Improving the Hills approach to measuring fuel poverty

Transcription

1 Westgate House 2a Prebend Street London N1 8PT Improving the Hills approach to measuring fuel poverty Increasing the evidence base for responses to the Department of Energy and Climate Change s consultation on Fuel poverty: changing the framework for measurement Commissioned by: ACE, CSE and Richard Moore research report 1

2 This report was researched and written by: Toby Bridgeman, Centre for Sustainable Energy Darryl Croft, Abelscroft EI; formerly Association for the Conservation of Energy Pedro Guertler, Association for the Conservation of Energy Richard Moore, Independent Ian Preston, Centre for Sustainable Energy The project team would like to acknowledge numerous stakeholders in the research and their invaluable contributions: William Baker, Consumer Focus, for his vision in commissioning the research, and guidance throughout Donald Hirsch, Director and MIS team at CRSP, Loughborough University for the provision of the Minimum Income Standard (MIS) budgets master for 2010 Jack Hulme, BRE, for information and references on the Green Deal occupancy assessments and on the feasibility of a household-based SAP assessment Christine Liddell, Professor of Psychology, University of Ulster for expert advice and references on excess winter mortality and morbidity Christopher McKee, DECC (Statistics) for advice and additional 1996, 2004, 2007 EHCS, 2009 and 2010 EHS data, formulae, thresholds and control totals for the accurate calculation of the LIHC indicator Jamie Torrens, Fern Leathers and the other members of the Fuel Poverty and Smart Meters team at DECC for helpful guidance at the inception of the research, their feedback throughout, and sometimes robust but always enjoyable debate of the issues And all the participants in the seminar held on October 31 and hosted by Consumer Focus to discuss the emerging conclusions. Synoptic overview [full table of contents follows the executive summary]: Chapter 0 is the executive summary Chapter 1 introduces the drivers for this research Chapter 2 compares the current and Hills proposed definition to identify the aspects of the latter than could be improved upon Chapter 3 proposes an approach to improving the composition of the energy cost threshold Chapter 4 considers options for setting the energy cost threshold differently to provide a better reflection of what constitutes a reasonable energy cost Chapter 5 draws some overall conclusions Outside of the main narrative of the report, Chapter 6 discusses how the fuel poverty gap indicator can be used to prioritise where resources are targeted Outside of the original scope of the research, Chapter 7 introduces the concept of an absolute indicator of fuel poverty based on a household-based SAP and occupancy assessment ACE, CSE and Richard Moore Acknowledgements and synoptic overview 2

3 0 Executive Summary 0.1 Problems with Hills approach to measuring fuel poverty and our proposed improvements Introduction This report comprises our research into the Hills framework for measuring fuel poverty which DECC is proposing as the basis of the Government s new approach to defining the problem. Our research accepts the broad framework proposed by Hills, namely that fuel poverty describes those low income households who face unreasonable energy costs. It also accepts Hills approach for defining low income. However, the research reveals substantial problems with the way in which Hills defines unreasonable energy costs. The research puts forwards practical proposals for addressing these flaws which we consider far better describe fuel poverty. The full research and this summary focus on technical improvements to the Hills approach and on occasion comment on how these improvements could improve targeting. However, we do not discuss in detail the policy implications of the unreformed Hills approach. Nevertheless, these are profound and could potentially seriously undermine concerted Government action on fuel poverty. It is therefore important that stakeholders consider in depth the issues raised by this research. We think we have developed an improved approach that better describes the reality of fuel poverty. We have strongly encouraged stakeholders, including DECC, to support our proposals and continue to do so Defining fuel poverty Whilst Hills correctly identifies problems with the existing 10% fuel poverty definition, there are major flaws with the design of the low income / high cost (LIHC) indicator as proposed. First and foremost, we do not believe that the Hills LIHC indicator adequately defines fuel poverty. While the methodology for calculating the indicator (with its equivalisation of both incomes and fuel costs) is highly complex, the underlying idea that fuel poverty can be measured by determining which low income households have high total fuel costs does not adequately encapsulate the fuel poverty problem. Other than setting a single income threshold and a total fuel cost threshold each year, the proposed LIHC indicator ignores the critical relationship between fuel costs and income which determines the extent to which households can or cannot afford their fuel costs. In the past, the Government accepted the notion that fuel poverty is determined by the extent to which a household can afford its fuel costs, regardless of the total size of those costs. While the Hills review was right to question whether the existing definition adequately measures this, it was wrong to abandon any concern for the continuum of fuel affordability in favour of determining fuel poverty simply on the total fuel costs of all low income households. As a consequence, the Hills LIHC indicator leads to some 1.3 million low income households no longer being classed as fuel poor. Yet these households are below the income threshold and are unable to afford their fuel costs, but have average potential annual fuel cost savings of over 250 or 23%. In the case of F and G-rated homes (according to Energy Performance Certificates) this rises to 570 or 40% potential savings from energy efficiency improvements. These households are clearly not solely in income poverty, yet are not classed as fuel poor under the Hills LIHC indicator. ACE, CSE and Richard Moore Executive summary 3

