Initial Advice to Scottish Government

3. Continue to Advocate for Government Funding to Mitigate the Escalating Disparity Between Incomes and Energy Prices

Immediate action

Recommendation 9 – the Scottish Government should use available devolved powers and continue to urge²² rapid action from the UK Government to close the gap between incomes and rising energy costs underpinned by the principle of “equity” for all.

9.1 Press the UK Government to use its fiscal and policy levers to stress the need for resources to support the fuel poor – recognising the particular challenges faced by those off-grid by:

• using government levers to lessen energy bills for all consumers. A £2,500 price cap may have prevented 150,000 households from becoming fuel poor (compared with the planned price cap of £3,549) but the Scottish Government is still projecting that 860,000 households (35% of all households) in Scotland will be in fuel poverty from this month
• encouraging a culture where support is provided in a fairer way, to reflect the higher-than-average costs of energy, of keeping warm, across Scotland compared to the GB average
• providing grants and loans to vulnerable consumers through targeted support and increased funding.

There is a complex interplay between the energy market; energy price controls; income and financial support. The fiscal and policy levers across these are wide-ranging and are inextricably linked with the four drivers of fuel poverty (1. Poor energy efficiency of the home; 2. High energy costs; 3. Low household income; 4. How energy is used in the home). For example,

• energy market – commodity costs drive retail energy costs
• energy price control mechanisms (e.g. price caps, discounts, tax and levies) impact income and, to some extent, dictate the extent of governments’ financial support schemes
• income (e.g. minimum/living wage, pensions, public sector pay, Universal Credit, other benefits) – affect the affordability of energy bills
• financial support e.g. heating and fuel allowances and energy efficiency grants) affect incomes and therefore the affordability of energy bills.

Further Energy cost reduction measures, benefitting the whole population, could be achieved in a number of well-versed ways. For example:

• reducing bills directly through VAT reduction on energy bills
• raising funds to reduce bills by a windfall tax on energy company profits.

However, the Panel supports a justice first approach to government funding measures: addressing the need where it is greatest to achieve good outcomes for all. Targeting support for the most vulnerable could be achieved through providing further grants and loan support to vulnerable consumers, including through mechanisms such as fuel vouchers and the development of a social energy tariff. This support needs to be “technology neutral”, with equal provision across all energy types, including biomass, oil, gas and electricity. It should also take into account both geographical and socio-demographic disadvantage, including recognition of marginalised rural and island communities and single meter properties.

The Chancellor’s announcement that the Energy Price Guarantee will now be reviewed by April 2023, with a view to reducing costs to the government rather than lasting for two years as originally announced, is a cause of concern. The Scottish Government should urge the UK Government to ensure that any change to the guarantee results in meaningful and equitable support for the financially vulnerable, including those who could enter fuel poverty through a diminution of the Energy Price Guarantee benefits, as well as those already in fuel poverty.

9.2 Ensure that, within the constraints of reserved energy policy, devolved policy and fiscal levers are being deployed to best effect

The recommendations set out above point to a number of areas suggesting where the Scottish Government could act, within its powers, to deploy policy and fiscal levers to mitigate the effects of fuel poverty. The Panel will be reviewing the Fuel Poverty Strategy and its delivery in 2023 (as noted below – see recommendation 11). However, given the urgency of this humanitarian crisis, the Scottish Government should continue to react dynamically to the changing landscape. (Examples of where it has already been doing this, include: the First Minster’s engagement with the energy sector [the energy summits]; increased funding commitments [Fuel Insecurity Fund/commitment to increase the Scottish Child Payment] and launch of the Cost of Living website). One approach the Scottish Government might consider is a rapid internal review of whether current cross-policy objectives and delivery could be more closely aligned to improve fuel poverty mitigation measures.

Recommendation 10 – the Scottish Government should urge the UK Government to reform the energy market – including the taxation and pricing models

There is widespread recognition that the energy market, and therefore the energy system, is not working²³ and that, geo-political factors aside, there is more that can be done across the UK to reduce exposure to volatility in global energy supply and prices. For example:

• commodity costs could be transferred from energy bills to general taxation along with a review of how social and environmental measures are funded
• gas and electricity pricing could be de-coupled which would mitigate against some of the volatility in their disparate markets.

The Scottish Government has the opportunity to signal its commitment to energy market reform by strong and proactive engagement with BEIS on the outcome of the UK Government Review of Electricity Market Arrangements Consultation²⁴ (its objective is to determine what reform is needed in 2023) which closed on 10 October 2022. Changes to the electricity market offer a huge opportunity to re-design the electricity system, fundamentally changing how the price of electricity is set and passing on the savings of renewable electricity generation to consumers. This could be game changing in reducing both current and future fuel poverty levels.

The Panel has heard, from its engagement with people with lived experience of fuel poverty, as well as energy advice agencies, that people in Scotland struggle to understand why electricity prices are so high when the equivalent of 95% of Scotland’s electricity consumption is from renewable sources. Although electricity pricing is obviously determined by market rules (and energy market policy is reserved), it is very difficult for those in fuel poverty, especially for those living rurally and often off-grid, where renewable energy production is concentrated, to understand how they have such unaffordable electricity bills. Engagement on the review of market structures needs to include this perceived inequity of the unit costs of Scottish renewable energy being pegged to gas-generated electricity. Given the significant proportion of UK renewable energy that Scotland generates reflecting the current reality of Scotland’s contribution is important.

Over and above this, the Scottish Government should urge the UK Government to:

• seek to collaborate more closely. The Panel has heard how silo working across departments, e.g. those related to energy and health, can lead to lost opportunities because wider engagement and thinking was not prioritised
• increase transparency and accountability in the relationship between UK and devolved energy issues to prevent dissipating responsibility, including around initiatives such as the Energy Company Obligation²⁵
• consider the efficacy of introducing a social tariff. The Scottish Government could influence the shape of a future social tariff by proposing a social tariff model to the UK Government and advocating for it as a medium term development in the energy markets. Several approaches could be taken to deploying a social tariff, for example, linking it to Warm Home Discount scheme eligibility criteria
• push for change to distribution charge models. (Even with some socialisation of costs, network charges represent another addition to the poverty premium which those who are fuel poor, and living in Northern Scotland, pay).