Why we need a National Energy Guarantee at the budget

As the first budget of the Burnham government approaches, the UK is staring down the barrel of another shock to energy bills. The wholesale price of gas, a key input in the cost of electricity and by far the most common heating source among UK households, has almost trebled since the start of the US assault on Iran, sending energy prices surging around the world.

Ofgem, the energy regulator, has already raised the price cap – the highest rate suppliers can charge to customers on a standard variable tariff – twice since the outbreak of the Middle East conflict, lifting it by 13% this July and by a further 4% this October. Major forecasters are now predicting double-digit increases for the first quarter of 2027. According to analysis by the New Economics Foundation (NEF), this could raise the typical electricity bill by over £400 a year, well above the level at which the government chose to cap prices during the last energy crisis.

On the heels of the worst inflationary crisis the UK has seen in a generation, the coming energy price surge threatens to push hundreds of thousands of households over the poverty line. The government, which has put the cost –of ‑living crisis front and centre of its political agenda, cannot afford to sit on the sidelines as energy prices blow an ever-larger hole in household budgets. Its current support measures, including taking VAT off electricity and moving green levies from bills into general taxation, have helped to cushion the blow so far, but will barely be noticeable to households come January. Even if you take the lower end of forecasters’ projections, the expected rise will more than outweigh the savings generated both by the removal of levies from bills and the temporary VAT exemption.

A National Energy Guarantee is the way forward

Every household must have enough energy for the essentials: to stay warm and keep the lights, fridge, and washing machine on, even during the depths of winter. The only way to achieve this is to implement a real price cap on an initial level of consumption, a protected ​“block”. In our model, we set this at around 60% of average household electricity and gas consumption (equivalent to 1,800kwh and 6,100 kWh respectively). While the precise level of energy needed for a decent standard of living will vary between households, this energy should be sufficient to deliver the bare minimum to all.

Rather than providing households with a lump sum of cash, which offers short-term economic relief but provides no certainty in a world of rapidly changing prices, we want to see a lock on electricity and gas unit rates. We propose that unit rates in the essential energy block should be returned to their pre-crisis level (we use late 2024 prices but other approaches are available). Based on current forecasts, this would mean discounting January 2027’s prices by around 25% for electricity and 40% for gas. 

A key element of our proposal is that households disconnected from the gas grid would have their allowance of cheap gas transferred across to electricity, at a kWh conversion rate of one unit of electric allowance to two units of gas. This would make sure that all households were entitled to a similar level of support, and electrically heated households (including heat pump owners) were not unduly punished.

On current forecasts, our protected block would hand every household around £190 of support over the first half of 2027. Around £125 of support would be delivered in Q1 and around £65 in Q2. This would come at a cost to government of around £5.4bn. In addition to this, we support the rumored proposals to temporarily increase the generosity of the warm homes discount by £100. This would cost government an additional £600m, taking the total cost of our package to £6bn, and the average household benefit to £210. However, should energy prices remain elevated, this support offer should be extended into the second half of 2027 and beyond (bringing with it additional costs). In this case it might be reasonable for the price of the protected block to rise in step with household incomes. 

Many organisations have called for the government to remove the remaining levies from electricity bills. At NEF we broadly support this call but believe the level of immediate relief it would provide on energy bills would be insufficient. As shown in the figure above, removal of the remaining levies would only take around £44 off household bills in the first half of 2027. By contrast, NEF’s proposed policy takes £80 off electricity and £110 off gas. NEF’s policy could be combined with levy removal to produce a similarly sized bill reduction. Levy removal is marginally less progressive than our essential block, as it favours households consuming large amounts of electricity which, on average, are wealthier. But, on balance, there are other good reasons to remove levies linked to the need to build a more dynamic electricity system. 

The initial costs of our support package should be paid for by the Treasury and offset with a tax rise, such as a windfall tax on bank profits or reforms to capital gains tax. Longer term, the policy would have macroeconomic benefits that would help to avoid future costs to the Treasury. It would smooth and reduce inflation, as explained by the Joseph Rowntree Foundation, and in doing so would reduce the pressure on the Bank of England to increase interest rates – delivering knock-on benefits to the cost of government borrowing.

At its core, our proposal is the same system used by the Netherlands, Austria, Poland, Hungary and Romania during the last energy crisis. It is also similar in design to the German model, the key difference being that in Germany the discount threshold varied based on a household’s historic consumption levels. Our proposal also borrows features from the energy billing models that are the norm in places like British Columbia, South Korea, and Japan. In Japan’s case, the system was first implemented in response to the 1974 oil price shock. 

Over-targeting approaches creates cliff-edges, bureaucracy and resentment

Underpinning our energy proposals is our position that protections should be in place to ensure that life’s essentials, be that healthcare, social care, childcare, water, or energy, remain accessible to all. Where the universal safety net is insufficient to prevent households from slipping into poverty, the benefits system should step in.

Attempts to create additional forms of means-testing for support that operate outside of the benefits system have a long history of failure. Just recently we have seen the Conservative party’s pledge to end the arbitrary cliff-edge that withdraws childcare support from households with a single very high earner. Meanwhile the prime minister has made it his professional mission to end the unfair, bureaucratic means-testing system in old age personal care. His conference speech set out a vision for a universal, free-at-the-point of use alternative. Such a system is needed in energy too.

Looking in detail at proposals for a social tariff (non-universal offers that expand eligibility for energy support beyond the benefits system),we see major risks that these schemes might not only miss their target, but create divisions in an already fractured society. The Resolution Foundation’s targeted energy discount proposal is an example. The proposal would offer qualifying recipients a targeted discount on energy unit rates, worth an annual average of £175 per household; eligibility would be extended to any household whose highest earner’s income falls below £24,000 a year plus those with a resident in receipt of a means-tested benefit.

There are problems with this approach. Whereas the NEG could be implemented with relative ease, the administrative complexity inherent in the Resolution Foundation’s scheme would create major implementation challenges. Households receive income from a huge range of sources (eg PAYE, capital gains, self-employment); accurately identifying who would qualify would be incredibly complex.

Moreover, the proposal’s focus on the top earner in the household fails to recognise the differing circumstances of households with similar incomes. A single home-owning adult earning £23,000 might need support less than a large, renting family, with a top earner on £25,000 that would miss out, but with limited additional data it’s difficult to know. NEF’s NEG removes these judgement calls by providing support to all. The Resolution Foundation recognises that their scheme produces what they call ​“rough justice”. But more than just rough justice, our analysis suggests the flaws in their system leave some of the most vulnerable households un-supported.

Our analysis suggests that over a million low-income households (defined here as those found in the bottom three equivalised income deciles) would go unsupported. Around 70% of those would be households with children. When it comes to need, the picture is even worse. We estimate that the group of low-income households not eligible for support face energy bills, on average, 19% higher than those who receive support (before support is applied). Working households would also be disproportionately penalised: more than 90% of excluded, low-income, households would have at least one member in work. These types of divisions risk breeding resentment towards the government, or towards a neighbour.

These disparities could – at least in principle – be mitigated by adapting eligibility thresholds to each targeted group: households with children, for instance, could qualify at higher individual incomes, or receive larger transfers once deemed eligible. Such tweaks at the margin, however, show the central problem of a means-tested approach: in setting strict income ​“cliff edges”, vulnerable households on the edges of eligibility will always be excluded , even when their socioeconomic status is indistinguishable from other eligible recipients.

Only a universal approach, as is the case of the NEG, can guarantee that help will reach each and every household that needs it. In times of pressing need, the extra cost of extending a subsidy to all is a small price to pay to ensure that no one is left behind.