Can ‘social tariffs’ solve the UK’s looming fuel poverty cataclysm?

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As thoughts turn to the colder months ahead, households already grappling with the cost of living crisis have been warned to brace themselves for punishing energy bills.

The price cap – set by energy regulator Ofgem – has already jumped by £693 this year, rising to £1,971 for the average dual fuel tariff from April. But things are about to get a lot worse.

According to some estimates, the next cap – to be announced in August and implemented from October – could be set at about £3,500. If, as expected, Ofgem moves to quarterly revisions, a figure of closer to £3,850 has been pencilled in for January, with bills during the first month of 2023 potentially hitting £500.

Eight million households are on the brink of fuel poverty, according to the charity National Energy Action. The next prime minister must make bills their number one priority, the power provider Octopus Energy has said, if he or she wants to avoid a “winter cataclysm”.

So far, no political party has come up with anything that comes remotely close to tackling a problem of such scale and importance. The government is offering a £400 rebate on bills. Labour wants to scrap VAT as well, shaving off a further £100. These figures pale in comparison to the £2,500 increase that households will have suffered within a year, if prognoses prove accurate.

One idea gaining traction – and proposed last week by MPs on the business and energy select committee – is a “social tariff”. But what is it and could it ease the pain for billpayers?

What is a ‘social tariff’?

In short, it involves lower-income households receiving significant discounts on their energy bills, funded by taxation or by spreading the subsidy cost across better-off billpayers. These are already commonplace in telecoms, with some phone and broadband providers offering basic packages for people in receipt of certain benefits, such as universal credit.

At the moment, while there is some support available through the warm homes scheme and the new £400 rebate, there is nothing to stop even the very poorest people facing crippling energy bills.

Why is it gaining support?

At the moment, the only thing keeping any kind of lid on energy costs is the price cap, which was introduced by Ofgem in 2019 and covers 22m homes. An attempt to stop energy companies profiteering by putting customers on the most expensive variable tariffs, it limits what is paid for each unit of gas and electricity used.

But the prices of gas and electricity are, to a large extent, at the mercy of wholesale markets, which have been sent soaring by factors including Russia’s invasion of Ukraine. The UK gets less than 4% of its gas from Russia, but some European countries get more than half. The interconnected nature of gas markets means that when Europe’s gas prices go up, so do Britain’s, as everyone competes for the same commodity.

The upshot is that the price cap, which factors in those wholesale market prices, has ratcheted up significantly. For some smaller energy suppliers, many of which had not hedged against such spikes, the cap didn’t rise quickly enough and they simply went bust, exposing a weakness in the system.

What’s more, prices look unlikely to come down soon. After Russia cut supplies into Europe through the Nord Stream 1 pipeline last week, stoking fears of a continent-wide winter gas shortage, analysts at Cornwall Insight predicted that average annual bills of more than £3,500 could be with us “well into 2024”.

In a 90-page report published last week, MPs on the influential business and energy select committee threw their weight behind an alternative proposal: the social tariff. This, they said, would offer “deeper price protection for vulnerable consumers”. They were partly persuaded by support for the idea from Martin Lewis of Money Saving Expert, the UK’s go-to expert on thrift and financial justice.

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View image in fullscreenRussia has cut gas supplies via the Nord Stream 1 pipeline. Photograph: Hannibal Hanschke/Reuters

How would it work?

There are various options but Fair By Design, a group that campaigns to stop essential services costing more for people in poverty, envisages a social tariff that works as an entitlement for anyone who is in, or at risk of, fuel poverty. This is defined as spending more than 10% of household income on energy.

“At the moment, we think it should be about £1,000 of discount per year for a low-income household,” said Carl Packman of Fair By Design and the Barrow Cadbury Trust charitable foundation. He points out that some energy companies used to offer social tariffs before the energy cap, but it was not universal and the terms were defined by individual companies. “We’d like to see one that is market- wide and is defined centrally, so that all suppliers are offering the same,” he said.

Has it been tried elsewhere?

Step forward Belgium, which has had social tariffs for years. Brussels announced a package of measures earlier this year in response to rocketing energy prices, including a VAT cut and one-off payments. It will also extend social tariffs to more households and expand the degree of support available.

Those in receipt of the tariff will save an average of €1,760 (£1,480) on bills in the winter months, according to figures from the energy ministry.

What are the drawbacks?

It’s unclear who would administer such a scheme. If suppliers ran it themselves, there would need to be some form of complex data-sharing agreement with the Department for Work and Pensions, to make sure the right people were receiving it. To avoid that, and to be truly universal, a government department or Ofgem would have to run it – a plan unlikely to go down well with proponents of smaller government in the Conservative party.

A social tariff may be an option – but it would need to be accompanied by a reformed price capSpokesperson, Octopus Energy

Fair By Design points out there may have to be a tapering system, so that there isn’t a cliff edge, where someone earning only slightly more than their neighbour gets nothing at all.

What do energy firms say?

They are divided. Some of the “big six” providers, such as British Gas, EDF Energy, Scottish Power and E.ON, are broadly in favour. A cynic might say this is because they hope a social tariff will replace the price cap entirely, allowing them to return to charging some people exorbitant amounts, while basking in the good publicity of helping the less fortunate – or simply getting the government to subsidise that part of it.

“We need to set a tariff that is affordable for these consumers, not paid for by all other customers but funded by the Treasury,” said Derek Lickorish, chair of energy company Utilita.

But a spokesperson for Octopus Energy, one of the challenger brands that has survived the energy crisis, said: “A social tariff may be an option – but it would need to be accompanied by a reformed price cap to protect all customers from the old days of dodgy pricing.”

So the price cap stays?

Fair By Design thinks it should. “We don’t want [the social tariff] to be seen as a replacement for the existing price protections, which serve a purpose too. They’re there to prevent suppliers making exorbitant profits.

“This is for particular customers to make sure energy is affordable. It shouldn’t be seen as an either/or.”

MPs on the business and energy select committee offer a slightly different vision. They do advocate removing the price cap, but say the social tariff should be accompanied by a “relative” tariff for the rest of the market. This would involve curbing the differential between the cheapest and the most expensive deals – an effort to avoid a return to the days when energy firms put people on sky-high variable tariffs, particularly customers they’d had for a long time who were unlikely to switch.