4 In short, the Hills review misinterprets the problem and as a result, substantially under-estimates the full extent of fuel poverty. We believe that fuel poverty occurs wherever, as the term implies, a household is unable to afford their fuel costs and where this is in large part due to their housing conditions. Unlike the Hills indicator, we do not exclude households with lower total fuel costs, where this is clearly still the case. In our report, therefore, we define those in fuel poverty in a more inclusive and meaningful way as - all households or persons that cannot afford their fuel costs due to a combination of low income and inefficient housing who thereby are not in income poverty alone Comparisons with existing definition The Hills LIHC indicator fails to improve the overlap between the fuel poor and key fuel povertyrelated proxies when compared to the existing indicator. The correlation of the Hills LIHC indicator with low energy efficiency ratings is significantly and consistently poorer than that of the existing definition. Similarly, it does not improve the match between fuel poverty and benefit eligibility. Neither are these comparisons improved substantially by confining the analyses specifically to LIHC low income households, as might have been expected. In practice, this is likely to make the targeting of fuel poverty on the new indicator more difficult than the existing indicator. The extent to which the full income and basic income definitions correlate with vulnerable groups is very similar. However, the LIHC indicator is much worse than the existing indicator in capturing those least able to afford their fuel costs, including those living in the least efficient housing. Reflecting this, the new indicator also performs significantly less well than the existing indicator in both capturing unhealthily cold homes and those households with the greatest level of under-spending on fuel. The poor performance of the LIHC indicator can be addressed through two improvements to the Hills framework: changing the way energy costs are calculated (i.e. equivalised), and changing the way the energy cost threshold is set. 0.2 Improving the composition of the energy costs threshold Problems with the Hills approach The energy cost threshold in the Hills LIHC indicator is based on the equivalised median total energy costs for any particular year ( 1,260 in 2010). The costs are equivalised to account for different types of household and are intended to reflect a reasonable level of energy expenditure. Hills is right to equivalise energy costs. Equivalisation is needed to enable like for like comparison of reasonable costs between different types of household. What is reasonable for a single occupant is different from what is reasonable for a five-person household. Further, what is reasonable for a pensioner couple in a small flat is also different from what is reasonable for a pensioner couple in a large detached property. However, the Hills indicator chooses to equivalise energy costs in the wrong way. First, it chooses to equivalise by household type rather than household size. This appears to reflect a misunderstanding of the English Housing Survey s (EHS) energy costs model, but also leads to the application of equivalisation factors that cover widely different household sizes. Household size is a more accurate and sensible way of accounting for the varying energy needs of different households. ACE, CSE and Richard Moore Executive summary 4

5 Fuel poor households (x 1000) IMPROVING HILLS THE HILLS APPROACH TO MEASURING FUEL POVERTY November 2012 Second, and more importantly, Hills fails to account for dwelling size within the equivalisation process. This has major repercussions: ignoring dwelling size makes it less likely that households struggling to afford their fuel costs in smaller, inefficient properties are defined as fuel poor. Since those below the income threshold are more likely to live in small homes, it also makes it more difficult for low income households to be classed as fuel poor, and so reduces the apparent number of households in fuel poverty G F E D C Dwelling size deciles and average SAP ratings Figure 1: Number of Hills LIHC fuel poor households according to size of dwelling (size deciles) and EPC rating Figure 1 illustrates that, as the dwelling size increases, so does the number of fuel poor households under the Hills indicator. In addition, the energy efficiency of fuel poor homes increases as the dwelling size increases. Fuel poverty therefore appears to be concentrated in larger, more efficient properties. This is despite the fact that a higher proportion of low income households struggle to afford their energy in smaller dwellings than in larger dwellings. Accounting for dwelling size is critical because difficulty affording fuel costs, the lowest temperatures, and the largest under-spending on fuel are disproportionately present in low income households living in smaller dwellings households which the Hills LIHC indicator is intrinsically unlikely to class as fuel poor. This perverse effect is shown in the case studies drawn from the English Housing Survey below pensioner couple A is defined as fuel poor whereas couple B is not. ACE, CSE and Richard Moore Executive summary 5

