It is the Panel’s view that the UK’s system of energy price support is no longer fit for purpose. We believe that a comprehensive and flexible social tariff is required to ensure vulnerable consumers can heat their homes and access required energy services.
This summer to reflect on our recommendations for a social tariff we consulted Scottish communities to understand what others are looking for from a social tariff. We have since published our recommendations for a social tariff. We are using these to influence the thinking of the UK Government, assuming they deliver their stated intention to consult on a system of energy bill support, including a social tariff. This blog describes thinking on aspects of social tariffs which our Research Manager identified in his literature review.
A social tariff is a scheme that lowers the energy bills of specified consumers. Social Tariffs can work by discounting a customer’s unit rate, standing charge, bill rebate, or a combination of these. Social tariffs are not new. They were previously offered voluntarily by big energy suppliers in the late 2000s. However, these voluntary social tariffs were phased out when the Warm Homes Discount (WHD) was introduced in 2011. The WHD attempts to support vulnerable consumers by providing eligible households with an annual £150 discount on their energy bills.
Objectives for a social tariff.
There are many possible objectives for a social tariff. For example, a social tariff could be designed to meet the same, or some of, the objectives held by the Department for Energy Security and Net Zero (DESNZ) when they designed last winter’s domestic energy support, such as, to:
- reduce annual bills,
- prevent energy under consumption,
- reduce consumer self-disconnection,
- reduce fuel poverty,
- align with existing energy system,
- reduce inflationary pressure,
- provide financial support to those who use alternative fuels, or,
- support households with no contract with an energy supplier.
A reading list for social tariffs
Our research manager, Fran Eatwell-Roberts, identified a number of papers on social tariffs for us to reflect on, including:
- Social Market Foundation, Public First and Citizen’s Advice (March 2023) Fairer, Warmer, Cheaper (here)
- Energy Action Scotland (April 2023) Social Justice and Social Security Committee (here)
- Prof Fetzer (April 2023) Written evidence submitted by Professor Thiemo Fetzer Department of Economics, University of Warwick (here)
- EDF (April 2023) Written evidence submitted by EDF (here)
- Tony Blair Institute for Global Change (Sept 2022) Staying Power: A Long-Term Framework for a Long-Term Crisis (here)
- Fuel Bank Foundation (Oct 22) Letter to the Prime Minister (here)
- National Energy Action, Age UK, Scope, Fair by Design, and Energy Action Scotland (Jan 23) Letter to the Chancellor of the Exchequer supported by 95 charities (here)
- Fair by Design and NEA (July 22) Solving the Cost of Living Crisis (here)
- National Institute of Economic and Social Research (Feb 2023)Written evidence submitted by The National Institute of Economic and Social Research (NIESR) (here)
- IPPR (Aug 22)Freezing the energy price cap could fight inflation and support households (here)
- New Economic Foundation (sept 22) Warm Homes, Cool Planet: A package to fix the UK’s energy price crisis (here)
- Age UK (March 2023) Keeping the lights on: The case for an energy social tariff (here)
- Policy Exchange (Sept 22) A plan for household energy bills (here)
- Countryside Alliance (March 23) Briefing Note: Cost of Fuel and Rural Households and Communities (here)
Debate within the literature
After a review of these sources, the Panel identified key questions within the literature, including:
Who should benefit from a social tariff?
All the work Fran identified argued that given today’s high energy prices, support could not simply be restricted to households in receipt of means-tested benefits. Eligibility needs to be expanded to include lower income households who are not in receipt of benefits, and households with greater than average energy expenditure needs (e.g., due to family size, ill-health, disability, or poorly insulated homes).
Despite a consensus for a wide eligibility criteria, the literature showed that there are people who warn against widening eligibility too far. The rationale for this is that helping those “able to pay” can be seen as wasteful and financially unsustainable; others said that providing short-term support to those “able to insulate” risks blunting incentives to improve home efficiency; finally, others argue that constructing a reliable eligibility criteria that extends beyond the benefits’ system is operationally difficult.
How could eligibility criteria work?
Fran identified a range of views. At one end, there are organisations who are optimistic about the ability to quickly create eligibility criteria, there are others who are more pessimistic.
The optimists present thoroughly researched plans for a system of automatic enrolment. This could be established by linking data held by HMRC, DWP, and energy companies. Proponents cite examples where versions of this have already happened (e.g., to determine Warm Home Discount eligibility). Others suggest that a basic system of automatic enrolment could be established quickly but that households should be given a chance to deepen the value of their social tariff discount by enriching their profile with additional information (e.g., submitting an up-to-date Energy Performance Certificate).
The less optimistic viewpoint argues that the data-linkage needed to maintain a reliable eligibility criteria would take time and that interim measures would be needed to ensure support was available from Spring 2024. Others argue that it’d always been difficult to run a very targeted scheme through the energy system and that Government levers of tax and spend would offer better avenues to provide the necessary support.
