Response to Ofgem call for input: Affordability and debt in domestic retail market

Whilst it is important to consider the inter-relationships between income and other characteristics, Consumer Scotland has also controlled for other factors that might increase energy affordability challenges in order to identify the particular contribution that any of these characteristics makes to the likelihood of a household experiencing energy debt. Our analysis shows that:

Having a household income under £40,000 a year is associated with an increased probability of energy debt. Households whose income is less than £20,000 a year are 5% more likely to be in energy debt than a household with an income of over £60,000 when controlling for other variables

The association between age and energy debt is not statistically significant when controlling for other factors such as age, income or dwelling type

The strongest association with energy debt comes from having a child under 5 in the household (10% more likely), having a disability that limits them a lot (8% more likely) and having a health condition (3% more likely)

As per Chart 2, consumers living in properties with poor levels of energy efficiency (self-assessed), as well as those who pay by prepayment meter or on receipt of bill, are statistically more likely to be in debt

The original report, Insights from the latest Energy Affordability tracker: causes and impact of energy debt, provides more in-depth analysis on the points set out here.

Changes to energy affordability challenges in the future

Consumers experience unequal outcomes in the energy market at present and there is a risk that these disparities are translated into or exacerbated by future market reform, unless action is taken to address these matters.

Consumer Scotland is concerned that the costs of achieving net zero targets should be proportionate and fair for all consumers. Barriers due to access, appropriateness or personal circumstances could prevent some consumers obtaining the benefits arising from the transition; some of these barriers may be caused by prohibitive upfront costs, unsuitable pricing structures or expensive running costs. For example, the shift towards rewarding greater flexibility of energy usage away from peak times may create inequalities between those who are able to flex their energy use and those who cannot, due to disability, care needs or other barriers[14].

Not all consumers can access or obtain the benefits/savings associated with flexible time of use tariffs. For example, someone reliant on using medical equipment, or who has caring needs, may need to access energy at set times of the day and will therefore struggle to reduce their demand at peak times. Whilst unlocking flexibility provides opportunities for greater consumer choice, incentivises the uptake of low-carbon technologies and improves cost-effectiveness, there are still barriers - particularly for consumers in vulnerable circumstances.

Heat networks are scheduled to become a regulated industry in April 2025. Consumer Scotland will be the statutory advocate for heat network consumers in Scotland. We would like to take the opportunity to highlight that there is a need to ensure that any work done on affordability and debt is applicable to heat networks but may also need to be tailored to ensure it is fully applicable in that context. There has already been instances of billing and debt issues for consumers on heat networks which have exacerbated affordability challenges[15].

Looking ahead, there is an opportunity to reconsider how the energy industry’s approach to design can most effectively meet the needs of all consumers. The future market should be designed in a way that ensures the inequalities in the current energy market are addressed. The objective should be to achieve a fair, inclusive energy market which reduces inequalities of outcome across consumers groups, whilst enhancing affordability for all.

Q2: What options should be explored to tackle energy affordability?

On the basis of available evidence, Consumer Scotland recommends that there is a need for targeted energy support for specific groups

It is clear that a combination of persistent high prices and high essential energy expenditure has left certain groups of consumers more exposed, with particularly acute impacts on their financial resilience, health and wellbeing, as well as wider economic impacts, including for example, on energy debt and healthcare systems[16].

Consumer Scotland recommends that the UK Government should explore a range of options for providing targeted bill support. These options should consider who is targeted (the criteria), how they are targeted (the mechanism) and how much support eligible consumers should receive. For each option, analysis should include an assessment of the comprehensiveness of the delivery mechanism, i.e. what proportion of those consumers  identified as being in need of support would be provided with this support; whether the support can be delivered automatically or whether consumers would be required to apply; and what the administrative costs would be for suppliers and other organisations to implement.

Low income consumers and those with high essential energy expenditure (such as disabled consumers) should be priority groups for targeted support interventions

Based on our evidence, and feedback from our stakeholders, Consumer Scotland recommends that any targeted support intervention should pay particular attention to the specific needs of consumers with high essential energy expenditure. The rationale for this is outlined in question 1 and 2.4 of this section. With regards to disabled consumers, our research shows specifically higher energy needs, affordability challenges and risk of debt for those who are limited a lot by their disability.

If an affordability policy was targeted only on the basis of financial means (e.g. income), without any consideration of energy need, then this would implicitly provide the same level of financial support to households that had similar incomes but potentially very different energy needs. For example, a household with energy use which is several times higher than average due to running medical equipment, and charging mobility equipment, is likely to struggle even if they are not on a low income.

Future targeting of support should include disabled people who have high essential energy needs. Whilst there are complications to determining which consumers may fall into this category, consideration should include needs which may be hidden, such as enhanced personal care or increased lighting for blind and visually impaired people. Whilst there may be an income-related component, there may be a number of consumers with high essential energy needs who are not classed as low income. Therefore, more consideration needs to be given to encompassing affordability challenges driven by these high need as well as low income.