6 Case studies from the 2009 EHS Pensioner couple (A)... Outright owners, with equity - 235,000 Three bedroom urban detached house 98m 2 Gas fired central heating SAP of 61 unit fuel costs of 14/m 2 Total energy costs - 1,407 Non means tested income, AHC - 12,068 Income after energy costs - 10,661 Below poverty line of 11,135 Minimum (MIS) living costs - 9,925 Residual budget for energy - 2,143 Can afford energy costs - has 736 surplus Energy costs above threshold of 1,270 Fuel poverty gap 137 Dwelling passes HHSRS on excess cold IN LIHC FUEL POVERTY Pensioner couple (B)... Public sector tenants, with no equity One bedroom urban bungalow 47m 2 Electric storage heaters SAP of 31 - unit fuel costs of 25/m 2 Total energy costs - 1,167 Pension Credit income, AHC - 10,412 Income after energy costs - 9,245 Below poverty line of 11,135 Minimum (MIS) living costs - 9,925 Residual budget for energy Cannot afford energy costs has 680 deficit Energy costs below threshold of 1,270 No fuel poverty gap 103 below threshold Dwelling is a Category I health hazard NOT IN LIHC FUEL POVERTY That a household such as Household (B) should not be classed as fuel poor is fundamentally wrong, particularly when Household (A) is classed as fuel poor, despite its higher income and equity, much more energy efficient and healthy home, higher space standards and adequate energy budget. Having the same high fuel cost threshold for a dwelling of 47m 2 as one of over twice the size is inequitable and clearly disadvantages the smaller dwelling in the calculation. Improving the equivalisation process In order to better reflect the number of households in fuel poverty and the depth of the problem, energy costs should be equivalised for household size and dwelling size, rather than just household type. The table below shows the factors that we suggest are used to equivalise energy costs. While our proposed approach results in five times as many factors as those used by Hills these are still less than half the number of factors used to equivalise incomes. Table 1: Proposed energy cost equivalisation factors for improved LIHC Household size Dwelling size useable floor area m 2 < 50 m Single person Two person Three person Four person Five+ persons Unlike the use of unit fuel costs ( /m 2 ), which is discussed then dismissed in the Hills report, the impact of such a change is not to weight fuel poverty in favour of smaller homes, but instead to neutralise the impact of dwelling size. Figure 2 below (equivalent to Figure 1) illustrates that as ACE, CSE and Richard Moore Executive summary 6

7 Fuel poor householkds (x 1000) IMPROVING HILLS THE HILLS APPROACH TO MEASURING FUEL POVERTY November 2012 dwelling size increases, the number of fuel poor households is relatively consistent, as is the efficiency of the fuel poor properties G F E D C Dwelling size deciles and average SAP ratings Figure 2: Number of improved LIHC fuel poor households according to size of dwelling (size deciles) and EPC rating Under the Hills equivalisation factors, 82% of low income households in E to G-rated properties and 6.3% of those in C-rated properties are classed as fuel poor. Our factors increase the former to 93% and reduce the latter to 1.8%. In addition, these factors provide a better match with eligibility for Super Priority Group support, and vulnerability. Importantly, those below the income threshold now have higher median equivalised energy costs than those above the threshold, meaning that the number of households in fuel poverty increases from 2.7m to 3.1m. The effect this has on pensioner couples A and B is shown below both are now in LIHC fuel poverty with, as one would expect, couple B having a significantly larger fuel poverty gap than couple A. Proposed factors: Pensioner couple (A)... Non means tested income, AHC - 12,068 Total energy costs - 1,407 Revised equivalisation factor 1.08 Equivalised energy cost - 1,407/1.08-1,303 Income after energy costs - 10,765 Below poverty line of 11,135 Median equivalised energy cost, ,237 Adjusted threshold - 1,237 x 1.08 = 1,336 Fuel poverty gap - 71 IN LIHC FUEL POVERTY Proposed factors: Pensioner couple (B)... Pension Credit income, AHC, - 10,412 Total energy cost - 1,167 Revised equivalisation factor 0.70 Equivalised energy cost - 1,167/0.70-1,667 Income after energy costs - 8,745 Below poverty line of 11,135 Median equivalised energy cost, ,237 Adjusted threshold - 1,237 x 0.70 = 866 Fuel poverty gap IN LIHC FUEL POVERTY ACE, CSE and Richard Moore Executive summary 7

8 0.3 Setting the energy costs threshold Introduction The argument used in the Hills Review that energy bills below the median are reasonable and indicate a household in general poverty rather than fuel poverty is not borne out by our research. This argument fails to account for whether those households have opportunities to reduce their energy costs. If a household is on a low income, has costs below the median, yet lives in a home where significant fuel costs savings can be achieved through low cost energy measures, then it is their inability to implement these measures rather than purely their low income that makes their costs difficult to afford. These households cannot be said to be income poor alone. Our revised cost threshold, therefore, is set to class households that have significant potential energy cost savings as fuel poor. For the purposes of setting a reasonable rather than an ideal cost threshold, the highest rather than the lowest after improvement energy costs possible are computed, commensurate with achieving a cost saving of at least 10%. The median value of these costs, and of the existing costs where a 10% saving is not possible, is then taken as the energy cost threshold. Two thresholds are determined, one being set by excluding solid wall insulation (SWI) from the improvement measures and the other by including SWI Revised indicators Based on this approach, Table 2 compares the fuel poverty numbers for 2010 generated by three options for a revised LIHC indicator with the Hills indicator. Option 1 shows the changes that occur if just the revised equivalisation is used and the cost threshold remains at the existing median of all households. By allowing smaller dwellings to be covered, the threshold falls slightly and an additional 16% of households, but only 8% more persons, are classed as fuel poor. For the same reason, the average fuel poverty gap falls, giving a 9% lower aggregate gap. Using measures without SWI to set the cost threshold, the number of households classed as fuel poor increases to over four million households. However, the proportional increase in the number of occupants and, particularly, in the aggregate gap is again significantly less. Setting the threshold using SWI further lowers it and increases the number of those classed as fuel poor to nearly 4.2 million, but once again with much smaller increases in persons in fuel poverty and the aggregate gap. Table 2: Options for median fuel cost thresholds using new equivalisation & improved costs, 2010 Equivalised fuel cost threshold ( ) Number of households in fuel poverty (1000s) Number of persons in Fuel poverty (1000s) Average fuel poverty gap ( ) Total fuel poverty gap ( m) Hills Review as Proposed Option 1: Revised equivalised fuel costs only Option 2: Improved housing stock (excl. SWI) Option 3: Improved housing stock (incl. SWI) 1, , , , ,666 3,103 (+16.4%) 4,054 (+52.1%) 4,162 (+58.0%) 7,656 8,286 (+8.2%) 10,921 (+42.6%) 11,344 (+48.2%) ,107 1,008 (-8.9%) 1,432 (+29.4%) 1,481 (+33.8%) ACE, CSE and Richard Moore Executive summary 8

