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Scottish Economy

Weekly update: energy costs and fuel poverty

The week’s economic news has again been dominated by the implications of inflation, and in particular of huge increases in household energy bills.

Projections for the energy price cap have again been revised up. The latest projections indicate that the price cap could reach around £3,500 in October, and increase further to around £4,400 in April. It is incredible to think that the cap was £1,277 earlier this year (having now increased to £1,971).

Such levels of increases will have severe impacts on households. In Scotland, a quarter of households were already in fuel poverty in 2019, the year in which the Fuel Poverty (Targets, Definition, Strategy) (Scotland) Act received Royal Assent.

That Act determines that a household is in fuel poverty if two conditions hold:

  • First, that in order to heat the home to a satisfactory level, the household would need to spend more than 10 per cent of its net income on fuel; and
  • Second, if, after deducting those fuel costs, and other essential costs associated with disability, care needs or childcare, the household’s income is below 90% of the UK Minimum Income Standard.

The definition therefore is not based on what a household actually spends on fuel, but on what they need to spend to heat their home to an acceptable level.

The daunting projections for energy bills will undoubtedly lead to a substantial increase in fuel poverty throughout 2022 and 2023. Quite how many households will be in fuel poverty according to the official definition will depend in part on what further action the government decides to take. But it is clear that a broad swathe of low and middle income households will be placed under severe financial strain.

The political debates this week have again focussed both on the level and targeting of further support the government should provide.

There is a clear case for targeting. In Scotland, almost all households (96%) with incomes below £200 per week were already in fuel poverty in 2019; but amongst households whose incomes were above £500 per week, fuel poverty rates were negligible. Further targeting via the social security system therefore seems appropriate.

But it should also be remembered that the financial distress caused by the energy price crisis will extend well beyond the poorest, and further broader-based support would also be justified. This is where the delivery mechanism becomes more challenging. Government could subsidise bills universally, although this would be expensive, providing support to some households whose need for support is relatively less.

But trying to provide support to low and middle income households only is tricky. Using the council tax system is far from ideal given the weak links between council tax band and income. Households in bands A and B are relatively more likely to be in fuel poverty, but over 14% of Scottish households in bands F, G and H were in fuel poverty in 2019. On this basis, using council tax band as a way to limit the breadth of financial support provided has clear disadvantages.

It now seems unlikely that the UK government will announce its next round of support for households until the Conservative leadership contest has concluded. Depending on the mechanisms it chooses for delivering that support, the Scottish government may be allocated additional resources of its own which it can prioritise as it deems fit, or the support may be delivered at UK level (via energy bills or the social security system).

Authors

David is Senior Knowledge Exchange Fellow at the Fraser of Allander Institute

 

 

Picture of Mairi Spowage, director of the Fraser of Allander Institute

Mairi is the Director of the Fraser of Allander Institute. Previously, she was the Deputy Chief Executive of the Scottish Fiscal Commission and the Head of National Accounts at the Scottish Government and has over a decade of experience working in different areas of statistics and analysis.

Emma Congreve is a Principal Knowledge Exchange Fellow and Deputy Director at the Fraser of Allander Institute. Emma's work at the Institute is focussed on policy analysis, covering a wide range of areas of social and economic policy.  Emma is an experienced economist and has previously held roles as a senior economist at the Joseph Rowntree Foundation and as an economic adviser within the Scottish Government.

Head of Research at the Fraser of Allander Institute