Other groups of consumers with high essential energy needs (and therefore high expenditure) may include those who live in properties with poor energy efficiency, or those reliant on traditional forms of electric heating. There is likely some intersection between these groups and consumers on low income and disabled consumers. There is a need to consider how these consumers can be best supported to protect them from excessively high bills due to property characteristics and heating type.

There are multiple considerations when it comes to implementation of targeted energy bill support

As set out above, Consumer Scotland has recommended that consumers with high essential energy expenditure should be amongst the key groups that are targeted for energy bill support. In designing targeted support interventions aimed at these groups, there are a variety of data sources which could be used to identify potentially eligible households. Eligibility criteria based on social security benefit receipt will inevitably leave some gaps in support because many low income households are not in receipt of benefits. There are significant support schemes that work automatically but it is important that there is also a safety net of additional approaches, e.g. referral routes, to capture the likely large number of households who might need support but who do not receive the relevant qualifying (passport) benefits.

Table 1 outlines potential sources of data which may be used to support delivery of targeted energy support. Note that this table is not exhaustive and the purpose is to identify potential sources of data which may be used and to identify any constraints

There is potential for data-matching which can make use of multiple sets of data through an automatic process to identify recipients. Data-matching reduces the burden on both consumers (reducing the need for onerous application-based approaches and awareness raising) and suppliers (the costs of administering the scheme). However, there are multiple barriers that need to be overcome in order to get the full benefit of data-matching.

Scotland faces specific challenges around data-matching which also need to be overcome in order to ensure parity of scheme design for any future targeted energy support. Consumer Scotland is aware of multiple proposals for the enhancement or expansion of Warm Home Discount as a vehicle for targeted bill support[19][20][21]. Whilst we would broadly support the use of existing structures and mechanisms for distributing support, the Warm Home Discount in Scotland still retains an applications process for its Broader Group (see the box below). Further challenges for data-matching include the wider devolution of certain social security benefits, notably those associated with disability and caring. For example, data-matching with benefits administered through Social Security Scotland would require agreement, and data compatibility, with an additional agency – potentially adding further complexity.

There is a need to include consumers with high essential energy expenditure as a separate, additional group when considering affordability support

As outlined in question one, high essential energy expenditure can be defined as: the expenditure required for consumers to meet their basic needs, which are determined by factors beyond their control. This could include poor energy efficiency, energy costs related to disability, reliance on traditional forms of electric heating or caring responsibilities.

Consumer Scotland’s evidence indicates that a significant number of disabled people, particularly those with limiting conditions, face additional high essential energy costs[22]. These costs need to be met to avoid consumers experiencing harm to their health and wellbeing. As our analysis suggests, affordability challenges are particularly acute for those limited a lot by their disability, and there is a strong case for focusing support on those with the highest energy needs (and who may also be on lower incomes).

For example, Marie Curie (2023) found that people with some terminal illness may see their energy bills go up by as much as 75% after they are diagnosed[23]. Similarly, Scope (2023) calculated that on average disabled people spent a greater amount of their budget on energy compared with a non-disabled people – amounting to £634 over a year[24].

As we have outlined above, there is evidence supporting the case for the inclusion of disabled people within any affordability support. Ideally, support would target those with high energy needs but particularly where that intersects with low ability to pay (which may not correlate perfectly with low income). However, there are practical challenges with being able to identify and effectively target this group given the complexity of data required. For example, data matching between Adult Disability Payment/Personal Independence Payment and income-related benefits would be ineffective assuming (a) benefits data was already used to target low income groups (b) the intention is to capture low ability to pay rather than low income.

Furthermore, older people and households with young children are likely to have high essential energy expenditure due to the high risk of illness and wellbeing impacts from living in cold homes. Public Health Scotland (2022) have recently conducted a rapid assessment of population health impacts from the rising costs of living. As part of the work, they highlight that fuel poverty and cold homes contribute to excess winter mortality[25]. Our Energy Affordability Tracker particularly points to increased affordability challenges for those with children under 5. The British Medical Journal (2022) published evidence that strongly suggests that growing up in poor homes has a direct and severe impact on health. This includes the risks of cold, damp and mouldy homes which mean higher than average rates of respiratory infections, asthma and other forms of ill health and disability, as well as increased mental health issues, impacts on growth and cognitive issues[26].

Q3: What factors should be considered when redistributing costs?

Consumer Scotland recognises that there is a challenge in how to distribute costs (including cross-subsidy) in a way that is fair. For example, when considering fairness in relation to the recovery of fixed costs in the energy system (i.e. through standing charges), we highlighted that isolated interventions would likely shift costs towards high volume users such as disabled consumers and households with young children[27][28]. Similarly, other potential interventions are likely to require similar assessments of any potential unintended consequences to ensure that affordability challenges are not created, or exacerbated, for any groups of consumers as a result of shifting the distribution of costs between different groups.

