How to price below the cap

As each week brings dire forecasts of what energy bills will look like come winter, a frantic discussion has gripped the sector on how to help consumers. Put simply, immediate action is required if we are to avoid a cataclysm for the poorest households. Is a social tariff, favoured by several key players, the solution? If so, what will it look like and how soon could it be implemented? Adam John asks the experts.

“The situation is absolutely dire…We have to do something very profound, we have to do it quickly, because all the time we are sitting here the clock is ticking and the price of gas keeps on increasing,”  says Derek Lickorish, former chairman of the government’s Fuel Poverty Advisory Group and currently non-executive chairman of Utilita.

He is far from alone in these thoughts. Fuel charity National Energy Action (NEA) recently predicted that more than 8 million households – one in three in the UK – will be in fuel poverty following October’s price cap increase.

Things are set to get even worse in January as changes to the price cap methodology will see it rise to well over £4,000, perhaps even passing £5,000 according to some estimates.

The crisis is so bad that even the government’s £11.7 billion Energy Bills Support Scheme, which will see most households given a £400 discount off their bills this winter, will do little to stem the tide of soaring prices.

“Current financial support will be inadequate as much of that money will be spent before winter kicks in. We are facing the bleakest of winters,” NEA chief executive Adam Scorer recently observed.

Against this backdrop of rising costs, urgent talks between energy bosses and government ministers have so far come to naught and no new measures to alleviate the crisis have been announced, with Boris Johnson doubling down on his insistence that it will be for his successor to handle.

As the latest forecasts indicate the price cap will rise to levels no one previously thought possible, a frantic discussion is taking place within the sector on how best to mitigate the worst impacts of the crisis on consumers.

Over the past year a multitude of voices have come out in favour of introducing a social energy tariff, priced below the cap in order to help the poorest households. From retail chief executives such as Keith Anderson of Scottish Power and Michael Lewis of Eon, to MPs on both government and opposition benches, calls for such a tariff to be introduced are becoming louder.

Furthermore in its report on the energy retail market, the Business, Energy and Industrial Strategy (BEIS) Committee recommended the government introduce such a tariff alongside a relative price cap for the rest of the market, once wholesale energy prices have stabilised.

Although mooted as a possible solution to alleviate the current cost of living crisis, social tariffs are not a new concept in the energy sector and in the mid-2000s retailers were voluntarily offering them to their poorest customers. They were however superseded by the Warm Home Discount which was seen by the government as a more effective solution.

Matt Copeland, head of policy at NEA, tells Utility Week that there is now “significant momentum” behind the idea of reintroducing social tariffs in the sector.

“There’s quite a lot of political salience behind the idea of a social tariff now, but it’s not limited to politics…there are a number of utilities that are calling for a social tariff in energy,” he explains.

Despite the enthusiasm, there is no consensus on what a social tariff in today’s market would actually look like, with differing views on how one should be funded and what additional support would be available.

In NEA’s case, the charity would like to see a combination of a mandatory social tariff for the poorest consumers, the existing price cap for the rest of the market, as well as retaining the Warm Home Discount.

Copeland adds: “Through the same mechanisms that suppliers can identify low income households for the Warm Home Discount (WHD), they could automatically identify all of their customers who are in receipt of means tested benefits and then be mandated to offer them a social tariff, which would be below the price cap cost, so a lower unit rate.

“You could do different things like remove the standing charge…You could have a completely different tariff structure.”

Using WHD data to identify households who are in the most need of additional help is an option also favoured by Lickorish who, as former chief operating officer of EDF Energy, oversaw the introduction of the company’s social tariff in 2006.

He tells Utility Week: “At the moment there are 3 million people on the Warm Home Discount. That is determined by the Department for Work and Pensions (DWP). They tell those customers, they tell the suppliers who to pay it to.

“The DWP has got data on a lot of other benefits. So data science should enable us to identify other potential recipients.”

Lickorish believes tapping into DWP data could mean up to 8 million people receive support in this way.

An expanded WHD?

Social tariffs are just one solution of several and there have been calls advocating more funding to help tackle rising bills.

Dan Alchin, deputy director of retail at Energy UK, asks: “One of the interesting things about the social tariff is we do have a social price support scheme already. One of the key questions for me is – and this is not to say social tariffs are a bad thing – what’s the objective and how is that different to the objective of the Warm Home Discount? And is a social tariff the best way of delivering that?

“If we’re trying to target the same people that currently receive Warm Home Discount – and the question is does it provide enough support at present – then is the answer a social tariff or a bigger Warm Home Discount?”

