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Warm Home Discount (England and Wales) Regulations 2022

Volume 823: debated on Monday 20 June 2022

Considered in Grand Committee

Moved by

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

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.

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.

My Lords, I am delighted to follow the powerful commentary of the noble Baroness, Lady McIntosh of Pickering. I declare my interest as president of the Sustainable Energy Association, and I take this opportunity to thank the Minister for a very engaging and encouraging speech at our annual reception last month.

While welcoming the new measures, I am asked to raise the position of the more than 500,000 private renters whose landlords manage their bills. When it comes to accessing the £150 the warm home discount affords, these 585,000 people may be barred from applying as they do not pay their energy supplier directly as the WHD stipulates. There is no legal requirement for landlords to pass on the energy grant to their tenants, and there seems to be a lack of guidance on how the process should be managed by landlords. By extension, this would be the case for the £400 energy grant which the Government will be offering this October. This can be a particular problem for those living in park homes, where the site owner pays for the energy supply and passes on costs to the residents. I believe Sir Peter Bottomley MP has been in touch with the Minister on this subject. Can the Minister share plans for ensuring that the warm home discount directly supports those who are in need of its help but who do not pay their suppliers directly? Will the Government be providing any guidance to enable fair management of the moneys by the landlords involved?

My Lords, it is a great pleasure to follow both the noble Baroness and the noble Lord, who asked excellent questions, particular the question about park homes. There are some 85,000 residents in park homes in this country, and they do not always have the sort of landlords we would like them to have. They are a big issue generally.

Although I welcome this secondary legislation in principle, it is worth noting that this is a reflection of a policy failure over decades, in that we have such a requirement to help people with energy bills because our housing stock is nowhere near the standard it should be. All this, including the £15 billion being spent by the Treasury on the cost of living, specifically around energy issues, is about standing still rather than investing in the future. I know the Minister will say that the Government are investing, but it is a trickle in comparison to what we need. Past Governments have been equally bad at resolving that. This is a symptom of a policy failure over decades in this country.

I shall ask a couple of technical questions on this and will then come on to one or two other things. The figure that rather shocked me—it may be because I misunderstand it—is in paragraph 7.2 on page 3 of the Explanatory Memorandum:

“The Impact Assessment models an improvement to the fuel poverty targeting rate of the scheme from 39% to 47%.”

Does that mean we have moved getting it wrong to 61% from to 53%? I would like to understand that. I remember going through these statutory instruments for Governments, and I understand the problem of trying to target these things correctly and that somehow the statistics or working with data from other departments does not work. But it is worth understanding whether that figure is what I understand it to be and how we improve that for the future because, my goodness, if that is it, we certainly need to improve it.

The next page refers to an algorithm that there were the largest concerns about. We all know the problem with algorithms. They can be great things but, as the Department for Education found out on A-level results, they can be disastrous. I am interested to understand what that issue was and whether it was resolved or was altered in the final prospectus.

Like the noble Lord, Lord Best, what I do not understand—the Minister will forgive me if I have missed it—is how private renters get their money back from prepaid meters. It seems straightforward when the core group are just paid the electricity on their bills. What happens in terms of prepayment meters?

I want to ask about one more thing before a more general point. This is for England and Wales; it talks about Scotland coming on later on but Northern Ireland is not mentioned. Northern Ireland has a much higher rate of fuel poverty than England and Wales—18% historically, though I am sure it will be a lot larger by the end of this year. We do not have a functioning Executive or Assembly in Belfast. Can the Minister say whether the Government will have to legislate directly regarding schemes over there or are schemes that have already been agreed carrying on? Clearly, fuel poverty is a big issue in Northern Ireland.

Lastly, I have a more general question for the Minister. We had an announcement today—it came through on the news—that, rightly, the Government wanted to protect the additional money paid by consumers to retail energy companies that tended to get washed out when they went bankrupt. The answer seemed to be—I know that news reporting is not necessarily accurate—to ensure that the balance sheets of these companies were better in order to solve it. If a company goes into administration, it goes into administration; the balance sheet is washed out automatically in that case. Why cannot we put that money into an escrow account or find some way in which that can be isolated from the company and remains the consumers’ money in trust? I do not understand why that is not a way forward. If the Minister could give me some clue on that, I would be very grateful.

