By Iani Iureca (BSc Economics)
[This essay was written for the Government, Welfare and Policy third-year undergraduate module. Students were tasked with writing a blog-style essay on a topic linked to a group poster project. Topics were chosen by students and reflect their own interests. The essay gave them experience of writing content in an engaging style for a non-expert audience. What you see below is one of this year’s top-marked blog-style essays. Christa Brunnschweiler]
Are you tired of feeling like you are constantly having to choose between heating your home or putting food on the table? If so, you’re not the only one. Fuel poverty is an escalating crisis in the UK, with an increasing number of people struggling to afford basic necessities such as cooking, heating, and transportation. The National Energy Action (NEA), which defines fuel poverty as a condition wherein households spend more than 10% of their income on energy bills, has discovered that as many as one in three families in the UK are living in fuel poverty1, with further increases expected in the future.
Fuel poverty is a pressing issue that not only affects people’s finances but also has a significant impact on their health and wellbeing. The NEA reported that an estimated 10,000 individuals die each year due to health conditions such heart attacks and asthma caused by living in cold homes1. The consequences of this are not just limited to personal tragedy but also have a pronounced economic impact considering that the UK spends about £2.5bn per year on treating illnesses caused by cold homes2. What’s behind this alarming trend? Unfortunately, there is no single trigger of fuel poverty. It’s a sophisticated matter that’s driven mainly by three distinct factors.
High Energy Prices:
The recent surge in energy prices is attributed to the impact of COVID-19 and the rise in demand for energy due to colder weather, exerting pressure on the UK’s already strained energy supply. This was further intensified by the sizeable fall in wind output from turbines, which led to an even higher demand for gas used in the generation of electricity. Just when it seemed that the situation could not worsen, the conflict in Ukraine further exacerbated the strain on the energy supply3. This placed the UK in a difficult position, given that the country imports approximately 50% of its gas4. All these factors combined led to increased costs for energy suppliers, implying they could not provide affordable energy to households, thereby leading to market failure. Energy prices in July 2023 are predicted to be 106% higher than in the winter of 2020/21, a colossal amount for the average household5.
Poor Energy Efficiency:
In comparison to other European countries the UK is found to be an anomaly, being affected the worst by the energy crisis. This is hardly surprising as according to London School of Economics (LSE) around 85% of households use gas boilers to heat their homes and around 40% of electricity is generated in gas fired power stations, the greatest amount of any other European nation6. But wait, there is still more though! Homes in the UK are considered among the worst insulated in Europe, with an average heat loss of 3C in 5 hours, compared to 0.9C in Norway7. What’s even more shocking is that instead of improvements being made, it has been reported that home insulation installations have plummeted by 90% since 2010, bearing the question of what the government was thinking.
Home insulation installations in the UK
Fall in Disposable Income:
In recent years, wages have been on steady decline whereas inflation has spiked exponentially faster than in the previous decades. In October 2022, inflation reached 11.1%, its highest level in 40 years8. This is concerning news for households that are already struggling with energy prices as they are simultaneously dealing with high foods prices and housing costs. According to government forecast from March 20239, income per capita in the UK decreased by 3.7% in the 2022/23 year. This is regarded as the most significant drop in living standards since 1956 when these types of data began to be collected. The news isn’t getting any better, as it is predicted that there will be a further drop of 2% in living standards in 2023/24.
The Government Support Package: Promising Solution or Empty Promise?
To correct market failures caused by high energy prices the governmentintroduced a £24bn package of support in May 2022/2310.
- £400 to all households considered as an energy discount.
- £150 council tax rebate for households in tax bands A-C which constitutes around 80% of households.
- £650 for family on mean tested benefits.
- £150 amount for individuals with disabilities
- £300 amount for pensioners
Sounds astonishing, right? Well, don’t get your expectations up just yet. Recent analysishas revealed that this support package combined with the Warm Home Discount will only compensate for 41% of the increase in the average cost of energy11. Additionally, the support package is predicted to be ineffective in targeting those residing in low-income households. The support also does not account for the worsening outlook of the inflation rates thereby having a greater negative impact on the poor as they will see an even larger fall in their income than initially predicted. This failure can have real social consequences and can be reflected in the many upcoming predictions that more households will fall into fuel poverty.
