The £140 Warm Home Discount introduced to help people in fuel poverty can actually trap some low-income households in bad energy deals and must be overhauled, a new report says.
The Social Market Foundation think-tank found that the Warm Home Discount (WHD) can be responsible for discouraging some low-income customers from switching energy suppliers, increasing the risk that they pay a “poverty premium” or face losing the discount.
The WHD is currently only available from the biggest energy suppliers. SMF interviews and focus group research with low-income customers shows that means some low-income households are dissuaded from accessing the best deals in the market because they fear losing the £140 discount.
The research is revealed in Eliminating the Poverty Premium in Energy, a Social Market Foundation report supported by the Joseph Rowntree Foundation.
The report recommends that the discount should be made available through all suppliers, with the government reimbursing the costs for small providers. This would free up those on low-incomes to switch to better deals, and make the whole energy market more competitive. Eligibility for the WHD should also be standardised across all suppliers and the payment made automatically to benefit claimants. This is particularly important in the context of Ofgem using WHD as its mechanism for targeting its ‘Vulnerable customer safeguard tariff’.
The report identifies a range of extra annual costs that those on low incomes face in the energy market, which can reach £394 per year in the worst cases. Specific premiums include:
• Not being on the best energy tariff: £308
• Using a pre-payment meter: £80
• Paying to receive paper bills: £10
• Not paying by direct debit: £76
The SMF report calls for major changes to the energy market and policy including:
• Introducing an automatic switching mechanism which would move consumers that have been on poor value standard variable tariffs for several years onto better value tariffs. This policy should be designed to replace the energy price cap in the early 2020s so that low-income consumers are protected from rip-off tariffs. Consumers would be automatically enrolled in the scheme unless they opt out.
• Forcing suppliers to offer the same deals to prepayment consumers as they do to other consumers.
• Ending the practice of suppliers charging more to those consumers who receive paper bills rather than electronic accounts.
• The energy price cap should be time limited but a condition of its removal should be that low-income consumers have an alternative method for getting a good deal in the market.
The report also notes:
• A worryingly low proportion (42%) of low-income consumers say they are prepared to have a smart meter installed. Additional requirements may be needed such as setting targets for installing smart meters in households rather than just offering them to households.
• That state-owned suppliers could help boost competition by giving more low-income consumers the confidence to switch providers. Such suppliers, backed by regional and city mayors, could have an important role to play addressing specific local problems (such as the high use of prepayment meters in London).
Report co-author, and SMF Research Director, Nigel Keohane said:
“Low-income consumers are being ripped off in the energy market, and introducing a price cap addresses just one part of the problem and only in the immediate term.
“Reforming the Warm Home Discount, whilst introducing mechanisms to automatically switch consumers onto better tariffs would ensure that low-income consumers are better able to afford to heat their homes.”
Campbell Robb, Chief Executive of the JRF said:
“Families on the lowest incomes spend a far larger proportion of their earnings on essentials such as energy: the poorest fifth spend almost twice as much as a proportion of their incomes on heating, compared with the average household. The fact that many are pushed further into poverty by this premium is just not right.
“Inflation in fuel costs and the freeze on benefits is also reducing the real incomes of low income families locking families in poverty. It is high time we redesign the way the economy and the energy markets work for people on low incomes.”
Notes to Editors
1. The £394 poverty premium calculation is estimated by summing up three premiums that can be experienced at the same time: Not being on the best energy tariff £308; Paying to receive paper bills £10; and Not paying by direct debit £76.
The report can be accessed here: https://www.smf.co.uk/publications/eliminating-poverty-premium-in-energy
Interviews/media enquiries: Please contact Laura Webb, SMF Head of External Affairs and Partnerships on 07502048969 / or email laura@smf.co.uk
About the Social Market Foundation
The Social Market Foundation (SMF) is a non-partisan think tank. We believe that fair markets, complemented by open public services, increase prosperity and help people to live well. We conduct research and run events looking at a wide range of economic and social policy areas, focusing on economic prosperity, public services and consumer markets. The SMF is resolutely independent, and the range of backgrounds and opinions among our staff, trustees and advisory board reflects this.
About the Joseph Rowntree Foundation
The Joseph Rowntree Foundation (JRF) is an independent social change organisation working to solve UK poverty. Through research, policy, collaboration and practical solutions, we aim to inspire action and change that will create a prosperous UK without poverty.