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It’s time to scrap the Winter Fuel Allowance and spend the cash on properly targeted help

4 min read

As spring brings us longer and warmer days, it is tempting to think of the energy crisis of last year as a short, sharp, unpleasant episode now in the rear-view mirror.

But even if the worst is behind us, the crisis remains all too real for many households. Though the price cap fell in April, it is still almost 40 per cent higher than it was before Russia’s invasion of Ukraine and it is unlikely to return to those pre-crisis levels this year. Nearly 3.2m households are in fuel poverty, while energy debt recently reached record levels. And given ongoing geopolitical turbulence, we cannot rule out more nasty surprises this year. 

In short, we are not out of the woods yet. Better designed energy bill support is urgently needed if we are to avoid households going without this winter and the government again being overtaken by events. The first problem with the existing system is generosity. The Warm Homes Discount (WHD), which provides a £150 rebate to households claiming certain benefits and who have high estimated energy costs, has only increased by a miserly £10 since 2014. Unsurprisingly, it is not even close to keeping pace with the cost of energy. If it had, the WHD would today be worth £240.

The second problem is targeting. To its credit, the WHD does try to target households in energy need, but the flat rebate means it doesn’t fully account for the vastly different degrees of energy need among households. Its design also creates a “cliff edge”, where some struggling households narrowly miss out.

If the WHD doesn’t direct money quite as well as it could, then the Winter Fuel Payment (WFP) scheme – which costs the taxpayer around £2bn a year – outright wastes it. Eligibility for the scheme has nothing to do with energy usage or income: all you need to do to qualify is be over 65, or live with someone who is. This means a lot of public money is going to households that frankly don’t need it, especially considering around 45 per cent of pensioner households have above average incomes. Calling the scheme an anti-fuel poverty measure is at best inaccurate and at worst disingenuous. 

A better way forward would be to expand the WHD and scrap the WFP scheme. I argued in a recent paper for the Social Market Foundation that we should reform the WHD in three respects. First, extend eligibility to those claiming disability benefits. Second, extend the energy-based eligibility to households in the top half of modelled energy costs. Third, introduce a tiered discount. Instead of a flat £150, this would offer five WHD rates, which would increase in line with energy need. Setting these discounts at £250, £280, £325, £400 and £550 would better account for differing energy costs among eligible households, broadly targeting a 15 per cent reduction in energy bills within each of the bands. 

These changes would mean an additional 1.4m households are entitled to the WHD, ensure the support they get is better adjusted to household need, and makes for a scheme that will make a material impact on people’s energy bills. 

Of course, doing all this will cost money: around £1.4bn, we estimate. But there is potentially £2bn to be freed up from phasing out the wasteful WFP scheme. Part of the cost could also be met through cross-subsidies, where better-off bill payers support the cost of the WHD through an additional £19 on their bills. This mechanism already raises around £374m. 
Scrapping pensioner benefits is always likely to be politically fraught, but if anything the £1.4bn price tag on this expanded WHD leaves room for additional support aimed at truly needy older households; for example, a “pensioner uplift” to the WHD.

Our energy support schemes can be fairer and better able to protect us from turbulent energy markets. Let’s fix the roof while the sun shines. 

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