Cost, efficiency or income? The main drivers of fuel poverty

NII_icons_RGB-01This week is “Cold Homes Week”, the biggest public campaign to raise awareness of fuel poverty in the UK. So we thought it would be worth sharing some of our views and concerns around fuel poverty, one of Nesta Impact Investment’s priority areas of investment under our Sustainable Communities theme.  

It's clear that fuel poverty is one of the UK’s biggest social issues. Recent government statistics estimate that it affects 4.5m households in the UK including vulnerable children, old people and those with long term illnesses or disabilities.

Research suggests that fuel poverty is caused by 3 main drivers:

1) The cost of energy – which has doubled over the last 10 years
2) Poor thermal efficiency of building stock and the consequent inefficient use of domestic energy
3) Low disposable incomes.

How much each of these factors affects the fuel poor is one of our questions, but our main question is to what extent these drivers can be influenced to make a lasting difference for the fuel poor? The Government’s announcement this week that they will ban the letting of the draughtiest homes is a welcome example of the levers available to the state in fighting fuel poverty, but what about options for businesses, charities or social enterprises?

1)      Cost of Energy

About 50% of an energy bill is dependent on commodity (“wholesale”) prices and 20-25% is dependent on distribution costs like the national grid that can’t be easily changed. That basically leaves 25% of the bill, of which 10% is VAT and government obligations, and the remaining 15% is what energy suppliers charge to manage accounts.

If 85% of the cost of energy is dependent on global market prices and delivery costs that keep going upwards, would a reduction in the remaining 15% make a huge difference to those in fuel poverty? Or would a better solution be transitioning to other cheaper and renewable sources of energy?

2)      Efficiency vs waste4270845019_2aea518dcc_z

Our main question here is whether improving the stock of houses will be enough to drive people out of fuel poverty. We believe something much bigger comes into play: habits and behaviours. We certainly believe that behavioural change needs to be a big part of the process to end fuel poverty; people don’t only need insulation and secondary glazing but they need to get into the habit of closing windows and turning off heaters.

3)      Low disposable incomes

There are several social initiatives trying to reduce poverty levels in general around access to education and employment. However, it might be too short sighted to just wait until poverty is reduced considering that 20-30,000 people die from cold each year.

Some of the roots to fuel poverty are highly related to other social issues like financial exclusion. There are peculiarities to the energy market which mean that those deemed to be the highest credit risk are made to pay upfront at a higher tariff level than those who pay in arrears through direct debit.

So, what are we looking for?

At Nesta Impact Investments, we have been looking at a variety of interventions that aim to tackle fuel poverty from different angles; from the emergence of new Energy Supply Companies to switching and group buying platforms, through to energy informatics companies, housing retrofit programmes and in-home device businesses aiming to influence occupier/user behaviour.

Each intervention has the potential to create savings in energy bills for people in fuel poverty; yet, some of them are arguably only short term solutions, particularly when behavioural issues are not considered or when switching becomes counterproductive as soon as suppliers raise tariffs on the second year.

What kind of interventions will bring the biggest benefits to individuals in fuel poverty - not just in short term savings but in a long term sustainable way? We continue to seek an answer to this question and we invite you to share your insights with us.


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By Mireya Alvarez - Nesta Impact Investments