Delivering affordable warmth in rural Scotland: action plan

Chapter 4 - The domestic energy markets: fuels and prices

Evidence reviewed by the Task Force demonstrates that the energy market is not serving rural Scotland well or fairly. It shows that off-gas rural households in particular incur significantly higher-than-average heating costs as a result of the range of contributory factors stacked up against them. These start with the greater exposure to harsh weather conditions and lower levels of energy efficiency and are compounded by higher levels of energy consumption.

This is particularly the case in off-gas areas where limited markets restrict consumer choice and increase costs of the alternative fuels and tariffs on offer. In chapters 4 and 5 we look at their experience of the energy market and, in particular, the factors which mean they are often paying among the highest rates on the market, whether for electricity or the non-regulated fuels such as heating oil and LPG.

UK Government analysis also projects that households who use electric heating will, on average, see an increase in their energy bills of around 1.4% of their total expenditure in 2020 as a result of social and environmental policies (compared with estimated decreases of between 0.4% and 0.8% for households using other fuel types).

Another significant factor is the impact of regional differences in network charges. The UK Government has put in place the Hydro Benefit Replacement Scheme ( HBRS) which is meant to protect consumers from the particularly high costs of distributing electricity in the north of Scotland. This benefit is paid for by consumers across the UK and reduces the excess network charges burden between the north and south of Scotland to 0.9p per unit. However even after the application of the HBRS support, consumers in the north of Scotland currently pay up to 2.1p more per unit of electricity from their dominant supplier than the same supplier's consumers pay in the south of Scotland - a difference which equates to an additional £21 for every thousand pounds spent on electricity. Moreover, VAT adds a further 5% to fuel bills which means that where consumption levels are much higher than average e.g. in the island groups, this can add up to an additional £300 on an annual bill.

There is therefore a strong case for keeping the level of the HBRS under review and revised so it fully recompenses North of Scotland consumers, and there is an equal case to closely scrutiny charges levied by dominant suppliers in their home region. Sustaining different network charges between the North of and South Scotland is not ideal and currently disfavours the North which means any amelioration of fuel poverty by Government needs to take this into account.

These factors combine to exacerbate the level of price disadvantage and results in fuel bills that are often two to three times higher than the UK national average. The Task Force calls on both the UK and Scottish Governments to recognise this rural Scottish price discrimination and adjust their policies, programmes and HBRS accordingly to remove this disadvantage and create a level pricing playing field.

The Task Force proposes the following 12 critical actions to address the fuel poverty inequalities being experienced by Scotland's rural population.

4.1 The Task Force supports the remedy proposed by the Competitions and Markets Authority ( CMA) ( Summary of AECs and remedies report, June 2016, para 20.24, h) namely that "….electricity suppliers of more than 50,000 customers be required to make all their single rate electricity tariffs available to all customers on restricted meters" and (unconditional) upon the replacement of their existing meter." CMA also wants Ofgem to closely facilitate the delivery of this outcome through appropriate guidance and regulation.

4.2. The Task Force recommends that suppliers with customers on restricted meters launch a proactive engagement campaign, targeting Priority Service Register customers in the first instance, to guide them through a thorough assessment of their heating needs and ensure that they are transferred, without delay, to the cheapest and otherwise most appropriate deal for their needs.

4.3 The Task Force also fully supports the CMA's two-year transitional price-capping remedy to remove the particularly acute pricing disadvantages experienced by prepayment customers. ( Summary of AECs and remedies report), June 2016, para 20.25 a)

4.4 The Task Force recommends that Ofgem keep under close review progress made towards consumers switching (as recommended by CMA) away from the dominant supplier and intervenes in the market if suitable progress has not been made within 2 to 3 years (by 2019).

4.5 SG to work with Ofgem to ensure that all Pre-Payment ( PPM) customers also have access to tariffs and support (of the kind presently provided by "Our Power" to some local authority and Registered Social Landlord ( RSL) consumers) to enable them to access and manage the costs of their electricity as affordably and effectively as possible.

4.6 Local authorities and housing associations to further promote and support initiatives by new providers like "Our Power" to provide the highest quality energy price and customer care services to prepayment meter customers.

4.7 SG to investigate whether there is market supply failure in non-regulated fuels - to be defined as when there are fewer than 4 wh olly independent suppliers available within a defined market area - and, if and where they find evidence of detriment to consumers, to recommend the CMA investigate further.

4.8 SG to promote, support through advice line information and grant-incentivise collective buying clubs for domestic oil and LPG.

4.9 SG to promote and grant-incentivise the development and uptake of District Heating Schemes in those instances where they can deliver affordable warmth outcomes for rural consumers.

4.10 The Task Force welcomes the commitment given by the UK Government that all customers in the UK will share equally the cost of the new power station required in the Shetland Isles. We urge the UK Government to keep the level of the Hydro Benefit subsidy under review so that any further divergence in cost differentials, such as the impact from replacing sub-sea cables to island groups, is tackled and these customers do not face further detriment from higher costs.

4.11 UK Government to extend the 5p Remote Areas Fuel Duty Discount (which applies to diesel and petrol) to domestic oil and LPG wherever there is market supply failure - to be defined as when there are fewer than 4 wholly independent suppliers available within a defined market area - (definition supplied by Office of Fair Trading).

4.12 SG to identify and recommend ways to UK Government of removing the persistent oil price differentials that exist, whatever the highs and lows of the basic price per barrel, between Scotland, England and Northern Ireland.