Energy prices are going down, but the burden on those least able to pay remains too high

Blog 23 February, 2024

Energy prices are going down, but the burden on those least able to pay remains too high

 By Hannah Corbett and Karen Turner

As widely expected, Ofgem has announced a decrease in the energy price cap from April.  Although this will mean lower average energy bills, questions remain around how to provide long-term support for those households continuing to struggle to pay their energy bills. Action on standing charges and the introduction of a social tariff can help, but only offer part of the solution. Sustained, long-term investment in improving energy efficiency to help vulnerable people reduce their energy bills without under heating their homes (and the rest of us to reduce our energy demand along with our bills) is vital, coupled with the effective targeting of income support for those who need it.  More broadly, we need to understand how the costs of investing in transitioning the UK to net zero can be distributed more fairly, and without burdening those households least able to pay.

Energy prices falling

From 1 April to 30 June, the average annual household energy bill will reduce by £238 to £1690, depending on how much energy is used (the price cap is on unit rates and standing charges), and the mix of electricity, gas and other fuels. Cornwall Insight projects that the cap will fall again in July, with a slight increase in October (just as we go into next winter).  It is worth noting, however, that energy bills continue to be higher than pre-COVID levels and are predicted to stay high for the rest of the decade.  Continued energy market volatility as a result of ongoing geopolitical uncertainty could also see them rise again.

Action on energy prices to help those struggling with energy bills

So, while the current fall in bills will be a welcome relief for many consumers, it could be temporary and during part of the year when there is less need to turn the heating on. The fact remains that too many households are struggling to pay for the energy they need to live warm, comfortable and healthy lives.  Current estimates have suggested that 6.5 million households across the UK are in fuel poverty.  In the near-term there are a number of actions on energy prices that could help alleviate this situation. Ofgem is currently undertaking a review of the standing charges that are applied to bills irrespective of the level of energy used or the consumer’s ability to pay, and which vary from region to region based on the estimated costs of getting electricity and gas to homes.  There have also been calls from across civil society and suppliers to establish a social tariff that would see discounts on energy bills for vulnerable households, with evidence highlighting the potential benefits.

Improving energy efficiency and supporting incomes

Yet action on energy prices can only go so far in assisting those on low incomes with persistently high energy bills as well as helping to accelerate progress towards realising the UK’s net zero ambitions.  Research currently being undertaken by the University of Strathclyde’s Centre for Energy Policy (CEP), as part of the UKRI-funded Energy Demand Research Centre (EDRC), is exploring the nature of outcomes for households and the wider economy of Government investing in improving energy efficiency and/or providing energy bill support for fuel poor households, with the aim of informing decision-making on how best to design and combine these types of programmes and target resourcing.  The work is grounded in evidence that demonstrates the multiple and widely understood positive economic and wellbeing impacts of investing long-term in energy efficiency programmes, yet for which commitments to date have often been sporadic and short-term.

Beyond this, there is a broader question that needs to be addressed.  That is, in the face of multiple types of poverty – energy, transport, fuel – each with their often complex and varying definitions, and in light of the UK’s net zero ambitions, do too many people have too little income to meet the necessary and changing costs of living comfortably and sustainably?  It is a question that cannot be answered simply by focusing on energy prices, energy efficiency initiatives, energy bill support or any other policy intervention in isolation, but one which requires more structural explanations and solutions spanning different Government departments.

Understanding who pays for a fair and affordable net zero transition

Importantly, to fully understand the types of incomes that people will require as the UK transitions to net zero more needs to be done to understand ‘who pays’ for the investment that will be required. This question is at the heart of all of CEP’s work and is articulated in our Net Zero Principles framework.  Ultimately, the cost of net zero investments (for example, those recently highlighted by Citizens Advice in relation to developing new nuclear capacity) are likely to fall back on households, for example, through changes in prices of goods and services and in income and tax generation. This is a point that was also highlighted in HM Treasury’s Net Zero Review (see p44).   As set out in CEP’s response to the Climate Change Committee’s consultation on the Seventh Carbon Budget, and underpinned by our work across the net zero space, we argue that understanding how transition costs may be met is absolutely essential if the macroeconomic and distributional dynamics can be assessed or projected.  In turn, this can help focus efforts to identify and act to avoid the risk of those least able to pay shouldering the burden of these costs.  This will be critical in ensuring we deliver a net zero transition that is economically and politically feasible and which maintains widespread public support.