9 Having set a reasonable cost threshold, our energy improvements model was re-run to determine the higher fuel savings that could be achieved in practice for the households failing that threshold, using the same standard measures, but including SWI where necessary. The results are shown in Table 3 for all fuel poor households in Option 2 and also for the 1.3 million with fuel savings that are excluded from fuel poverty by the Hills LIHC indicator. The households in Option 2 but not covered by the Hills indicator have lower absolute savings, but equally high proportional savings, averaging 23% overall. With lower incomes in this group, these are likely to be just as effective in contributing to affordable warmth. Table 3: Average potential cost savings and improvement costs for low income households for Option 2, split by EPC band SAP band All households fuel poor on Option 2 Average Savings ( ) (%) Average imprvmnt cost ( ) No. Hholds (1000s) Fuel poor on Option 2 but excluded by Hills Average Savings ( ) (%) Average imprvmnt cost ( ) No. Hholds (1000s) B C , , D ,866 1, , E ,605 1, , F , , G 1, , , Total ,861 4, ,383 1, Effect of the revisions All of the options significantly improve the correlation between fuel poverty and poorer energy efficiency, as shown for Option 2 in Figure 3. In practice, this is likely to greatly assist the targeting of fuel poverty, as all low income households living in above median energy cost E to G-rated properties can effectively be considered as fuel poor. Although the number in better C-rated dwelling also increases slightly, these still account for only some 2% of the fuel poor and are unlikely to be a high priority for action. Largely as the result of the higher headline totals, the match between fuel poverty and the CERT Super Priority Group is also substantially improved, as is the match with households most vulnerable to cold homes due to both age and illness. ACE, CSE and Richard Moore Executive summary 9

10 % of low income households IMPROVING HILLS THE HILLS APPROACH TO MEASURING FUEL POVERTY November % In fuel poverty Not in fuel poverty 80% 60% 40% 20% 0% A & B C D E F G A & B C D E F G Proposed indicator Revised indicator Figure 3: Percentage of low income households classed as fuel poor in each EPC band for proposed and revised indicators The revised equivalisation and threshold help to balance the distribution of fuel poverty between smaller and larger low income households. For example, the disproportionately high share (36%) of households of four persons or more covered by the Hills indicator is reduced in Option 2 to 28%, close to the 27% of all low income households. Due to its bias towards larger properties, the Hills indicator remains focused on owner occupiers with above average equity. However, the proportion of the fuel poor in the social sectors is increased by Option 2 from under 20% in Hills to 29%. Although this is still less than the 33% of all low income households, this should also make fuel poverty somewhat easier to target. For the same reason, London s share of fuel poverty under Hills (14%) is disproportionately low, while under Option 2 it is nearly 17%, again close to the 18% of all low income households. Reducing fuel poverty Finally we have analysed the potential for reducing fuel poverty by improving the energy efficiency of the housing stock, using the same criteria as for determining the available cost savings. This is a theoretical comparison for 2010 and takes no account of changes in income. Assuming that the improvements, where possible, are spread across the total housing stock, the resulting median and cost threshold from the improved housing stock would be This provides a new total number of fuel poor households of 2.9 million, a reduction of nearly 1.2 million or 28% from the total produced in Option 2. The most significant reductions, however, are in the fuel poverty gap. For Option 2, the potential reduction in the total fuel poverty gap could be as much as 926 million with the new average fuel poverty gap being reduced by 176 or 51%. Table 4 shows the number of households in each SAP band in Option 2 and those remaining in fuel poverty after improvement. It shows that fewer than 6% of the remaining fuel poor would be living in E to G-rated properties while the vast majority would be in D- rated properties or better. ACE, CSE and Richard Moore Executive summary 10

