Councils combat energy 'poverty premium'
People living in poverty face higher energy costs. Some councils are trying to combat this. Sheffield council launched Sheffield Money, a new loans service that could save the city’s poorest residents a combined £20m a year. Councils around the country are also using collective switching to help residents move to the best deals. The council signs up as many people as possible and takes part in an auction with energy firms. Nottingham city council has launched its own energy company which will run on a not-for-profit basis and aims to undercut the big providers. Bristol council plans to do the same. Plymouth is considering a similar move.

Being poor comes at a cost. The best bank accounts, borrowing rates and energy tariffs are all reserved for people who are in a position to shop around. And if you do not have a clean credit file or access to up-to-date technology you can expect to pay more for almost everything you buy.

In the summer, Citizens Advice Scotland reported that people living in poverty were paying roughly 10% more for essential goods and services, while according to a report from 2014 by the east London charity Toynbee Hall, residents of Tower Hamlets pay a “poverty premium” of up to £1,014 a year, consisting mostly of higher energy costs, car insurance and loans.

This isn’t a matter of not being a savvy shopper or failing to compare prices before you buy. It is a matter of not having access to the best deals. When every penny counts, being charged more than the next person for the same goods and services can cause bigger problems further down the line.

The cost of being poor

Higher energy costs can be the hardest to avoid. Energy bought through prepayment meters is still more expensive than that bought on a standard tariff paid for by direct debit, and the premium over online accounts is even bigger. In July, Citizens Advice said prepayment customers were paying on average £226 a year more for their energy than those on the cheapest online deals.

Householders can switch between prepayment tariffs, but there is little competition so the choice – and saving – is limited. To get the best deals, as well as internet access, you need a good credit record. Even with these, private renters can find it hard to switch payment types. While the regulator Ofgem says a landlord cannot prevent you switching meters, you may have to switch back at the end of the tenancy, and the associated costs could be off-putting.

The less choice you have about where to borrow, the higher the cost

Some of the same things that might lock someone out of the cheapest energy deals could also prevent them getting the best mobile phone tariffs. Again, the best deals are often reserved for those with a good credit record who can sign up to pay monthly by direct debit, rather than pay upfront with a pay as you go phone.

And while there is a price war on loans for the most-creditworthy borrowers, interest rates for those on low incomes or with poor credit histories remain high. The crackdown on charges for payday loans – which included a cap on rates – has made a big difference to the cost of that form of short-term borrowing and stopped loans spiralling out of control. Still, the less choice you have about where to borrow, the higher the cost.

Personal loan rates among mainstream lenders are heading towards 3% on large sums, but some short-term lenders are still charging almost 100 times as much for smaller amounts. And goods bought on credit from monthly payment stores come with high interest rates, charged on prices that are already not the keenest. While a middle class consumer can be assured that if they buy their fridge freezer from John Lewis they will get the best price on the high street, someone who needs to pay it off on a month-by-month basis can expect to pay more for the item before the credit is even added.

The fundamental reason for all of this is creditworthiness, and banks’ reluctance to take a risk on a consumer without a track record of repayments, whether this is because they have had a poor credit record, have had periods of unemployment, or have simply moved around a lot, perhaps through no choice of their own.



Finding the best deals

Some councils are trying to address this problem by offering new ways to borrow and buy energy. In Sheffield the council recently launched Sheffield Money, a new loans service that it believes could save the city’s poorest residents a combined £20m a year. Via a website, phone line and branch it is offering access to loans from credit unions and not-for-profit providers, with annual interest rates ranging from 12.67% to 89.9%. On a £500 loan taken out over a year, many borrowers will be able to save £300 in interest payments.

Councils around the country are also using collective switching to help residents move to the best deals. The council signs up as many people as possible and takes part in an auction with energy firms. Residents are then told how much they can save and are given the choice as to whether to move.

Most councils have encouraged registrations offline, through leaflets distributed to households, sign-up events, and by allowing people to register for friends and relatives. And there are signs this approach is working. A government study of collective switching published in 2013, showed that across the country 9% of switchers did not have internet access, while in some parts the figure reached two-thirds. A third of those moving had not done so in at least the last three years.

Nottingham city council has gone further, and has launched its own energy company, which will run on a not-for-profit basis and aim to undercut the big providers. It said its first customer cut their energy bill from £2,000 to £1,400 a year. Bristol council this summer approved plans to do the same. Will Straw, co-author of an IPPR report, City Energy: a new powerhouse for Britain (pdf), said Plymouth is another council looking to set up its own energy services company, spurred on by the government’s devolution agenda.

Ofgem is working with suppliers to remove some of the barriers to switching that prepayment customers face, and to try and get tariffs down, but it is not clear how and when this might happen. In the meantime, those forced to choose between heating and eating have their problems compounded by bills that are higher than if they were online and able to pay by direct debit.

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