The cost of living and domestic fuel - a proposal

Graham Room is Professor of European Social Policy in the Department of Social and Policy Sciences at the University of Bath.

Context

Domestic fuel prices are expected to increase dramatically in the coming months. There will be many more households struggling to meet their bills. There are various proposals about extending existing fuel reliefs for those on benefits, although many who are not on benefits will not be eligible. The Labour Party has advocated freezing the energy price cap this winter, but what would happen thereafter is unclear. Windfall taxes on the energy companies could bear much of the cost.

On Thursday 8 September, the UK Prime Minister, as her first action in the job, set out her own plans to meet the crisis. Over the next two years the price cap will be frozen. What happens after that is unclear. But the costs of this two-year intervention will apparently be recovered from consumers in the medium to long term. No windfall taxes are foreseen. The costs will be upward of £90 billion but no detailed costings have been offered.

Thus two fundamental questions must be posed. First, unless after those two years energy prices fall back to ‘normal’, what will happen to the fuel tariffs faced by ordinary households in the UK? And secondly, who will and who can and who should pay for the rescue package that Truss has announced?

But we surely need to look beyond the immediate situation and consider what regime would be suitable in the medium to long-term.

Proposal

My proposal is to give every household an allowance of free gas and electricity – a citizenship right for all – with rising rates of payment for successive bands of usage above that allowance.

It would parallel somewhat the graduated way we pay income tax. First, set a standard annual allowance for each and every household – an annual amount of domestic fuel (e.g. so many kilowatt hours) that each household can consume free of charge. Then above that, up to some threshold their consumption would be charged at something like the existing price. Finally, a substantially higher price for consumption above that level.

This could eliminate a lot of fuel poverty and encourage people on low incomes to use enough fuel to keep themselves warm - and not have to choose between heating and basic foods. It would also discourage high consumption of fuel by the better off and thus be climate friendly.

Questions and clarifications

a] There would need to be separate arrangements for care homes and boarding schools, factories and office blocks. My proposal is concerned solely with households and domestic fuel.

b] I am not proposing any means testing, in the sense of checking people’s income to see if they are poor enough to need extra help with their fuel bills. Instead, every household when it receives its quarterly gas and electricity bills would get the first xxx units as of right, free of charge, the next yyy units at a similar price to now, any additional units zzz at the high price. I assume that people on modest incomes will be unlikely to find themselves caught with those high price units, they typically live in small houses and don’t have outdoor swimming pools that need heating. Of course, there may be separate arguments for increasing Universal Credit for example, in view of the other costs of living including of food.

c] One refinement might be to vary the basic allowance depending on the size of the household. It would not be appropriate to multiply the allowance by the number of people living in the house: two people do not need twice the fuel of one person in order to achieve the same level of comfort.

• There is a useful parallel in studies of household income poverty, where the OECD for example has ‘equivalising’ ratios when comparing the wellbeing that a given income provides for different sizes of household. Within a given household, the first adult (over 14 years) is given a weighting of 1, additional adults have a weighting of 0.7 and children (i.e. under 14) have a weighting of 0.5. Thus a household of two adults and two children would have a weighting of 2.7. In other words, such a household would need 2.7 times the income of a one person household to enjoy the same level of wellbeing.
• I am not suggesting that these specific weights would be applied in the case of fuel, simply that a similar approach might be used. (And indeed, the OECD itself is not convinced that the foregoing weights are necessarily the most appropriate in the case of incomes, they also therefore advocate that sometimes the square root of the above weights be used).

d] It would also be possible to increase the free allowance for people with special needs, for example those using dialysis machines. (This is of course quite different from means-testing, in the sense of providing extra for those with incomes below a particular threshold – see (b) above).

e] I proposed above that the middle tier (above the free basic tier) would be charged at something like the existing price. But does this mean the sort of price we have enjoyed until the past year or so or the current price? That is up for debate. My suggestion is that the Government would take a view as to what is the likely average level of pricing over the next 10 years and use this as the benchmark, rather than the current high levels that have been provoked in part at least by the war in Ukraine.

f] I proposed above that the third or upper tier would be charged at a substantially higher price. There are at least three issues here. First, I am assuming that it is better to charge at a higher price rather than use rationing: that at least preserves individual choice as to how to use their money. Second, I am assuming that a higher price would nudge us all towards greener behaviour and that this is a good thing. Third, I am assuming that the higher price would bring in some of the funds needed to fund the free allowance.

g] This latter point raises the larger question of how this scheme – and in particular the first tier - would be funded.

• One approach would be to draw a parallel with COVID or with support to Ukraine – these are national emergencies, so we must spend what is needed and cover the costs through taxation over the coming years. This assumes that the emergency is short-term and that any special measures should also be short term. (This applies also to Labour’s proposal for freezing the energy price cap – expensive but meant just for the short-term).
• My proposal is intended to be read as a scheme that would remain in place for the long-term. So while emergency funding by the Exchequer may be needed initially, to get the scheme running, in the medium term it would need in part at least to be self-sustaining.

1. 1. 1. The top tier of the scheme (with the high price) might recoup sufficient surplus to pay for the bottom (free) tier – I have not been able to model this however.
      2. There might (as some advocate) be windfall taxes on the energy companies.
      3. Insofar as the top tier of the scheme plays a significant role in weaning people off profligate energy consumption, it might be accounted as part of national investment in greener living. Indeed, the scheme could be seen as part of a larger package of climate-related measures.

Other voices

a] Others have come up with a similar idea. In an article from Polly Toynbee, she develops proposals put up by Fuel Poverty Action for ‘Energy for All’.

The proposal adds two further concerns:

• The need to fine tune aid to other needs of certain sub-groups: such as ‘people who need more energy, because of their age, disabilities, household size, or housing conditions’. They envisage ‘audits of each home’ so as ‘make sure needs are met’.   
• Their wish to impose windfall taxes on energy companies, as a major element in the financing of the scheme.

b] Stephen Fitzpatrick at Ovo Energy company has also just made a similar proposal, but without going into detail (including on costing).

c] Most recently, the New Economics Foundation has published Alfie Stirling and Dominic Caddick, Warm Homes, Cool Planet (September 2022). This does some costings of the scheme, and thus goes beyond my own proposal.

d] Chaitanya Kumar at the New Economics Foundation has compared the various reform schemes on offer, including the one above – see “Rising Block Tariffs for energy with an initial free block of energy”. This appears as among the most effective of the reform proposals in terms of impact on most vulnerable target groups. It also appears as being neutral in terms of costs to government – this seems to assume, as I do, that the higher levels of consumption would and could be charged at a rate sufficient to produce the same overall yield as at present, with no need additional subsidy from general taxes (or elsewhere).

e] All these proposals also sit well with arguments around Universal Basic Services: Universal Basic Services – UBS – sustainable social safety for the 21st century.

This note has greatly benefitted from discussions with Chris Martin, Professor of Economics at the University of Bath.

 All articles posted on this blog give the views of the author(s), and not the position of the IPR, nor of the University of Bath.