Flint advises international businesses and investors on policy, politics, regulation and competition.
Flint advises international businesses and investors on policy, politics, regulation and competition.
Quick links
Sectors
Follow Us
Many assumed that the intense political debate on energy bills would have dissipated by now, given prices peaked in the summer of last year and have fallen significantly since. However the new Government’s decision to introduce means-testing of the winter fuel allowance for pensioners – just at the point energy prices are starting to creep up – has once again put energy affordability at the top of the political agenda.
Even without the winter fuel allowance drama, there are several reasons to think energy bills will never be far from the newspaper front pages. The UK remains highly exposed to volatile international energy markets, which remain jittery in the face of significant geopolitical uncertainty. Many households are also still suffering from the previous spike in energy prices, with Ofgem recently reporting that household energy debts have reached a record level of £3.75 billion.
While the new Government is right to argue that the solution to this is accelerating the delivery of homegrown energy supplies, the cost of the new infrastructure will largely be transferred to consumers through bills. This will have distributional consequences that will need to be addressed in this Parliament.
Labour’s election manifesto promised to cut energy bills by £300 by 2030, creating a particular challenge for the new political team. Energy affordability will be a theme throughout the new Government’s term. This blog explores the challenges ahead and how the Government might avoid it becoming an election-defining issue come 2029.
Short term outlook
There has been a general fall in bills since prices peaked in summer 2023. Bills are now 34% lower than they were then but 29% higher than pre-crisis levels in Winter 2021/2022. And the outlook moving forward is far from certain. Further geopolitical unrest, be it through events in Ukraine or the escalation of conflict in the Middle East, could cause another spike in global oil and gas markets over the coming months. We have also benefited from mild winters in recent years. A cold winter would cause further strain.
All of this is feeding into a rising price outlook in the short term. Ofgem increased the price cap from £1,568 to £1,717 (for the average customer) for October-December 2024, and while Cornwall Insight recently predicted a slight fall in January, the level will remain over £100 above the level consumers paid this summer. This is outside the control of the government.
Long term outlook
Looking further ahead, to deliver on the government’s 2030 Clean Power Mission and electrify the wider economy beyond that, significant investment is required in the UK’s energy system. Forecasts vary, but across just electricity generation and networks alone, we need hundreds of billions of pounds of investment over the coming decades.
As we move away from fossil fuels and shift to an electricity system with more fixed costs, energy bills should become more stable and cheaper in the long run. However, it is unclear what the medium-term impact will be on consumers, given that the costs of investing in low-carbon energy, improving networks, and managing a renewable-based system are still uncertain. And with pressure on public finances, it remains likely that further increases in short term policy costs will be recovered through energy bills.
While there may be some uncertainty on future system costs, the crucial political difference in the long term is that government will have far greater control over how costs are recovered from consumers and taxpayers. The costs will no longer relate in the same way to global market forces.
Instead, they will relate to specific decisions UK politicians will make on the pathway to net zero, including, for instance, the balance between public and private finance (mostly the latter); the levels of government subsidy, and which assets need to be built (and where). It will fall to current politicians to show how these costs will be allocated fairly across customer groups and generations, protecting those that are vulnerable whilst also ensuring that the right market signals are in place to make best use of the energy being produced.
There is little any government can do in the very short term to lower energy bills. Calls simply to remove costs from bills and put them into the exchequer are not realistic in the current fiscal environment.
This puts the country in a vulnerable position – what happens if we experience another surge in global energy prices? There is a risk that without adequate planning now, current affordability challenges will only get worse, leaving us more exposed to market shocks, even if the clean power transition accelerates.
Winter is approaching fast, which means the government has fewer options to choose from if it wants to support consumers in the short term. This also includes changes to existing schemes such as the Warm Home Discount, where any significant expansion is unlikely to be feasible at this late stage.
While the price cap protects consumers from sudden price rises and the risk of excessive pricing, it does not target affordability – offering the same level of price protection to poorer and richer households. However, one thing which could be taken forward relatively quickly is some form of debt relief for consumers who are still trying to recover from the last price crisis.
Ofgem reported in March 2024 that total energy debt and arrears had risen from ~£2 billion to ~£ 3 billion over the preceding 12 months, with the figure now reaching £3.75bn. Many consumers are still struggling to get on top of their energy bills, which could lead Government to consider a one-off debt forgiveness scheme.
Such an approach would offer immediate relief and reduce anxiety, but it would only be a temporary fix, failing to address the root causes of the issue. It also could come with political challenges given that the decision to remove Winter Fuel Payments from many pensioners is likely to worsen the outlook on debt.
