatise energy policy? The simple answer is you lose control and focus. The complex answer is more of a long ramble which I will try and summarise here.

In the Hills Review of Fuel Poverty (2012), DECC officials concluded that policies to improve the thermal efficiency of the housing stock would tend to be the most cost-effective in reducing fuel poverty. They also found that the supplier-funded policies had the highest Net Present Values (because they would deliver the most cost-effective package of measures). Narrowly targeted supplier-driven policies, such as Affordable Warmth within the Energy Company Obligation (ECO), have the largest effects on fuel poverty, on the assumption that suppliers do react to their incentive to maximise cost-effectiveness.

DECC’s analysis is more and more focussed on the use of Net Present Value and Marginal Abatement Cost Curves (MACC). These economic metrics help them prove their case to HM Treasury and further justify the use of energy suppliers who do things efficiently. Sadly, a spreadsheet or computer-based model of energy policy, which people like me find mightily exciting, completely fail to provide any context in terms of the human face of fuel poverty and the actual needs on the ground.

The cost of living is increasing for many households in the UK. Rising prices for essential goods and services, combined with static or falling incomes, is putting increasing pressure on the household budget and the cost of energy is a key factor in this. The issue of rising energy prices is further exacerbated by income levels having not kept pace. Research published by uSwitch in January 2013 indicates that the average household annual energy bill rose by some 117% between 2005 and 2012, while average household income increased by 33% on average in that time.

The only policy that currently provides energy efficiency measures to the fuel poor is the Affordable Warmth aspect of ECO. This scheme mainly delivers gas boilers to householders with broken boilers. The suppliers have effectively achieved their current targets, meaning that there is little funding available. As a result, the recent clearing price on brokerage for this scheme has fallen to 8p per point. This means that contractors are promoting boiler offers with an advertised customer top-up contribution. (This was recently confirmed to us by installers).

An economist might see this as a success story, as it's viable to support boilers at a lower rate - however, nobody knows the source of this customer contribution and/or the impact of that expenditure on a low income, fuel poor household. How will they afford to make a contribution towards the cost of the boiler? Are they going to turn to high interest short-term unsecured lenders? 'Affordable Warmth' may well have become unaffordable for some of the people it was designed to help. On the human level, that's not such a success story.

Whilst the previous scheme, Warm Front, had its critics, it provided free heating systems to those who needed them and generally did a very effective job of leveraging money from supplier-funded schemes for insulation. But beyond this it also sent out a message to the public and to the energy suppliers. To the public, it said that the Government thought that this stuff was important. To the suppliers, it said that we were working together to get what’s needed done.

The recent changes to ECO and its £245 million windfall to suppliers also highlights the total loss of control that privatisation brings. By reintroducing an exchequer-funded scheme for energy efficiency, the Government would re-establish some control over energy policy, establish a commitment to the forthcoming fuel poverty strategy and bring a sense of us ‘being in it together’, as the Prime Minister used to say.

With control comes the chance to do something that goes beyond the MACC curve and allows some imagination. For example, bringing health and energy policy together to tackle the cost of cold homes on the NHS. Cold-related illnesses cost the NHS over £1bn per year, but there's been a failure to really get the health sector involved.

So I'm encouraged that NICE (with CSE's input) have now drawn up draft guidance on tackling the health impacts of cold homes, with a particular focus on the role to be played by the health and social care sectors. They are better placed to address the challenge of fuel poverty from the 'human' end, making sure that energy efficiency improvements get to those who really need them. GPs and social workers are going to be better than even the cleverest spreadsheet at identifying people with cold homes. They might also be able to increase the take-up of these home improvements, so that people actually go through with the installation. Who are you more likely to listen and respond to - someone from the energy company that's been hiking your bills, or your GP?

The NICE guidance is currently open for consultation. Personally, I'd recommend a 'Healthy Homes Programme,' which would:

  • Prescribe a basic level of insulation and heating control for those with cold-related illnesses.
  • Provide a full set of heating controls, repairs to heating systems and lower cost insulation measures.
  • Make the scheme available to those with cold-related illnesses i.e. Chronic Obstructive Pulmonary Disease (COPD), Ischaemic Heart Disease (IHD), asthma and depression.
  • Improve the health of the UK population by driving improvements to housing standards. The cost of the measures should be offset by reductions in the expenditure required to treat these illnesses in the NHS. The first two years would be accompanied by a monitoring programme to monetise these savings.

This Healthy Homes Programme would address one of the key barriers to working with GPs and frontline health staff - at the moment, when they refer people with ill health to existing schemes there is no guarantee that they will actually get support. I’d like to see all three of the main political parties putting this into their manifesto for 2015.

Image: iStock.com

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