11 Table 4: Existing Option 2 and remaining fuel poor households by SAP bands after improvement Before improvement option 2 After improvement EPC Band Households (1000s) % of fuel poor Households (1000s) % of fuel poor B C D 1, , E 1, F G Total 4, , The above results are based on all homes with significant cost savings available to them receiving improvements. Should fuel poor households receive a disproportionately higher level of energy action than all households, then the reduction in fuel poverty would be greater. To make changes in fuel poverty less dependent on general trends in the housing stock, the cost threshold could still be determined using improved costs, but be based on just the median of higher income households. 0.4 Implications for policy and for measuring progress The DECC consultation deems it potentially necessary to alter primary legislation to reflect the methodology ultimately adopted for measuring fuel poverty. This may involve changes to the scale and timing of the target, possibly both away from eradication (as far as reasonably practicable) and away from It is critical that if primary legislation is altered, that a meaningful target is retained which enables stakeholders to hold the Government to account. The consultation puts forward several options for re-setting the target, namely the number of households in fuel poverty, the fuel poverty gap, and the fuel poverty ratio. We find that adopting our proposals to improving the composition of the energy costs threshold and setting it differently would make the number of low income households living in E, F and G-rated homes a viable and valid basis for a fuel poverty target. This because the overwhelming majority of these households would be fuel poor, and could be permanently removed from the headcount of fuel poor households following improvements to their homes. In addition and while not an immediate part of the scope for the research presented here this report incorporates two accompanying papers which explore opportunities for using a more nuanced fuel poverty gap measure, as well as a household-based SAP and occupancy assessment approach which can tie in directly with any LIHC-based approach to measuring fuel poverty. ACE, CSE and Richard Moore Executive summary 11

12 Table of Contents 0 Executive Summary Problems with Hills approach to measuring fuel poverty and our proposed improvements Improving the composition of the energy costs threshold Setting the energy costs threshold Implications for policy and for measuring progress Introduction WHECA and Hills What is fuel poverty? Energy costs and threshold What is a reasonable cost? Drivers for Government Improving Hills Are median costs reasonable costs? The existing 10% definition What would twice the median look like today Minimum Income Standard: comparing fuel affordability to Hills low income threshold Potential for cost-effective energy efficiency improvements Overlaps with fuel poverty-related proxies Improving the composition of the energy costs threshold Introduction The impact of the Hills equivalisation factors Improving the equivalisation Methodology Accounting for household size Accounting for dwelling size The revised equivalisation factors Effects of the revised equivalisation Setting the energy costs threshold Introduction What are Improved Costs? Potential methodological approaches to Improved Costs Exploring the implications of setting the energy cost threshold differently ACE, CSE and Richard Moore Table of contents 12

13 4.5 Comparison between the Hills LIHC and revised indicator Conclusions Accompanying paper A: finessing the fuel poverty gap Introduction Fuel poverty gaps, income and fuel affordability A fuel poverty rating scale Trends in the fuel poverty gap, 2004 to The ratio of the fuel poverty gap Comparison of fuel poverty gaps under the proposed and revised LIHC indicators Conclusions Accompanying paper B: an absolute LIHC indicator of fuel poverty Introduction A household-based SAP and occupancy assessments The energy cost and income thresholds Better targeting Appendix I calculating twice the median Appendix II Minimum Income Standard: comparing fuel affordability to the Hills low income threshold An alternative approach to the income threshold Comparison of income threshold and EHS/MIS measure of fuel affordability Appendix III Correlations between the definitions and low EPC ratings Appendix IV Correlations between the definitions and benefit/programme eligibility Introduction CERT Super Priority Group CERT Priority Group Eligibility for Warm Front grant (based on the criteria prior to April 2011) Eligibility for Warm Front grant (based on the criteria post April 2011) Appendix V Creating a new vulnerability variable: methodology Introduction Excess winter mortality amongst elderly persons Excess winter deaths amongst younger persons References Appendix VI How the fuel poverty gap and the ratio of the fuel poverty gap are calculated Bibliography ACE, CSE and Richard Moore Table of contents 13

14 1 Introduction 1.1 WHECA and Hills In 2000, Parliament passed the Warm Homes and Energy Conservation Act (WHECA) 1, with a Fuel Poverty Strategy 2 set out the following year. This strategy included a target to eliminate fuel poverty in vulnerable households by 2010, and in all households by The strategy defined a fuel poor household as one that would need to spend more than ten per cent of its income to maintain a satisfactory heating regime. In March 2011, with the 2010 target missed and the 2016 target looking unlikely to be achieved, the (then) Secretary of State for Energy and Climate Change, Chris Huhne, announced the appointment of Professor John Hills to lead a review of the fuel poverty definition and target 3. Professor Hills reported back in October that year with an interim report, following up with a final report in March Professor Hills found that fuel poverty was an issue distinct from general poverty; serious in nature, but that the way it has been measured suffering significant flaws, most notably the sensitivity of the headcount of fuel poor households to fuel prices. He proposed an alternative approach to its measurement, which defined a fuel poor household as one with a low income and facing high costs. Hills s Low Income High Costs (LIHC) measure of fuel poverty defines a household as fuel poor if both its income and energy costs breach a threshold. Regarding income, the threshold is proposed to be 60 per cent of the median equivalised income, after housing costs, plus the individual household s adjusted modelled (required) energy costs. For energy costs, the threshold is proposed as the median modelled energy bill, after adjustment for household type. Under the WHECA, a person is to be regarded as living in fuel poverty if he is a member of a household living on a lower income in a home which cannot be kept warm at reasonable cost. The Hills report states that it is unreasonable for low-income households to have to pay more to keep warm than typical households on much higher incomes. Professor Hills therefore defines unreasonable as having to spend more than the median household would need to. 1.2 What is fuel poverty? The Hills review defines a household in fuel poverty as simply a household on a low income with high total fuel costs. We believe this to be a wholly inadequate definition of fuel poverty, as other than setting a single income threshold and a total energy cost threshold each year, it ignores the continuous and critical relationship between energy costs and income which determines the extent to which households can or cannot afford their energy costs. While the existing definition, being based on costs expressed as a percentage of income, is an inadequate way of measuring the affordability of energy, the proposed LIHC indicator, by totally ignoring the continuum of affordability, is throwing the baby out with the bathwater decc.gov.uk/assets/decc/what%20we%20do/supporting%20consumers/addressing%20fuel%20poverty/strategy/file16495.pdf ACE, CSE and Richard Moore Introduction 14

