The energy price cap has dropped, but the crisis will be with us for some time
Energy bills have recently started to fall. From 1 July the current price cap dropped to just over £2,000 per year for the average household. But they remain at crisis levels, nearly double their historical average level. It may take years for them to return to historic levels, if they ever do. A broader environment of high inflation and, for mortgage-holders, escalating interest rates, has left many households struggling to pay their bills.
It’s really hurting people
We see this everyday in the people who come to us for help. Between January and April 2023, we broke records for 70 different advice issues. These included homelessness, energy debts, prepayment meters, and help on affording food and other essentials. Citizens Advice has seen demand for energy advice surge by 188% in the last 3 years. We saw more people who couldn’t afford to top up their prepayment meter in 2022 than the previous 10 years combined. Energy debt and affordability are now the most frequent issues dealt with by our advisers.
Many people will struggle to pay back their debts in a reasonable time, or at all. The consequences of self disconnection and rationing for those who are struggling to pay are dire, affecting their quality of life, health and finances.
We need targeted support
The Government was quick to recognise the need to help people struggling with their energy bills, putting in place an Energy Price Guarantee that sought to ensure the average bill didn’t exceed £2,500. This support was really welcomed, but had 2 major drawbacks.
The first was that it was universal — everyone qualified. This made it very expensive, and meant support was given to those who didn’t need it.
The second was that it was time-limited, when unfortunately it looks very likely that the bills crisis may last for many years, and we know that people were already struggling even when bills were much lower.
The solution to these problems is to put in place an enduring system of targeted price support, focused on those who need the help most.
How can that support be provided?
We’ve put forward proposals for the introduction of targeted price support, focusing on helping those on low incomes and with high energy usage. Households on below average incomes would qualify, even if they were not in receipt of benefits, in recognition of the scale of the problem. Over 12 million households would be helped. The average payment to an eligible household would be around £400 a year. As our recent Living on Empty report highlighted, these payments could be transformative for struggling households — leaving the average person seeking our help with debts able to cover their ongoing bills.
Through clever matching of energy consumption and income data, we think it’s possible to create a system that gives different amounts to different households depending on their needs, so the very poorest, and those with the least energy efficient homes, receive more support than others. Recognising that it might take some time to set up a data matching system, we’ve also suggested a simpler system that would provide the same payments to all eligible households.
Our proposals don’t come cheap, at around £4 billion a year, while average household energy bills remain around £2,000 a year. But this is a massive reduction on the current bill for universal energy support — around £40 billion for 18 months. Doing nothing isn’t an option: as the data earlier in this blog highlights, financially households are drowning — and unaffordable energy bills are a key driver of this.
There are other ways to help, but not all are focused
One possible alternative is to restructure all electricity and gas tariffs so that they are “Rising Block Tariffs” (“RBTs”). RBTs would charge consumers different prices for the energy they use, depending on their total usage. For example, the first units they used might be subsidised or free. After they’d used a certain amount, the price might go up to a more normal level for each extra unit used, and then when their use became higher still, a more expensive price would kick in.
Advocates of RBTs argue that they would be better for the environment, because they would encourage people to use less, and more supportive to low income households, because they tend to use less energy.
They’re an option that we considered as part of our own analysis. But we decided against this approach because we thought there were better ways to target support on those who need it. It is true that on average, low income households tend to use less energy than more affluent households. But that average tends to hide a lot of variation in energy usage at all income levels. There are many low income households who use a lot of energy, and high income households who use very little. Because of this RBTs are unlikely to provide help to everyone who needs it — and may provide help to many who don’t.
The time for action is now
The Energy Price Guarantee expires in March 2024. That might still feel a long way, but in terms of developing and implementing a replacement it really isn’t. It will take time to design a replacement scheme and to get it in place. The government needs to show urgency in bringing forward proposals to help struggling households.
