Energy tariffs could be amended to reduce the extent to which vulnerable customers, who are inactive in the energy market, are penalised by higher energy tariffs. This was the key finding of CSE’s study of tariff options for such consumers, conducted on behalf of Citizens Advice.

Our research showed several straightforward options that could be introduced to significantly reduce the fuel bills of millions of vulnerable consumers who are currently disadvantaged by the energy market, paying over the odds for their fuel.

Before the study, Citizens Advice identified several possible options that could address the problems with the energy market that result in some consumers paying higher energy tariffs. CSE’s work provided researchers, policymakers and energy market stakeholders with a deeper understanding of how these proposed reforms might compare. Which income groups would be the winners and losers, the policy costs, other net benefits and impacts, and how politically and practically feasible they each are.

The research used the outputs from a tried and tested model of household energy consumption. Therefore it ensured robust results and provided a mark of assurance to stakeholders. CSE was ideally placed to carry out the work; applying our Distributional Impacts Model (DIMPSA) designed to establish the impact of its policies on household energy bills. The study complemented CSE’s existing fuel poverty research at the time. This included modelling work on the impact of the UK’s carbon budgets on fuel poverty conducted for the Climate Change Committee (CCC).

There were two main phases of this research study. Firstly, we reviewed ten tariff options, drawing on both existing evidence and expert stakeholder opinion. The second phase consisted of modelling and analysis to explore the potential distributional impacts of a selection of options. We chose these options based on the findings from phase one. They included:

Introduction of a backstop tariff.

A low-priced tariff, to which eligible customers would be transferred automatically.

Provision of a block of consumption exempt from environmental and social policy levies.

The costs of environmental and social policies such as the Energy Company Obligation (ECO), the Feed-in Tariff (FIT) and the Warm Home Discount (WHD) make up around 6 per cent of domestic gas prices and 11 per cent of electricity prices.  Under this option, these levies are removed from a block of consumption to provide households with some energy free of these charges. The full costs are instead recovered from the remaining (higher) consumption bands.

Exemption from environmental and social policy levies for some consumers. 

Similar to the above option. However, the levy is only removed from the bills of vulnerable consumers, and costs would be recovered through increases in the bills of other customers.

Revision of the Warm Home Discount/fuel price support.  

This could take several forms. For example, extending eligibility to more households, increasing the payment or funding the payment through taxation instead of through energy bills. The first of these (extending the group) was modelled here.

Determining the target group

To further explore the impact of these tariff options on household energy bills, we established a proxy for the most vulnerable, disengaged consumers. The chosen group were those meeting the eligibility criteria for the Cold Weather Payments (CWP). This provides a good approximation of potentially vulnerable and disengaged customers, who are at risk of being penalised by the energy market with higher fuel prices. Analysis showed that 96% of the CWP target group displays one or more of the following characteristics: disabled, elderly, in the poorest 20% of households, never switched energy supplier.

Phase 2

We undertook modelling using up-to-date variations in unit fuel prices and CSE’s comprehensive dataset of UK household energy consumption (derived from the Distributional Impact Model for Policy Scenario Analysis – DIMPSA); the latter is based on a socio-demographically representative sample of UK households surveyed in the Office of National Statistics Living Costs and Food Survey. In the model dataset, we used the CWP eligibility criteria to identify the target group as described above. We applied baseline tariffs to different households. These were based on a selection of socio-economic characteristics of households and a switching behaviour prediction model.

Table E1 shows the tariff options that we modelled, along with the target group, and how we ensured revenue neutrality – maintaining energy bill revenues to pre-modelling levels – in each scenario:

Tariff option	Description	Target group	Ensuring revenue neutrality
Backstop tariff: Option 1	The lowest tariff available for their fuel type and payment method in their region. [1]	CWP-eligible customers only	Tariffs for all non-eligible customers increased.
Backstop tariff: Option 2	The lowest tariff available for their fuel type in their region, irrespective of payment method	CWP-eligible customers only	Tariffs for all non-eligible customers increased.
Backstop tariff: Option 3	As per Option 1, but only non-switchers are moved to the lowest tariff available for their fuel type and payment method in their region.	CWP-eligible and non-switcher customers only	Tariffs for all non-eligible customers increased.
Backstop tariff: Option 4	As per Option 1 (the lowest tariff available for their fuel type and payment method in their region or devolved nation) but with all tariffs adjusted to ensure revenue neutrality (including the backstop tariff).	CWP-eligible customers only	Tariffs for all customers increased.
Levies removed: Option 1	Energy policy levies removed from an initial block of consumption.	All customers	Unit rate increases for higher block of consumption for all customers.
Levies removed: Option 2	Energy policy levies removed from an initial block of consumption.	CWP-eligible customers only	Unit rate increases for higher block of consumption for all customers.
Free block: Option 1	Initial block of energy consumption free.	All customers	Unit rate increases for higher block of consumption for all customers.
Free block: Option 2	Initial block of energy consumption free.	CWP-eligible customers only	Unit rate increases for higher block of consumption for all customers.
Extension to WHD	WHD rebate extended to CWP-eligible customers and all energy suppliers. [2]	CWP-eligible customers only	Additional cost on bills of all customers to pay increase in WHD allocation.

We analysed the impact of each tariff option on household energy bills for the target group and for the population as a whole. Maintaining revenue neutrality (the total sum paid by all consumers) means that for particular tariff options, the tariffs and energy bills increase for some consumers, to offset reductions in the tariffs of the target group.

‘Winners’ and ‘losers’ under these scenarios

The results clearly showed that the backstop tariff and extended WHD options could be very effective at reducing fuel bills for eligible households. They would also only require small – and in some cases negligible – increases in the bills of other households to ensure ‘revenue neutrality’, or to cover the additional costs of a more broadly targeted fuel price discount.

Of these two options, the extended WHD option would be easier to implement. This option also offers a guaranteed fixed reduction in energy bills, irrespective of energy consumption levels. However, one major negative aspect is that it does not transfer vulnerable households to cheaper tariffs. I.e. it does not address the failure of the market to serve these customers.

A backstop tariff would transfer customers to cheaper tariffs. It also has the potential to reduce energy bills by a more significant amount than a fixed fuel price discount. However, it would be more complex to implement in practice. It was also more difficult to determine exactly how energy companies and the energy market as a whole would respond.

Nevertheless, both these options were considered viable options to reduce the energy bills of those disadvantaged and poorly served by the energy market, and as a result, struggling to heat and power their homes. Either would result in positive consequences on the health and wellbeing of millions of households.