Some households face the prospect of energy bills swallowing up nearly half of their post-housing income after the new price cap kicks in.
That was one of the many bleak findings outlined in an analysis, published last week by the Joseph Rowntree Foundation charity, of the impact of the looming energy price hike on low-income households.
Poorer single adult households will spend a “shocking” 43% on average of their income after housing costs on energy bills. The figure for lone parent families on low incomes is 22%.
This is taking into account the package of measures to cushion the blow from the price cap hike, which were announced by Rishi Sunak within minutes of Ofgem’s publication last Thursday.
The biggest chunk of the chancellor of the exchequer’s package is what is effectively a £200 loan, which all customers will receive in October and will then be recouped over the next five years in staggered payments.
In April, an estimated 80% of households will also receive a £150 one-off council tax rebate, which all those living in Band A to D properties will be eligible for. Councils will be awarded £150 million to make discretionary payments to those on low incomes who either live in higher band rated properties or are exempt from council tax.
In the context of what works out as a £9.1 billion package, it may seem a bizarre question to raise in, but is it enough?
Labour certainly didn’t think so with shadow chancellor Rachel Reeves immediately branding Sunak’s announcement as a “pale imitation” of the opposition’s twin pronged plan to axe VAT temporarily on energy bills while extending the Warm Home Discount (WHD) for low-income earners.
Adam Bell, the Department for Business, Energy and Industrial Strategy (BEIS)’s former head of energy strategy, agrees. “There is no world in which we were going to have a massive taxpayer subsidy for everyone.”
Simon Markall, deputy director of external relations at Energy UK, says the package announced this week was “definitely welcome” and reflected his body’s call for a mixed response combing broad support for all household with more targeted help for vulnerable customers.
But noting that the £200 chunk of the package won’t begin hitting customers bank accounts until October, when many will already have had to pay bumped up bills, Bell says: “It looks too late and too small.”
There are also big question marks over the practicality of recovering sums from customers over several years, which will have yet to be ironed out and may help to explain why the £200 pay-outs won’t take place until October.
Targeted support
The size of payments is of course a particularly pressing issue for those on the lowest incomes. Adam Scorer, chief executive of fuel poverty charity National Energy Action, branded Sunak’s package as “broad and shallow” immediately following the chancellor’s announcement.
While the council tax rebate is no doubt well intentioned, it is not “particularly well targeted”, says Foster: “No doubt there will be number of cases where people will be eligible, who are financially very well off.”
Bell agrees: “The middle classes don’t need this benefit as much as lower income people do.”
The Institute for Fiscal Studies has calculated that 44% of Band A to D households, who will receive the £150 rebate, are in the top half of the income distribution scale. Just over a third (38%) are in the bottom third of the household income distribution.
The government has expanded eligibility for the WHD by around a third, meaning that approximately three million households will now receive the discount, which is targeted at those on the lowest incomes.
However, the annual WHD payment has only gone up from £140 to £150, which is in line with proposed increase set out in last year’s energy white paper but much smaller sum than many commentators had expected in the run up to Sunak’s announcement.
While acknowledging that it would be “churlish” not to welcome the extension of the scheme’s eligibility criteria, the level of the increase could have been bigger, says Foster: “They could have been more generous because it’s a targeted support mechanism: you are putting money into peoples’ pockets who genuinely need it.”
Even taking into account the measures announced by the chancellor last week, those on the lowest incomes will still have to find several hundred pounds extra per annum for their fuel bills.
Bell, who is now head of policy at consultancy Stonehaven, says the impact on low income earners could be “crippling”.
Many households will face “really horrible choices”, says Foster: “That’s a huge sum for people at the bottom of the income scale.”
Higher bills will also have health consequences, as households turn down the heating, leading to a build-up of the damp and moisture that exacerbates respiratory conditions, says Bell.
Responding to questions in the House of Commons following his announcement, Sunak was at pains to reassure fellow Conservative MPs that the package would not only benefit those on the lowest incomes.
The council tax rebate is an “overt” political “bribe” that will benefit the middle-income swing voters, who the Conservatives must assuage in order to avoid a bloodbath at May’s council elections, says Bell: “They have to be seen to be give the least well off something but people receiving WHD aren’t Conservative voters. The first bill will land on the door-step just after April.”
However, any political relief may be short-lived, especially if the level of wholesale energy prices remains elevated for several years, says Foster: “This will get them past May but drags on the misery of very high bills for several years.”
The government is likely to have to take a fresh look at its energy support package if this is the case, says Markall: “We need to look at whether it’s enough if this crisis looks like it’s going to be longer term than a six month to a year blip.”
Sunak’s political calculations about his own potential future role as prime minister may have played into the scale of last week’s package, says Foster: “There may be more in the bank but he’s not going to use it to save Boris Johnson’s skin if he can use it for himself in a couple of months’ time.”
If and when the support package is reviewed, the government should take a more thorough look at the structure of the retail market, says Markall: “We don’t want to see further supplier failures because that pushes up customers’ bills. The logic is to find a more sustainable energy retail market.
“The chancellor can’t keep taking money off customers’ bills: we have to find a long-term solution.”