For Lickorish, expanding the Warm Home Discount, which he describes as a “blunt instrument”, in lieu of a social tariff is not an effective solution as the scheme does not reflect actual energy consumption, whereas a social tariff would.

He adds: “At the time when the Warm Home Discount came in, we probably had annual energy bills of under £1,000 a year. We’re now talking about £4,000 a year.

“The Warm Home Discount has its value, but it’s a blunt instrument. And also, I like the notion of any assistance we give to this group going to the electricity bill, because then it ceases to be inflationary. If the money comes off the bill, it doesn’t find its way into the inflationary cycle.”

Elsewhere, other industry chiefs have their own ideas about what a social tariff should look like and how it should be funded.

Giving evidence to the BEIS Committee earlier this year, Scottish Power chief executive Keith Anderson suggested the government introduce a deficit fund in October where £1,000 will be taken from the bill of fuel poor customers, put into a fund and repaid over a 10-year period.

“You can spread that across the whole consumer base, or government can partially fund it,” Anderson added.

Ultimately, the Scottish Power boss believes the price cap should be replaced with a social tariff.

“Right now, people on a prepayment meter pay more, and that is perverse. A social tariff should be brought in to discount the price for people in fuel poverty and those on prepayment. The cost of that should be borne by those who can afford to pay,” he said.

Eon Energy boss Michael Lewis however believes that as well as a social tariff for the poorest, the price cap should be redesigned to cap the difference between suppliers’ cheapest and most expensive tariffs – a relative cap.

In his evidence to the BEIS Committee, Lewis said: “The key point is that a fixed-price tariff in a market is very difficult, without creating unintended consequences. If you move to a relative cap, you move away from those unintended consequences, plus a social tariff for vulnerable customers.”

Like Scottish Power, his company’s position is that a social tariff should be the cheapest available and funded by everyone else in the market.

Yet spreading the costs over the consumer base in this way is not favoured by NEA, which wants to see the tab picked up by general taxation.

Lickorish agrees, stating that “there is no way that the market can withstand that kind of cross-subsidy. It has to be a properly funded social tariff by the Treasury”.

Whilst admitting this would lead to more borrowing, he said it is something that is “essential if we are to take the stress out of this for the poorest”.

The view from Westminster

While Parliament itself is in summer recess MPs have joined the frenetic debate on possible solutions to the crisis, with several in favour of social tariffs.

“It’s an injustice that the poorest households continue to pay higher energy costs because they’re on prepayment meters. This must end and a social tariff should be brought forward,” Darren Jones, Labour MP and chair of the BEIS Committee, said in response to his committee’s report.

“This is an initiative, I would say, we need to be putting in place pretty quickly when Parliament comes back in September, when of course there will be a new government,” Conservative MP Peter Aldous adds.

Yet not all are in agreement, and Conservative MP John Penrose, himself a strong advocate of a relative price cap, believes the situation is too big for social tariffs to resolve.

He tells Utility Week: “In normal times, a single, simple social tariff to help the small number of most vulnerable customers would be an obvious and sensible solution. But it isn’t the answer to today’s spiralling energy bills which are affecting a lot more of us.

“That needs bigger and broader long-term answers like fundamental market reforms to get the falling price of renewables feeding into customer bills, and a relative cap to fix the loyalty penalty too.”  

Asked about where the political landscape lies, Penrose acknowledges there is a consensus that something needs to be done and help is required.

However, he adds: “I don’t think there is a consensus and a coalition coalescing around any one potential solution yet. It may be that the Select Committee’s report will be the beginning of that coalition starting to coalesce. But it’s early days yet.”

If the government does follow the BEIS Committee’s recommendation of a social tariff, it will probably take many more months before it can implemented.

As Alchin observes: “If you’re looking at solutions for this winter, then I suspect a social tariff probably isn’t one of them because it would take time and that’s not on our side.

“But if you are looking at addressing the longer term questions around affordability and ensuring customers in vulnerable circumstances and those at risk of fuel poverty can afford their bills, it’s certainly an option on the table.”

Yet there are others like Lickorish who believe if the work is put in now, a social tariff could be possible by 1 January.

Whoever succeeds Johnson as prime minister, their first order of business must surely be tackling the cost-of-living crisis. They must act fast though because, as Lickorish observes, the clock is ticking and prices keep increasing.

Supporting customers through this winter and identifying emerging vulnerabilities are among the key themes at the Utility Week Forum, which will take place in London on 8-9 November. Find out more here.