What are social tariffs and why might we need them?   

As the government’s primary tools for mitigating high consumer energy bills are expected to end in April 2024, and with the Autumn Statement’s mention of a “new approach to consumer protection” many are discussing the future of the UK’s energy bill support mechanisms. Given the Statement’s express mention of “social tariffs” as a potential solution the topic is subject to increased discussion among think tanks, political commentators, and energy suppliers. Whilst the infographic above gives an idea of what social tariffs entail, this article goes into further detail, highlighting the specifics behind some of the proposed tariff options.

What are social tariffs and why might we need them?   

Whilst no legal definition exists for energy suppliers, a social tariff is often understood to be a levy or subsidy-funded reduction in the cost of basic utilities for targeted groups of customers, typically those least able to pay. Of course, this is complicated as more consumers are likely to fall into payment difficulty as both energy prices and the cost of living increase.

Responding to this situation, the government has already begun issuing £400 energy bill rebates via the Energy Bills Support Scheme – to all households across the UK and has enacted the Energy Price Guarantee to cap unit prices, limiting the impact of high market prices on household energy costs. Given that both measures are expected to come to an end in April 2024, the government could consider other remedial measures. Social tariffs are one such way of doing this.

Cross-sector parallels  

Social tariffs are not new. They were previously offered voluntarily by energy suppliers in the late 2000s and are still available for those in receipt of certain government benefits via the Warm Home Discount. In both the water and telecommunications markets, social tariffs are also on offer, granting year-round bill reductions to those in receipt of certain benefits. Importantly, as social tariffs are generally used to provide targeted support to a well-defined tranche of consumers at risk of financial distress and, in this case, fuel poverty, they have neither been designed nor tested to tackle the systemic issues currently impacting the energy market.

Types of social tariff proposals:

Tariff deficit fund  

A ‘tariff deficit’ funded social tariff is designed to lower specific consumer bills, which can be achieved via lower unit rates, standing charges, bill rebates, or a combination of these. The fund could be mandated via regulatory or government policy or created voluntarily by individual suppliers or suppliers as a group. The costs of the deficit fund can then be recovered from the generality of consumers, balance sheets, or taxation.

Whilst the Energy Price Guarantee currently performs a similar function, the support it offers is neither targeted nor capable of providing sufficient relief to all vulnerable consumers.

Additionally, some suppliers have called for supplementary measures to be enacted alongside a tariff deficit fund:

  • A ‘Fuel Poverty Taskforce’ should be established to create, compile, and analyse data relating to fuel poverty, with the end-goal of introducing targeted measures to those most in need.
  • Removal of the £59 price differential for those using prepayment meters.
  • Removal of the ‘standing charge’ to help consumers better understand and regulate their energy usage.
  • A campaign to better insulate the UK’s homes – which are among the worst insulated in Europe – to ensure longer-term energy efficiency.

Tiered approach

Here, the degree of eligible support depends on income or energy consumption, with the latter typically used as a proxy for the former. It works by progressively increasing the unit rate over several ‘tiers’ of consumption or by implementing a price ‘floor’ and ‘ceiling’. These are also known as rising block tariffs.

The approach aims to provide less costly energy where levels of use are lower but remain sufficient to assure good health and well-being for most households. Higher unit rates are then applied for volumes of energy consumption above mere sufficiency and where the household is considered to be more affluent, with increased usage a proxy for higher income. In most cases, it would be necessary to provide supplementary support for high energy consuming households with vulnerable occupants e.g., those with medical needs.

Policy Exchange set out, in its Tiered Energy Relief Scheme paper, recommendations for a twin track approach to introduce tiered tariffs:

  • Track One – those in the lowest tier of consumption will have 100% of their energy bills subsidised whilst those in the highest tier will only be subsidised for 47.6%.
  • Track Two – Supporting those who have ‘fallen through the gaps’ of Track One, Policy Exchange suggest increases (£2.8bn) for either the Personal Independence Payment or the Disability Allowance and a similar increase (£2.9bn) in Winter Fuel Payments. Not seeking to exclude those on prepayment meters, the price differential of £59 will be eliminated.
  • For those still falling outside the reach of Track Two, the paper suggests the allocation of c.£5bn to the Household Support Fund. Policy Exchange have also suggested provisions for those living in fully electric homes, including a 200kWh monthly increase in their subsidised use of electricity.

Alongside plans to raise social assistance benefit, lower VAT rates on energy, and further invest in household energy-efficiency measures, the Dutch government have introduced a scheme that caps gas and electricity unit rates up to maximum consumption level, after which customers pay the rates of their existing contract. Crucially, as the ceiling is based on the average Dutch household’s energy usage, self-disconnection is held to be unlikely. The scheme runs from 1 January 2023 to 31 December 2023.

Welfare-linked approaches

Whilst most advocates of social tariffs have suggested either a tariff deficit fund or a tiered approach, others have stressed the need for benefits means-tested solutions or the collection of new fuel poverty statistics as measures to better target support for the most vulnerable.

Currently, the only remaining social tariff offered by GB energy suppliers is the Warm Home Discount, although many suppliers provide additional support including advice or grant awards. The Warm Home Discount is mandated for licenced gas and electricity domestic suppliers with over 50,000 customer accounts in GB, granted to those in receipt of certain government benefits, and funded through a levy on other consumers’ bills. Over the period October-March, recipients automatically receive a one-off payment of £150 towards their energy bills.

An example of an alternative approach was proposed by Onward in September 2022 that stressed the need for extensive targeting and additional measures like a Fuel Poverty Taskforce and the removal of the standing charge. Here the recommendations, alongside other initiatives including an energy demand reduction programme and use of alternative fuel supplies, focussed on £1,000 in support for every household (to be paid as credit on their energy bills), an additional £1,000 for those on means-tested benefits (including pensioners), a further £500 per child claiming Child Benefit (up to a maximum of two children), plus £500 for people with disabilities.

Concluding remarks 

Energy bills are forecast to remain very high, with little prospect for the real cost to fall back to long-term historic levels any time soon. Current government interventions will lower end bills for all compared to the counterfactual, but even so costs are unprecedently high and there was insufficient time to design a package of measures to target support more effectively ahead of this winter.

It is imperative that the industry and government explore the role social tariffs could play to mitigate the worst impacts of high energy prices for vulnerable households ahead of the “new approach to consumer protection post April 2024”. This will need to be considered alongside the development of supplementary measures as social tariffs alone are unlikely to be a panacea.

The key questions to consider include the perennial one of identifying and then targeting those that should receive support (and as importantly those that should not), but also how support costs are recovered fairly without unduly pushing other consumers into needing additional support.

There are no easy answers, but social tariffs are likely to one of the necessary elements of a wider package to ensure all consumers can afford the energy they require.

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