Government must be ready to provide targeted energy support, says Resolution Foundation

A targeted energy discount scheme could save eligible households £175 and soften the impact of any further gas price shocks this winter. But the Government will need to act fast to have a scheme ready by January 2027, the Resolution Foundation warned today (Monday).

Despite the Prime Minister's welcome day-one VAT cut on electricity bills, further escalation of the war in Iran means that higher energy bills this winter are a growing possibility, just as temperatures drop and household gas use increases. 

Billing me softly lays out how the Government can get ahead of higher bills while avoiding another costly universal support package, which it cannot afford and would ultimately benefit richer households the most.

And further Resolution Foundation analysis this week underscores the need for further targeted support. When gas prices spiked in 2022 following the invasion of Ukraine, lower-income areas cut back their gas use by 15 per cent more than higher-income areas. Two years later, only one-sixth of this fall in consumption had been reversed, suggesting that these households are still heating their homes less than is comfortable.  

So the Government should ensure it has an effective scheme ready to switch on to support those vulnerable to bill hikes this winter, particularly for the January March 2027 period.

Targeting support effectively requires facing tough trade-offs. Passporting support only to means-tested benefit recipients is administratively simple, but it reaches just a quarter of British households and misses most below-average-income households. And hardship is not confined only to the very poorest: in 2022-23, 15 per cent of households in the second income quartile said they could not afford to keep their home warm.

But the Government can strike a balance between effective targeting and deliverability by applying a temporary discount to gas and electricity unit prices for households in need. Support should be expanded beyond those on means-tested benefits to also include those passing an income test assessed on the highest-income individual in the household. Setting this threshold at £24,000 per year would mean support would go to around 40 per cent of all households and reach over four-fifths (83 per cent) of those in the poorest fifth of the population.

A scheme costing £2 billion would provide an average discount of £175 per eligible household. A tiered system could go even further, paying around £220 to those with incomes below £18,000, and £85 to those between £18,000 and £24,000, albeit at the cost of additional complexity.

The authors note that the proposed design would lead to some rough justice, particularly for single earner households above the threshold; most likely to be working-age couples with children. This could be mitigated through a more generous income threshold for households that contain children.

Finally, though any scheme introduced this year might not be perfect, alternative methods risk errors and delays which could leave many more households without timely support this winter. So the Government should also develop a more robust scheme for future crises, including looking at automatic enrolment via HMRC data, as opposed to self-declaration.

Jonathan Marshall, Principal Economist at the Resolution Foundation, said:

"The last energy crisis pushed families in the poorest places to cut their heating by more than those in the richest, with most still not warming their homes as much as they used to and a fresh price spike this winter risks driving them lower still.

"The Government can get ahead of this, if it acts now. A targeted energy discount could save eligible households £175 a year and reach over four-fifths of the poorest families, while expanding support beyond just those on means-tested benefits.

"Successive governments have failed to build a robust system for dealing with household energy prices. But with ongoing uncertainty in the Middle East meaning there is still considerably volatility in energy markets, the Government must act now to have a targeted scheme ready to switch on by January 2027, so that support reaches struggling families quickly when they need it most."

Notes to Editors

• Embargoed copies of Billing me softly by Mike Brewer, Alex Clegg and Jonathan Marshall are available from the press office. For more information contact Alessia Jones on 020 3372 2969.
• On Monday we will also be publishing Losing Energy by Zachary Leather and Amber Rajham, looking at domestic energy use decline and regional responses to fuel price shocks; this is the analysis showing that lower-income areas cut back gas use 15% more than richer areas in 2022, and only recovering by one-sixth of this fall by 2024. Embargoed copies are available from the press office.