BLOG | Karen Turner | Nov 2023
Energy prices are rising again. Ofgem has announced a 5% increase in the price cap (applying from January). The increase in unit prices of gas and electricity can largely be attributed to continued fluctuations in the wholesale price of energy and higher demand over the winter period, and with another slight drop anticipated in the New Year to apply from spring, standing charges seem to keep rising. To this end, Ofgem have also launched a review of standing charges. But will this and other energy price and affordability actions and interventions be enough?
Standing charges – a long-term challenge
Part of the standing charge challenge is the continued cost recovery of those suppliers whose businesses failed earlier in the energy price crisis. However, there is a longer-term challenge. As the UK decarbonises its energy, high and increasing standing charges can be expected to remain a problem, given that they constitute a more stable and certain revenue source to set investment and other costs against In short costs for actions such as upgrading the electricity network will need to be paid for, and the status quo involves recovery through energy bills and in particular the standing charge component. This is a real issue for those on lower income and other vulnerable households for whom the daily rates make up a higher share of their bills, especially if they live in areas where standing charges are higher due to the costs of getting electricity and gas to their homes.
Social tariffs welcome but can only go so far
For this reason, it is good news that Ofgem will conduct a review of standing charges. However, it is not yet clear what the current (or potential future) government’s intentions are regarding calls for a social tariff. This could be a game-changing intervention, potentially involving those less able to pay for the essential energy to heat their homes to a comfortable and healthy temperature facing prices below those given by the energy price cap, most likely with the bill footed by those more able to pay. These are issues that we will be exploring as part of broader research undertaken as part of the new Energy Demand Research Centre, where I am leading a theme on equity.
However, a social tariff can only do so much. Is the real problem not the fact that we have so many people in society who are living in poverty and less able to pay for basics such as energy and food? This is a situation that will only be exacerbated if businesses pass on the costs through bills and price increases of heating and other decarbonisation costs. Making targeted interventions through prices such as the energy price cap and social tariffs on energy and other necessities is a complex process, and arguably the real challenge is simply that many people’s incomes are too low.
Focussing on the income part of poverty
There is increasing discussion about a range of poverties - energy poverty, fuel poverty and transport poverty - largely identified because of the high costs of accessing and securing the essentials in life relative to people’s incomes. However, the common problem is that many people simply do not have sufficient income to meet the necessary costs of living, let alone some access to the luxuries that help most of us achieve some extent of comfort and contentment in our lives.
Is all this not really a broader public policy, and political (and institutional), challenge rather than just an energy or climate policy one? Certainly in the context of our committed ambitions and the necessity of decarbonising and reaching net zero, we are talking about a major transition in the way we live and do business. Should this not include focussed attention on what type of incomes people need now and will need in the future to move out of absolute poverty and all the specific ‘types’ such as energy poverty, including how we can distribute the costs and redistribute the gains, as we transition to a more sustainable economy?
More fundamental debate and action is needed
The Chancellor’s statement this week did give attention to boosting working people’s take-home wages with a 2% cut in employees’ National Insurance rate from January 2024. The increase in the National Living Wage is another more targeted and progressive step. However, the continued energy price crisis, rising housing costs and wider cost of living challenges mean that few working households will feel better off.
In terms of more vulnerable households the increase in pensions in line with average earnings and working age benefits in line with this September’s inflation rate will similarly only act to limit but not eliminate losses in real incomes and spending power. Moreover, plans to tighten rules on access to welfare without ensuring there are sufficient jobs and sources of income will inevitably have poverty implications.
However, this is not just a problem of current policy. There is a pressing need to substantially shift how the economy and people therein function if we are to both avoid the disasters of climate change and being left behind as a nation as the opportunities of a green future. In meeting this challenge, there is also an urgent need to consider governance and other challenges in addressing major failures in the system, where absolute and relative poverty levels may be one of the biggest.
Poverty is dire for the people who live in it, and places pressures on society and taxpayers due to the impacts on a range of things, including but not limited to health spending and provision. Sooner or later, policy interventions will need to be made to address and improve the distributional impacts of the required transition – is it not better to try to head off the need for them by focussing on the income gap challenge now?
Image credit: HM Treasury, flickr.com, CC BY-NC 2.0