The surge in oil prices as a result of the current conflict in Iran is the most significant energy shock since Russia's invasion of Ukraine, with oil prices reaching a four-year high of $119/barrel on Monday. This is thought likely to continue to rise, with some forecasts predicting prices could go as high as $150 a barrel, above the record high set in July 2008.
This is now hitting the 1.5 million households that are reliant on heating oil, but we are also seeing a sharp spike in wholesale gas prices, with suppliers pulling or repricing a number of fixed-price tariffs. For the roughly 33 million households on standard energy tariffs, the Ofgem Energy Price Cap will shield them until July (or until the end of their fixed tariff term), but Cornwall Insight is already forecasting the cap to rise to £1,801 in summer. This comes just days after Ofgem confirmed household bills would fall by £117 in April.
Over the last four years, soaring energy prices have caused severe hardship for people and communities across the country. Increasing inflation triggered by the Covid pandemic and Russia’s invasion of Ukraine means households and businesses have already stomached years of sharp price increases, and many are stretched to breaking point. This is no longer just about energy bills, but a spiral of social, financial and health impacts for millions of households across the country - especially those who can already least afford it.
A deepening problem
Since 2023, household energy debt has more than doubled to reach £5.5 bn. Arrears now represent around 75% of all unpaid energy bills, meaning there are no repayment plans in place for the majority of this debt. At the same time, National Energy Action estimates that the number of households in fuel poverty across the UK is 6.1 million - that's 1 in 5.
These figures reflect more than just rising prices – they expose deep and persistent inequalities in our energy markets and point to a retail market that has struggled to adequately protect those most exposed to harm when crises like these happen. The impacts go beyond bills: cold, damp homes and unaffordable bills are linked to poor mental and physical health, rent and mortgage arrears, supplier debt, social isolation and increased pressure on public services.
While increasing energy bills affect everyone, those already socially and economically disadvantaged in society are suffering most. Those are the people least able to insulate themselves from rising prices, either financially or with new low-carbon technologies and energy efficiency, and so are turning down their heat and energy use to dangerous levels, or risk accruing energy debt. This is the harsh reality - while the amount of energy debt has risen dramatically, the number of households in this debt has not, suggesting that a significant part of the debt challenge is with a proportion of consumers who are going deeper into debt.
Fuel poverty support today operates in ‘firefighting mode’ to address the very real and immediate issues people face, but it is reactive and disjointed:
- The Warm Home Discount provides a one-off £150 discount on your electricity bill for households who are in receipt of Guarantee Pension Credits or certain means-tested benefits
- Households receiving certain benefits or support for mortgage interest may also get Cold Weather Payments (only between November and March)
- Those over 66 with an income less than £35,000 could also get between £100 and £300 of Winter Fuel Payments.
Whilst any support is welcome, these payments don't address the systemic issues that lead to fuel poverty, including low incomes, high energy prices and inefficient buildings. The eligibility criteria for government support are also leaving many people exposed. A recent cost-of-living survey by the Joseph Rowntree Foundation found that 23% of low-income households reported being unable to keep their homes warm, with around 40% of these households not in receipt of means-tested benefits.
Breaking the cycle of energy price shocks
All of this, of course, is taking place against the backdrop of the climate emergency and our net zero transition, bringing into sharp focus the need for a more resilient, clean, and secure energy system. The most effective way to insulate consumer bills from the impact of volatile international gas prices is by decarbonising our energy system, reducing our reliance on international fossil fuels and transitioning to homegrown clean energy such as wind and solar. Regen is working to advocate for a fairer energy market that properly values renewable energy in our work on the government's Reformed National Pricing programme - we contributed some of these insights to the Energy Security and Net Zero Committee's inquiry into the cost of energy last year and will be launching a paper on constraint markets shortly.
According to the Climate Change Committee, reaching net zero will cost about £4 bn a year, or close to £100 bn by 2050. Analysis from E3G and the ECIU suggests that the total cost of the fossil fuel price spike as a result of Russia's invasion of Ukraine was £183 bn over the last four years, with the National Audit Office estimating the cost of energy bill support alone as £69 bn. Not only would reaching net zero be the best and most cost-effective option for the economy, but doing so would prevent further energy shocks as a result of war and geopolitical volatility. The energy transition is no longer just climate policy - it is the most credible energy security strategy the UK has.
