There has been lots of comment in the press about how the cuts to feed-in-tariff will add to fuel poverty but a dearth of numbers so far. I just couldn’t help myself – I had to do some digging.
Firstly, a short history of fuel poverty and the official definition. The current definition (which I will come on to) is currently being reviewed by Professor John Hills, with an interim report on findings published 19 October 2011. It is a fascinating (and sometimes controversial read) but for the sake of simplicity, I am leaving this to one side and exploring the definition which is still current.
The Warm Homes and Energy Conservation Act of 2000 (WHECA) stated:
For the purposes of this Act, a person is to be regarded as living â€œin fuel povertyâ€ if he is a member of a household living on a lower income in a home which cannot be kept warm at reasonable cost.
So whilst reports of the Queen being in fuel poverty because her bills were 10% of income are sadly, not true, as she cannot be said to be living on ‘lower income’. So where did the 10% of income arise? In response to the 2000 WHECA a strategy document was published in 2001 which used the following definition (which has remained the same over the past 10 years).
A household is in fuel poverty if it would need to spend more than 10 per cent of its income to achieve an â€˜adequateâ€™ level of warmth through the year and on other energy costs.
- It depends on a modelled assessment of what it would cost to heat a home to particular temperatures (usually 21 degrees for the main living area, and 18 degrees for other occupied rooms), based on data from yearly structural surveys of a sample of homes and interviews with the people living in them, plus an allowance for other energy costs, based mainly on the average energy use of households for the number of people in the household and their dwelling size. It does not use actual spending, as that might reflect very low costs for those who are living at low temperatures, or very high costs for those who are wasteful in their use of energy.
- In 2009 space heating accounted for 56 per cent of this assessment on average, and water heating for 10 per cent. The remaining third related to other uses (cooking, lights and appliances).
- It is based on the ratio between required spending and household income. The higher required spending and the lower income, the greater this ratio (particularly if income reported in the survey is very low).
- It uses a particular threshold, 10 per cent, whose origins are that in 1988 this was twice median fuel spending as a share of income (that is, half of households then spent 5 per cent or less of their income on fuel, and half spent more).
Whether a household is in fuel poverty or not is determined by the interaction of a number of factors, but three specifically stand out. These are:
- The energy efficiencyÂ of the property (and therefore, the energy required to heat and power the home)
- The cost of energy
- Household income
On 14th July 2011 the latest fuel poverty statistics were published by DECC – it is well worth a read and goes into much more detail than I have space for here. The Venn diagram below comes from that report.
Energy inefficient dwelling: Households that have a SAP rating below 35. Approximately 10 per cent of all households in England in 2009 fell into this category.
High required energy bill: Households with a modelled annual fuel bill greater than the mean of all modelled fuel bills, which was approximately Â£1,340 in 2009. Around 41 per cent of all households in England in 2009 fell into this category.
Low income: Households with an income level below ten times the average modelled fuel bill (as above)16. Approximately 23 per cent of all households in England in 2009 fell into this category.
Approximately 13 per cent of fuel poor households fall into all three categories simultaneously, that is they have inefficient dwellings, high energy bills and a low income. Modelled fuel bills and SAP ratings are naturally not independent of one another and therefore the large overlap between these two categories is not unexpected. However, even if a household faces one or more of these problems, it is not necessarily fuel poor.
It should be clear that the definition is flawed in that eventually huge swathes of the country will end up in the yellow segment as fuel prices continue to rise. Hence why Hills is looking at the definition.
Anyway, what does this have to do with FiT? How could a solar panel alleviate fuel poverty?
[table "3" seems to be empty /]
Some important differences to this analysis – firstly, I have assumed the export rate is much lower at 20%. This assumes those in fuel poverty who would be benefiting from the FiT are in their houses during the day more. This increases the yearly energy savings (the bottom line, which differs to the first two tables). This is how the ‘rent-a-roof’ market works – they install the panels, receive the FiT, the tenant reduces their electricity bill annually by the amount of energy produced. I have assumed a very large array in this case which may be optimistic. The electicity rate is increased as well to 18p rather than the 14p I assumed in the two previous posts. This is from findings that those who are less wealthy are less enabled to shop around for the best deals for electricity (for example access to internet is one factor).
The savings of Â£484.70 against a bill of Â£1,340 is 36%. Assuming as above 66% of the fuel cost is gas, then more than all the electricity could be paid for by FiT. At 18p a unit, 2532 units are used. Reducing the rate to 14p would mean a reduction in bill to Â£1,239. The savings for FiT would now be 376.99, again more than the bill of Â£354.48. As I said above, the size of panel may be optimistic, but it is clear that installing the panel will alleviate the fuel poverty factor associated with high required energy bill.
What is perhaps surprising from the two scenarios above, pre and post FiT cut, is that the tenant is equally well off under each scenario. The same amount of energy is being produced and saved against their electricity bill. What has changed is how attractive the deal now is for those supplying the panels – the IRR has halfed [*I have realised my IRR calculations are incorrect as I am still attributing the fuel savings to the supplier, whereas in this scenario it needs to be excluded - the scale of the change will however be similar]. As we discussed yesterday, these suppliers will in reality be able to drop their prices somewhat to offset this effect.
So the FiT cut is bad for fuel poverty in that it has become less attractive for investors, rather than changing the savings against high required fuel bills.
Next, I think I will look at the other ‘leg’ of fuel poverty – energy inefficient dwellings, and what the proposed EPC C rating for FiT eligibility could mean.