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The UK government is facing calls to spend almost £4bn to launch a “social tariff” providing cheaper energy for poor households amid growing concerns over the Iran conflict.
As households brace for an increase in living costs, the Resolution Foundation said ministers should develop a system of discounted domestic energy bills in time for next winter to protect the most vulnerable households.
Urging the government to target support for those most in need, the thinktank warned that a blanket approach to protect all households – similar to Liz Truss’s energy price guarantee after the 2022 Russian invasion of Ukraine – would be “wasteful” or risk leaving poor households behind.
In a report that comes as ministers face pressure to intervene on energy bills, the Resolution Foundation said a social tariff worth £3.7bn that subsidises the gas and electricity bills of the poorest households could provide an average £310 for the poorest tenth of households, rising to £520 for a family with high energy needs.
It said such an approach would have the most impact while providing value for money amid concern that elevated levels of government borrowing and debt are limiting the chancellor Rachel Reeves’s capacity to respond.
A social tariff would provide a 21% discount on electricity and gas prices to households with incomes before housing costs that are below £38,000.
Keir Starmer’s government has come under growing pressure from opposition MPs about the potential rise in living costs, as the Tories, Reform UK and the Liberal Democrats push for the chancellor to drop a planned rise in fuel duty from September. A 5p cut in the tax on petrol and diesel – first made after the Russian invasion of Ukraine – is scheduled to be phased out in that month.
Nigel Farage’s Reform UK has also pledged to scrap VAT and remaining green levies on energy bills. VAT is set at 5% on household energy bills. At the autumn budget, Reeves cut green and social levies from bills, transferring funding to general taxation, to reduce household bills by £150.
However, the Resolution Foundation warned extending a cut in fuel duty or removing the remaining “policy costs” – government-mandated levies to fund environmental or social schemes – would come with a hefty price tag and help higher-income households most.
The analysis showed removing the remaining £3.7bn of direct policy costs on domestic bills would give £150 to richer households, versus £120 for poorer households, given their higher energy usage.
Reeves has said the government was exploring options for targeted support, telling MPs last week that Treasury officials were dusting down preparatory work undertaken during the Russia-Ukraine energy shock.
“The fact that that work took place then means that we are more advanced on this occasion,” the chancellor told MPs on the Commons Treasury committee. “We are looking at all those things, but it is too early to give you different scenarios and different options for different scenarios.”
Proposals have been made before for the creation of an energy social tariff to subsidise the bills of low-income households. Such schemes are commonplace in the telecoms sector. However, the quality of data on household incomes and energy usage has held back progress.
Urging the government to complete its work on a social tariff rather than “rush a policy response”, the Resolution Foundation said ministers had time to develop a plan before the winter because the current Ofgem energy price cap was protecting households in Great Britain until July.
It said if a social tariff could not be launched in time, removing some policy costs and increasing the value of universal credit benefit payments was the best fallback but remained a “poor substitute”.
Household gas and electricity bills are fixed until July, when the energy price cap is next set by the regulator for Great Britain. Forecasters have warned it could then rise by 10%, adding £160 a year to the average bill. Many consumers will also be insulated for longer because they are on fixed energy tariffs.
However, there are concerns millions of households were already struggling with energy costs before the first US-Israeli strikes triggered a rise in the global price of oil and gas prices almost three weeks ago.
Research from Age UK published on Wednesday shows more than one in four (28%) of pensioners said they were struggling financially before the Iran war started, with energy being the main issue.
