Warm Home Discount (England and Wales) Regulations 2022

Lord Callanan Excerpts

Monday 20th June 2022 Grand Committee

Moved by

[Lord Callanan]

That the Grand Committee do consider the Warm Home Discount (England and Wales) Regulations 2022.

Relevant document: 2nd Report from the Secondary Legislation Scrutiny Committee

[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)]

My Lords, these regulations were laid before the House on 12 May.

For 11 years, the warm home discount scheme has ensured much-needed support to millions of households. Since it began, it has provided more than £3.3 billion in direct assistance to households. Primarily, this support has taken the form of direct rebates off household energy bills.

The Government committed in the 2020 energy White Paper to extend and expand the scheme and to reform it better to target households in fuel poverty. These regulations provide for that expanded and reformed warm home discount scheme in England and Wales. Under the regulations, the scheme is set to last until 2026. The regulations succeed the previous warm home discount regulations in England and Wales. The Government will lay separate regulations for an expanded warm home discount scheme in Scotland, which will be debated separately.

The regulations have six main provisions. First, the expanded annual spending envelope is set in the regulations. For winter 2022-23, the spending envelope is £474 million, rising each year thereafter. Secondly, participating energy suppliers will be obligated to provide rebates directly off the energy bills of fuel-poor households. The value of the rebates for households is set at £150—an increase of £10. This means that around 2.8 million households will receive a rebate every winter. Thirdly, the scheme will continue to provide rebates to pensioners on the lowest incomes—those in receipt of the guarantee credit element of pension credit. This “core group 1” of eligible pensioners, as it is known, has been a key feature of the scheme throughout its existence.

Fourthly, there will no longer be a “broader group” of other low-income and vulnerable households. Under the former scheme, this group was required to apply to their supplier every year for a rebate. Even if eligible, these households were not guaranteed to receive a rebate, and the criteria varied by supplier. The Government are therefore creating a “core group 2” of households on the lowest incomes and with the highest energy costs. Eligible households will be those in receipt of one of the qualifying means-tested benefits or tax credits and meeting a high energy cost threshold. These households will be identified through data matching using benefits data, property characteristics data and energy supplier customer data. The Government intend to publish a statement setting out the exact details of the eligibility, including the high-cost threshold.

Fifthly, these regulations make it mandatory for suppliers to contribute to Industry Initiatives. Industry Initiatives allow suppliers to fund other financial and energy-related measures such as financial assistance payments, debt write-off, benefit entitlement checks, energy advice and energy efficiency measures. Industry Initiatives will be set at £40 million for this winter and rise each year thereafter. The regulations also set minimum obligations and caps regarding financial assistance. This recognises the value that they provide, while ensuring that other high-value Industry Initiatives measures still receive funding.

In addition, the Government are maintaining aggregate and household-level caps on debt write-off to avoid this measure being misused to reduce bad debt. The last Industry Initiatives restriction is to limit the number of mains gas-powered boilers and central heating systems that can be installed. These will still be permitted to support particularly vulnerable customers during emergencies but will be restricted to align with the heat and buildings strategy.

Sixthly, and finally, the regulations set the thresholds for suppliers participating in the scheme. The Government are lowering the thresholds so that more suppliers participate, and to reduce the barriers to customers switching suppliers. In 2022-23, the threshold will be set at 50,000 domestic customer accounts; from 2023-24, it will be set at 1,000 accounts. This means that 99.9% of the market is covered.

The Government are expanding the scheme to provide rebates to 750,000 more households. Thanks to these reforms, the vast majority of eligible households will receive their rebates automatically, without having to apply. A small minority will be contacted and required to contact a helpline to confirm their details.

The Government’s analysis shows that, by focusing support on households on the lowest incomes, the fuel poverty targeting rate will increase to 47% overall and 560,000 more fuel-poor households will receive a rebate compared with an unreformed scheme.