We also recognise Ofgem’s limitations in scope regarding how costs are distributed between different groups of consumers. We welcome Ofgem’s levelisation policy aims and the move away from consumer impacting cost-reflectivity (i.e., prepayment meters or standard credit/customers who pay on receipt of bill) especially given the known higher risks of affordability challenges for these payment methods.

A principles-based approach may support work in ensuring ongoing fairness when considering cost redistribution. For example, the broader cost issue could be considered in two stages:

• First, determine the principles by which system costs should be shared across consumers, and use these principles as the basis on which to consider cost redistribution between consumer groups. Ofgem already does this, for example through its Targeted Charging Review (TCR)[29]
• Second, design and implement appropriate energy affordability policies that protect consumers who most need support with their bills. Much of this role sits with Government[30]

Q4: To what extent is debt a factor that puts suppliers off taking on new customers or offering certain types of services and tariffs to them?

Not answered

Q5: With reference to the themes and indicators in our Competition Framework, to what extent is the affordability of energy and the build-up of legacy debt affecting competition and innovation (including new entry) in the domestic retail market?

Not answered

Q6: What represents best practice in debt management by suppliers?

In March 2024, the Financial Conduct Authority (FCA), Ofgem, Ofwat and Ofcom published a joint debt collection statement via the UK Regulators’ Network[31]. The statement identified that customers subject to collections activity are highly likely to be in vulnerable circumstances due to financial difficulty, such as problems with their physical or mental health; that firms should be aware that customers in vulnerable circumstances may find it difficult to engage with creditors; and that customer vulnerabilities may be exacerbated if creditors take an inappropriate approach to collections.

Drawing on rules, guidance and best practice from the individual sectors, as well as a joint agreement which set out shared expectations on how firms should support customers in financial difficulty, the regulators set out four outcomes that they expect firms to deliver in relation to debt collection:

• Firms ensure an appropriate frequency of collections communications and reduce the frequency where it is not delivering positive customer engagement or is causing harm to consumers
• Collections communications use tone that is supportive
• Information about free debt advice and how to access it is clear and prominent in collections communications, and that ‘warm’ referrals (where a firm directly refers a customer to another organisation) are used where appropriate
• Firms make it as easy as possible for advisers from free debt advice organisations to contact creditors

Consumer Scotland welcomes this cross-sector approach to driving up standards on debt recovery. In our response to Ofgem’s statutory consultation on consumer standards[32], in relation to debt intervention proposals such as the tactical use of payment holidays for those experiencing short-term financial stress, and the new contact ease guidance for suppliers, we argued that such initiatives are only as robust as their compliance monitoring and evaluation processes. It is encouraging therefore, that the four signatories of the joint statement have committed to monitoring how firms are supporting customers in 2024, and to take action where firms are falling short and delivering poor outcomes.

In the same response, acting on evidence from a stakeholder in the debt advice sector, we highlighted that consumers must be allowed to choose who advocates on their behalf in debt correspondence, and that this wish is respected by suppliers. We therefore welcomed the Energy UK Winter 2023 Voluntary Debt Commitment[33], which committed signatories to fully consider information (including budgets, affordable payment offers and prepared Standard Financial Statements[34]) and third-party authority forms, from a customer’s chosen credible debt or consumer body organisations, including FCA-authorised debt advisors. Consumer Scotland would like to see this commitment made permanent, as part of an appropriate framework or industry process.

Q7: What lessons can we learn from other sectors and countries on managing affordability and debt? And how should they be applied to the energy sector?

Consumer Scotland has been undertaking work to examine affordability interventions across different markets. The markets included within the analysis are broadband, gas and electricity, post and water. This is work is ongoing but we have highlighted emerging key learnings here for the benefit of the Call for Input:

• Most affordability interventions have points of friction or a lack of clarity for consumers. Issues around eligibility, application processes and different supplier approaches, alongside having to apply across multiple utility systems can have a negative impact on consumer outcomes. Within the context of the energy market, this may point to a need an improved consumer journey through designing energy bill support which has universal eligibility, if delivered through suppliers, and clear mechanisms to distribute support.
• The cost of living crisis alongside the investment required to meet net zero targets creates tensions when designing affordability interventions. Any intervention which requires cross-subsidy amongst consumers will present challenges in this context.
• Within the context of energy, this may include considerations of distributional analysis and of fairness when distributing costs of necessary investments between different consumers
• Automated payments and data matching removes barriers created by application processes when designing affordability interventions. There is a need to look at what other, market-level data may be relevant and necessary to identify and reach the consumer groups that require support. Within the energy market, this likely points to a need for support which is automatically targeted and delivered alongside an additional referrals process, if gaps are identified.