New data out today shows that Warm Home Discount — the main support scheme for people at risk of fuel poverty — reached nearly 650,00 more people in 2023/24 than the previous year. This is welcome news, but is just one part of the story — over the years Warm Home Discount has fallen behind both energy costs and inflation. As we head into the general election, energy affordability must be a top priority for the next government.

At Citizens Advice we help millions of people every year, and we’re speaking to more and more people who are struggling with energy affordability. In 2023, our advisors spoke to record numbers of people who couldn’t afford to top up their prepayment meters, leaving them in the cold and dark. Energy debt is now the most common debt we support people with — this April we helped more than 10,000 people with energy debts, a 77% increase compared to April 2021.

It might be tempting to think that the tide is turning. The average energy bill fell by over £200 in April, and is set to fall over £100 more in July. But the crisis isn’t over. Prices are still well above historic norms, and current expert forecasts predict that the energy price cap will rise this winter.

Energy prices significantly impact household budgets — especially as other costs rise

To better understand the impact of energy price changes on people’s budgets, we’ve carried out a new analysis using our National Red Index model. This draws on a combination of expenditure data from people who have contacted us for debt advice, and publicly available income and expenditure data.

The Index looks at negative budgets — where someone’s income isn’t enough to cover their basic essentials like rent and food. At the moment, 5 million people are in a negative budget and building up debt to get by. A further 2 million are living on empty — only escaping a negative budget by cutting their essential spending back to unsafe levels.

To help understand the impact energy costs can have, let’s look at 2 possible scenarios: 1) energy bills return to pre-crisis levels, and 2) events lead to a spike in energy prices similar to the height of the crisis*. The conclusion is clear: the next Government needs to introduce better targeted energy bill support going forward.

1. Even if bills returned to historic norms (around £1,200**), 1.5 million more people would be in a negative budget than before prices started to climb

We don’t expect bills to return to this level, but even if they did, millions of people who could previously afford their essentials before would still be unable to. While nearly 300,000 people might be pulled into a positive budget, that would still leave 4.75 million in the red — cutting back on essentials, and building up debt to get by. That’s compared to roughly 3.25 million in 2020–21.

The fact that 1.5 million more people are unable to afford the essentials reflects the cost of living increases across people’s budgets. High inflation for essential products, consistently high housing costs, and benefits not keeping pace with inflation are all factors contributing to the growing number of people living on a negative budget. The average size of people’s monthly shortfall has also increased, making it harder for people to climb out of debt.

2. If unexpected events led to another drastic price increase, the impact on people’s finances would be much worse.

Although prices aren’t predicted to return to their 22/23 peak, we know that energy prices are volatile and unforeseen events could lead to another drastic spike. We modelled the impact on people’s budgets if energy prices rose to £2,500***. A rise of this scale could push more than 850,000 more people into the red, leaving 5.9 million people who can no longer afford their essentials. That’s over a million more people than at the height of the crisis.

We’re living in a time of great uncertainty. While CPI has now fallen to 2%, the Housing Cost Indices (HCI) — which is a much better measure of inflation for low income households — is historically higher****. More targeted support is needed to help protect people against this volatility.

What needs to happen

It’s clear that existing bill support schemes are falling far short of what’s needed to support people, and fixing this needs to be the priority of a new government.

We think that the best solution is through further reforms to the Warm Home Discount, with expanded eligibility and support that is more tailored to energy need — so those with higher costs get more help. This could provide support of up to a third of a typical bill (currently around £560) to low income households with the highest energy costs. Below we model the number of households that would be helped out of a negative budget under each scenario if our proposal were adopted*****.

The impact of our proposal would be significant. In the event that we faced another drastic price increase, a tiered Warm Home Discount could keep a further 150,000 households out of the red. More support with energy efficiency will also help people reduce their bills over the longer term. We know that energy isn’t the only essential cost where help is needed. Introducing and improving social tariffs in other essential markets — like broadband and water — would provide further help for people to cover their bills.

There is a cost to these interventions, but the evidence is clear that the affordability crisis is far from over. Not addressing the issue will lead to higher prices from rising energy debt, and more hardship for those who are already struggling the most. Fixing the problem of energy affordability will be a key test for the next Government.

*This modelling uses the Citizens Advice National Red Index monitoring tool. You can find out more about the methodology used in the tool at our website here.

**The price cap value in Winter 2021 was £1,216

***Between October 2022 and June 2023, when energy prices were at their highest, the cost for an average bill was capped at £2,500 by the Energy Price Guarantee.

***The most recent available data (to March 2024) puts HCI at 4.4%

***** Our tiered WHD discount proposal is designed to provide up to a third of an average bill to people on means-tested benefits with the highest energy costs. We applied a reduction on energy bills to eligible households in our national red index model. For scenario 1 we applied £600 to a quarter of households with the highest energy costs, £400 to the next quarter, £200 to the following quarter, and £0 to the final quarter. This payment was added to clients bills equally over the winter period (Oct — March 2023/24). Our tiered WHD option is designed to be responsive to changes in energy costs (to a third of energy bills), and therefore for option 2 we applied savings of £800, £530, and £265 respectively. The graph assumes a HCI inflation rate of 3.2%.