How should the Social Tariff be funded?
Different organisations say that the costs of a social tariff could be recovered from consumers, the balance sheets of energy companies, or taxation. Most recommend that it should be funded via taxation.
What should the delivery mechanism look like?
The papers Fran identified recommend one of three delivery mechanisms:
- a fixed-value discount akin to that provided by the Warm Homes Discount and Energy Bill Support Scheme;
- a discount applied to unit rates making each unit of energy used cheaper, akin to that provided by the Energy Price Guarantee; and,
- a rising block tariff, where the price paid for each block of energy increases.
Each of these three mechanisms have pros and cons:
- 1.A fixed value discount
A fixed discount gives consumers an amount towards an energy bill. The consumer buys their units of energy at market prices. Once the value of their fixed discount is used up, future expenditure comes out of the consumer’s pocket.
A fixed discount is said to: help preserve market competition because a consumer still wants low prices for the portion of the bill they pay; and preserve the incentive to make energy savings because a consumer would still act to minimise unnecessary fuel expenditure.
However, there’s concern that this model risks cliff edges unless it adopts a tiered approach where different discounts are given to different household’s depending on their situation or income. This would have the added advantage of offering the greatest help to those with lowest incomes
Those wary of fixed discounts also say they are insensitive to a household’s specific needs, including, for example, disabilities or medical conditions, which could require them to use more energy. Furthermore, experience of the Energy Bill Support Scheme show how fixed discounts can risk excluding certain groups such as those with traditional Pre-payment meters.
- 2.Unit Rate Discounts
This is a discount applied to unit rates, making each unit of energy used cheaper. A discounted unit rate provides a greater value of financial support to households that consume more energy. This is seen to be good as far as it protects vulnerable households with high energy needs. However, it is criticised because on average it disproportionately benefits the better off. Others argue a unit discount might remove an incentive to insulate one’s home. It is also thought harder to reconcile with a competitive market
- 3.Rising block tariff
This is where consumers get the first portion of their energy cheaply and start to pay higher rates per unit for additional consumption. They are used in parts of Europe and Dubai.
This option has support, especially from environmental groups, since rising costs for increased consumption are seen as helpfully incentivising demand reduction. Also, some might think it fair that those who use the most should pay the most. This option can also be designed as a cheap option (for government) because rising block tariffs could in theory be modelled to be cost neutral to government and energy suppliers (i.e., households consuming the most pay such high prices for each additional unit it can compensate for the low bills paid by households consuming the least).
However, rising block tariff models face serious problems because high users can have very low incomes; and vice versa (for example, for medical conditions or poorly insulated housing stock). It is only for the average household that energy use correlates positively with income.
The Panel’s thinking
The Panel’s recommendation – to introduce a comprehensive and flexible social tariff to replace the Warm Homes Discount – gives our response to many of these key questions.
Objectives – a social tariff should aim to reduce levels of fuel poverty and eradicate extreme fuel poverty; protect health and address inequalities by ensuring everyone has satisfactory levels of energy provision, comfort, and warmth. [Recommendation 1]
Eligibility – those in greatest need should receive a tariff that covers a significant unit rate discount and all of their standing charge. [Recommendations 2 & 3]
For example, we recommended that those in greatest need should receive a tariff that works through both a unit rate discount and, by covering a consumer’s standing charge, a fixed rate discount. We decided that this combined approach would be the fairest mechanism because:
- it can be automatically applied and would therefore overcome some of the barriers to take-up that might otherwise be faced by those on legacy prepayments meters.
- it removes the burden of paying the standing charge, which is one of the main drivers of self-disconnection.
- It ensures the recipients’ entitlement to means-tested benefits remains unaffected
- And, it will ensure the investment is used for the purpose for which it’s intended (i.e., to keep a home warm and well serviced)
On the debate regarding eligibility criteria, we struck a pragmatic balance by recommending that anyone on means-tested benefits should be automatically eligible to receive a social tariff. We also highlighted the need for a second route where a household can apply and receive the social tariff, even if they do not claim the means- tested benefits above, but nevertheless would be likely to suffer detriment if support was not available. For example, this route could be crucial for households
- who have a low income but do not claim means-tested benefits,
- who have a modest income, but live in a home that’s expensive to heat (e.g., houses with poor energy efficiency, off the gas-grid, and households with high energy needs, e.g., because of a medical condition.
We also recommend that the value of the tariff be flexible, ensuring it can be targeted and tapered according to need. This tapering will help to avoid an entitlement cliff edge and preserve the financial sustainability of the tariff. [Recommendation 4]
Funding – It is the Panel’s view that the level of meaningful financial assistance required to support households’ energy costs cannot be funded simply through levies on bills. We recommend that the costs of a social tariff are covered through general taxation.[Recommendation 7]. We believe that the costs could be offset by reviewing the non-targeted, non-taxable status of the Winter Fuel Allowance; and ringfencing taxation from the energy sector.