Date: Monday 17 June, 2013
Location: PG Hub 7, Senate House
Topic: UK Fuel Poverty: Is the Liberalisation of Energy Markets to Blame?
Speaker: Jennifer Ljungqvist

About the Speaker: Jennifer Ljungqvist previously did an MA in Economics and International Relations at University of Aberdeen before commencing her MSc in Economics at Warwick. She has in the past done IT Risk, IT Assurance and Health Consultancy work with private and public bodies in the Utilities, Retail, and Aviation, Telecoms, Financial Services and Healthcare sectors. Jen has also long held an interest and done economics research work in Health Economics at e.g. the Health Economics Research Unit in Aberdeen and Environmental Economics. Her undergraduate dissertation was titled ‘The Lack of Corporate Environmental Responsibility Environmental Management in Context’ and her recent research on Energy Poverty for Dr. Monica Giulietti, Associate Professor of Global Energy at Warwick Business School, was the foundation for her 17 June presentation.

Presentation: Though a relatively recent topic in terms of academic literature, with Belinda Boardman leading the way in the 1980s, the subject of ‘Fuel Poverty’ [FP] or ‘Energy Poverty’ is not a recent phenomenon. Three of the main definitions of FP can be outlined as follows:

• ‘Need to Spend’: Households who would spend >10% of their income on fuel to achieve recognised heating standards (rhs) – Used in the UK
• ‘Actual Spend’/ ‘Expenditure Fuel Poor’: Households who actually spend > ‘specified % of their income’ on fuel (often 10% mark used) – Used in Ireland, Australia, New Zealand
• ‘Feel Fuel Poor’: Households who report difficulties in affording sufficient energy for their needs

There is yet to be a commonly agreed definition of the concept, thus comparisons of FP statistics across countries and the value of FP targets is subject to the definition used. The ‘Need to Spend’ definition for instance, unlike ‘Actual Spend’, is promoted for taking into account both those who under-heat their homes and those with high fuel bills but is does not take into account consumer attitudes, perceptions or preferences the way that the ‘Feel Fuel Poor’ definition does.

So why should we care about FP?

First, looking at the UK as an example of a country with colder winters, if vulnerable energy consumers such as older adults, families with young children or the ill do not adequately heat their homes because they cannot afford it or because it costs too much due to rising energy prices and poor insulation then this could have direct adverse effects on their health. The World Health Organisation recommends minimum indoor temperatures of 18C or 20-21C for more fragile elderly adults, but if temperatures are below this there are risks of small adverse health effects (16-19C), increased probability of respiratory or cardiovascular conditions (<16C) or even hypothermia (<10C).

Second, if households do spend enough to heat their homes but this expenditure is a significant proportion of their income then this will affect those consumers ability to spend money elsewhere in the economy and their living standards in general. Research has shown that a large number of fuel poor are also often income poor.

Third, long term solutions to tackle FP such as improved insulation, more cost-efficient use of energy, more educated energy consumers and utilizing waste heat from renewables and other industries (e.g. Combined Heat and Power [CHP]) also tie into today’s climate change targets.

The problem in the UK is a prominent one, there was a rise in the number of fuel poor in England to 2.8 million (13.2%) in 2004-2007 of which 2.3 million were vulnerable households and 56% were in the lowest income percentile. The problem peaked in 2009 (see graph) at a total of 5.5 million households and has since decreased to 4.5 million in 2011, possible correlated to improved insulation and wider use of more cost-effective heating mechanisms such as district heating using combined heat and power (CHP); the efficient use of waste heat from renewable energy sources.

The title of the presentation was whether liberalized energy markets are to blame for FP in the UK. Some of the existing arguments for and against are as follows:

Since the 1990s de-regulation of UK gas and electricity markets the initial rise in prices among prepayment consumers (mostly low income households) as a form of cross-substitution for the decrease in prices for direct debit payments and the prevalence of market dominating energy suppliers (the ‘big six’ in the UK) and distributors (only 7 in the UK) the reform has been criticized for allowing natural monopolies and possible cartels to form and focusing energy companies’ attention on energy pricing rather than efficient supply and use of energy.

On the other hand, more recent data does not support the fear that prices for prepayment users is rising faster. Also, many of the large energy suppliers and distributors argue that the consistent transparency of price changes maintained by watchdogs Consumer Focus, Ofgem and Energy UK as well as the UK Government’s 2000 and 2004 Fuel Poverty targets are providing unofficial pressure on prices, keeping them from increasing significantly.

Final considerations…
Whatever conclusion you reach on the advantages and disadvantage of a de-regulated market Waddams Price (2005) cautions that re-imposing price caps would bring new costs and disturbances in the market. Furthermore, it should be noted that British history of cheap access to coal for heat starting during the industrial revolution, which required large and open air vented buildings and resulted in poorly constructed and insulated buildings, the country’s cultural trend to admire and maintain old buildings and the bas past experiences with energy efficient solutions such as district heating have also played their part in today’s fuel poverty numbers. Whereas the much earlier and wider use of energy efficient solutions in continental Europe in large part grew out of necessity.

The problem of fuel poverty, though prominent, does not only apply to the UK or cold climate countries. The recent summer heat wave of 2013 where a number of fragile energy consumers have died shows that too hot temperatures and the lack of access to or inability to afford cooling facilities such as air conditioning can be equally detrimental to one’s health.

Thus, lessons learned in tackling fuel poverty alongside climate change through more energy- and cost-efficient means such as renewable energy, district heating and/or CHP can be applied to developing as well as developed countries. This will become more and more important as energy use and costs look to continue to increase; see below graphs.

 

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