Social energy tariff needed by April 2024

Citizens Advice is calling on the government to introduce a social energy tariff by April next year to help the increasing numbers of households struggling with their bills.

A new report by the Social Market Foundation (SMF) and Public First, commissioned by Citizens Advice, recommends the introduction of taxpayer-funded lump sum cash payments to certain households according to their income and energy use, which it describes as a social tariff.

It warns that existing systems to target support are “inadequate”, with the current method of using the social security system to deliver bill support being incapable of reaching all those who might reasonably be considered in need of support.

“Using it to deliver that support means giving public money to those in less need,” it says.

As an example, the report states that 12 million households with an average bill of £3,000 would spend more than 10% of their income after housing costs on energy. Targeting energy bill support at means-tested and disability benefit claimants, it adds, would reach just half of these households.

Additionally, the report points out that not every consumer who needs help is in the benefits system.

“With bills at £3,000, some 76% of households in the poorest decile face spending over 10% of their income on energy after accounting for housing costs. But only 45% of households in that income group claim means-tested and disability benefits,” the report adds.

It adds that while using state pensions to determine who gets help brings another 11 million households into scope, this would result in public funds being received by those who “appear to have little need of it”.

“Using the state pension as a criterion for energy bill help means around one in three households in the highest income decile would receive government support. The UK needs a better mechanism for identifying and assessing household need over energy bills,” it concludes.

As a solution, the report recommends introducing a formula-based lump-sum payment which would deliver up to £1,500 in support.

Under this approach, household income data held by HMRC would be pooled with consumption data held by energy retailers and matched to identify households in fuel poverty. This would be undertaken by the Department for Energy Security and Net Zero, with the targeting regime built on the existing mechanism for determining eligibility for the Warm Home Discount.

“In the long-term, there may be a case for transferring this targeting and identification work to an arms-length body that could also offer ministers independent advice on the correct levels of bill support that should be provided at any given time and market condition,” the report suggests.

It is estimated that this policy would cost £6.5 billion and benefit 12.3 million households.

“This is the most progressive policy we modelled: 66% of households receiving lump sum payments would be in the bottom three income deciles. The average payment for beneficiary households in the lowest income decile would be £853, falling to £90 for those in the fifth income decile,” the report explains.

Other options explored in the report include a fixed-value bill discount and a unit-rate discount.

Although the preferred option involves making cash payments to customers, SMF believes any of the three options can be fairly described as a social tariff.

“While that term is used increasingly loosely in debate around energy policy, we believe that all three meet the definition because they have the effect of ensuring that an eligible household pays less for a given quantity of energy than a non-eligible household would pay for the same quantity,” it says.

It adds that in all of its scenarios, the bill reduction experienced by recipients of help would be less than the cash value of the payments made, since those households would have a behavioural response, increasing energy use slightly in response to their energy becoming cheaper.

Elsewhere, Citizens Advice is calling for a “national programme” of loft and cavity wall insulation for all fuel poor households.

It claims that for a cost of £1.1 billion, more than a million households could save up to £561 annually.

Clare Moriarty, chief executive of Citizens Advice, said: “Energy affordability is a long-term problem that needs a long-term solution. A social tariff protects millions of people from spending excessive amounts on their bills.”

Dhara Vyas, deputy chief executive of Energy UK, added:  “Energy UK welcomes this research. It solidifies the need for more targeted support for consumers on an issue which requires an enduring solution, such as a social tariff.”

She added: “Improving energy efficiency in homes will help people lower their costs in the long term, whilst strengthening the UK’s security of supply and boosting economic growth.

“To ensure continued support for everyone and ease the burden of high living costs, suppliers are ready to work with the government to make progress with the introduction of targeted support, such as a social tariff, no later than April 2024.”

A Department for Energy Security and Net Zero spokesperson said: “We know this is a difficult time for families, which is why the government covered around half of the typical household’s energy bill over the winter.

“Energy bills support will continue through our Energy Price Guarantee until April 2024, in addition to targeted support for the vulnerable including a £900 payment for those on means-tested benefits.

“In addition to this, the government is investing £6.6 billion in this parliament to make buildings more energy efficient. This includes a new ECO+ scheme which will roll out energy efficiency measures such as cavity wall insulation to hundreds of thousands of households.”