Urgent need to learn lessons from expensive energy support packages: better design could have saved £4.5 billion
3rd February 2025
Energy support packages significantly alleviated household losses, but they were poorly targeted and encouraged overuse of energy.
Between October 2022 and March 2023, as energy prices surged, the government spent £35 billion (more than 1% of annual GDP) on two schemes to support households. These schemes were a 39% energy price subsidy under the Energy Price Guarantee (EPG) and £400 universal transfers through the Energy Bills Support Scheme (EBSS).
New research from the Institute for Fiscal Studies (IFS) shows that while these measures significantly alleviated household losses, they were poorly targeted and encouraged overuse of energy. Similar outcomes - in terms of both overall losses and equity – could have been achieved at £4.5 billion lower cost if the government had not subsidised energy and instead targeted transfers based on households' income and past energy use. The government should ensure that it is in a better position to target help more effectively (as other countries did) should another energy price spike occur.
One problem with directly subsidising energy prices is that it reduced incentives to cut energy use during a supply crunch. We estimate 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.
Direct cash payments, such as the EBSS, avoid 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. Other European governments based payments on past energy use, enabling better targeting.
A cheaper and more efficient response to any future energy price shock would involve better-targeted cash transfers to support the most exposed households. We should invest now in ensuring we have the data infrastructure available to make such a policy response feasible.
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 – £35 billion 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.’