Warm home, wrong decision | Caroline Elsom

Here we are again. A major war has broken out. Fighting is disrupting oil and gas prices. Energy bills are set to soar and the Chancellor is called upon to protect the public from any consequence. This is not an archive piece from 2022. This is 2026, and in the intervening four years, the Government has  done a marvelous job looking as busy as possible caring about the cost of living whilst making it harder than ever to cushion consumers from cost of living spikes.

Reports have emerged on the options under discussion to mitigate the war’s impact at the next revision of the price cap in June, when household energy bills are expected to rise by as much as £300 a year. The choices faced by the Chancellor are unenviable, but predictably with this government, chief among the options mooted is among the worst of all: increasing the Warm Home Discount.

It is a solution that would raise energy bills for most consumers and undermine Britain’s long term energy security. And they will choose it in order to score cynical political points on tackling poverty, while trapping ever more claimants in a benefits system that it does not pay to leave behind.

The Warm Home Discount currently gives those on income-related benefits an automatic £150 energy bill rebate each winter. It is one of the smorgasbord of discounts and freebies revealed in my recent Onward report which, together, total an extra £10 billion of welfare outside of the already eyewatering headline sums.

This type of top-up, separate to regular benefit payments like Universal Credit, is known as a passported benefit. To qualify, there is no assessment of energy usage, home efficiency or need; the eligibility is conferred simply by already being on benefits. It is welfare, but with a more comforting label.

Like many of the more than 20 different passported benefit schemes now delivering payments largely or exclusively to existing claimants, reaching for the Warm Home Discount in the current energy crunch would be yet another disastrous response to a temporary problem.

The Chancellor’s search for the optimal relief programme is hindered by the information silos affecting all the current cost of living support schemes. The Government simply does not know who really needs help: information on individual earnings sits in HMRC, while information on household-level welfare payments lies in the Department for Work and Pensions. Energy consumption and billing data is gathered from suppliers by Ofgem, yet it is the Ministry of Housing, Communities and Local Government that is responsible for the Energy Performance Certificate Register (EPC) of home energy efficiency.

Almost every domestic policy department in Whitehall already administers or regulates some form of passported benefit to welfare recipients, each is piecing together its own notion of need from records that do not match. This further complicates the Government’s ability to get the full view of household income and outgoing so it can find those faced with the most acute energy-related problems.

In the case of the Warm Home Discount, it is often viewed as a convenient option, delivered directly from energy suppliers to eligible customers without affecting borrowing headroom. But the Chancellor should not be fooled into believing that the cost remaining off Treasury books makes it cost-free.

Involving private energy companies in dispensing welfare that could be delivered straight to existing claimants adds immediate cost. Any increase to the value of the rebate would simultaneously raise bills even more than they will already rise for the vast majority of customers, while offering less than the advertised rebate to Warm Home Discount eligible customers who will also pay for the subsidy.

Changes to the scheme this year have already made it more expensive than ever. Rebates this past winter were expanded to all those on means-tested benefits, rather than just those considered to have higher costs to heat their homes. By the Government’s own estimates, this will balloon the bill for the scheme to £1 billion a year.

Earlier this year it was also announced that suppliers would be forced to recoup the cost from unit rates rather than standing charges. This means that everyone else is charged extra per kilowatt hour of energy they use instead of a fixed increase. As well as making the system more regressive for a significant cohort of low-income, high energy users, it also undermines the Government’s own decarbonisation objectives.

Cost recovery is now a 50:50 split between gas and electricity unit rates, making it relatively more expensive to switch away from gas heating. Continued reliance on gas means continued exposure to future price shocks.

According to Jack Pardoe from Octopus Energy, the average billpayer will now contribute around £17 from their electricity bill and £25 from their gas bill to fund the Warm Home Discount. This means that in reality, benefit claimants will only receive a discount around £110 rather than the full £150 after they have paid for their own discount.

When counting all of the government-imposed costs on suppliers, the Warm Home Discount is entirely negated

When counting all of the government-imposed costs on suppliers, the Warm Home Discount is entirely negated. Onward analysis suggests that the average household pays around £285 a year extra due to costs that could be removed overnight, or just under a third of the average energy bill. This could be saved before touching more significant carve-outs like VAT on energy bills.

There is a far darker reason why the Chancellor would rather raise the Warm Home Discount than remove these layers of cost. It is no coincidence that the two passported benefit schemes receiving the most significant expansions this year are the Warm Home Discount and free school meals, which are counted as income in poverty statistics, unlike most other support schemes. Delivering energy bill support via the Warm Home Discount should be seen for what it is: a way to massage poverty rates for political gain, all while eroding the value of support to the poorest and making everyone poorer with higher bills.

If the Government deems that it really is only those on benefits who deserve any extra support through a likely energy bill surge, then it should do this directly through Universal Credit or Pension Credit instead. This would at least avoid the steep cliff edge that those working their way off benefits face. At least by adding support to core benefit payments, claimants would see their household budgets slowly reduce while working rather than receiving hundreds more in energy support on benefits than working just enough to no longer be on Universal Credit.

Better still, the Chancellor should not leap to any of the current least-worst options presented to her. During energy crisis meetings in early 2022, while I was an advisor in the Department for Work and Pensions, I recall officials insisting it would take at least a year to set up a new cost of living payment scheme. The first payments were delivered that summer. There is still time to design a better response before higher energy bills bite in the winter.

We simply do not yet know how long or how serious the current crisis will be, and therefore what scale of support package will be necessary. Regardless, the Chancellor must push harder for more ambitious, better targeted alternatives to the Warm Home Discount.