Building an energy system that serves citizens
While decarbonising our energy system will reduce our exposure to volatile international fossil fuel markets and exploitative geopolitics, fairness is not an inherent outcome and, without intervention, not everyone will benefit equally:
- Capital costs of new technologies are unachievable for many
- Standard-rate electricity prices are four times higher than gas prices today
- Time-of-use tariffs are inaccessible for those unable to flex their demand at peak times, such as single-parent households or shift workers (e.g. nurses)
- Nearly 14 million people are at risk of digital exclusion due to a lack of access to the internet or limited digital literacy
- Many have limited capacity as a result of existing pressures from poverty and socioeconomic disadvantages.
It is no coincidence that those experiencing the sharpest impacts of the crisis and fuel poverty are also the people and communities most at risk of exclusion or disadvantage as we decarbonise homes, towns and cities. There is not enough focus on how structural inequalities, such as disability, race, gender and class, can create distinct experiences of fuel poverty. These distinct experiences require solutions based on people's realities. As the importance of net zero is once again brought into focus, it is imperative that the government designs the new system with the future in mind – helping people not only afford energy but also participate equitably.
What can we learn from the last energy price crisis?
During the 2022 energy price crisis, the UK government introduced two energy support schemes to calm markets and provide a measure of manageability for households and businesses. These schemes were a 39% energy price subsidy under the Energy Price Guarantee (EPG), which effectively acted as a second price cap, and £400 universal transfers through the Energy Bills Support Scheme (EBSS).
It should be noted that the schemes were deployed both swiftly and on a large scale; however, the speed with which the schemes were introduced meant that they were inherently reactive and therefore represented somewhat of a blunt instrument. 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. According to the IFS, the government's aim to protect consumers 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.
At the time of introduction, the fundamental affordability of energy was in question, and the introduction of these schemes was seen as a response to events that represented a "once-in-a-generation challenge to the energy market". However, four years on and facing a similar issue, the government needs to evaluate how it unpicks the systemic issues causing volatile energy prices and placing millions of households in fuel poverty.
This highlights the need for more granular, detailed consumer archetypes and bill scenario forecasting to better understand how different groups may be affected by the various changes which could reduce bills. These insights could then underpin a better methodology for assessing the impact of bill reduction initiatives, facilitating a move away from blanket bill reductions towards a more targeted approach that supports consumers who are currently least able to benefit from the energy transition.
What should the government do now?
Addressing these challenges sustainably will require more fundamental and joined-up action, especially in the context of net zero. Regen calls on the government to urgently address the cost of energy for households experiencing fuel poverty.
Short-term actions to quickly support households most at risk:
- Remove further levies from electricity bills. The government should increase the percentage of the renewables obligation that has been shifted to general taxation from 75% to 100% and reverse its decision to move the recovery of the Warm Homes Discount to unit costs, instead moving this to general taxation. The government should also shift other environmental levies from electricity to more progressive general taxation, which has the added benefit of reducing the spark gap - the difference between the cost of electricity and gas - helping to incentivise electrification.
- Equalise the price cap for all consumers, regardless of payment method, eliminating the prepayment poverty premium.
- Retain the electricity and energy profits levy to protect against generators making windfall profits during the crisis, which would contribute to the costs of taking levies off bills.
- Deliver a targeted rollout strategy for rooftop solar and domestic batteries to fundamentally lower households' energy bills, with an immediate focus on low-income households.
Longer-term actions to reduce the impact of future price shocks:
- Focus on better methods of identifying marginalised and vulnerable households that need help, through improvements in smart meter distribution and updating and improving the Priority Services Register, which is currently analogue.
- Create a tiered Warm Homes Discount scheme that offers higher value payments to those on the lowest incomes and with the greatest energy needs. By simply re-targeting the WHD based on household income and energy usage, we could see the fuel poverty gap reduce by 10% per year in England, at no additional cost.
- Introduce a mandatory social tariff across all suppliers. A social tariff is likely to be the most effective means of supporting those in fuel poverty going forward, shifting government bill support away from patchwork crisis mode into something more sustainable. A social tariff (such as a rising block tariff) would protect essential energy consumption at low prices. It is also key to net zero, ensuring people in vulnerable circumstances can realistically make the switch to low-carbon heat without their bills becoming completely unaffordable.
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