Government must invest in an exit strategy from bills support

It looks like it may turn out to be history’s most expensive post-party clean up.

Until very recently, the industry consensus was that any government intervention to deal with the energy crisis was unlikely to happen until later in the summer, when the picture would be clearer on the precise scale of the hike to the price cap hike facing customers this October.

However, Ofgem’s announcement that the price cap looks set to rise to £2,800 this winter, issued the day before the publication of the report into the now notorious Downing Street parties, seemed to turbo-charge the process.

This teed up Rishi Sunak’s announcement two days later, in which the chancellor of the exchequer announced a fresh £15 billion of support for cash-strapped customers.

Josh Buckland, a former government special advisor, muses that this speedy timetable marks a departure from the delays that typically characterise high-profile energy announcements.

“You can take the cynical view that it was about the Sue Gray report, there was a general view that they needed to act sooner rather than later.”

Paying tribute to the campaigning of the welfare charities, spearheaded by consumer champion Martin Lewis in the run up to Sunak announcement on energy bills, he says: “They’ve done a really good job of pushing energy up the agenda.”

However, there were industry nerves ahead of the announcement that the government would come out with proposals which would prove unworkable due to the low level of engagement that had taken place beforehand.

The outcome was a “pleasant surprise”, says one industry source, who adds that the package was “very generous” and much better targeted at low-income households than Sunak’s previous first stab at tackling the issue earlier this year.

Matt Copeland, head of policy and public affairs at National Energy Action, says the £15 billion package will mitigate the bulk of this year’s bill hikes for lower-income households.  “The absolute worst-case scenario has been averted.”

However ,even this generous package doesn’t take away the pain for those households who were already struggling to avoid fuel poverty before the recent surge in prices took hold.

Inflation will eat up much of the support

Adam Bell, the former head of energy strategy at the Department for Business, Energy & Industrial Strategy (BEIS), points out that such individuals will be under “tremendous pressures” from increases in other costs, notably food, and will still face budgeting struggles.

“With inflation at 10%, a lot of that money is going to vanish with the increased cost of living, no matter whatever saving measures people take.

“There’s still a lot of people who are going to find this winter, very, very challenging, and I would expect bad debt to increase as a result.

“It would be great to find a way of just taking those off the bill in advance, just to make sure that that money is directed exactly to where it is needed.”

The Warm Home Discount (WHD) provides a mechanism for pumping money directly into low-income customers;’ accounts, ensuring that supplies can be maintained. While the WHD’s coverage of low-income customers is patchy, Bell believes that this could have been expanded “relatively quickly” via secondary legislation. However, the Treasury, which was in the driving seat on last’ week’s announcement, had less understanding of how the scheme worked than BEIS and needed to find a solution fast, he says.

The patchy nature of the WHD also means ramping it up would not capture the working poor, unlike universal credit, says Buckland: “The big challenge they’ve got is obviously those who just fall out of that net. You’ve got a big chunk of the package that isn’t very targeted, but at least it is giving material support to everyone, which mean they have not completely slipped through the net.

“Prices are going up so much, there are lots of people who are clearly really struggling so you do need to channel some money into those groups. The problem is how you find them because they are not on means tested benefits and they’re not going to qualify for the WHD discount.

“They decided to do something that is universal to ensure those people got something. Clearly there is a question around those on higher incomes but it’s a necessary consequence of trying to capture everyone. That probably means that it’s a justifiable intervention overall.”

Copeland agrees, adding that the majority of the support is targeted and that around a quarter of fuel poor households are not receipt of any benefit so would be missed otherwise.

“There’ll be lots of households who are just about managing on very low income. That’s, the rationale to maintain and increase the universal piece because that will mean that everyone, including those people, get some level of support.”

Daniel Newport, BEIS’ former head of heat and buildings strategy agrees, saying: “The benefits system is the right way to help people and it’s the right way to target people that need help.”

The need for more sustainable interventions

While the autumn’s budget will once again be dominated by the cost of living, it may not be as energy focused as recent announcements have been, says Buckland.

And it won’t be feasible for the chancellor to keep on coughing up the kind of huge sums that he handed out last week, even though current energy prices look set to remain, Bell says: “The government may just be hoping that something turns up next year, but I would not be betting the fortunes of the entire population on something turning up.”

Even if the Ukraine conflict ends before then and supplies begin to return to normal, he believes it’s difficult to see a return to the status quo soon.

Buckland says: “These kinds of direct payments, especially to all households, just isn’t sustainable and it’s very expensive.

“You are probably looking at further intervention to target support to low-income households but the idea of doing something universal at the scale they did this time round is unlikely.”

Newport, who now works for the Tony Blair Global Institute, says: “We can’t just drop the sort of short-term support approach overnight. We should expect that to be a feature of the landscape, some extent, over the next few years at the very least, but we need a more sustainable set of interventions.”

On the plausible assumption that energy prices will stay high for three years, the case increases for more structural interventions, like a major energy efficiency retrofit programme, through a big increase in the Energy Company Obligation (Eco) programme, says Buckland: “If they’re going to do anything good value in the medium term, it needs to be something that is structural rather than just near-term funding.”

The lack of any fresh steps on energy efficiency in the cost of living support package announcement was “deeply disappointing”, says Bell: “There’s still no understanding that reducing our exposure to these costs is always going to be the best option in the long run.”

The first thing the government must do is crack on with initiatives they have already signed off, such as laying down the legislation for the Eco4 programme and implementing its promises to introduce new minimum energy efficiency standards for new properties, says Copeland.

Secondly, he advocates the introduction of a social tariff for low-income customer that could cap on the kilowatt per hour price, offering greater savings for heavier users than the flat rate payments dished out last week.

The scale of support on offer means suppliers can afford to be a “little bit more lenient” than they could otherwise have been, says Copeland, who adds they must also stop installing costly legacy pre-payment meters.

The sheer scale of this year’s energy price shock and the government’s response also creates a wider macro-economic argument for these long term solutions, says Newport: “We are still looking down the barrel of a recession, because of the remaining impact on people’s disposable incomes. How many shocks like that, can you afford?

“The central argument now for going harder on the transition is that it’s not just cheaper, it’s also much more stable.”

However, the scale of recent interventions means that the Treasury has set itself a big challenging, Newport says: “I would be sat there in the Treasury thinking we’ve set ourselves a very difficult precedent, we should also be investing in in an exit strategy.”

The need for a long-term solution to affordability issues is at the heart of Utility Week’s Energy Reset campaign. Download our major new report on the subject for free here.