UK's Energy price guarantee must be fixed to solve fiscal 'black hole'

·4-min read
Rally at Belfast City Hall to protest against rising energy bills
The NIESR said the energy price guarantee is fiscally expensive, even over its shortened six-month period, and that it is not in the long-term interests of the country. Photo: Press Association

The UK government's Energy price guarantee must be fixed to solve the UK’s fiscal “black hole” and build towards a more sustainable future, Britain’s oldest independent economic research institute has said.

The National Institute of Economic and Social Research (NIESR) warned on Wednesday that not only the guarantee is fiscally expensive, even over its shortened six-month period, but it is also not in the long-term interests of the country.

Guaranteeing a cap on prices during the winter heating season it may cost as much as £30bn before the cap is lifted in April 2023. In addition to the cost, recent data found that the current scheme is also poorly targeted.

The blanket increase in the standing charge raises the financial burden for UK households regardless of consumption, meaning it is disproportionate for lower-income households.

Meanwhile, the reduction in the unit rate also disproportionately benefits households with higher levels of consumption – typically the better off. Some high-income and high-energy consuming households benefit more than five times as much from the EPG than the median UK household.

Read more: Energy bills: Liz Truss caps gas and electricity prices at £2,500

NIESR added that the EPG also reduces the incentive to save energy, as well as the incentive to invest in energy efficient building upgrades, such as better insulation, more efficient boilers or solar panels.

It instead proposed a policy package that includes a two-tier energy tariff, an energy-efficient investment tax credit, and a programme of government grants for lower-income households.

“This would help the UK save money, protect the environment, and improve national energy security,” it said.

The research paper draws on data from the Energy Performance Certificate (EPC) scheme, which covers around 50% of the UK housing stock, and the UK government’s National Energy Efficiency Data framework.

This contains data on energy consumption available at a granular postcode- and anonymised individual level, to model energy demand and potential energy savings.

Energy prices will be capped for the next two years. Source: Ofgem
Energy prices will be capped for the next two years. Source: Ofgem

NIESR said: “Taking simple steps to improve the energy efficiency standards of housing in England and Wales could save up to 30% of primary energy consumption for residential use.”

At October 2022 Ofgem market prices this represents permanent savings of up to £20bn per year.

Higher energy prices change the cost-benefit calculation for energy savings measures; insulation measures rolled out across the country could pay for themselves within six to seven years, if energy prices remain at levels consistent with the October 2022 Ofgem price cap.

“This is some serious work that raises awareness of two issues: (1) the negative distributional effect of the current policy path in the UK; (2) the approach of the current government may conflict with the long-term goal to accelerate the net-zero transition,” Dr Xavier Javarel, associate professor of Economics at the London School of Economics, said:

“The work uses the best available public data to provide a quantification of what the energy price shock may mean for households if behaviours don’t change. The work is sketching a path forward that should be seriously looked at when recalibrating the UK’s policy path going forward, following an evidence-based approach.”

Read more: This is what Liz Truss’s energy bill plan means for you

Meanwhile, professor Adrian Pabst, NIESR’s deputy director, said: “NIESR has consistently argued against general subsidies that are fiscally very expensive, socially iniquitous and ecologically wasteful.

“We welcome [the] research, as it adds to the growing body of evidence that a variable energy price cap provides the targeted assistance that the hardest hit households need while also incentivising energy savings.

"The wealthier households that can cushion the blow thanks to their higher income and financial savings should not be subsidised at a time when the UK has to use its remaining fiscal resources to help the most vulnerable in society”.

Watch: How to save money on a low income