Consultation response
Scottish Fuel Poverty Advisory Panel response to Ofgem’s consultation on an energy debt relief scheme
Chair of the Scottish Fuel Poverty Advisory Panel
E: c/o philippa.brosnan@fuelpovertypanel.scot & roanna.simpson@fuelpovertypanel.scot & trisha.melvin@fuelpovertypanel.scot
03/02/2025
To: Dan Norton, Deputy Director for Price Protection, Ofgem
Dear Dan,
On behalf of the Scottish Fuel Poverty Advisory Panel (SFPAP) I have pleasure in responding to Ofgem’s consultation on an energy debt relief scheme. SFPAP is an advisory non-departmental public body which provides independent advice to Scottish Ministers on fuel poverty and scrutinises Scottish Ministers’ progress towards delivering Scotland’s 2040 fuel poverty targets. SFPAP is made up of the following members:
- Matt Cole, Chair of SFPAP and Head of Fuel Bank Foundation
- Alister Steele, Panel Member and former Managing Director of Castle Rock Housing Association
- Kirsten Jenkins, Panel Member and Senior Lecturer in Energy, Environment and Society at the University of Edinburgh
- Margaret Corrigan, Panel Member and former Adviser for the energy advice service provided by East Ayrshire Council
- Fraser Stewart, Panel Member and Just Transitions Lead at Regen
Since it was established on the 1st of January 2022, the Panel has engaged widely across the third sector (advice agencies and housing associations) and energy sector (retail and network energy companies, trade associations), yourselves at Ofgem, and with the Energy Ombudsman and Consumer Scotland. It has also engaged with and is informed by those with lived experience of fuel poverty. The Panel’s views are informed by this engagement as well as their own knowledge, experience and understanding.
Rising debt levels and high energy bills make it clear that current measures to support vulnerable consumers and low income families are not working. Without a radical reappraisal of consumer protection, exposure to and the risks of fuel poverty is likely to deepen in Scotland, and across GB and the UK. It is the Panel’s view, therefore, that in order to substantially reduce levels of fuel poverty, a targeted, flexible and dynamic discount mechanism that reduces the energy costs of eligible households is urgently required. This discount mechanism would serve to ensure that energy debt is not built up in the first place. In order to deal with existing levels of energy debt, an energy debt relief scheme should consider how to best support those who are in debt and financial hardship, without having the effect of materially increasing prices for all customers. Any intervention must be well-targeted, meaningful, but also be coupled with support, advice and action to mitigate the risk of future debt.
What we know about energy debt
Any energy debt relief scheme must be thoroughly informed by evidence on energy debt in Scotland and GB more broadly. Consumer Scotland’s 2024 Energy Affordability Tracker shows that 9% of consumers in Scotland are in energy debt.1 2 Moreover, as you well know, the total value of debt and arrears owed by customers to suppliers has risen substantially since 2018. After sustained increases during 2021 and the first half of 2022, the value stayed relatively steady until Q1 2023, after which it rose sharply. Between Q2 2024 and Q3 2024 it rose by 4%, from £3.69 billion to £3.82 billion.3 These numbers are staggering as they are, but it is also important to understand their limitations.
Firstly, as noted by Ofgem, these statistics are a snapshot of the total debt and arrears that was owed on the last day of the reporting period for customers repaying debt of arrears that has existed for more than 91 days. They do not include customers with a debit at the end of a payment scheme that will be rolled into a new payment scheme and those whose payments have increased because payments were previously set too low. As such, it is possible that the statistics may underestimate energy debt levels.
Secondly, the aggregated number does not show the scale of debt per impacted household. The average level of debt owed by domestic customers in arrears is £1,568 for electricity and £1,324 for gas in Q3 2024, this is an increase of 33% for electricity and 32% for gas compared to Q3 2023.4 Data from Citizens Advice Scotland also reinforces the scale of debt per household. In 2023/2024, the average energy debt clients presented with to the Citizens Advice network in Scotland was around £2,300, and the average debt for people in accessible/remote rural areas who sought advice from the Citizens Advice Scotland network was £3,047, over £700 more debt on average than Scotland as a whole.5
Furthermore, these statistics do not take into account situations where consumers use regulated credit to pay for energy, therefore risking building increased household debt in the process. A March 2024 briefing from Citizens Advice Scotland, based on polling from YouGov, found that 276,186 (6%) of people in Scotland have used commercial credit to pay energy bills in that year.6 This is a particular issue for users of prepayment meters. Consumer Scotland’s Energy Affordability Tracker survey from 2024 found that 21% of prepayment meter users reporting having credit card or overdraft debt as a result of paying for energy, and 27% owed someone else money as a result of borrowing for energy costs. This may reflect the fact that these users have no choice but to pay upfront in order to maintain their heating and power.7
As you will also know, the debt situation is made more complex because a significant proportion of low income households have been increasingly unable to access regulated and mainstream consumer credit, with some low income household types much more likely to be declined than others. This leaves many households using more expensive credit and loans to pay for essentials, incurring a ‘poverty premium’.8
Consumer Scotland’s Energy Affordability Tracker highlights energy indebtedness across a range of demographic characteristics. The highest rates of energy indebtedness are among those who have a disability that limits them a lot9 , households with incomes below £20,000, and those with a child under the age of 5.10
It is also important to remember that energy debt does not exist in isolation. Debt of all types is rising. Recent steep rises in the cost of living (not matched by rising incomes) have increased the scale of the debt problem by further eroding living standards, reducing financial resilience and negatively affecting household debt affordability.11
Furthermore, long-standing and increasing debt has serious impacts on health and wellbeing. Consumer Scotland’s Energy Affordability Tracker found that customers who are in energy debt are substantially more likely to say that keeping up with energy bills negatively affects their mental and physical health than those not in energy debt.12
A holistic approach – a targeted, flexible, and dynamic discount mechanism
A holistic solution is required to avoid debt continuing to increase. It is the Panel’s view that in order to substantially reduce levels of fuel poverty, and the debt often associated with it, a targeted, flexible and dynamic discount mechanism that reduces the energy costs of eligible households is urgently required. This discount mechanism would also serve to ensure that energy debt is not built up in the first place. Often called a social tariff, the Panel recognise that support needs to go beyond a simple tariff and be targeted at delivering very specific outcomes. Such a mechanism should be focussed on closing the fuel poverty gap – providing the support needed to bridge the gap between household energy budgets and optimum household energy costs.
