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Controlling fuel poverty during the transition

01 December 2009, 20:33 CET
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The transition from a fossil fuel economy to a renewable one, and the use of low-carbon bridge technologies like nuclear power and carbon capture and storage (CCS), will cost billions.

Ed Miliband, UK Energy Secretary, said recently: “you can have cheap energy, or you can have clean energy, but you can’t yet have cheap, clean energy”.  By 2040 or 2050 renewable energy from the sun or the wind or the waves or the tides will be less expensive than coal and oil are today, and there will be massive improvements in energy security, which will have financial as well as many other advantages.  It will no longer be necessary for the US and UK to invade countries like Iraq to get at the oil.  But the transition from a fossil fuel economy to a renewable one, and the use of low-carbon bridge technologies like nuclear power and carbon capture and storage (CCS), will cost billions.  

Should this transitional cost be paid out of taxation receipts, or via fuel bills?  Higher fuel bills encourage energy efficiency, but have a significant social impact: poor people living in leaky buildings sometimes cannot afford to keep warm, and each winter many of them die.  This is a greater problem in the UK, given the very poor state of the housing stock, than it is in colder countries such as Scandinavia.  This is not surprising, since Scandinavia performs better on most issues than does the UK.  More surprising is that winter fuel deaths are proportionately higher in the UK than in Russia.   

In theory, therefore, the cost should be paid out of progressive taxation like income tax.  But in practice, we cannot afford to wait until governments have got their deficits under control before beginning the low-carbon transition.  Much of the money will have to be collected via fuel bills.  This can be through explicit levies, as the UK government is now proposing to fund CCS, or through cap-and-trade schemes such as the EU Emissions Trading System, or through a Feed-in Tariff/net metering, or through a Renewable Obligation/Renewable Portfolio Standard.  These will all increase fuel prices.

‘Fuel poverty’ – the name given to the situation in which people have to spent more than 10% of their income on fuel – is prevalent in the UK, mainly because of the awful state of the building stock.  The Government has set targets to reduce this, but the targets will be missed (see article by Prashant Vaze).  Fuel poverty will be a major issue for whichever UK government is elected in 2010, and if it is the Conservatives they will be well aware of this.  Party leader David Cameron was an Adviser to the Treasury when the last Conservative government put Value Added Tax onto domestic fuel, and this caused enormous (and legitimate) opposition.  

So what should be done to control fuel poverty during the low-carbon transition?  Overall, redistribution of wealth is greatly needed in the UK: fuel poverty is just one form of poverty, and levels of inequality have actually increased during 12 years of Labour government.  But there are three specific steps on fuel poverty that any government should take:

1.  Prevent energy companies collecting higher tariffs from poor customers than from rich ones.  Those who pay by direct debit have a lower tariff than those who do not – possibly because they do not have a bank account.  Those who pay in advance by pre-payment metres, possibly to help control their budget, pay higher tariffs still.  This is unacceptable.  Energy companies may argue that the costs of operating pre-payment metres are higher, and that these costs need to be recovered.  But the costs could and should be recovered from all customers, not just the poor.  Cross-subsidy from rich and middle-income customers to poor customers is entirely justifiable.

2.  Require energy companies to offer a lower tariff to those identified as vulnerable to fuel poverty. In the UK, utilities offer Social Tariffs to such people.  These are voluntary – though introduced only after extensive ‘negotiation’ with government.   Government has now said that in future they will be mandatory, and an Energy Bill that would make them mandatory is now before the UK Parliament.  There are other valuable aspects to the Energy Bill, including a levy to fund CCS (which would obviously increase fuel poverty without mandatory social tariffs), so it should be supported.  It will definitely pass the House of Commons, where Labour has a majority, but may not pass the unelected House of Lords, where no party has a majority.

3.  Improve the private rented sector.  Privately-owned properties that are rented out include the worst examples of heat inefficiency.  The ‘tenant-landlord problem’ is much debated: the landlord could improve the state of the building, but the tenant pays the fuel bills.  Government has talked about making it compulsory for owners to improve the energy rating of properties before letting them out, but this was met with a threat that many properties would be withdrawn from the market.  A better way would be to require landlords to improve the energy rating if a tenant asks for it. Landlords wouldn’t be likely to keep properties off the market just because a tenant might ask for improvements.  I live in a rented flat, with large single-glazed windows.  It gets pretty cold.  The cost of double-glazing would only be a couple of weeks rent.  

Some fuel-poverty campaigners argue that the tariff should increase as more fuel is used, so that the first 100 units cost x, the second hundred 2x and so on.  This is referred to as a rising block tariff. A scheme like this is used in California.  But it would not be appropriate in the UK.  Some poor people live in old, very inefficient homes.  If they are retired, or unemployed, or ill, or have young children, they will need to use a lot of energy.

By Stephen Tindale

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Climate change is the most serious issue ever to have faced humanity. Rightly, it is now high on the public, political, media and business agendas. However, too much of the discussion is still about what we should not be doing or what we should be against. There is not enough discussion or information on solutions - what we can and should do to minimise dangerous climate change, and what should be done to make us not only safer and more secure, but also richer and happier.


Stephen Tindale photoStephen Tindale (writer and co-founder) is a climate and energy consultant, who has worked on climate change for the last 20 years. His current portfolio includes work for npower renewables and for the Centre for European Reform. He is also a Visiting Fellow at the Policy Studies Institute. Stephen lives in London.