The Government held a consultation on these reforms last summer and we published our response in April. The consultation responses supported extending and expanding the scheme as well as proposals for reform. The Government are proceeding with the main proposals; however, we decided to make a number of changes in light of the consultation responses. We have added housing benefit to the list of qualifying benefits, and tax credits in the eligibility criteria for core group 2. Energy suppliers will be required to provide estimates of the value and proportion of spending under industry initiatives in relation to households where a person has a disability or a health condition. This will enable the Government to monitor the level of support provided to disabled customers. The Government have removed the proposed mid-year adjustment to the Industry Initiatives budget. This risked creating significant uncertainty and delivery risks. Lastly, the Government are keeping the overall debt write-off cap under Industry Initiatives at £6 million per year.

The warm home discount remains a source of critical support for many low-income households. The regulations extend this scheme, expand the support to more households and focus that support on those most in need. I therefore commend these regulations to the Committee.

[Baroness McIntosh of Pickering (Con)]

My Lords, I congratulate and thank my noble friend for presenting the regulations before us, which I warmly welcome. I set out my interest on the register, as president of National Energy Action, and raise some of its concerns about these regulations—or rather, what is not in the regulations—with my noble friend and ask for his positive response.

First, I point out that the regulations were drafted at a time when the scheme was very successful, prior to the Covid crisis. I will come on to that in a moment. My first concern is that the way of selecting core group 2, to which my noble friend referred, is potentially unfair. While National Energy Action supports the guiding principle that the Government should help the worst first, the proposed methodology creates a significant risk that some households that are currently eligible for support and live on the lowest incomes could miss out on rebates, if they are falsely estimated to have lower energy costs. The new core group 2 methodology also means that you cannot access a rebate without receiving a means-tested benefit. What happens to the 50% of fuel-poor households that do not currently receive such a benefit? Have the Government considered what will happen in those circumstances?

If a household is not selected as part of core group 2 but should have been, it seems very difficult to contest the decision. The customer journey is not particularly user-friendly. How does my noble friend expect to resolve issues arising from that circumstance? National Energy Action is not convinced that the funding available through Industry Initiatives is sufficient to meet the expected demand. The way that funding has been allocated for Industry Initiatives means there is significant uncertainty about the total available pot each year. The first year of the scheme could see a reduction in funding compared to 2021-22, which does not seem sensible given the energy crisis and is surely not what the Government envisage happening.

The department has still not made amendments to the scheme to ensure that, if and when there is a supplier failure, the supplier of last resort takes on the full obligation of the failed supplier. This means that there is a risk that some obligation can be lost through the process, so that the overall number of rebates is reduced and projects that have been committed to go through industry initiatives actually go unfunded. Then, there is the significant issue that I raised earlier: the scheme was designed for good times and against that background; it was not put together with an energy crisis in mind. Although it is too late to go back to the drawing board now on the warm home discount, could not the Government look at what additional protections are necessary? Given that the Treasury has agreed one-off payments this winter, and that the crisis will outlast that support, something extra might be necessary against that background.

National Energy Action would therefore like to propose a number of things that it believes the Government could do to overcome this. One is to investigate deeper price protection or a new social tariff, which I have raised with my noble friend before. This would make energy more affordable for a discrete and well-defined set of low-income energy customers. Such a tariff must be additional to existing schemes, mandatory for all suppliers, targeted at those most in need, reduce the costs of eligible households and use auto-enrolment. It might need primary or secondary legislation so that it could sit alongside the price cap.

Secondly, will the Government consider accelerating the repayment of utility debts across the UK? This would provide financial support for households that have a debt repayment plan with their energy supplier, with government matching every pound paid by the customer with £1 of Treasury funding. This would help every indebted household, but it would cost £500 million per year.

