Read our new briefing on the social tariff here.
While we live in politically uncertain times, one thing is not in doubt: we are living through what economist Linda Yeuh has called “the worst cost-of-living crisis since the 1950s”.
Figures from the Office for National Statistics show inflation hit 9% in April, the highest level since 1982. As energy bills hit record highs, it’s the poorest UK households who are facing the worst consequences.
While energy price rises affect everyone, the impacts are not felt the same by everybody. Low income consumers face a double burden of rising cost of bills as well as paying more for their energy due to the poverty premium.
The cost of gas and electricity has skyrocketed, mostly due to rises in wholesale costs. Ofgem’s price cap restricts how much a supplier can charge consumers for energy, but the price cap alone can only restrict price rises that are deemed unreasonable by the regulator. The cap will not protect against unaffordable price rises that the regulator considers reasonable such as any increases in the cost to suppliers buying gas.
Since April 2022, the price cap has risen by 54% to nearly £2,000. In October 2022 energy bills are predicted to rise to an average of £3,244 a year.
Further analysis from Cornwall Insight finds that the price of energy for the average household customer in the first quarter of 2023 (Jan-Mar) will rise to £3,363 a year.
Sharp rises in the cost of energy will increase the number of people who pay over 10% of their income on household energy costs, also known as fuel poverty.
If the predictions are correct, then a further 5.5 million people will be pushed into fuel poverty this year, totalling 12m.
The poverty premium in the energy market
The poverty premium describes the extra costs people on low incomes pay for essential services such as energy, credit, insurance, transport, and food.
Sometimes the poverty premium reflects the extra costs to supply low income customers with a product: such as using a prepayment meter for paying for energy. Sometimes it is because the ways of getting the cheapest deal are inaccessible for low income customers: such as requiring all consumers to compare online offers by suppliers to find the best available deal. It also manifests itself in the poor quality housing that many low income households live in, where they are unlikely to be able to afford to make improvements which would improve energy efficiency.
The poverty premium proves what we have known for a long time: it’s very expensive to be poor. And while the Government has a plan to make low income homes more energy efficient, it’s vital we find ways to remove the extra costs faced in the market for those on low incomes.
Solutions to the cost of living crisis
The government’s response to the cost of living crisis has been to raise money for emergency measures, helping households in the short term to cover their bills. A longer term solution now needs to be found to make energy bills affordable.
We think the government should introduce a new social tariff to lower the cost of bills for low income households.
A social tariff in the energy market is a set price package for household energy bills. It is a safety net for eligible households who might be struggling to afford their bills. It is typically below the price of the cheapest available energy tariff and targeted at those living in fuel poverty or on a low income.
The new social tariff in the energy market should be additional to existing protections like the price cap and the Warm Home Discount scheme. It should also be mandated across all suppliers, targeted at those most in need, and reduce costs of bills for low income consumers.
In order to create a new social tariff we need government to consult on how best to implement a social tariff as soon as possible. We also need MPs from all political parties to come together to show support for the introduction of a social tariff by raising it in debates in parliament.
You can read our new briefing here.
By Carl Packman, Head of Corporate Engagement, Fair By Design.