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.

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.

These are also the most ambitious reforms better to target households in fuel poverty. The reforms enable the Government and energy suppliers to focus the support on those most in need and provide that support automatically to households in England and Wales.

I turn to the points made by noble Lords. First, in response to my noble friend Lady McIntosh, we will have a comprehensive challenge process. People who believe that they should be eligible will be able to check online and challenge any decision not to include them via the call centre.

On the point about targeting made by the noble Lord, Lord Teverson, 69% of fuel-poor households are in receipt of means-tested benefits. These reforms use the best data available to improve the fuel poverty targeting rate and will ensure that most households can receive their rebates automatically without having to apply. As I said earlier, these changes will be introduced alongside the £37 billion that the Government have announced to help with energy bills and the cost of living this year.

A number of noble Lords mentioned failing suppliers and the SoLR process. All suppliers of last resort have so far honoured the warm home discount rebates. The reforms we are making will, in fact, make it easier for them to do so in future. As I said, we are expanding the eligibility criteria.

In response to my noble friend Lady McIntosh’s point about social tariffs, the warm home discount replaced social tariffs in 2011, as it was considered a more transparent and consistent way of supporting households.

In response to the points made by the noble Lord, Lord Best, first, I thank him for hosting me at his event a couple of weeks ago. Where a tenant is named on the electricity bill or account of a particular participating supplier, they may be eligible to receive the warm home discount. This rule was adopted as the named billpayer is responsible for any payment issued on the electricity account and it ensures that we are able to verify customers’ eligibility and therefore reduce the risk of fraudulent claims. In the case that the noble Lord mentioned, where a landlord is supplied with the electricity, we encourage tenants to speak to their landlords and see whether they can also be listed on the electricity bill or account, which would enable them to receive the discount.

In the case of park homes, residents will be able to apply for a rebate under a special scheme called the park homes warm home discount scheme, which has been set up specifically for permanent residents living in a park home. Separately, many of our energy efficiency schemes around insulating properties apply specifically to park home residents. The special park homes scheme is funded by energy supplier contributions as part of the industry initiatives spending.

In response to some of the points made by the noble Lord, Lord Teverson, I am afraid that it is the case that, without perfect data, it simply is not possible to target fuel poverty 100%; I only wish it were. For that, we would effectively need household income data for all households, as well as data about the energy efficiency of every household. I am sure that many of my officials in BEIS wish that we had that data—it would make a lot of our schemes a lot easier—but, of course, we do not have it at the moment. This is an important first step, and we will always look to improve the targeting rate in future.

The universal credit rollout will allow some improvements, as will more comprehensive coverage of energy performance certificates—EPCs—which are also gradually being rolled out. Nevertheless, all the people benefiting from the scheme will be low-income households, even if they are not necessarily in fuel poverty, although, clearly, many of them will be.

On the point about Northern Ireland, the primary legislation for the warm home discount does not cover it. It is part of a different, all-Ireland energy market, so it would be very difficult for the scheme to be directly replicated.

On the point about prepay customers on smart meters, they can be credited directly. Those who are still on analogue meters are usually paid in vouchers, which enable them to access credit to top up their meters.

Moving to the points made by the noble Lord, Lord Lennie, we will lay the reconciliation regulations in the autumn—I am sure the noble Lord awaits them—ahead of the first reconciliation exercises conducted towards the end of the year.

With regard to the famous algorithm, the Government will apply a model that estimates households’ energy costs using property characteristic data. These characteristics are property type, property age and property floor area. They allow us to estimate energy costs accurately while, as far as possible, attempting to keep the process simple and transparent. This enables us to ensure that low-income households with the highest energy costs receive a rebate and that the vast majority of households receive those rebates automatically. The Government have been working with external experts to review and improve the algorithm and other statistical processes that we use in this system.

In reply to a related point from the noble Lord, Lord Teverson, we should accept that the scheme’s targeting will never be perfect, but it will be much improved. As additional data become available, we will attempt to improve it further in the future.

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?

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.

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?

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.