Income-based support versus money off energy bills for fuel poverty support

The Panel has had a consistent interest in the best ways to provide fuel poverty support. To support their understanding of the issues involved, they consulted stakeholders to explore the evidence on income-based support versus money off energy bills for fuel poverty support.

Analysis on Cash First vs Money Off Bills – Final.pdf

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4. Other approaches to fuel poverty

4.1 Evidence from the literature

Turner et al at the Energy Demand Research Centre at the University of Strathclyde utilised an economy-wide scenario simulation model to understand the relative benefits of public spending on direct bill support[19]. The model set a £9 billion budget, based on what would be required to close the fuel poverty gap, measured at £417 in 2023 prices. The findings show that providing direct bill support of £417 per annum will benefit households living in fuel poverty by enabling them to spend this amount on more energy and/or on other goods and services. Giving people more money to spend will generally trigger a limited (and constrained) consumer spending driven economic expansion. However, the results suggest that where spending is directed to non-energy spending, this will support a greater uplift due to the relatively higher labour and wage intensity of other consumer-facing sectors. This model assumes that if government pays part of the energy bill, the £417 support can be entirely directed to non-energy spending

Where the model assumes government provides direct bill support by paying part of the energy bill, and households living in fuel poverty consequently spread the £417 uplift to their income (as a result of lowered energy spending) on non-energy goods and services, the results suggest the wider economic expansion peaks in 2030-31 with a potential GDP uplift of close to £628 million (0.03%) above what it would otherwise be in 2031, while net job gains peak at almost 6,000 in 2030. Gross (full-time equivalent, FTE) jobs gains are concentrated in consumer facing sectors.

In an alternative scenario, the boost to total spending of households living in fuel poverty is greater if direct bill support is not directly tied to energy bills. That is, if a straight income transfer gives those households more freedom in how they spend the £417, here assuming they spread it in line with existing spending, which implies some of it goes to more relatively costly energy. However, the boost to the wider economy is smaller (and associated CPI pressure more limited) because spending on energy supports less employment and thus triggers more limited further rounds of income and spending gains in the household.

The authors therefore argue that, while it may be tempting to stick with direct bill support, which helps all households in fuel poverty from the outset while delivering time-limited wider economic gains (and associated revenues to the public purse that can help offset the direct cost), it fails to deliver long-term benefits or to make progress on the net zero agenda. They posit that, ideally, policy focus needs to shift from transitory direct bill support to delivering the more sustained benefits of energy efficiency investment, but in such a way as to not harm those currently receiving the benefit, and to allow time (and a clear signal) for the construction sector and its supply chain to respond.[20]

4.2 Evidence from call for evidence

4.2.1 Energy efficiency measures and clean heating systems

In their responses, several organisations highlighted that a meaningful approach to fuel poverty must also involve action on other drivers of the issue, namely the poor energy efficiency of the homes and insufficient heating systems. While recognising that financial measures (either as an income-related benefit or as a reduction to fuel bills directly) remain essential for addressing immediate hardship, both Energy Saving Trust and Changeworks emphasised the effectiveness of reducing the amount that households spend on energy through improvements to energy efficiency and clean heating.

Energy Saving Trust argue that reducing the amount of money that households spend on energy through energy efficiency and clean heating measures has a number of advantages compared to increasing household income alone:

  • Income or bill support provide important short-term relief, but long-term reductions in energy demand are key to permanently bringing down bills and shielding households from future price rises.
  • Investment in energy efficiency and, in many cases, low carbon heating delivers long-term reduction in energy bills and reduces the need for ongoing subsidy.
  • For households that previously underheated, bills may go up when they start heating to a healthy level, but those bills will still be lower than they would otherwise would have been without the improvements.
  • The SHCS[21] shows that lower rates of fuel poverty are associated with higher energy efficiency standards.
  • Reducing energy demand provides a lasting benefit for household budgets because it tackles one of the root causes of unnecessarily high energy demand in homes.
  • Reducing energy demand through energy efficiency and clean heating can also support wider policy objectives, including improved health, climate change mitigation and greater security of energy supply.

Changeworks drew attention to evidence from the 2022/23 Area-Based Scheme with Edinburgh City Council. In that year the scheme delivered energy efficiency installations to 673 residential properties of mixed tenures. This included fabric improvements and renewable technologies. Changeworks’ evaluation found that:

  • 73% of households now find it affordable to heat their homes.
  • 70% reported their homes feel warmer after having wall insultation installed.
  • It is also consistently identified that the impact of various measures improves when households feel confident through effective support and guidance.
  • These measures deliver lasting benefits that extend beyond the current occupants, ensuring fuel poverty is addressed even if household circumstances change.

IPPR Scotland argue that fuel poverty should be integrated with clean heat policy. They see fuel poverty as sitting in unproductive tension with decarbonisation policy.  A programme which switches households to clean heat risks this intervention shifting fuel poverty from one group to another. At current prices the risk is that households adopting clean heat face bill increases. In future the picture could flip, meaning households who have not been supported to shift away from gas are disadvantaged. It is important to protect individual households from these potential injustices. IPPR Scotland argue that this could be done by recognising that a household has switched to clean heat in the social security system. Ideally, this would be stitched into universal credit, but with devolved powers the Scottish Government could provide supplementary payments along the model of the Scottish Child Payment. These payments would be indexed to the type of heating system a household has and relative prices, with the design aiming to ensure (at minimum) households who do switch to clean heat are not worse off than those who have not (yet). These ideas are explored in more detail in their 2024 report No home left behind: Funding a just transition to clean heat in Scotland.

4.2.2 Minimum Income Guarantee (MIG) and Social Tariff

Citizens Advice Scotland (CAS) advocate for a Minimum Income Guarantee (MIG), as laid out in the Minimum Income Guarantee Expert Group report: a roadmap to dignity for all. This is long-term policy change which would be delivered via a three-phase approach over 15 years. As an overarching framework it would contribute significantly to eliminating fuel poverty in Scotland, central to which would be the introduction of a social tariff for energy.

CAS argue that a MIG would ensure that no one falls below an agreed income level set to allow everyone to live a dignified quality of life, offering financial security and unlocking opportunities for all. This would be achieved through a combination of fair and accessible paid work, reform on costs, high-quality services and strong social security. Reform on costs includes reducing energy costs in targeted ways, namely through a social tariff for those on the lowest incomes or with unavoidable high usage. CAS highlighted that:

“Each component of the MIG must work together in harmony; if one element of it is underdelivering then the MIG will have less of an impact. This means increasing incomes as well as reducing costs.”

SFHA, too, discussed the need for a social tariff. They provided the example of tenants living in remote and rural Scotland and reliant on electricity for heat face much higher costs than the typical dual fuel customer. They stated that, whether through rebates or direct financial support, the value of support required to improve the ability for these households to heat their home to a comfortable standard, or tackle existing energy debt, must be proportionate to need if it is to have a significant impact. Current schemes like the Warm Home Discount and Winter Heating Payments which offer flat rate payments could be improved, they argued, through a more sophisticated social tariff as proposed by the Social Tariff Working Group.

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