In its report entitled How should governments help households during an energy crisis?, the think tank examined state energy bill support put in place during the energy crisis of 2022/23.
It found that while the measures put in place significantly alleviated household losses, they were poorly targeted and encouraged the overuse of energy.
Energy support schemes
Between October 2022 and March 2023, at the peak of the energy crisis, the Government spent £35bn on two schemes to support households.
The first was the Energy Price Guarantee, which capped average annual bills at £2,500, overriding Ofgem’s energy price cap, which was significantly higher at the time.
The second was the Energy Bills Support Scheme (EBSS), which saw every household receive a £400 discount on their energy bills, paid in six instalments from October 2022.
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Would targeted support have been better?
The think tank said that similar outcomes – in terms of both overall losses and equity – could have been achieved at a £4.5bn lower cost if the Government had not subsidised energy and instead targeted transfers based on households’ income and past energy use.
The IFS urged the Government to ensure it is in a better position to target help more effectively – as other countries did – should another energy price spike occur.
According to the IFS, one problem with directly subsidising energy prices is that it reduced incentives to cut energy use during a supply crunch. It estimates that a 10% increase in energy prices prompts households to reduce consumption by an average of 3%. This means that an energy price subsidy keeps energy use high and increases the cost of support.
The IFS noted that direct cash payments, such as the EBSS, avoided incentivising excess energy use. However, these uniform payments were issued to all households irrespective of income or circumstances, which failed to address differences in household energy needs.
Researchers suggested that a cheaper and more efficient response to any future energy price shock would involve better-targeted cash transfers to support the most exposed households.
Peter Levell, IFS’ deputy research director and author of the report, said: “The cost of supporting households through the energy price spike of late 2022 and early 2023 was extraordinary – £35bn over a six-month period. That is more than half the entire annual schools’ budget.
“Part of the reason for the huge cost was that the Government did not know which households had both low incomes and high energy use and so felt compelled to offer universal help. A big part of that help came in the form of a lower energy price, which itself led to higher demand, increasing the cost of the support. Investment now in better information could save billions in the future if we ever again face a similar surge in energy prices.”
