Fairer, warmer, cheaper: new energy bill support policies to support British households in an age of high prices
This report, produced for Citizens Advice by the Social Market Foundation and Public First, was the culmination of a nine-month project developing a framework to help consumers navigate an era of high energy prices. It reaches the following conclusions and recommendations:
The current system of policies supporting households with high energy bills is inadequate for an era of high energy bills. It should be replaced. A new policy framework should be in place by spring 2024 and form the basis of energy bill policy for the rest of this decade.
It should include a social tariff arrangement whereby households spending an excessive proportion of their income on energy bills should receive targeted financial support to reduce those bills.
Eligibility for the social tariff should be determined by the state without the need for active participation or application from households. It should then be delivered by energy suppliers.
Eligibility for the social tariff should be based on household income and household energy consumption. Receipt of means-tested benefits should be one qualifying condition, but not the only one. The significant number of households with low incomes who are not in receipt of benefits should also qualify for the social tariff.
To deliver the social tariff, central government should develop a new mechanism for identifying qualifying households. This mechanism should build on the current system for determining Warm Home Discount (WHD) eligibility in the first instance, but in the longer term, policymakers should consider transferring the job of identifying eligible households to an arms-length body with a remit to review the quality and availability of data needed for that identification, and make recommendations on its improvement.
The social tariff eligibility mechanism should be based on matching HMRC’s Real Time Information (RTI) on taxpayer incomes with data from the energy industry on households’ energy consumption. These sets of data should be shared with the Department for Energy Security and Net Zero (DESNZ) which would determine which households qualify for the social tariff and communicate that to suppliers.
We accept the limitations of HMRC RTI data in this context, largely arising from doubts about how accurate and timely the addresses reported for employees are. But we note that on RTI’s own terms, employers should be providing up-to-date information on employee addresses in their RTI submissions. We also note that the current WHD eligibility mechanism makes use of HMRC incomes data, so this is not an untested approach. We also conclude that even an imperfect new system would be better than the status quo.
The precise form of the social tariff warrants further consideration by policymakers, but the analysis here suggests that the most progressive and fiscally efficient form would be a lump sum payment that varies according to a formula that takes into account household income and energy use. We recommend this option is carefully considered as the central pillar of energy bill support policy from 2024 onwards, although we acknowledge that some of the other policies modelled here also have merit.
The precise level and scale of support delivered via the social tariff should be determined according to prevailing market prices, household incomes and other economic factors. But drawing on our analysis of bills, incomes, public opinion and stakeholder views, we suggest that where annual bills are in the region of £3,000, the social tariff should deliver support of around £900 to the typical eligible household.
The case for this formula-based lump sum payment remains strong with energy bills at £2,500 a year, since the greatest share of public money spent via the policy still goes to households on lower incomes and payments to high-income households are avoided. On that basis, this policy should be the leading option for implementation, even if bills are £2,500 or less.
The current WHD scheme should be folded into the new social tariff mechanism, meaning WHD would cease to exist as a standalone policy.
Whatever level of support is delivered via the social tariff, funding should come from general taxation rather than levies applied to energy bills. This is an exercise of social policy rather than energy policy and should be funded by the state. Further, the level of funding required for a meaningful social tariff policy means that funding via on-bill levies would require such levies to be of a scale that is politically undesirable.
Energy efficiency improvement policies should prioritise addressing fuel poverty over overall reduction in aggregate. But demand reduction should remain a high priority of public policy more widely.
Using the enhanced targeting system recommended in this report, the scale and ambition of the ECO regime should be significantly expanded. Better targeting makes this feasible by reducing the search costs of energy suppliers. Instead of knocking on doors looking for eligible households, suppliers would start with an identified pool of high-consumption, low-income households. Adding the VOA data on property characteristics currently used for WHD eligibility would further enhance this process, though we note the limitations of EPC data and support its improvement.
Our primary recommendation on energy efficiency is therefore that the ECO regime be further enhanced with significantly wider ambitions. Such ambitions could encompass the aim of carrying out loft and cavity wall insulation improvements for all fuel-poor households. We estimate this would carry an aggregate capital cost of £1.1 billion and deliver average annual bill savings of more than £550 for a fuelpoor household where both loft and wall improvement is carried out, as well as reducing those households’ need for bill support payments over time.
We do not argue for a fixed timetable for this ambition to be realised, but believe it can and should be delivered within the lifetime of a normal Parliament.
Funding for this expanded ECO regime should continue to be raised via on-bill levies, consistent with the current approach. Policymakers should engage more with public opinion to make the cases for this.
This report was originally published on 8 March 2023. An amended version was published on 9 March 2023 that corrected some typographical errors.