15 Regardless of the size of their total energy costs, we believe that fuel poverty occurs where, as the term implies, a household is unable to afford their energy costs and where this is in large part due to their housing conditions. In this report, therefore, we define those in fuel poverty in a more meaningful and inclusive way as all households or persons on low income that cannot afford their energy costs and that are not in income poverty alone. While the methodology for calculating the Hills low income high cost indicator (with its equivalisation of both incomes and fuel costs) is highly complex, the underlying idea that fuel poverty can be measured merely by determining which low income households have high total fuel costs, over-simplifies the problem considerably. In the past, the Government has fully accepted that fuel poverty is, by definition, about the extent to which a household can or cannot afford their energy costs, regardless of the actual size of those costs. While the review was right to question whether the existing definition adequately measures this, it was wrong to abandon any concern for the continuum of energy affordability in favour of determining fuel poverty simply on the total energy costs of low income households. A fuel poor household is one that cannot afford to keep adequately warm at reasonable cost (UK Fuel Poverty Strategy 2001) Our final goal is to ensure that every home is adequately and affordably heated (Energy White Paper 2003) 5 Whether a household can afford their energy costs can be determined using the data on income, housing and energy costs from the English Housing Survey (EHS) and data on other minimum living costs derived from the Minimum Income Standard (MIS), using the algorithm: Income (EHS) < Housing Costs (EHS) + Fuel costs (EHS) + minimum living costs (MIS) We accept, however, that it would be politically difficult for Government to use the MIS budgets directly in calculating a new definition of fuel poverty, due to the way these show that, with the exception of pensions, state benefits are inadequate to prevent social exclusion. Consequently, while the EHS/MIS based measure of energy affordability is used in several sections of this report, we are not using the measure in the construction of an improved definition. We are only using the measure to better understand the affordability of energy amongst low income households and to inform the task of improving Hills. 5 ACE, CSE and Richard Moore Introduction 15

16 1.3 Energy costs and threshold As section 1.2 suggests, a key concern with the Hills approach is the way in which energy costs are measured and the resulting energy costs threshold is set. This research project has been commissioned in order to investigate this measure and threshold, and propose amendments that might improve equity and result in a fairer overall indicator of fuel poverty. The proposals within this report should be seen within the context of improving just this facet of the proposed indicator. A wider review of fuel poverty definitions and alternative approaches, such as that undertaken in Northern Ireland and Scotland (where the Hills approach was recently rejected 6 ), has been beyond the scope of this project. As such the suggestions that we make for improving the proposed indicator reflects the scope of the report rather than a general endorsement of the approach taken. 1.4 What is a reasonable cost? The energy cost threshold is the focus of this report, and a central question is what can be considered a reasonable energy cost? Whilst, as Hills identifies, it is clearly unreasonable for low income households to have to spend more than the median household in order to maintain a satisfactory heating regime, it is not clear whether, by extension, an energy bill that sits below the median for a low income household should always automatically be considered reasonable. By defining reasonable as less than the median, the energy costs threshold produced by Professor Hills becomes relative and arguably arbitrary in nature: half of households would always fall beneath it and be facing reasonable fuel costs (whilst half of households would always be facing unreasonable fuel costs). The shifting nature of the median means that it is difficult to reduce the fuel poor headcount through efficiency improvements; as energy costs reduce, so will the median. This is less of a problem on the income side since bringing incomes up towards the median would reduce fuel poor headcount since the threshold is at 60% of the median income. Whilst many aspects of the Hills proposals have been lauded (amongst them the income threshold, income equivalisation, the treatment of housing costs), the LIHC definition has met with near-universal disapproval or consternation with respect to the energy cost threshold. One respondent to the interim report noted that "the Hills Review appears to have produced an energy cost threshold which is both inadequately low, yet practically unobtainable for 50% of all households. 1.5 Drivers for Government Alongside the concern that households facing what many would consider unreasonable costs will no longer be considered fuel poor, is a question over how the LIHC approach will affect central and local government attitudes to the eradication of fuel poverty. Hills argues that the existing ten per cent definition has led to inaction because of the high sensitivity to fuel prices. However, there are equally valid concerns over the political impact of the LIHC definition. For example: Whilst Professor Hills states that policies to improve the thermal efficiency of the housing stock would tend to be the most cost-effective approach to tackling fuel poverty, the fact that improving efficiency reduces the median and brings additional households into fuel poverty might reduce motivation for Government to use this route to alleviating fuel poverty. Instead, 6 Environment/Housing/warmhomes/fuelpoverty/ScottishFuelPovertyForum/SFPFinterimreportmay012 ACE, CSE and Richard Moore Introduction 16