A further proposal is accelerating the improvement of energy efficiency through three possible methods, the first of which is prioritising parliamentary time for the passage of ECO4 legislation. The second is committing the remainder of the funding promised in the Conservative Party manifesto for upgrading fuel-poor homes. Apparently, the Government have committed only £1.1 billion of the promised £2.5 billion for the home upgrade grant scheme. Committing the remainder would help more than 100,000 households to save more than £750 a year on their energy bills. The third method is setting regulatory minimum energy efficiency standards for rented properties. This would help those in the private rented sector, which has some of the leakiest housing in the UK. Despite winter temperatures being as low as they are, we probably have some of the most poorly insulated housing in the whole of northern Europe.

Finally, I would like to raise the issue of the role of the regulator, which has probably not costed in, in general, the failures of existing energy companies over this past year. Will the department consider a number of measures, such as reducing the standing charge for pre-payment users by recovering SOLR costs on a volumetric basis, and better identifying and acting on the financial vulnerability of energy consumers? Will they ensure that the costs of failed suppliers are spread over a longer period, to reduce the immediate burden on consumers? Will they reduce the wider burden of energy debt on consumers by enforcing licence obligations? Finally, will they work to ensure that all prepayment users can receive a smart meter as a priority, and perhaps have a more general debate on what the role of the regulator in this market should be?

With those specific comments, which I hope my noble friend will look on favourably, I give a warm welcome to the regulations before us.

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[Lord Lennie (Lab)]

My Lords, I thank the Minister for bringing these proposals, which are an improvement on the previous scheme. I also thank noble Lords for their contributions, in particular the noble Baroness, Lady McIntosh, who represented the NEA’s concerns about the core group 2 and how some of them will miss out, on the way that the scheme is set up, on the funding sufficiency—or insufficiency—and on the prepayment customer concerns, which the noble Lord, Lord Teverson, also raised. The noble Lord, Lord Best, is an expert on the private rented sector. We share his concerns about that; I will come on to that in what I have to say. The overall theme of the noble Lord, Lord Teverson, is that it represents a failure in public policy that we have to have this scheme in any place, but here we are: we have to have it and this is, as I have said, an improvement.

The Government have said that they intend to bring forward a new set of reconciliation regulations “later this year”, which is better than “when Parliament has time” or “in due course”, but can the Minister be a little more precise about when “later this year” means?

On the criteria and the algorithm used to estimate energy costs, how satisfied is the Minister that the algorithms used will not lead to an education-type embarrassment for the Government and, therefore, a failure in terms of there being lots of customers who potentially would benefit from this scheme but may then miss out? Have the Government included all eligible households, including persons with a disability, in their revised six criteria for the new scheme?

The scheme has an impact on energy suppliers, the authority and the Government. The energy suppliers are likely to recover their costs from their customers, which is estimated to be £19—a £5 increase on the former scheme. The authority and the Government are likely to incur costs of approximately £22 million for their work in issuing notices and identifying customers eligible for core group rebates. The Secretary of State will conduct a review or partial review of the scheme, and the authority will review participation of suppliers in the scheme and publish an annual report. This is welcome.

However, Labour would introduce legislation to uplift the warm home discount for 9 million working families and pensioners during the present inflationary crisis. As the noble Lord, Lord Teverson, and the noble Baroness, Lady McIntosh, pointed out, this is an extraordinary time for energy costs. I am not saying that it could have been predicted but Ukraine is upon us and, therefore, more may well need to be done in the lifecycle of this scheme.

Core group 2, which has replaced the broader group, will not now have to apply for inclusion in the scheme, which is welcome. However, there will be households beyond that group who remain in fuel poverty, such as those in rented accommodation. They may be on low incomes and with disputed levels of energy use, particularly when they have no access to what proportion of the payment they make to their landlords is for energy supply. They may not be receiving benefits, which would usually give them automatic inclusion. It may be impossible for them to contest their exclusion. The Minister’s observations on this would be very welcome.

If an energy company goes into administration or disappears entirely, will the supplier of last resort take on the full obligation of the failed supplier or are there now no small-enough energy suppliers left—that is, those with 50,000 customers—that can go bust? Have they all gone bust already? The recovery of the scheme from customers will mean that, in some cases, energy companies will be recovering money from those who have received the warm home discount, thus giving with the one hand and taking away with the other. Would Minister like to comment on that?

