‘Social tariffs’ leave middle classes facing a bitter truth about their energy bills

Pregnant woman sitting at kitchen table with laptop - moodboard
Pregnant woman sitting at kitchen table with laptop - moodboard

Taking charge amid the chaos triggered by his predecessor’s mini-Budget, one of Chancellor Jeremy Hunt’s first acts as Chancellor was to scale back the level of state financial support for households’ energy bills.

The 56-year-old took his red pen to Liz Truss’s “energy price guarantee” meaning the limit on average bills in place since October will climb from £2,500 to £3,000 in April, before ending a year later.

Hunt now faces a more thorny challenge: how to help households after that point, with analysts predicting high energy costs for several years and suppliers arguing the market is broken.

The Chancellor told MPs last month that he is considering “social tariffs”, discounted energy bills for those who cannot afford them, funded either by taxation or through higher bills for others. It is thought such tariffs could save eligible households £1,000 a year at current wholesale rates.

The move is supported by many suppliers who would prefer it to the blanket limit on what they can charge under the “price cap” regime that has been in place since 2019.

Yet social tariffs come with their own challenges, including how they should be funded and how to decide who qualifies and who doesn’t.

“The Government has to find a way to target support on energy bills [to] those who need it most. It is unsustainable to continue to support the energy bills of all households at current levels, including the highest earners,” says Simon Virley, head of energy at KPMG.

“Social tariffs are a viable way of doing this. They are already used in other sectors, like broadband, as well as other countries, like Belgium.

“The challenge will be defining the groups eligible for support under the social tariff, given that many low and middle income households who are not on income-related benefits will still be struggling with their energy bills if prices remain high.”

Under current market rules, suppliers are subject to caps on how much they can charge per unit of energy for their default tariffs, which effectively sets a price cap on most bills.

Currently, the Government is paying a large portion of these bills so that households only stump up on average £2,500 per year, under the “price guarantee” put in place in October to protect households from soaring energy costs.

The 2019 price cap could be extended when the “price guarantee” comes to an end in April 2023, but this would not protect households from wholesale prices as bills would still move in line with them. Other solutions are likely to be needed even if it stays in place.

Keith Anderson, chief executive of major household supplier Scottish Power, has argued for moving “beyond rigid marketwide price regulation” and on to a “social tariff targeted at those on low incomes”.

He met the Chancellor last week and said he was “very impressed” by Hunt’s engagement on tackling the crisis and resetting the market “to ensure it delivers affordability for all, including a targeted social tariff for the most vulnerable”.

Rival supplier EDF agrees “regulatory reform is clearly needed”, arguing: “The price cap has not protected customers from the rising prices of the last 18 months and has contributed to the collapse of more than 30 suppliers last year, adding further costs to household bills.

“We need a retail market that is sustainable, accessible to all and supports the transition to net zero. A social tariff could well be part of the solution we need. There are, however, a lot of questions to answer about how it would be designed.”

Belgium has had a social tariff for around 20 years, available to people getting means-tested benefits or those earning less than €25,000. “We’d like to see something similar, because it works very well,” says Carl Packman, at the Fair by Design campaign group.

Evidence involving discounted tariffs in other markets in the UK is mixed.

More than 720,000 water customers are helped by some form of social tariff, cutting their bills by £105m. Yet support varies widely. Each supplier has different schemes and the extent of support they can give depends on how much their other customers are willing to pay.

In the broadband market, only 136,000 of 4.2m eligible households had signed up for support as of August 2022, according to research by Citizens Advice.

Then there’s the question of where to set the threshold for support.

Small changes have a huge impact. In August, the Resolution Foundation think-tank estimated that a 30pc bill reduction for people on means-tested benefits would cost about £6bn, but create a “cliff-edge” for those not on benefits.

Extending a 30pc discount to those earning below £25,000 and a 12pc discount to those earning below £40,000 would cost £15.4bn, but result in 94pc of the poorest half of the population benefitting, it found. Actual costs will depend on wholesale rates.

“It’s always going to be fraught,” says Ed Reed, at energy market experts Cornwall Insight. “You’ll always get some who could benefit but fall outside the definition, and people change vulnerability over time.” He argues there’s a growing sense that imperfect help is better than doing nothing.

However, none of these systems solve the question of who would pay. The Government is currently facing a potential £37bn bill to support energy bills over 2022-2023, and will be keen to push spending off its books.

Yet piling costs on to other customers’ bills could also be extremely unfair at a time of high costs.

“By and large since privatisation, the policy has been that costs to do with subsidising customers or new energy generation would fall on customers rather than on the citizen,” says Cook. “But there has been a growing call to think about the least regressive and most fair way to do this.

“If this is a social aim and not a market issue, then you could argue it is fairer to think about funding that through the tax base.”

That would involve all taxpayers footing the bill, rather than middle earners and the rich subsidising social tariffs through their energy bills.

As Jeremy Hunt tries to fix the energy market, difficult questions are looming.

A Treasury spokesperson said: “Right now the Energy Price Guarantee is insulating millions of families and businesses from high global gas prices.

“To best protect consumers beyond April 2024, we are working with consumer groups and industry on a number of options, including social tariffs, as part of wider market reforms to bring down costs. No decisions have been made at this stage.”