Think tank moots tiered energy bills to help meet basic needs

Energy bills should be restructured for at least six months to slash prices for basic gas and electricity needs, a right wing think tank has proposed as part of £37.3 billion emergency package suggested for the next prime minister.

The Policy Exchange’s plan for household energy bills, published on Thursday (1 August) ahead of Monday’s Conservative party leadership contest announcement, recommended a twin-track approach to supporting households.

The centrepiece of the package is a sliding scale Tiered Energy Relief Scheme, which would be complemented by a targeted welfare package of support for households in the greatest need.

Under the the scheme, household energy bills would be restructured for a six-month period with an option for an extension.

Each household’s first tier of consumption, worth 100 kWh of electricity and 350 kWh of gas per month, would be subsidised to 25% below the level of the October 2021 price cap, working out at a unit rate of 15.6p/kWh for electricity and 3.05p/kWh for gas.

The second tier of consumption, covering the next 75 kWh of electricity and 100 kWh of gas per month, would be subsidised below the current price cap level at a rate of 28.34p/kWh for electricity and 7.37p/kWh of gas.

The third tier of consumption, accounting for all monthly electricity and gas usage above 175 kWh and 450 kWh respectively, would be paid at the level of the October 2022 or the January 2023 price cap.

According to Policy Exchange’s paper, average households in the poorest ten per cent of the population would see their entire monthly consumption subsidised because it would fall into the first two tiers.

The top income decile would typically only receive support for just under half (47.6%) of their usage.

The scheme would also immediately absorb the cost of VAT and green levies on all residential energy bills, reducing household costs by an estimated £2.3 billion and £3.6 billion respectively.

The maximum reduction for the average household would be £936 over six months.

A key advantage of the tiered consumption structure over the price freeze, proposed by the Labour Party, is that it would maintain incentives for the most energy intensive households, with the greatest opportunity, to reduce usage, thereby helping lower overall demand and system-wide costs.

Policy Exchange said restructuring bills would also help to cut the rate of inflation, with knock on benefits in terms of government borrowing levels, and would be more affordable for the exchequer than a universal reduction in energy prices.

Combined with the proposed VAT and green levy deductions, the TERS would require a maximum £26.6 billion worth of funding, which the report said would be reduced by some households using less than their allotted subsidised consumption.

The approximately 1.8 million households living without gas would be offered a higher quota of subsidised electricity in the first two tiers.

The levels of support through the tiers could also be adjusted to withdraw or increase support depending on fluctuations in gas and electricity prices, according to Policy Exchange.

The second prong of the plan is targeted welfare payments for households containing larger families, disabled people, or those living in the worst insulated homes.

The think tank proposed £5.7 billion worth of additional welfare payments during the next six months for elderly and disabled people, who may have greater demand for electricity to run medical equipment.

In addition, the report recommended that a further £5 billion should be committed to the existing Household Support Fund, which was set up ex-chancellor Rishi Sunak earlier this year and is distributed by local authorities.

This expansion would enable support to be targeted towards households with exceptional needs, such as low-income households containing large families or living in poorly insulated properties.

These additional welfare payments would push up the overall cost of the package to £37 billion, the report estimated.

The report concluded: “A Tiered Energy Relief Scheme based on progressive consumption levels, and complimented by a targeted support package, is the most effective option in these difficult circumstances. It is our best opportunity to protect the most vulnerable and drive energy conservation while avoiding further interest rate hikes that could jeopardise essential service.’

The Policy Exchange’s proposals resemble the progressive deficit fund tariff proposed by energy retailer Ovo earlier this week as part of its 10-point plan for dealing with the energy crisis. However, the think tank said its proposals would be more progressive as the bill reductions would be funded from general taxation rather than being recovered from consumers over following years.

In the longer term, the plan proposed moving towards social tariffs for low income households and ramping up efforts to improve energy efficiency.