Govt could reduce bills for almost 90% of households with a National Energy Guarantee

A National Energy Guarantee which entitles every household to a free amount of essential energy would lower bills for 88% of households by 2024, according to research from the New Economics Foundation (NEF), published today. This could be done for the same amount that is being raised through the windfall taxes on energy producers.

The research finds that even with energy prices falling, families could still see their average energy bill coming in twice as high in 2024 as it was in 2021. Without a change of policy from the government, this would mean bills eating up 10 times the share of household income for the poorest 10% compared to the richest 10%. The research finds that the richest 10% of households have seen 36% more in cash savings from the government’s energy price freeze compared with the poorest 10%, due to higher energy consumption.

Government support for households to pay their energy bills is gradually being withdrawn from this April, with the expiration of the energy bills support scheme. In April next year, the energy price freeze and cost of living payments are due to end. But by April 2024, the report finds, bills could still be at least 70% above where they were before the invasion of Ukraine. The report argues that this gives the government just over a year to permanently reform the energy sector in order to protect consumers from future price shocks.

The NEF report recommends that the government replace its energy bills support package with a National Energy Guarantee, made up of:

• Free and low-cost essential energy, where every household is entitled to a set amount of essential energy to support daily energy needs. Half of this essential energy is offered for free and the other half priced at a fixed, low rate. Consumers will pay 50% less than they were pre-crisis for this essential block of energy.
• Households with higher energy needs, such as those with disabled residents or children, would be provided with an additional free energy allowance.
• Further energy use would be charged under a new pricing system where the cost of a single unit of energy increases depending on how much a household uses.
• Households using the most energy would be put onto a carbon-busting premium tariff, in order to cross-subsidise the cost of the essential energy, and make it more attractive for wealthier households to invest in energy-reducing measures like home insulation or domestic solar panels.
• Households using social security would be exempt from this carbon-busting premium tariff, regardless of energy usage.

The National Energy Guarantee would see all essential energy needs protected from sky-high prices. If introduced next April, four out of five of the lowest income households would see their energy bills slashed by over £1000, with their bills dropping to levels not seen since before the invasion of Ukraine. The report finds that this would provide all households with a basic safety net of cheap or free essential energy which should enable the average household to run daily essential appliances like fridges and kettles, and keep two rooms warm.

In addition, the report argues that current support incentivises wealthier households with high energy usage to continue to use lots of energy, rather than invest in home insulation or solar panels. With household energy usage accounting for 23% of the UK’s greenhouse gas emissions, and existing plans to retrofit and upgrade homes to make them more energy efficient falling short, the report argues that reforming the energy system needs to include a mechanism to decarbonise housing.

Chaitanya Kumar, head of environment and green transition at the New Economics Foundation (NEF), said:

“Being able to heat your home to a comfortable temperature is a basic need that we all share. It is vital for our mental and physical health. So far, this government has offered piecemeal short-term support to get families through this energy crisis. With support due to end entirely in just over a year, this is our opportunity to fix our energy system once and for all. Energy is an essential service which we all need to live, and we need to be prepared for the energy shocks of the future. A National Energy Guarantee would make sure every household is entitled to a free or cheap amount of energy to cover their essential needs.”

Laura Sandys CBE, former Conservative MP and chair of the UK government’s energy digitalisation taskforce, said:

“I really welcome the analysis in this report about the most effective way of delivering a social tariff and creating new incentives to reduce energy consumption throughout the market. While there are many differing views on some of the details this is an important and valuable contribution of how we create a new retail market that serves those on low incomes while also unlocking a more vibrant energy efficient incentivised market.”

Caroline Lucas, Green MP for Brighton Pavilion, said:

“A National Energy Guarantee approach could offer the best of both worlds: delivering genuine energy security alongside incentivising energy efficiency. It recognises that energy is a fundamental requirement and guarantees that those on the lowest incomes can meet their basic energy needs, whilst also ensuring the richest energy-intensive households bear a greater responsibility, thereby incentivising energy efficiency investment to help tackle the climate emergency. Our energy system desperately needs rethinking and reshaping – this model deserves serious consideration.”

Clive Lewis, Labour MP for Norwich South, said:

“Current government policy is pushing too many people into fuel poverty. Without taking a holistic approach to overhauling our energy pricing system, this is unlikely to change. So I welcome this report from the New Economics Foundation, which highlights how fuel poverty is not inherently a result of global energy supply issues, but rather a result of how energy is distributed in the UK, and the solutions at the heart of this issue are political choices that are within our control.

“It is imperative that we create a safety net for those households struggling to pay their energy bills, and the National Energy Guarantee would be a major step forward in doing that. There is no reason why we cannot create an energy pricing system which enables everyone to have access to the energy they need to flourish in their day-to-day lives.”

Mike Childs, head of science, policy and research at Friends of the Earth, said:

“With so many people struggling with the soaring costs of heating their homes, it’s time to rethink the way we’re charged for energy. Balancing the grid requires encouraging people to shift electricity use to off-peak times, and we need to encourage wealthier households to invest in insulation, fit heat pumps, install solar panels and use electric vehicles. NEF’s proposal for a National Energy Guarantee approach deserves serious consideration, alongside proposals made by others, such as the introduction of a social tariff. Only by properly considering all options on the table will the government be able to develop a climate-smart and socially just approach to energy pricing.”

Contact

Margaret Welsh /​margaret.welsh@neweconomics.org /​07776340574

Notes

The New Economics Foundation is a charitable think tank who are wholly independent of political parties and committed to being transparent about how it is funded.

The report, A National Energy Guarantee is available at https://​newe​co​nom​ics​.org/​2​0​2​3​/​0​4​/​t​h​e​-​n​a​t​i​o​n​a​l​-​e​n​e​r​g​y​-​g​u​a​r​antee 

Since 2018, the grassroots campaign Fuel Poverty Action has pressed for a proposal of free energy to meet basic needs, funded by higher prices for extravagant use. The idea generated huge public support and in 2022, the New Economics Foundation picked up the challenge of modelling such a scheme. This week Fuel Poverty have launched a new Energy For All manifesto, which augments this energy guarantee using additional funding from higher windfall taxes and the removal of fossil fuel subsidies.

Essential energy is defined in our research as the minimum energy required to run daily essential appliances like washing machine, cooker, lighting, internet etc. alongside adequately heating roughly 50 square meters of space with gas. We acknowledge there is no universally agreed definition of essential energy and we urge the government to undertake research that can inform the setting of these thresholds.

For households that rely on electricity (eg, storage heaters) for their heating requirements, our modeling assumes half of the free gas allowance we build into our model, for a typical dual fuel household, are transferred onto electricity, considerably raising the free electricity allowance. As more heat pumps are installed in off-gas grid homes, such transfers could be adjusted more in line with the efficiency of heat pumps.

The National Energy Guarantee could be designed in a cost-neutral way with the premium tariff payers’ cross-subsidising low income users. However, the bill savings calculated here are based on an additional government subsidy of £8bn, roughly equivalent to the revenue from the energy profits and electricity generators levies as forecast by the OBR.

Table: Change in household bills in April 2024 resulting from a National Energy Guarantee, administered through a three-tier rising block tariff. Scenario assumes £8bn of windfall taxes are re-circulated into subsidising household energy bills. See further notes below.