Targeting support to households could help combat the soaring energy prices that are putting enormous pressure on household finances, given that not everyone is able to cope equally. We identify four lessons from the energy crisis and explore how they can help build the energy system of the future.
Households with a UK median income of £31,400 a year spend 10% of their disposable income on energy, whilst pensioners spend 29%. All UK households will receive the final £66 instalment of the £400 energy rebate in March, a month before the Energy Price Guarantee will raise prices to £3,000 a year on average.
In a recent briefing at the Institute for Government, Ofgem’s Chief Executive Officer Jonathan Brearley painted a more optimistic picture. He said that, while it’s unlikely that gas prices will fall back to pre-pandemic levels, a mild winter, an increase in France’s nuclear output and high levels of gas storage may help energy prices to fall below the Energy Price Guarantee by July, possibly earlier.
Four lessons from the energy crisis and how they can help to build the energy system of the future
1. Poor energy efficiency worsened the UK energy crisis
In a previous blog I briefly explored the reasons why the UK has struggled to deal with this energy crisis, in comparison with other European countries. Over-reliance on international gas markets and fossil fuels, combined with the least efficient housing stock in Europe, has put unnecessary pressure on households’ pockets. A great deal of energy is being wasted, escaping through the gaps of poorly insulated homes.
That is why the UK needs to redesign its energy system, with aggressive investment in renewables. This transition is inevitable in a world in which gas prices will remain high. But investment cannot only focus on big scale infrastructure projects; targeting support to households is vital to engage and support them through the green transition..
By taking advantage of local climate conditions and landscape, and combining state-of-the-art energy efficient construction, households of the future could have much-reduced energy consumption.
The energy system of the future relies on retail energy companies that offer a wide range of products and services that help UK homes to reach their full potential, alongside providing electricity and gas. Retail energy companies should be ready to provide customers with products and services to reduce their carbon footprints and energy bills.
The most basic home improvements that can boost energy efficiency are:
- Wall, floor and loft insulation
- Double glazed windows
- Heating controls
This new market also needs to be competitive and innovative. Here is an example of how it’s done elsewhere. In New York state households are taking advantage of the geothermal state tax credit rolled out last year. Geothermal is a type of renewable energy that captures the heat produced deep in the Earth’s core, approximately 1,801 miles below ground.
These underground reservoirs of steam and hot water can be tapped to generate electricity or to heat buildings directly. Previously expensive, it has recently become accessible to domestic use thanks to entrepreneurship. Small households can be 100% energy self-sufficient and larger households have seen a significant decrease in their energy bills.
2. Progress towards energy efficiency must involve local government
The UK needs initiatives that engage local government, social and private homes in the net zero transition.
- Registered social housing providers have received £800 million funding from the Social Housing Decarbonation Fund to improve their housing stock to a minimum of EPC C
- Targeting support to households living in energy-inefficient properties via the Local Authority Delivery (LAD) £500 million and the Home Upgrade Grant (HUG) £950 million for local authorities is welcome
- £25 billion has been allocated to energy suppliers and local authorities via the Energy Company Obligation scheme. The aim is to install low-cost insulation to bring down people’s energy bills.
These schemes are not open for new applications but similar funding is expected to come in the next few years.
Targeting support to households impacted by high energy bills is now much easier for local authorities due to the introduction of EPC data to our Low Income Family Tracker platform (LIFT). This enables councils to identify low-income families living in energy-inefficient properties and target support.
If identifying people eligible for energy efficiency schemes is of interest, councils may want to consider partnering in funding competitions such as the Net Zero Living: Fast Followers until 1 March 2023, as part of the Innovate UK Net Zero Living programme.
3. Taxpayers should not be responsible for bailing out failed suppliers
In the last three months of 2021 25 energy companies went bankrupt, forcing Ofgem to find new suppliers for millions of customers. The NAO argued that the regulator did not do enough in the years that preceded it to ensure the energy supplier sector was resilient to external shocks, and consumers had to pay the price of insufficient regulation.
Taxpayers had to pick up the bill. Fuel Poverty Action estimates that £68 of the £75 annual increase in the standing charge is due to ‘negligent policymaking’ to cover the costs of badly-run energy companies that went bust over the last year.
4. Energy companies must treat customers fairly
The perception that energy companies are not treating their customers fairly may increase as rapidly as energy prices. Ofgem is worried about the number of households being switched to prepayment meters.
Ofgem’s CEO Jonathan Brearley said that “during [their] review of how suppliers treat some of their customers, we heard directly from an elderly gentleman who thought he’d had a power cut because he had not been told that he’d been switched over to a prepayment meter.”
The energy regulator has asked suppliers to stop forced installations of prepayment meters, after a report by The Times exposed the use of contractors to break into the homes of vulnerable people to install prepayment meters. British Gas is temporarily suspending the use of court orders and debt collectors while investigating the issue.
It’s vital that energy companies are proactive in identifying and helping vulnerable customers. Water companies are ahead of the curve. With the help of Policy in Practice’s Better Off Calculator, thousands of low-income and vulnerable customers have been able to access social tariffs and maximise their income.
Current support is being delivered by energy companies that are proactively helping customers and giving energy vouchers. Although welcomed, this kind of support is limited, temporary and unsustainable in a world where energy prices will remain high.
Is an energy social tariff part of the solution to the energy crisis?
Ofgem, charities and energy companies have been calling for extra, targeted support for low-income and vulnerable households via a government-funded social tariff. Whilst this would help, it would also add yet another benefit to the increasingly complex system that claimants have to navigate. The most effective way to protect vulnerable households is to ensure that benefit levels meet an acceptable standard of living and to improve the energy efficiency of residential properties.
The Fair By Design charity calls for a social tariff that would provide a discount of £1,000 per year for low-income households. Last year, people on means-tested benefits received £650, plus the £400 energy rebate. Pensioners on a low income received both payments plus an extra £300 payment through the Winter Fuel Payment, up to £600 total.
The next phase of the Cost of Living payments is being rolled out in 2023-2024. While the other payments will remain the same, households on means tested benefits will receive £900, to be paid between spring 2023 and summer 2024.
This extra support will be vital in helping low-income households to meet their energy costs, but one-off payments are a recognition that the current level of benefits is not enough.
Although helpful, this temporary support ignores the reality that energy prices will remain high, which gives households uncertainty over their future finances. It also does not tackle the root cause of the energy crisis discussed above: a large energy-inefficient housing stock and over-dependence on highly volatile international energy markets.
Permanent benefit levels should be linked to a measure of household need to prevent households from falling into poverty as prices fluctuate.