Energy policy costs applied to domestic energy bills disproportionately impact low income households, is there an alternative and fairer approach?

To recover the cost of energy policies which support the transition towards a low carbon energy system, levies are applied to household and business energy bills. This briefing note focuses on the levies applied to households.

Household energy policy costs

Energy policy costs are applied to household electricity and gas bills, equating to £132, or 13% of the average energy bill in 2016. This research highlights how low-income households are hit hardest by the current arrangements as the poorest households spend 10% of their income on heat and power in their homes, whereas the richest households only spend 3%, so any increase in prices hits the poor disproportionately.

Energy service demands in the UK

Household electricity and gas use represents only 12% of total final UK energy use. “Total” energy use includes all the energy used to provide households with the products they buy and the services they access, and includes energy embodied in imports. If we calculate the full supply chain energy embodied in all goods and services, the lifestyles of the richest require nearly four times more energy than the poorest, but because levies are only raised on household electricity and gas bills the richest only pay 1.8 times more towards the energy policy costs.

An alternative approach to meeting energy policy costs?

Placing policy costs on businesses, or funding the costs from general taxation would lower the burden on the poorest households. The general taxation approach would better align energy demand with policy costs, and would reduce costs for 70% of UK households. The poorest households would pay nothing, saving them £102 a year, while the richest households would pay an additional £410 a year (under £8 a week).

While none of the funding approaches offer a “perfect solution” in terms of distributional impacts, raising the funds through general taxation offers a fairer and practical approach. The taxation approach would require leadership and a long term commitment to avoid leaving the policy vulnerable to short term budgetary changes. It is recommended that this approach and moneys raised are locked in for a decade to mitigate risks associated with changes in Government.

Download a summary of the data and methods below:

Funding a Low Carbon Energy System: summary of data and methods