The Department of Energy and Climate Change (DECC) has changed the way it defines fuel poverty – seemingly lifting two million households out of it in the process. But is it an improvement?
A close inspection of new DECC figures released today shows that while the new definition still has significant problems, it helps illustrate how difficult the situation is for millions of the UK’s most vulnerable households.
Previously, any household that spends more than 10 per cent of its income on fuel was classed as fuel poor. While the definition was easy to calculate, it wasn’t particularly accurate.
DECC tells us that under the old definition there was a significant group “inaccurately being classified as fuel poor”. In particular, the measure included richer households that could afford to spend more than 10 per cent of their incomes on energy.
The old definition was also dependent on fuel prices. If there was an unexpected jump in the cost of gas or electricity, lots of households would suddenly be classified as fuel poor. This made it harder to measure the effect of government policies, regardless of the effect of government policies.
The new definition: Low Income, High Cost
To address these problems, the government asked Professor Sir John Hills at the London School of Economics to come up with a new definition. After a prolonged consultation period, a slightly adapted version of his Low Income, High Cost (LIHC) measure has now replaced the 10 per cent measure.
There are two parts to the LIHC definition. To be considered fuel poor, a household must spend more than the UK median on its energy bill – and that expenditure must push it below the poverty line.
The government prefers this measure as it is less responsive to fuel prices changes – if energy costs go up, so does the median amount households have to spend. It also prevents rich households from being classified as fuel poor.
The LIHC measure is also more detailed. It allows the government to assess how much money must be spent on the problem. The LIHC allows the government to work out how much lower a household’s fuel bill would need to be – or how much higher their income would need to be – to no longer be fuel poor. This is known as the poverty gap.
So the LIHC doesn’t just calculate how many households are in fuel poverty, it also assesses how severe the problem is for each household.
New definition, new problems
But the new definition also has problems.
While the new definition doesn’t inaccurately include some households that can afford to pay energy bills, it is now excluding some that can’t, says Peter Smith from fuel poverty charity, National Energy Action.
Under the LIHC measure, some households that spend a large amount of their income on fuel costs – up to 30 per cent – are no longer considered fuel poor because they stay just above the poverty line. This creates a new problem, as those households are no longer eligible for government support, despite their incomes being significantly strained by energy costs.
So by changing the definition to better identify households most vulnerable to fuel price hikes, the government is in danger of overlooking households already feeling the strain, Smith says.
Today’s statistics show the situation is getting more severe for fuel poor households.
The graph below shows the average amount of extra income households would need in order to get out of fuel poverty (the red line) is steadily rising.
DECC says the increase in the poverty gap is largely down to rising fuel costs, which affect households with high energy costs and low incomes the most.
That’s because higher energy prices have a greater impact on the incomes of households that spend more on energy bills – with a five per cent rise costing a household that spends Â£1,500 on energy Â£75, compared to Â£60 for a household that spends Â£1,200, for instance. And if the household also has a low income, the cost jump is more keenly felt.
Helping fuel poor households
The Energy and Climate Change committee recently criticised the government’s main policy for helping fuel poor households – the Energy Companies Obligation (ECO) – for failing to reach many of the most vulnerable households.
The latest figures show that – however it is defined – fuel poverty remains a problem for millions of households, and the government isn’t doing enough to prevent it.