A falling price cap, given worsened weather and global supply chain shocks, won't be enough to households in need with the respite on bills that they need. With both main parties promising cheaper energy bills, whoever wins in July should be bold on addressing our failing energy bill support schemes and fix the roof while the sun shines.
Today saw the welcome news that Ofgem has lowered the energy price cap, meaning the average energy bill will fall by £122 from July. Rishi Sunak has sought to capitalise on this good news, promising to make price comparison websites easier to use and instruct Ofgem to produce a league table of energy firms based on customer complaints, waiting times and responses.
However, the crisis will remain for many households. Even when bills come down in July, they will still be nearly 40% above April 2021 levels (more than £400 in absolute terms). Furthermore, this fall is likely to be temporary. Cornwall Insight has forecast that energy bills will rise once more to £1,761 in the run up to winter, reversing the impact of the recent falls in the price cap. Above all, no one can predict destabilising geopolitical events that risk pushing up energy prices even further.
Our current system of helping these households fails to meet the scale of the challenge. Improving consumers’ ability to shop around won’t cut it. Previous SMF has found that even when people do shop around for energy, a significant proportion still find it very difficult to afford. We should be under no illusion: high energy bills will be an early test for the new government, whether it’s Conservative or Labour. Better designed energy bill support is urgently needed this coming winter.
There are two main problems with the way the government currently delivers support for energy bills. The first is generosity, or the lack of it. The Warm Homes Discount (WHD), which provides a £150 rebate to households claiming certain benefits and who have high estimated energy costs, has only increased by a meagre £10 since 2014. If it had risen in line with the rising cost of energy, it would be worth £240 today.
The second is that support is poorly targeted. The WHD does target support towards households with high energy needs, but the flat rebate on bills means that for some households it provides adequate support, while for others it barely scratches the surface. Its design also means some households in poverty arbitrarily miss out on support altogether.
The Winter Fuel Payment (WFP), the government’s other key vehicle to provide support for energy bills, is not targeted towards need at all. Eligibility for the scheme has nothing to do with energy usage or income: support is automatically given to households with someone over 65 years of age. This means a lot of public money is going to households that frankly don’t need it, especially considering around 45% of pensioner households have above average incomes. Fuel poverty amongst pensioners is a real concern, but the WFP is not the best way to tackle this problem.
Whoever wins the upcoming general election will have to address these flaws, and SMF has recently set out how best to do so. We recommend scrapping the poorly targeted Winter Fuel Payment and reforming and expanding the Warm Homes Discount. By doing this, the government could take an existing envelope of public spending and use it in a fairer, more effective way.
The WHD should be reformed in three ways. First, extend eligibility to those claiming disability benefits. Second, extend the energy-based eligibility to households in the top half of modelled energy costs. Third, introduce a tiered discount. Instead of a flat £150, this would offer five WHD rates, which would increase in line with energy need. Setting these discounts at £250, £280, £325, £400 and £550 would better account for differing energy costs among eligible households, broadly targeting a 15 per cent reduction in energy bills within each of the bands. These changes would mean an additional 1.4 million households are entitled to the WHD, ensuring that the support they receive is better adjusted to their specific needs to have a more meaningful impact on struggling households’ finances.
This will inevitably cost a lot of money: around £1.4 billion, according to our estimates. But these costs could easily be covered by redirecting the £2 billion currently spent on the wasteful Winter Fuel Payment scheme.
Scrapping the WFP could provoke an understandable political backlash; given that older households are particularly vulnerable to the effects of fuel poverty, concern is certainly warranted. But if anything, the £600 million left over leaves room for additional support aimed at truly needy older households; for example, through a “pensioner uplift” in the WHD scheme.
We shouldn’t let falling energy bills lull us into a false sense of security. Our current system of energy bills support is not fit for purpose. With both main parties promising cheaper energy bills, whoever wins in July should be bold on addressing our failing energy bill support schemes and fix the roof while the sun shines.
