A Social Tariff: How to End Fuel Poverty

Here at So Energy, we don’t just say we’re here to support our customers, we actually support our customers. We understand that the volatile energy market over the past year has caused significant concern among many, so we’re determined to do all we can to help protect customers. To help vulnerable customers afford their energy for years to come, we’re proposing a new form of tariff: a Social Tariff. Read on to learn more.

How is So Energy proposing to end fuel poverty?

Currently, energy prices are determined by the energy regulator, Ofgem. Every 3 months, Ofgem reviews and sets the price cap to limit the amount energy suppliers, like So Energy, can charge customers per unit of gas and electricity. Remember that this caps prices, not bills and the more energy you use, the greater your bill will be.

Ofgem’s price cap is influenced by wholesale energy costs (the amount suppliers pay to buy the energy we supply to your homes) and as the price of wholesale energy rises and falls, so, too does the price cap. However, there is a 3-month delay in changes to the wholesale market being reflected in the price cap because Ofgem sets the cap using the cost of energy during the previous 3 months. This is one factor why, despite energy prices currently falling, bills are currently still rising (learn more in this blog).

Replacing the current energy price cap with a “Social Tariff” would create a permanent safety net for the most vulnerable households whilst giving suppliers the chance to innovate and provide customers with more options. We know the Government is looking at replacing the price cap with an alternative mechanism like a Social Tariff – as mentioned in the Autumn Statement – which is why we have developed a detailed proposal that would help identify and support those most in need. The Government has said that it is looking to implement this change in April 2024.

To help you understand the support we, and the Government, can offer with your energy bills, visit this blog post.

What would a Social Tariff look like?

A Social Tariff is a targeted reduction in energy bills for qualifying low-income households. It could act as a discount from normal tariffs (like the Warm Home Discount (WHD)), it could be a specifically discounted tariff or a combination of both. Many organisations and consumer groups have also proposed a Social Tariff, but there is yet to be a consensus on how it would work, exactly who should qualify, how discounted the Social Tariff rates would be, and how such a tariff would be paid for. The proposal So Energy has created addresses all these questions.

Who should qualify for a Social Tariff?

The aim of our Social Tariff is to eliminate fuel poverty – or at least get as close to possible as this target as possible. A person is deemed to be in fuel poverty if they pay over 10% of their income on heat and light after housing costs have been factored in. How many households are in fuel poverty at any given time will depend on how much energy bills cost versus their income. For example, according to the Social Market Foundation, 9.8 million households would be in fuel poverty if bills are £2,500 a year but this climbs to 12 million households if bills remain over £3,000 a year.

How discounted would a Social Tariff be?

Based on the goal of eliminating fuel poverty, different households would receive different discount sizes over a set timeframe. We propose that consumers’ energy use is inputted into a “reference tariff” (perhaps based on Ofgem’s existing cap) to calculate the energy cost for each household. This data could be matched against HMRC household income data to determine an appropriate payment for each household, considering the available budget.

Qualifying households would receive a tailored discount as a credit to their account. The payments could be provided quarterly and weighted to account for greater energy use in the winter months. Using a reference tariff means vulnerable consumers will still have the freedom to choose innovative tariffs and the level of payments will be consistent across the country.

How would a Social Tariff be funded?

All bill payers would see a flat additional cost to help fund the Social Tariff. Then, when a pre-determined set of criteria shows that the nation is in an “elevated” energy price scenario, further funding is contributed by the taxpayer. To protect against unfunded spending commitments, the amount of additional taxpayer funding provided would be capped.

The criteria of an “elevated” pricing scenario compared with a “normal” pricing scenario would be set by the Government, balancing the need to help maintain energy bills at an affordable level for even the most vulnerable of customers with not overcommitting on Government-spending.

What is So Energy doing to end fuel poverty?

As part of our campaign for a Social Tariff, we have:

• Engaged with Government and consumer/charity groups

• Shared our proposal

• Compared different approaches

• Influenced strategic thinking in the wider energy sector
  

Our campaign efforts continue and we’re hopeful the Government will act on a proposal so suppliers can offer a Social Tariff to vulnerable customers.

While we’re optimistic about the future of Social Tariffs, they don’t exist yet. This social reform still needs to be accepted by the Government but we’re determined to continue campaigning for change on behalf of our customers.