When the levy breaks: Energy bills, green levies and a fairer low-carbon transition

The costs of the government's low-carbon programme are falling disproportionately on low-income groups. People within the lowest income decile – that is, the poorest 10 per cent of households – are spending 1.7 per cent of their income on energy policies. This is six times greater than those in the highest income decile, who contribute just 0.3 per cent of their income. The greatest jump between deciles is between the lowest income decile and the second lowest, who contribute 1.1 per cent of their income, a difference of 0.6 per cent, or almost one-third less.

It is not surprising that lower-income groups spend a larger proportion of their income on energy bills, and therefore on energy levies. However, the trend is exaggerated because many low-income consumers actually pay a higher rate for their energy, because they are often excluded from the lowest available energy tariffs; because prepay meters, which add £80 to the average annual bill, are prevalent among this group; and because lower-income households are less likely to switch providers, which is a factor in not accessing lower tariffs. Because the cost of government policies are usually applied as a percentage of bills, these price differentials have a disproportionate impact on lower-income households.

As the amount of levy-funded spending for this programme increases in the coming decades, this will have a damaging impact on these groups, and attract controversy, which could threaten existing commitments to decarbonisation. In order to maintain support for the low-carbon transition, costs must be kept as low as possible and funding must be raised in a way that protects vulnerable groups.

We have presented a number of policy ideas that could reduce the burden on billpayers, and rebalance the negative impacts away from the lowest-income households. If the ideas we have outlined were to be adopted, we believe that consumers would need to contribute billions less in the 2020s. Each consumer could be offered levy relief without jeopardising climate targets, and this could be delivered in such a way that it helps to incentivise energy efficiency. Importantly, it could also recast levy-funding in a progressive manner.

We recommend six changes to the policy framework:

1. Introduce a public ownership option for new nuclear capacity: to reduce the risks involved in developing new nuclear capacity, and thus the cost of capital, and to secure some gains for the British billpayer
2. Adopt the Danish model of procurement to cut the cost of offshore wind projects: to make it more straightforward for offshore wind developers to secure suitable sites and consents
3. Lift the moratorium on onshore wind farms: to ensure cheaper onshore wind capacity is not replaced by more expensive offshore wind or other technologies
4. Replace the capacity market with a strategic reserve: to avoid compensating providers for the same kind of high-carbon generation that is simultaneously being penalised by other policies
5. Replace the current energy efficiency policy with a 'Help to Heat' strategy: to ensure energy-efficiency initiatives are more effectively targetted at fuel-poor households
6. Offer every consumer a green levy allowance: to help reduce the unfair burden currently placed on lower-income households, and to incentivise energy efficiency.