Why fuel poverty is corroding the UK’s social contract

By Ross Melton, Associate Director

Fuel poverty is rapidly rising across the UK, presenting a major challenge to Government this winter – but what is driving this increase and how can the energy industry constructively respond?

Energy policy lead Ross Melton unpacks the causes of rising fuel poverty, its wider social implications, and what can be done to tackle the problem.

What is causing increased fuel poverty in the UK?

At the risk of stating the obvious, Russia’s spring 2022 invasion of Ukraine has transformed our world.

In 2021, Russian state-owned energy giant Gazprom was the world’s single largest producer of natural gas, supplying 18 trillion cubic feet to fuel the global economy. For context, this is more than 230 times the volume of natural gas used in the UK annually, at around 77 billion cubic feet.

Western sanctions on the Russian economy, coupled with a resurgence in post-pandemic global energy demand, and the surprise April decision of the OPEC+ cartel of oil and gas producing nations (led by Russia and Saudi Arabia) to cut global oil and gas production, has led to a quadrupling of global wholesale gas prices.

The UK has proved uniquely vulnerable to global energy markets turmoil because of our lack of gas storage infrastructure and the UK’s minimum unit price mechanism, which effectively ties the minimum price of renewable and nuclear generated electricity (whose cost have not increased) to rising gas prices.

The UK Government has taken action to address these challenges – working with industry to reopen the Rough gas storage facility; implementing the Energy Price Guarantee to temporarily subsidise household energy bills, though this scheme will be rolled up next month; and committing to launch a review of the wholesale energy market to disconnect electricity and gas pricing in early 2024 with the recent Powering Up Britain strategy. While these initiatives have boosted UK resilience and shielded many from the worst effects of rising energy prices, average household energy bills have still doubled from around £1,500 a month in late 2021 to north of £3,000 today. For comparison, energy bills are now greater than the average London monthly rent at £2,500 or mortgage repayment at £2,100.

Who is vulnerable to fuel poverty?

Rising energy costs have shifted the goal posts. With household income growth unable to keep pace with an average 100% increase in energy bills, millions of previously secure families are now facing the risk of energy vulnerability for the first time.

The numbers are stark, with the Government’s Annual Fuel Poverty Statistics classifying around 13% of households in England as fuel poor, alongside 25% in Scotland, 14% in Wales, and 24% in Northern Ireland. Leading fuel poverty charity National Energy Action estimates that 7.5 million UK households were in fuel poverty in April 2023, with the Government anticipating this number will rise to 8.8 million by the end of the year.

Crucially, steeply rising energy costs are affecting new segments of the population.

What are the impacts of fuel poverty?

With more than 21 million people – out of a 69 million total UK population – at risk by the end of the year, fuel poverty is a direct challenge to the UK’s social contract. With around 1.3 million people in the UK currently unemployed, this suggests that almost 20 million of those at risk of fuel poverty are currently in paid work or full-time education.

Seen through the employment lens, fuel poverty is a direct challenge to the UK’s social contract – the unspoken promise that if you work hard, you will be able to meet your basic needs of food, housing and warmth.

It is easy to find historic and contemporary examples from across the world of the risks arising from breaching our shared expectation that hard work is rewarded, leading to deepening inequality and social division. Politically, no Government wants to face an electorate that can no longer afford to heat their homes.

How can we tackle fuel poverty?

While wholesale gas costs have fallen significantly from their unprecedented peaks in winter 2022/23, Chief Executive of the UK Energy Regulator Jonathan Brearley, has warned that we are unlikely to see household energy bills returning to 2020 levels any time soon, calling on energy companies to do more to support vulnerable customers. Indeed, the Regulator has indicated that it will raise the Energy Price Cap from £2500 to £3000, increasing the average household energy bill by a further 20%. Wholesale energy prices are expected to spike again this autumn and winter as demand increases – without further Government action, rising costs will eventually need to be passed onto consumers or risk the financial sustainability of UK energy retailers.

Long term, reducing our reliance on volatile international energy markets vulnerable to autocrats will require substantial investment in low-cost renewable generation, alternative fuels and infrastructure, in line with the UK’s Net Zero ambitions.

However, with millions of families facing another challenging winter, there is still time for UK Government and industry to take action to protect the most vulnerable in our society, including:

• Prioritising the most vulnerable – Utility providers are required by law to develop Priority Service Registers (PSRs), identifying their most vulnerable customers requiring additional support. As the number of customers at risk of fuel poverty rises, now is the time to evolve and refresh the methods of identifying vulnerability, introducing innovative ideas like transient or temporary vulnerability for pregnant women or an otherwise healthy person recovering from an operation.
• Enhanced data sharing – GDPR and other data regulations currently prevent utility providers from sharing information on vulnerable customers with Government agencies, other utilities and fuel poverty charities without their written permission. This leads to millions of customers going without desperately needed support. Following our departure from the EU, the UK has an opportunity to review and adapt these regulations to enable better data sharing to support the most vulnerable.
• Insulation and housebuilding – Long term, the UK Government must increase the quality and availability of energy efficient affordable housing, taking on the NIMBYs to reform planning regulations and boost supply.
• Social Tariff – The UK Government must take the lead developing a sustainable social tariff, securing lower energy costs for the most vulnerable in society while maintaining the profitability of energy suppliers. Unlike the blunt-force measures of the temporary Energy Price Guarantee and Ofgem’s Energy Price Cap, the social tariff must be targeted, only eligible to households meeting specified vulnerability criteria.

Instinctif Partners is ready to help

With extensive experience supporting UK energy, telecoms and infrastructure providers to enhance their consumer vulnerability approaches, Instinctif Partners is ideally placed to help you navigate the changing energy environment. We have a strong track record in engaging with vulnerable stakeholders, helping you to understand the effects of fuel poverty on your customers, and what can be done to enhance your support.

To learn more, please get in touch.