The economy-wide impacts of different approaches to addressing fuel poverty: the importance of where, when and how public funds are spent

Depending on the metrics and measurement used, at least 3.6 million UK households currently live in fuel poverty (i). This presents a public policy challenge in terms of reducing both fuel poverty and energy demand in ways that are positive for the wider economy, that support employment and income generation, and do not introduce price pressures which further affect the cost of living and doing business.

Within the Energy Demand Research Centre (EDRC), the Equity theme has explored the impact of different ways of using of a £9 billion public funding pot, aimed at closing the fuel poverty gap on an annual basis between 2025 and 2030(ii). This figure was arrived at in the following way. The fuel poverty gap is defined by ONS (iii) as the amount of money a household needs to no longer be considered as living in fuel poverty. This amount was estimated by DESNZ (iv) at £417 for 2023, the last year for which an estimate is available. If £417 is allocated to help 3.6 million households for the 6 years between 2025 and 2030, the total pot required is £9 billion.

We used an economy-wide model to simulate scenarios where this public funding pot is

(a) channelled as a direct energy bill support to 3.6 million UK households in fuel poverty under the English definition or

(b) used to fund basic energy efficiency measures for as many homes as possible.

1. Direct energy bill support (at a total cost of £9 billion) temporarily helps all households who are classed as living in fuel poverty and provides a transitory boost to the economy through the uplift to their non-energy spending. This boost peaks in the years 2030-31 with an additional 6,000 jobs and annual GDP gains of just over £600 million. However, all benefits quickly erode thereafter.
2. Redirecting the £9 billion pot to provide loft and cavity wall insulation for households in fuel poverty would deliver more permanent gains in terms of reduced energy bills for those receiving energy efficiency improvements. The impacts on those households’ real income and spending will support modest lasting GDP and job gains (around £100 million per annum/1,100 jobs). However, the pot is only sufficient to reach 64% of the 3.6 million households helped through direct energy bill support.
3. Public spending on delivering loft and cavity wall insulation means additional demand for an already busy UK construction industry. This could trigger more pressure on the cost of living and doing business in the period to 2030 than direct bill support does.

The key point is that new public spending constitutes additional demand in a constrained UK economy, not least because of persisting worker and skills shortages. The main implication is that some increase in the consumer price index (CPI) should be expected where the economy expands in response to either approach considered here. However, where government spends on construction activity for energy efficiency, the pressure on the CPI, and the cost of doing business during the period of public spending (to 2030) is exacerbated because the construction industry services investment demand in all sectors.