Blog: Networks’ good intentions

If most consumers think of their energy networks at all, they probably don’t associate them much with social obligations. But millions of pounds of consumers’ money goes into social obligations schemes each year.

This focus on social obligations is relatively new: while many activities for vulnerable consumers have always been funded to some extent, it is only since the RIIO price control that Ofgem has placed them at the heart of its strategy for energy networks.

As the consumer champion, it’s our job to make sure that this money is being spent in the best interests of vulnerable consumers. Today, Citizens Advice publishes research on how these schemes are delivering for consumers. We find plenty to praise, but also have some serious recommendations of how the industry could be going further.

Let’s start with the examples of good practice. Clearly energy networks are driving real improvements for vulnerable consumers.

The Fuel Poor Network Extension Scheme connects off-gas fuel poor households to the gas grid, which can dramatically reduce their energy bills. Gas distribution networks exceeded their target in the first two years – so Ofgem increased them by 20 per cent. Now gas distribution companies have to connect 90,000 fuel-poor homes by 2021.

On the electricity side, distribution networks have vital responsibilities to vulnerable consumers when power cuts occur. In recent years, with the rest of the industry, they’ve been undertaking hugely important work to improve the Priority Services Register – implementing fundamental reforms that move us all from thinking of vulnerability as a static characteristic that somebody either has or doesn’t have, towards recognising that people are often in vulnerable situations at some times of their lives and not others. This requires a substantial modernisation of systems, which is partly funded by social obligations schemes.

However, our research also suggests several improvements for future years. Here I discuss four recommendations we set out in our report.

Firstly, we think that networks should undertake social obligations only when they are best-placed to deliver cost effective outcomes for energy consumers. There’s a huge amount of vital work that networks can and should do. But we’ve always got to remember that this is funded from consumers’ bills – so there has to be a clear rationale for how they help vulnerable energy consumers and why it’s networks, rather than government or other services, who are driving these improvements.

Secondly, there might be significant partnership opportunities that aren’t being exploited at the moment. For example, Ofgem are already pushing gas distribution networks to go further in working with partners to make sure that fuel poor consumers aren’t just getting a gas pipe – they’re being helped to install central heating and other equipment, so they can really benefit from the schemes. Our research suggests there’s still further that networks could go. Similarly, electricity distribution companies should be looking for opportunities to exploit energy efficiency measures for consumers. This is a win-win – networks could reduce costs by reducing the need for costly reinforcement; while vulnerable consumers get essential assistance in reducing their energy bills.

Thirdly, social obligations are currently thought of as day-to-day expenditure: funding specific schemes to help specific sets of consumers. Clearly, this is vital. But it’s also crucial that networks think about the long-term impact of their decisions on vulnerable consumers. One thing this could mean is conducting distributional analyses of major network investment decisions – answering the question of which groups in society benefit, and which bear the cost.

Fourthly, there might be opportunity to expand on the work that’s currently done. If networks are able to demonstrate that there’s consistently excellent work they can do and that they’re best placed to do it, Ofgem should think about increasing the amount of funding available to meeting the needs of vulnerable consumers in future price controls.

Pivotal to this will be establishing an evidence base. We’re encouraged that Ofgem are already encouraging networks to use more robust evaluation methods, but we haven’t yet seen this come through in networks’ social obligation submissions. Networks need to be implementing rigorous methodologies to identify quantifiable benefits where possible and clearly stating and justifying the value of the non-quantifiable benefits, to give consumers confidence they’re getting value for money.

Our research suggests there’s lots of great work that’s being done, and we think there are plenty of ways that energy networks can get better. But these changes probably won’t happen by accident. They’ll need a real enthusiasm and energy from networks to deliver the best they can for vulnerable consumers; equally, Ofgem will need to consider how best they can structure incentives in the next round of price controls.

The operational period of future price controls is a long way off, but Ofgem, the networks and consumer representatives will start thinking about their design imminently. While we think much progress can be built on here and now, it’s also crucial to get that design right for vulnerable consumers. The entire energy system will likely change beyond recognition in the coming decade. The support we provide for vulnerable consumers needs to change with it.