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The UK is in the midst of the deepest squeeze on living standards since records began. Families are feeling the pinch in two ways. First, they are experiencing the increased cost of direct energy consumption, such as heating and lighting a home. The annualised price cap for a typical family paying by direct debit nearly doubled from a little over £1,000 to just under £2,000 between April 2021 and April 2022. But it is about to get far worse. By October 2023 the cap will have risen to over £3,500, and the latest forecast estimates a further rise to more than £6,600 by April 2023, with the cap remaining at around £5,900 for the remainder of the year. By next spring, a typical family are likely to be paying 500% more on domestic enery than they were before the pandemic.

The second way in which gas prices are hurting consumers is indirect. Companies providing goods and services across the economy are facing the same rise in energy costs as families, only the unit price on commercial usage isn’t capped in the same way. Most companies are passing on some or all of these underlying costs by marking up the price of their products, or else facing bankruptcy.

The response from the government so far has ticked all the wrong boxes: too little; too late; poorly targeted; and overly complicated. Even if the government’s current support were to be extended, by April 2023 family spending across the board will have risen £2,400 more than incomes, on average since April 2023. For example, Liz Truss’s proposal to reverse the increase in national insurance contributions would see just 15% of the benefits go to the poorest 50% of the population.

The proposal from opposition parties to freeze the energy price cap would provide welcome respite and should be enacted for an emergency six month period from October 2022, but as a solution it cannot be sustained beyond April 2023. At well over £100bn over 12 months, the cost of continuing a price cap freeze beyond April is eye watering. Freezing the price of energy also does too little to help reduce the UK’s exposure to volatile fossil fuel prices, or to help prepare the UK for future economic crises. The government’s response to the current high cost of living must provide a stepping stone to both increasing the UK’s energy security and efficiency, and a stronger income safety net to deal with future unkown shocks.

To meet this challenge, NEF is proposing a national energy support package to be implemented from April 2023:

1. Scrap the existing price cap system and replace it with a new system of ​‘free basic energy’. Under this system every household would be entitled to a free amount of energy consumption, but would pay a higher marginal cost for energy use above the free amount. Under an illustrative version of this system, the poorest 10% of families would get the majority of their energy use free. They would then pay around £1,850 on average for their remaining energy. This compares to an average bill of £6,250 for these families under current forecasts for the April 2023 price cap. The richest 10% of families would pay more for their energy compared with the forecast price cap, and the government would also subsidise the overall cost of energy by £14.6bn while prices are elevated, paid for from a temporary increase in borrowing and recouped through a future profit cap on energy suppliers.
2. Create a new ​‘energy element’ in universal credit and legacy benefits worth £1,000 per year for a single person and £1,650 for a couple, to help the poorest families meet the costs of their energy bills above the new free entitlement. By the time universal credit is fully rolled out, this payment would become a permanent, seperate new element just as there are currently separate top-ups to support with housing, disability or the costs associated with having children. While the universal credit IT systems are being updated, the payment could be added as a top-up to the main payment in all means tested benefits. The total cost would be £10.6bn over 12 months and this would be paid for by taxing income from capital gains at the same rate as earnings from employment, previously estimated to raise around £12bn a year.
3. Create a new ​‘cost of living allowance’ paid to all families by direct bank transfer or cheque and worth £750 in the first year from April 2023 to help meet wider increases in prices beyond household energy use. The cost of this payment would be £21bn over 12 months, and it would be fully funded by reforming the government’s windfall tax on oil and gas profits, raising £22.6bn over 12 months. In future years the payment could be targeted by household income or used as part of a financial incentive for families to improve the energy efficiency standard of their home. The payment would also enable the creation of a new system for paying all families quickly in the UK in the event of future economic crises.

On average, 80% of families would receive considerable net support from the NEF national energy support package. Families with the lowest 10% of incomes – household incomes of around £24,000 on average before tax – would receive the equivalent of £6,200 in support on an annualised basis, either in the form of a new cash payment or a reduced energy bill. For a families on average incomes – household incomes worth around £54,000 on average – would receive the equivalent of around £2,300 in support. For families with the lowest 50% of incomes this support would more than offset the rise in spending over and above income growth since April 2021.

The highest income 20% of families would make a net contribution towards paying for this support through the higher cost of energy use above their free amount. On average the richest 10% of families – with pre-tax household incomes of around £212,000 on average – would make a net contribution of less than 4% of income. The next 10% of high-income families – with pre-tax income of around £88,000 on average – would contribute a little over 1% of income. Alternatively, these families could find ways to reduce their energy use.

Overall the NEF national energy support package would provide more than double the support that the government is currently offering, but at less than half the price of freezing the price cap. At the same time, it would incentivise both the government and households to improve energy efficiency and domestic renewable energy generation while also permanently strengthening the UK social security system.