Introduction

The exact definition of what constitutes a social tariff is uncertain, but for the purposes of this paper it is taken to mean any special payment arrangement, over and above those specified by supplier’s Licence Conditions, devised with a view to benefiting disadvantaged energy consumers. The Government’s commitment to eradicate fuel poverty by 2016 has focused the minds of suppliers, and the energy regulator Ofgem, on how innovative tariffs can contribute to this wider policy objective. Consequently there have been a number of tariff initiatives developed by companies to address specific elements of fuel poverty.  Further information on company initiatives can be found on the Social Action Plan section of the Ofgem website.

This paper sets out NEA’s view of the essential elements of a social tariff for domestic energy consumers.

Eligibility criteria

As indicated above, beneficiaries of a social tariff should be those most disadvantaged financially and who can also be categorised as vulnerable. Whilst individual energy suppliers are free to develop their own criteria, and already do so in some of their Corporate Social Responsibility offerings, NEA offers as a potential example those households who qualify for the Department for Work and Pensions’ Cold Weather Payment system[1]. Eligible households comprise: 

•  A household in receipt of Pension Credit
• A household in receipt of Income Support or Income-based Jobseeker’s Allowance and where the benefit includes one of the following:
  • Disability Premium
  • Severe Disability Premium
  • Disabled Child Premium
  • Higher Pensioner Premium
• A household in receipt of Income Support or Income-based Jobseeker’s Allowance and with responsibility for a child under five years old
• A household in receipt of Child Tax Credit which includes a disability or severe disability element

All of these households are on a minimal income and share a further degree of vulnerability through age (elderly or very young) or disability.

The potential customer base

Some 2.8 million households are currently in receipt of some form of Pension Credit and a further 1.5 million non-pensioner households qualify for the Cold Weather payment. Consequently, around 18% of all households in Great Britain would be eligible for a specially developed social tariff. It should be noted that the Department for Work and Pensions can readily identify all of the households who would qualify for this form of social tariff.

The structure of the tariff

Since the purpose of the tariff would be to protect low-income households and to provide them with affordable warmth, one option would be to adopt the fuel poverty formula (a maximum spend of 10% of household income on fuel costs) in determining how much in cash terms a household could afford to spend in meeting energy bills. The theoretical household income would be assumed to be the lowest amount that that household type could receive in Pension Credit, Income Support or Income-based Jobseeker’s Allowance. The virtue of this approach is that, by definition, it removes a household from fuel poverty; the negative aspect is that it completely separates energy consumption from cost and would be extremely unlikely to be well received by energy suppliers. For this reason it is not proposed that a fixed charge scheme of this type be adopted.

Essential criteria for a social tariff

The fundamental principle of a social tariff is that it should offer terms and conditions superior to any other offer available from the supplier in terms of total charges for the number of units of energy consumed. This could be achieved in a number of ways including:

•  A flat rate charge per unit of gas or electricity set at a cost lower than the supplier’s next best offer
• A charging structure equivalent to the supplier’s best existing offer but accompanied by an additional discount e.g. a winter rebate
• A specific number of units of gas and electricity available at a discounted price after which charges for additional consumption are based on the conventional market rates charged to direct debit customers (generally the most competitive tariff)
• Fixed charges for gas and electricity based on property size and dwelling occupancy but underwritten by a guarantee that the level of charges will be X% below the next best offer for that hypothetical level of consumption (following the StayWarm model) 

Energy efficiency

All households qualifying for the social tariff should be offered a comprehensive energy audit, a full package of energy efficiency measures and energy advice. Practical measures would be funded through a combination of Warm Front and Energy Efficiency Commitment Priority Group budgets and should seek to improve the energy efficiency standard of the property to a minimum of SAP 65.  

Since Warm Front is specific to private sector housing and the Energy Efficiency Commitment has no formal fuel poverty objective there is a strong case for an improved hybrid programme that merges the affordable warmth objectives of Warm Front and the considerable funding resources of the Energy Efficiency Commitment in a single, national programme to deliver optimal benefits to the maximum number of households. 

Markets and social tariffs

Whilst NEA has reservations about the role of commercial organisations in delivering social objectives that are properly the responsibility of Government, it seems inevitable that the market will be asked to deliver a solution in respect of social tariffs. NEA considers this to be somewhat dogmatic and confusing since the market is clearly subject to a degree of external control through direct regulatory intervention and rather less direct involvement through Government. Vulnerable low-income households are least likely to participate in the competitive market and NEA would see considerable merit, at least at the present time, in effectively removing certain categories of household from the vagaries of competitive markets. However the degree of prescription required for a universal social tariff is not an option at this time and, in this instance, a modified market is certainly preferable to a free market.  

The Government role 

Seemingly the Government sees a comparatively biddable market (a clear oxymoron) as a means to promote its own fuel poverty objectives whilst stopping short of formal intervention through mechanisms such as the benefits system. It is instructive to note the example of the Republic of Ireland and that country’s operation of Household Benefits Package which last month increased the number of free gas and electricity units provided to low-income elderly households, all persons aged over 70, carers and people with disabilities to 2,400 kWh and 2,226 kWh respectively. 

NEA’s argument that fuel poverty is too important to be left to commercial enterprises receives some support in the recent publication of The Stern Review: The Economics of Climate Change. The Stern Review considers briefly the implications of domestic energy costs in the context of carbon abatement and appears to conclude that subsidies are not the way forward: ‘But it is inappropriate to deal with poverty by distorting the price of energy. Addressing income distribution issues directly is more effective. There are a number of ways to achieve this. One is by indexing social transfers to a price index, taking account of different consumption patterns of poorer groups in the relevant price index for those groups. Other more direct means include making special transfers to those with special energy needs such as the elderly, and the use of “lifeline” tariffs, whereby people using a minimal amount of power pay a sharply reduced rate for a fixed number of units.’ NEA would understand this as an endorsement of our view that whether social or environmental objectives are the issue Government should develop and implement the policy.  

Other issues

A number of additional issues will have to be addressed including how continued eligibility for a social tariff will be monitored and the role of the Department for Work and Pensions in promoting the tariff. However these and other practical details will have to be resolved in discussions involving the energy supply companies, Ofgem and energywatch and relevant voluntary sector organisations. Ofgem should urgently convene a meeting of high level representatives from these agencies to refine and develop the concept of a universal social tariff