17 Government might look to less cost-effective solutions such as income support (which, if households are taken above the 60% threshold, would result in a reduction in fuel poor numbers) or energy price support measures at the expense of, rather than complementary to, energy efficiency improvements. With a relatively constant number of fuel poor households, Government might decide that the effort in tackling fuel poverty does not give sufficient political reward to resource adequately. Whilst Hills acknowledges that the LIHC headcount indicator is unlikely to reach zero under the proposed indicator, the complimentary measure the fuel poverty gap is expected to show change over time, and would be reduced as efficiency measures are installed. The measure is responsive to fuel prices, but it is less sensitive to fuel price changes than the headcount of fuel poor households is under the existing definition. However, the fuel poverty gap will only act as a driver for the deployment of energy efficiency measures if current policy is specifically linked to it. For example under the Energy Company Obligation (ECO), the cost per point saved (i.e. the cost of achieving heating cost reductions under the ECO s Affordable Warmth obligation) will drive the type of measures that are supported by the ECO. In practice, the practical policy link to the fuel poverty gap could only be established in the context of the ECO if (say) the fuel poverty gap reduction, as measured for each household receiving support, counted towards the Affordable Warmth obligation. The problem of a lacking link between measuring fuel poverty and programme design / delivery is not new, but the Hills review could have made more of its opportunity to bring the two closer together. 1.6 Improving Hills During the course of this research, the Government issued a consultation on the proposed LIHC definition of fuel poverty. The principal aim of this research is to ensure that stakeholders, who may well find the LIHC concept technically difficult to fully grasp and comment on, are aware of improvements that could be made in order to improve its fairness, and that fuel poverty policy is as a result targeted at those households that are in most need of help. The intention is to see the Hills definition strengthened so that it better identifies households that are in fuel poverty, and sends the correct signal about the urgency and manner in which the problem should be addressed by the relevant stakeholders involved in programme design and delivery. ACE, CSE and Richard Moore Introduction 17

18 2 Are median costs reasonable costs? Chapter Summary The issues: If the proposed LIHC definition is overlaid on top of the existing 10% definition then 694,000 low income households would be removed from fuel poverty. The Hills report argues that for these households the issue is one of low income rather than high energy costs, and therefore that they should be considered as being in income poverty but not fuel poverty. The homes they live in are generally smaller and as such have lower energy costs. However, the Hills Review fails to adequately consider the whether they can be kept warm at reasonable cost. The findings: The income threshold under the LIHC indicator provides a good match between who is deemed to be on an LIHC low income and who struggles to afford their fuel. However, comparing the existing and the proposed LIHC definition against a range of fuel poverty proxies shows correlations between these proxies and being defined as fuel poor not improving under the LIHC approach. For some proxies, the LIHC definition offers a significantly worse match. This leads us to conclude that the proposed energy cost threshold is not a good test of what constitutes reasonable costs. Proposed solution: Re-examine both the way the energy costs threshold is composed, and the level at which it is set. The WHECA defines somebody as being fuel poor if they are a member of a household living on a lower income in a home which cannot be kept warm at reasonable cost. The LIHC measure of fuel poverty as proposed by Professor Hills argues that it is unreasonable for low income households to have to spend more than the median household to keep warm. By extension, every household with an energy cost requirement lower than the median therefore represents a reasonable cost. This chapter assesses whether the LIHC energy cost threshold proposed can be seen as an appropriate threshold for reasonable energy costs, through assessing the nature of those households above and below the threshold, comparing with alternative measures of reasonableness : Existing 10% threshold The twice the current median threshold The Hills income threshold and fuel affordability in relation to a minimum standard of living Whether or not cost-effective energy efficiency improvements are possible in the home and checking overlaps with the most common proxies used for targeting fuel poverty support: Energy efficiency ratings Benefit eligibility Vulnerability Self-reported fuel poverty Fuel affordability Cold homes Under-spending on fuel ACE, CSE and Richard Moore Are median costs reasonable? 18