There are also a number of questions that would need to be answered on how a support mechanism should be designed:
While debt relief may provide temporary respite, with bills set to stay high for the foreseeable future there is a real need to find a long-term solution to energy affordability. Since the energy crisis there has been growing support across think tanks, consumer groups, as well as Ofgem and the supplier community for a social tariff in energy – similar to that in the water sector.
A social tariff would primarily protect those in real need, but it could also be designed to protect those least able to pay for the costs of delivering the energy transition by providing a mechanism to change the allocation of those costs. Unlike the price cap, which focuses on fairness by eliminating loyalty penalties, a social tariff would focus on affordability. If targeted at those most in need, it could enable meaningful bill reductions for those consumers. In water, social tariffs can offer a discount in excess of 50%.
Although politically attractive in some ways, a social tariff would not be without risks. First, the discount could well mean that some customers pay less than the marginal cost of energy – potentially encouraging inefficient consumption choices. Second, and perhaps more importantly, there is the challenge of getting the support to the right consumers. Government may be tempted to target those in receipt of means-tested benefits as an indicator of fuel poverty. However, this could miss many fuel poor households that do not receive benefits – an increasing proportion of the population in fuel poverty.
While there is a growing consensus about the need for an affordability intervention, debates remain on what an intervention should look like. There are a number of other options, some more complex than others, including a lump sum payment not dissimilar to the Warm Homes Discount. However, if it were to replicate the water sector, it would be introduced through a discount to the unit rate of electricity and gas for those eligible. The table here outlines and assesses the various options available.
The long-term debate about energy bills will become more active in the coming years as the costs needed to facilitate the transition to net zero filter through to consumers in a more meaningful way. The scale of investment required in low-carbon electricity will rise in the years ahead, as will the cost of network reinforcement and wider energy system changes, including the need for greater levels of storage. And these costs are material: government analysis suggests that for the onshore network alone, investment could range from £100-240 billion by 2050.
The majority of network costs are currently fixed, and this means they are recovered through standing charges. Since the price cap launched in January 2019, standing charges have already increased overall by 88% (and by 164% for electricity). These fixed costs, as currently distributed, have a disproportionate impact on low-energy users (for whom they make up a large part of the bill) and those in vulnerable situations. To make energy bills more consumption-driven, Ofgem is now proposing to transfer some fixed costs paid for through standing charges over to unit rates.
While the aim of standing charge reform is to improve affordability across the market, its overall impact may be relatively limited, and it will create winners and losers. Namely, it will help low-income consumers who do not use much energy, but on the flip side, those with low incomes but high usage who cannot reduce their usage (e.g. because of reliance on medical equipment or low energy efficiency housing) would pick up a bigger proportion of energy costs. Therefore, any reform to the allocation of costs between unit rates and standing charges will not eliminate the need for the more direct affordability interventions outlined.
More widely, as policy and network costs increase, transparency over their level and likely evolution will become increasingly important. Frustratingly, the last Government publication on this was a decade ago in 2014. In our view, the new Government should publish an update as a first step to setting out how it intends to allocate the costs in the future.
Beyond standing charge reform, the price cap is likely to remain in place for the foreseeable future, given the current political context, but it will need to evolve. Ofgem has made multiple changes to the cap since the energy crisis to make it more cost-reflective and responsive to market changes. However, although the changes are well-intentioned, the steady stream of consultations has created uncertainty for industry. The price cap has become increasingly complicated and there is a feeling that if it requires this much surgery, perhaps it is not fit for purpose.
Earlier this year, both the government and Ofgem issued early-stage discussion papers on the future of price protection, particularly how it needs to adapt to a world where more consumers migrate to tariffs specifically designed for heat pumps and EV charging.
While a good start, a more strategic and holistic view is required. A social tariff would potentially change the arguments for the price cap – and its design if it were retained. There are also important questions about how to encourage customers to engage with their energy use and adopt clean technologies in their homes.
The increasing levels of debt across the retail market demonstrate in stark terms that reforms to tackle bill affordability are long overdue. If nothing is done and prices rise again – a definite possibility – the Government could be faced with another energy crisis.
The new Government, like its predecessor, has not yet focused on longer-term reform of energy retail markets, but if it is to deliver its Clean Power Mission, it will need to come up with a politically acceptable strategy for the retail market as the scale of transition costs becomes real. There is no time to lose.
See the table for affordability intervention options here.
This blog was written by Alice Coffey, Jeremy Adams and Josh Buckland. Alice is a consultant who supports clients on energy, sustainability and ESG issues. Jeremy is a director who advises clients on energy and other regulatory issues. Josh leads Flint’s work supporting clients on energy, climate and sustainability issues.