Fuel PovertyThe problemand its measurement

Interim Report of theFuel Poverty Review

John Hills

Approaching theTerms of Reference

Derek Lickorish

Chairman, Fuel Poverty Advisory Group

SLIDE 2

Welcome

Professor John Hills

Independent Review of Fuel Poverty

Interim report

1. Whether fuel poverty is a distinct problem

2. If so, how fuel poverty is best measured and does the current approach to measurement capture problems effectively?

Final report

3. Implications of measurement for the way we understand the effectiveness of the range of policy approaches to reducing it

Approaching theTerms of Reference

SLIDE 3

Causes offuel poverty

SLIDE 4

Causes

- Fuel poverty is caused by a lack of control of energy bills or inability to convert cash into heat

- Dwelling size and SAP rating have greatest impact on the size of the energy bill

- Those on low incomes are least likely to be on the best tariffs, e.g. not on direct debit

- Government policies have different effects on different households The net effect on different income groups depends on the how the interventions financed by those policies are distributed

SLIDE 5

Impacts offuel poverty

Impacts

- There is strong evidence relating to specific health impacts e.g. cardiovascular and respiratory problems below certain temperature thresholds, especially for the elderly

- A conservative estimate of the number of excess winter deaths caused by fuel poverty is 1 in 10 or 2,700 – more than the number of road deaths last year

- There is an association between cold homes and other social problems such as isolation in adults and poor educational attainment in adolescents

- Those who are fuel poor but not living in cold homes do so at the expense of other essential and non essential goods e.g. heat or eat

SLIDE 6

- Unequal ability to convert cash to warmth

- Pushed into poverty by high costs

- Poor pay morePoverty

-High rate of EWDs and morbidity issues in general

- Mental health and social well-being

- Social isolation

Health

-Capital investments out of reach for some

- Potential obstacle to carbon mitigation policy delivery,especially wherecosts go on bills

Carbon /

Energy

Perspectives onfuel poverty

SLIDE 7 PERSPECTIVES ON FUEL POVERTY

Warm Homes and EnergyConservation Act 2000

“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.”

Warm Homes and EnergyConservation Act 2000

“A person is to be regarded as living “in fuel poverty” if he

or she is a member of a household living on a lower

income in a home

which cannot be kept warm at reasonable cost.”

Is this what we currently measure?

What a good indicator can do

- Monitor trends and underlying changes

- Indicate extent, depth (and

possibly persistence)

- Identify the kinds of people

affected

- Support policy design and

assessment Steps 1 to 4 courtesy of Prof C Liddell (NI Review 2011)

Why measurementmatters

SLIDE 8

Current definition

A fuel poor household is one that would need to spend more than 10% of its income on adequate warmth.

SLIDE 9

The currentindicator

SLIDE 10 THE CURRENT INDICATOR

Strengths

Needs-based Sensitive to three key drivers- Modelled assessment - Income- Doesn’t count being cold as success - Energy efficiency

- Prices

Weaknesses

Fixed threshold Over-sensitive- No clear rationale - Is unduly dominated by prices- No longer current - Technical issues also have big- Shows tail of distribution impact (e.g. reporting of low

incomes and temperatureRatio standards)

-Numerator / denominator problemUnreliable- Misreports trends- Distorts policy choices

SLIDE 11

Options for measurement

ModellingFor each option we have modelled how many households would have been captured by each definition from 1996 to 2009 (not all years). We have also modelled household and regional composition for 2004 and 2009.

Minor adjustments Fundamental changes

A After housing costs D After fuel costs poverty

B Twice median spending E Low income – low SAP

C Fuel poverty gap F Subjective

SLIDE 12 OPTIONS FOR MEASUREMENT

Option A – After housing costs

- Involves measuring income AHC and adjusting threshold (13.6%)

- A very common demand in the evidence gathering exercise

- Gives a better account of affordability

- Shifts composition by type and region

SLIDE 13 OPTIONS FOR MEASUREMENT

Option B – Twice median spending

- Involves adjusting threshold each year, tracking median expenditure

- Therefore a relative measure, in spirit of original

- Can be done Before Housing Costs (as here) or After Housing Costs

Option C – Fuel poverty gap

- Involves measuring the ‘distance’ of fuel poor households from the threshold

- Gives a sense of the depth of the problem (how badly affected households are), alongside the extent (how many households are affected)

- But calculating this distance could compound some of the weaknesses of the current indicator, effectively double-counting the effect of price changes

SLIDE 14 OPTIONS FOR MEASUREMENT

Number of households(millions)

Fuel poverty gap(£ billion)

SLIDE 15 OPTIONS FOR MEASUREMENT

Option D – After fuel costs poverty

- Takes the DWP 60% median AHC income poverty line and adjusts it for fuel spending (based on modelled need)

- Some households become fuel poor who were not income poor (e.g. B)

- Some income poor households do not become fuel poor (e.g. A)

See Figure 6.3 in report.

