Between October 2022 and March 2023, as energy prices surged, the
government spent £35 billion (more than 1% of annual GDP) on two
schemes to support households. These schemes were a 39% energy
price subsidy under the Energy Price Guarantee (EPG) and £400
universal transfers through the Energy Bills Support Scheme
(EBSS).
New research from the Institute for Fiscal Studies (IFS) shows
that while these measures significantly alleviated household
losses, they were poorly targeted and encouraged overuse of
energy. Similar outcomes – in terms of both overall losses and
equity – could have been achieved at £4.5 billion lower cost if
the government had not subsidised energy and instead targeted
transfers based on households' income and past energy use. The
government should ensure that it is in a better position to
target help more effectively (as other countries did) should
another energy price spike occur.
One problem with directly subsidising energy prices is that it
reduced incentives to cut energy use during a supply crunch. We
estimate that a 10% increase in energy prices prompts households
to reduce consumption by an average of 3%. This means that an
energy price subsidy keeps energy use high and increases the cost
of support.
Direct cash payments, such as the EBSS, avoid incentivising
excess energy use. However, these uniform payments were issued to
all households (irrespective of income or circumstances), which
failed to address differences in household energy needs. Other
European governments based payments on past energy use, enabling
better targeting.
A cheaper and more efficient response to any future energy price
shock would involve better-targeted cash transfers to support the
most exposed households. We should invest now in ensuring we have
the data infrastructure available to make such a policy response
feasible.
Peter Levell, IFS Deputy Research Director and author of
the report, said:
‘The cost of supporting households through the energy price spike
of late 2022 and early 2023 was extraordinary – £35 billion over
a six-month period. That is more than half the entire annual
schools budget. Part of the reason for the huge cost was that the
government did not know which households had both low incomes and
high energy use and so felt compelled to offer universal help. A
big part of that help came in the form of a lower energy price,
which itself led to higher demand, increasing the cost of the
support. Investment now in better information could save billions
in the future if we ever again face a similar surge in energy
prices.'
ENDS
