OVO’s 10 point plan to address the national energy crisis
01 September 2022
We know that the record-level increases in energy prices are unsettling for millions of households across the country. Since prices first started to rise, we have been working with the regulator, government, consumer groups and industry to limit the impact on household energy bills as much as possible.
With the average price set to rise further from 1st October to £3,549 under the energy Price Cap set by Ofgem, households - particularly those who are the most in need - face a lack of support compared to the scale of the crisis.
At this stage, there are no perfect solutions - but OVO believes that a compassionate and creative approach must be followed to address the energy bill crisis in the short, medium and long-term:
In the short-term:
1) Bring forward the energy rebate to be paid in full before Christmas
The £400 Energy Bill Support Scheme is not perfect - those who can afford higher energy bills will still receive it. But, it’s an existing mechanism we should utilise. To support households in need with keeping their homes warm this winter, the rebate should be paid in full to households over the next three months.
2) Set up a Fuel Poverty Taskforce to identify those most in need
Higher energy bills are going to be a tough reality for everyone in the UK for the foreseeable future, but they won't affect everyone equally. For some, it will mean cutting back on their spending in other areas, but for others, they simply will have no way of making more cuts. Identifying those households most at risk should be an urgent priority. Data exists in multiple places, held by charities, energy companies and government departments. Bringing all of this together will make sure help gets to those who need it and provides a safety net that can ensure vulnerable households are supported for as long as needed. We need a Fuel Poverty Task Force to coordinate this immediately.
3) Immediately increase funding for debt advisory charities
Consumer debt charities are a vital port of call for struggling households, but they face a considerable shortfall in financial resources to meet the level of public need arising from the cost of living crisis. The demand for their services will continue to rise as we head into one of the most difficult winters we have faced. Citizens Advice has seen an increase in people seeking advice on their energy bills rise by more than 1000%. Millions of people will be in real poverty for the first time, these charities are on the front line. They urgently need more funding to help.
In the medium-term:
4) Abolish the prepayment meter poverty penalty
Millions of customers already pay in advance for their energy. For many, it is a useful way for them to manage their household budget. Historically prepayment meter customers have paid less for their energy than those paying in arrears, but more than those customers paying by Direct Debit. We think this is wrong. Under the regulations set by Ofgem, a prepayment meter customer pays around £59 more per year than a customer paying by monthly Direct Debit. Ofgem should lower the unit rates under the Price Cap to make sure a prepayment meter is the cheapest way to pay for energy.
5) Reduce bill shocks - in a progressive way
Over time, consumers may have to adjust to permanently higher energy prices. But the scale of the shock of the recent price rise this winter threatens to tip the economy into a deep recession and will be catastrophic for millions of low income households. It is right that we find ways to smooth further price increases in the short term. Bills should be subsidised through a ‘Tariff Deficit Fund’ and repaid over a period of years. But this scheme can’t be open ended and unlimited. It should be progressive just like the tax system. This can best be achieved through limiting the number of subsidised units of energy households receive, as higher-income households typically use more energy. Of course there will be exceptions; certain types of customers with low incomes do have large energy consumption (for example customers who have at-home medical care). These customers should be identified through the Fuel Poverty Task Force and helped through targeted support.
6) Make bills simpler and fairer by abolishing the standing charge
There are fixed costs to serving energy consumers, regardless of how much energy they use. The economic principle behind standing charges is sound, but the reality is standing charges represent the single biggest source of customer confusion on energy bills, and causes the greatest resentment. If we ever want to make a meaningful impact on energy efficiency, consumers must be able to make a clear link between the number of energy units they use, and the amount they pay. Doing away with standing charges is the simplest way to make energy easy to understand. It will also benefit low income households more than wealthy households, and further reward energy efficiency. It is a compromise, but definitely one worth making. We must make household energy bills simpler and fairer by removing the standing charge for all domestic tariffs.
7) Insulate everything: mobilise a national energy efficiency effort
The UK’s homes are some of the least energy efficient in Europe. The more inefficient our homes are, the more dependent we are on expensive gas imports. During the Second World War, the nation helped lower dependence on food imports by growing fruits and vegetables on any spare bit of land they could find. In the same way, we need a national effort to insulate. To lower bills further, regressive social policy costs need to be removed and shifted into the more progressive general taxation regime.
In the long-term:
8) Ensure the Future System Operator has a mandate for securing long term energy demand
Energy retailers like OVO buy energy in advance to hedge their customers’ consumption. The mechanics of the price cap mean we are now buying just three months in advance, exposing UK consumers and the economy to extreme price volatility. This is not good for anyone. Bills would be lower and more stable if our future energy needs were hedged further in advance. Over the past 10 years, the free market approach has worked to deliver affordable energy for the UK but we should accept that the next ten years are going to look very different. We are entering into an era of global competition to secure energy supplies and we need to think strategically, long term and at a national level. The remit of the publicly owned Future System Operator already includes short term balancing of the gas and electricity market. It should be expanded to allow for the long term procurement of the nation’s primary energy needs guaranteeing physical supply and providing price stability.
9) Bring back the Department of Energy and Climate Change
For seven years, there has been no Government department solely focussed on energy and the fight against climate change. There have been some very effective leaders at BEIS but it is such a broad mandate that it is hard to see that energy could get the focus that it needs. These are two incredibly important and complex areas. We need to bring a dedicated department of energy and climate change back to ensure there is a Secretary of State solely focussed on building a low-cost, low-carbon energy system.
10) Introduce a carbon tax
Putting an effective price on carbon is the most effective way to reduce the UK’s dependence on fossil fuels and catalyse the decarbonisation of all sectors of our economy. It will tax the profits of big oil and gas companies on an ongoing basis, rather than the one off gain we would get from a windfall tax. The revenue collected from a carbon tax should be used to protect the public from adverse cost impacts, and invested in decarbonisation. A ‘carbon dividend’ should be redistributed to low-income and fuel poor households to support them through the Net Zero transition. With the introduction of a carbon tax, regressive environmental levies on bills which fund the ROCs and FiT schemes can be removed and shifted into general expenditure, and VAT should be removed.