The overall scheme is likely to add to the rise in the socialisation of the expenses of suppliers of last resort, resulting in a probable £100 contribution to the increased price cap. Have the Government considered whether the scheme should be covered by Exchequer funding or by a wider group of people contributing, not just individual customer payers?

In welcoming the progress the Government have made with these changes to the scheme, there are a number of observations on which I would welcome the Minister’s response.

[Lord Callanan (Con)]

I thank all noble Lords who have contributed to this debate. The context is that, this year, as we all know, we have witnessed an extraordinary increase in the cost of energy. The Government recognise that millions of households across the UK may need further support with the cost of living, in particular energy bills. That is why the Government have so far announced additional support this year worth more than £37 billion, including targeted support for many of those in the groupings we are talking about today—those on the lowest incomes.

All domestic electricity customers in Great Britain will receive £400 off their bills from October through the energy bills support scheme. Meanwhile, more than 8 million households across the UK in receipt of means-tested benefits will also receive £650 as a cost of living payment. Further payments will be made to pensioners and disabled people. The Government remain committed to helping low-income and vulnerable households heat their homes over the coming winter. Although energy efficiency measures provide long-term assistance in reducing energy bills, as the noble Lord, Lord Teverson, reminded us, there is a clear need for direct financial support now. In this context, the warm home discount remains a key part of our overall approach to tackling fuel poverty.

This is the largest expansion of the scheme since it began. In 2021-22, the energy envelope was worth £354 million across Great Britain; in 2022-23, it is rising to £523 million. This scheme will ensure that 2.8 million households in England and Wales receive a rebate off their energy bills each winter right through to 2026. That means that around a third more households than previously will receive a rebate each year. In addition, most will receive their rebates automatically. This means that households will have much more certainty about receiving the payments when they need them most. A large part of my postbag has been people writing to their MPs and then on to me if they have not been selected as part of the core group 2 element; people do not understand how the scheme works.

The Government have recognised the need for certainty about the support to households in Scotland. We recently consulted on an extension and expansion of a separate warm home discount scheme in Scotland. That was as a result of the Scottish Government not being able to make their minds up about whether they wanted to be part of this scheme, not because of any delays on our part. The Government will publish the response shortly and lay the regulations for the scheme in Scotland as soon as possible.

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[Lord Teverson (LD)]

That is a very useful explanation, but will the department look at how accurate it was in retrospect? Will it take a sample of properties and see whether the scheme reflected how things were on the ground to check the effectiveness of the algorithm?

[Lord Callanan (Con)]

Yes, of course we will conduct a process of constant improvement. As more data become available, as universal credit is rolled out, and as EPCs are increasingly rolled out and more properties have one, it will make targeting easier. We will modify the scheme as we go forward, using new and improved targeting data.

I thank noble Lords for the useful points they made. I am pleased that virtually everyone who spoke was in broad agreement that the scheme should continue at this time because it has been very successful at providing householders on the lowest incomes with critical support.

[Baroness McIntosh of Pickering (Con)]

Before my noble friend takes his seat, there seems to be a discrepancy in the figures. My noble friend said that 69% of the fuel poor are in receipt of means testing, which means that 31% are not. The NEA said 50%. I would be interested to know, however many there are, how those who are not in receipt of the means-tested benefit under core group 2 will qualify. Is it the Government’s intention to commit all the funds that were highlighted in our manifesto at the last election?

[Lord Callanan (Con)]

My noble friend has asked me a number of difficult questions. Yes, we want to ensure that as much of the funding as possible is committed to this scheme, perhaps all of it will be. I am not sure what my noble friend is referring to by the funds we promised in our manifesto. Is she referring to energy efficiency? In that case, the majority have already been allocated.

On the targeting of those in fuel poverty, I default to the information that I have been given as opposed to the NEA figures, but if there is a mistake in those numbers, I will write to my noble friend.

Motion agreed.