19 Energy Costs IMPROVING HILLS THE HILLS APPROACH TO MEASURING FUEL POVERTY November The existing 10% definition At its heart, the existing fuel poverty definition measures the number of household for whom a satisfactory level of energy consumption would require an excessive proportion of income, with excessive considered to be over 10%. In 2010 there were 3.54m households in fuel poverty in England under this full income definition. The threshold was fixed at 10% since this was twice the median fuel expenditure as a share of income in In other words, one half of households at the time spent five per cent or less of their income on fuel, the other half spent more. Ten per cent was also, coincidentally, the actual average level of spending by the poorest three-tenths of households in Based on the English Housing Survey (EHS) 2010, 54% of households that would be required to spend more than 10% of their income on energy costs would not meet be considered fuel poor by the LIHC approach currently proposed: 1.1 million of them because they exceed the income threshold once taking into account their required energy costs, 700,000 because their energy costs are below the median, and 97,000 households that did not fail either threshold (Figure 4). 694,000 beneath median costs threshold 97,000 beneath median costs threshold and above income threshold 1,624,000 meet the LIHC requirements 1,121,000 above income threshold Income Figure 4: Distribution under the LIHC indicator of the 3.54m household currently defined as fuel poor The LIHC definition would therefore remove 694,000 low income households from fuel poverty that would need to spend more than 10% of their income for adequate warmth. The Hills report argues that for these households the issue is one of low income rather than high energy costs, and therefore that they should be considered as in income poverty but not in fuel poverty. We test this (at face value intuitive) proposition in later chapters. In chapter 3 we assess whether the absence of accounting for dwelling size unfairly penalises those on low incomes in small homes. In chapter 4 we further test whether it is right to assume that any household with energy costs above the median can be considered as facing reasonable energy costs. ACE, CSE and Richard Moore Are median costs reasonable? 19

20 2.2 What would twice the median look like today The interim report from the Hills Review 7 included a discussion on the implications of calculating a twice the median threshold for each year that the fuel poverty statistics are reported. As discussed above, this was the original calculation behind the current 10% fuel poverty definition. The project team consulted with DECC to establish the methodology used in the Hills Review to calculate a twice the median threshold. The team corroborated the final methodology used by reproducing the 9% threshold generated in Table 5 below shows the values published in the Interim Report. The methodology has been described in full in Appendix I to allow reproduction by others. Table 5: The thresholds for twice the median as derived from the Living Costs and Food Survey (UK sample) Year Spend on fuel as a proportion of income (%) Twice fuel spend as a proportion of income (%) 1995/ / / / / The team examined the Hills Review s twice the median threshold using the 2010 Living Costs and Food Survey. Table 5 shows that the threshold rises to 9.4%. If this threshold is applied to the 2010 English Housing Survey then there would be 3.98 million fuel poor households, an increase of 440,000. Figure 5: Distribution under the LIHC indicator of the 3.98m households defined as fuel poor using the twice the median approach in ACE, CSE and Richard Moore Are median costs reasonable? 20

21 Figure 5 shows the distribution of the 57 per cent of household that would be required to spend more than 9.4% of their income on energy costs but would not be classed as fuel poor under the LIHC proposals: 1.3 million because they exceeded the income threshold once taking into account their required energy costs, 810,000 because their energy costs are below the median, and 130,000 households that failed to meet either threshold. 2.3 Minimum Income Standard: comparing fuel affordability to Hills low income threshold The Hills fuel poverty review proposes that the low income threshold for fuel poverty should comprise the general poverty line of 60% of the median equivalised income of all households, after housing costs, (see Appendix II) but with the addition of equivalised fuel costs for each individual household. The Minimum Income Standard (MIS) living cost budgets can be used to assess household budgets to determine a measure of fuel affordability. This section assesses the relationship between fuel affordability and income using the MIS. A full methodology is given in Appendix II. The 2010 MIS-based analysis increases the number of households estimated to have an insufficiently large residual income to be able to afford both their fuel costs and a minimum living standard from under 5.9 million in 2008 and 5.8 million in 2009 to nearly 6.3 million in The increase appears mainly due to the 2010 MIS review which, while lowering some budgets by between 1.3 and 1.6%, increases the total living cost budgets, after housing and fuel costs, of the majority of household types by between 0.5% and 3.9% above inflation. Table 6: Proposed income threshold by EHS/MIS based definition of fuel affordability (2010) Thousand households/row percentage/column percentage EHS/MIS based Low Income/High Costs definition Total definition Income fails threshold Income passes threshold households Can afford fuel costs ,003 15, Cannot afford fuel costs 5, , Total households 5,679 15,921 21, As shown in Table 6, the proposed income threshold correlates closely with the MIS-based calculation in some respects. The proportion of households under the proposed LIHC income threshold that also fail the MIS based definition is 95% in Table 7 shows for each of the years 2008, 2009 and 2010, the number and percentage of low income households who could and could not afford both their fuel costs and a minimum living standard. For the former, it also shows the extent of their surplus income as a percentage of their residual income, after housing costs (AHC). It shows a consistently high proportion of low income households unable to afford their fuel costs and for those that could, that their surplus income was generally small and in many cases probably insufficient to cover any major rise in fuel prices. ACE, CSE and Richard Moore Are median costs reasonable? 21