Extensive Review on Policy Recommendation
Short Term:
So how can the UK avoid itself from facing widespread fuel poverty throughout the country? Institute for Fiscal Studies (IFS)10 has recommended raising the current £650 grant to £1,200 for families on mean-tested benefits, this would help protect low-income families that are working but also the ones that are not working. In fact, the government recently demonstrated initiative by proposing a £900 increase for the upcoming year for those on means-tested benefits12. However, it’s crucial to note that financing such an investment through additional borrowing rather than taxation could exacerbate the rise in inflation. This could amplify the very problems these support packages are meant to resolve and potentially cause more economic harm than good. This partially explains why the government has not gone to the full extent as recommended to avoid causing inflation to spiral out of control.
Additionally, it has been predicted that 4 in 10 households in the lowest income spectrum will not receive this benefit either because they earn slightly higher to qualify, or simply aren’t aware of the benefits they are entitled to13. To address this issue, the UK government could consider adopting the approach used by the Welsh government. They invested in a pilot project aimed at training individuals to disseminate benefits awareness to households at risk of poverty. This initiative was primarily targeted at households with low income, disabilities, and ethnic minorities which proved very successful as it helped claim over £2,468 million in additional benefits14.
Long Term:
Fuel poverty differs from general poverty in that while general poverty can potentially be mitigated by financial assistance, the most effective way to combat fuel poverty is through targeted capital investment15. In other words, simply delivering extra income support to households may not be sufficient to address the issue of fuel poverty. The NEA recommends substantial additional financial support, underpinned by public investment, to assist households in enhancing the infrastructure of their heating and insulation systems1.
On a positive note, the UK government has proposed 600,000 heat pumps installations per year by 2028 and has removed the VAT on all home insulations making them more affordable16. Whilst this is a step in the right direction, there are concerns about how firms will secure financing and obtain skilled labour to install the substantial number of heat pumps and insulation of homes across the nation. If these concerns are not addressed it could widen the housing quality gap between the south and north of the nation, reflecting the socio-economic inequality in the UK. Such an issue must be tackled to ensure these policies benefit everyone, especially those on the lower income spectrum.
The UK government could take a lesson from the “France Renov” scheme initiated in France17. This program provided households with free personalised advice, with additional help at every stage of the retrofitting of homes, alongside various forms of financial aid that were specifically targeted towards households in the lower income spectrum. The scheme had the potential to cover 50% of renovation costs, up to a maximum of £26,300. This program has proved extremely successful as 750,000 homes were renovated to high standards by 202118.
Final Remarks:
A combination of short-term and long-term policies is needed to address fuel poverty in the UK. However, based on previous successes seen in other nations it’s quite clear that government intervention through long term policies can more effectively target the root causes of fuel poverty and correct market failure than short term subsidies offered to households. By making homes efficient and easier to heat it can alleviate the burden of high energy costs for low-income households and reduce carbon emissions. This will provide much needed relief for households struggling to make ends meet, whilst also improving their level of health, wellbeing and reducing the number of deaths linked to cold homes. This can contribute to a healthier population and reduce the pressure on the healthcare system, improving the stagnant state of UK’s productivity19.
Bibliography:
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2Local Government Association (2019) The cost of unhealthy housing to the NHS. Available from: https://www.local.gov.uk/parliament/briefings-and-responses/cost-unhealthy-housing-nhs-house-commons-26-february-2019
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9 Clark, D. (2022). Annual change in real household disposable income per capita UK 2018-2024. [online] Statista. Available at: https://www.statista.com/statistics/1070120/real-household-disposable-income-per-capita-change-forecast-united-kingdom/.
10 Institute for Fiscal Studies. (2022). The long squeeze: rising inflation and the current government support package. [online] Available at: https://ifs.org.uk/articles/long-squeeze-rising-inflation-and-current-government-support-package.
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19 Santini, Z.I., Thygesen, L.C., Koyanagi, A., Stewart-Brown, S., Meilstrup, C., Nielsen, L., Olsen, K.R., Birkjær, M., McDaid, D., Koushede, V. and Ekholm, O. (2022). Economics of mental wellbeing: A prospective study estimating associated productivity costs due to sickness absence from the workplace in Denmark. Mental Health & Prevention, 28, p.200247.
doi: https://doi.org/10.1016/j.mhp.2022.200247
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