What might a targeted, flexible, and dynamic discount mechanism look like and how might it work?
1. Those in greatest need should receive a discount that covers a significant unit rate discount and their whole standing charge. Covering the standing charge as well as providing a unit rate discount is important because the burden of paying the standing charge is one of the factors that leads to self-disconnection by vulnerable groups.13 Discounts would be greater in the winter to recognise the additional costs that many in fuel poverty struggle to absorb.
2. The Panel thinks that anyone on means tested benefits should be automatically eligible to receive the discount mechanism. This would include households on Universal Credit, Housing Benefit, Pension Credit, income-related Employment and Support Allowance, income-based Jobseeker’s Allowance, and Income Support. We’d also recommend a second route where a household can apply and receive the discount mechanism even if they do not qualify for the means tested benefits above but are likely to suffer some ill effects if support is not available. Households should qualify for this second route if they have one of the following:
- a low income
- a modest income and live in a home that’s expensive to heat
- a member of the household who has a medical condition that requires an enhanced heating regime or the use of electrified medical equipment at home
- a member of the household who is in receipt of Carers Allowance
3. The value of the discount mechanism would need to recognise different definitions of fuel poverty across the UK and ensure that the value of each household’s discount is determined by the price of energy and the household’s individual circumstances. This would ensure that the level of support could be targeted and tapered according to need. This tapering will help to avoid an entitlement cliff edge and to preserve the financial sustainability of the discount mechanism.
4. We would envisage the discount mechanism values being set by Ofgem, or an independent body, and set with reference to closing Scotland’s fuel poverty gap.
5. We think that the UK Government should administer eligibility criteria for the discount mechanism to ensure consistency and appropriate accountability across the UK in alignment with each administration’s fuel poverty definition. This could readily be achieved by the UK Government through linking HMRC, Department of Work and Pensions, and energy usage data. The UK Government should also be responsible for maintaining a clear and transparent process where people who miss out on receiving the discount mechanism can understand why, and/or appeal. Energy suppliers could deliver the scheme itself, and, in the longer term, the discount mechanism could also take account of a home’s energy efficiency information.
6. The Panel strongly believe that the level of meaningful financial assistance required to support vulnerable households’ energy costs cannot be funded simply through levies on bills and think that the discount mechanism costs should be covered through general taxation. The costs could be offset by ringfencing taxation from the energy sector and using the money which will come to governments as a result of the policy change to target the Winter Fuel Payment.
The cost of support may well be high – in 2023 Age UK estimated that a social tariff is likely to cost between £5.6 – £9.4 billion in scheme year one (2024/2025)14 , whereas in their 2023 report Citizens Advice Scotland estimated a cost of between £5.6 – £8.9 billion (depending on the model used).15 16 However, given the already staggering and growing current levels of consumer energy debt and the impact this has on the energy price cap, it is essential.
Panel view on Ofgem’s overall approach
Fundamentally, the Panel believes that the approach proposed by Ofgem is a missed opportunity because it is focussed on a single problem in the energy supply system and fails to take a holistic and long term approach.
The proposals fail to recognise that whilst high and increasing energy prices continue it remains unaffordable for a significant number of households to heat their home to an adequate temperature. The energy and debt crises are continuing for many households and did not end in early 2024.
The approach fails to recognise the relationships between support for vulnerable customers and increasing level of debt. The Warm Home Discount (WHD) has not increased whilst prices have risen, so an increase in debt is an obvious consequence. In addition, the approach does not address those in energy debt where the debt is held outside of the regulated system – for instance those with ‘energy’ debts to credit card companies or other third parties. It also does not account for those who have rationed energy to avoid debt. In the proposed scheme, it is only those with supplier debt that will benefit. It appears to the Panel that the scheme has been designed for supplier benefit ahead of vulnerable customer benefit.
Panel view on the specifics of the proposed scheme
In the short term, if Ofgem do plan to introduce a debt relief scheme in isolation the Panel would highlight the following:
- As shown in Ofgem statistics17 , energy debt is still amassing beyond the proposed cut-off date (31st March 2024). As such, the proposed cut-off date should be extended.
- Energy suppliers should bear at least some of the cost of any debt relief scheme. If another funding mechanism is used to supplement this, the Panel would recommend utilising the price cap as network/standing charges should be used exclusively for transmission and distribution costs.
- There are likely to be issues with using WHD as an affordability proxy as there is no automatic payment of WHD in Scotland.
- The Panel would favour a minimum debt level as a percentage approach would disadvantage high energy consumption, low income households.
- Suppliers need to ensure that frequent affordability assessments are undertaken – something that is affordable in the summer may not be in the winter.
- Working with third party advice organisations will help ensure that affordability assessments are thorough and accurate. However, it should be acknowledged that these organisations are already overburdened and will therefore require appropriate funding to support any processes.
The Panel would like to engage with Ofgem once you have considered the evidence from this consultation. We would be happy to do this either with you directly, Dan, or as part of a wider stakeholder group.
Yours sincerely,
Matt Cole
Chair, Scottish Fuel Poverty Advisory Panel