After fuel costs poverty

Option E – Low income – low SAP

- Borrow from WHECA: overlap of low income and low SAP (i.e. poor energy efficiency)

- Paints a stable picture, but does not respond to prices or reflect modelled need patterns

SLIDE 16 OPTIONS FOR MEASUREMENT

See Figure 6.5 in report.

Option F – Subjective measurement

- Has the advantage of measuring how people feel, but ...

- Individual perceptions may differ from society more generally.

- Elderly people often don’t self report problems.

- Specific phrasing of a question may alter the response.

SLIDE 17 OPTIONS FOR MEASUREMENT

See Section 6.6 in report

SLIDE 18 OPTIONS FOR MEASUREMENT

Overview of Options A to E

SLIDE 19 OPTIONS FOR MEASUREMENT

Insights

A After housing costs D After fuel costs poverty- Better reflects affordability - Reflects those pushed

into poverty by high costs

B Twice median spending E Low income – low SAP- Relative to contemporary - Captures some

of the spending, not fixed overlap within

WHECA

C Fuel poverty gap F Subjective- Additionally measures depth - Useful cross-check of problem

Is it possible to bring these insights together?

G

Low income andhigh costs indicator

SLIDE 20

Low income high costs,including a fuel poverty gap

Our analysis suggests we want something that is focused on needs, that measures income after housing costs, that reflects the relative nature of costs, that focuses on the overlap set out in WHECA and that measures the depth of the problem.

The basic definitionUnder this indicator, a fuel poor household is one that :- faces higher than typical costs; and- were it to spend that amount, would fall below the poverty line

SLIDE 21 LOW INCOME AND HIGH COSTS INDICATOR

The broad concept

See Figure 7.1 in report

See Figures 7.2 and 7.3 in report

SLIDE 22 LOW INCOME AND HIGH COSTS INDICATOR

The more detailed concept

Fuel povertygap

We are consultingon how to set the thresholds.

Fuel poor under current definition

Not fuel poor under current definition

2004 prices

SLIDE 23 LOW INCOME AND HIGH COSTS INDICATOR

Relationship between the Low income – high costs indicator and the current definition

Low costs – high income boundary

Median income

Fuel poor under current definition

Not fuel poor under current definition

2004 prices + 75%≈ 2009

SLIDE 24 LOW INCOME AND HIGH COSTS INDICATOR

Relationship between the Low income – high costs indicator and the current definition

Low costs – high income boundary

Median income

Fuel poor under current definition

Not fuel poor under current definition

2004 prices + 150%

SLIDE 25 LOW INCOME AND HIGH COSTS INDICATOR

Relationship between the Low income – high costs indicator and the current definition

Low costs – high income boundary

Median income

SLIDE 26 LOW INCOME AND HIGH COSTS INDICATOR

Number of fuel poor households and aggregate gap

Number of households (millions)

Fuel poverty gap (£ billion)

Conclusion andconsultation

SLIDE 27

Conclusion

- Fuel poverty is a serious problem with serious impacts

- Measuring it is important to understand the scale of the problem and to help shape policies to address it

- WHECA was right: the core problem is the overlap between income and costs

- A Low income – high costs indicator reflects this, with the addition of a fuel poverty gap which in turn reflects the Energy Act 2010

SLIDE 28 CONCLUSION AND CONSULTATION

Questions for consultation

- Do you agree with the conclusion that the problem of fuel poverty is, as set out in WHECA, centred around the combination of low incomes and required energy costs above reasonable levels?

- Does Chapter 3 set out a comprehensive analysis of health and well being impacts associated with fuel poverty? Is there further compelling evidence relating to those impacts discussed or others that the review would benefit from considering?

- Do you agree with our analysis of the strengths and weaknesses of the current fuel poverty indicator, as set out in Chapter 5, and of modifications and alternatives to it in Chapter 6?

- Do you agree with our analysis of the strengths and weaknesses of the approach based on a Low Income-High Costs indicator and fuel poverty gap, as set out in Chapter 7?

- Do you have any views on the thresholds the review has used for the preferred indicator, as set out in Chapter 7 (and discussed further in Annex B)?

The full report is available at:

www.decc.gov.uk/hillsfuelpovertyreview