With the continued cost-of-living crisis, there has been growing call for a social tariff to protect vulnerable customers from high energy prices. Typically, what is meant by a social tariff is essentially a cross-subsidy, where the bulk of customers pay a small premium to reduce prices for the selected vulnerable customers.
This is in effect a hidden “tax and benefit” scheme. Although it might seem attractive to politicians trying to hide the level of the tax burden, it doesn’t result in the best outcome for consumers. This is primarily because providing cheap energy in this way is distortionary, reduces price signals, and is contrary to other societal goals like net zero.
Having a levy outside of the main tax regime can be appropriate for relatively small schemes, but this is not a small problem. The number of households that qualify as “vulnerable” is increasing all the time and, if we include financial vulnerability, it is likely that in excess of 25% of UK households would qualify.
A poor price signal will not only reduce the incentive to use energy more efficiently, but it might also cause consumers to disengage from other technological solutions – for example solar that might provide an even cheaper solution. It could be possible to design a social tariff to go with every technology option but that would be incredibly complicated to administer.
The underlying issue is affordability, and there are three key drivers: (i) price; (ii) consumption; and (iii) income. By concentrating on supressing price, we ignore the option of reducing consumption, and conveniently forget that adjusting incomes also provides a solution.
The current cost-of-living crisis, which goes much wider than just energy, is being caused by the fact that for many lower income households, their incomes have not kept pace with the rate of inflation that is applicable to them. The effective rate of inflation for this demographic is much higher than the standard rate of inflation when inflation is being driven by increases in the price of basic needs like food and energy. Fundamentally, pensions, benefits and the minimum wage all need to be higher.
Many vulnerable customers do have additional energy needs, for example for medical or mobility equipment. But there is no reason why those needs cannot be addressed when setting the level of benefits. Forcing the Treasury to consider this issue would very likely lead to better decision making because underfunding the energy needs of vulnerable households incurs cost elsewhere in the economy. This can range from very immediate costs like extra NHS expenditure because of conditions caused by living in cold and damp houses, to longer term costs such as underperforming workers because their education has been adversely impacted.
The key problem with adjusting incomes is that the additional money might not be spent wisely. But as we have seen with EBSS during the winter of 2022/23, it is possible to give additional money that directly, accurately, and efficiently delivers the power and heat that consumers need. Ultimately that is what taxpayers want to see: those less well off or disadvantaged having access to heat and power.
This is why we have been calling for a something we’ve termed a “social discount”. Just like the Warm Home Discount or EBSS it would be an amount of money that gets directly applied to an energy account. This leaves the customer with a price signal to still do the right thing in terms of reducing consumption and doesn’t exclude them from other technology options.
Ultimately, modern technology could even deliver the additional benefit of being flexible enough to adjust the level of the payment dependent on weather conditions.
The need for support is obvious, but it is vital that we get it right.