Addressing fuel poverty: what are the relative benefits of public spending on direct bill support or energy efficiency?

Around 3.6 million UK households currently live in fuel poverty (under the English definition).1 What can government do about this, particularly in the timeframe to 2030 where energy prices are expected to remain elevated above pre-2022 levels?2 Two basic solutions may involve: (1) government providing direct bill support, for example extending the Warm Homes Discount while prices remain elevated, or (2) publicly funding basic energy efficiency measures, for example loft or cavity wall insulation, so that households living in fuel poverty can permanently lower their own bills.

Our research within the Energy Demand Research Centre (EDRC) Equity theme addresses the question of which would deliver most benefit to more households living in fuel poverty, and when, and would trigger wider economy benefits that could benefit more households, jobs and GDP?

In practice, a combination of measures will be required to tackle fuel poverty while delivering on decarbonisation. However, it is useful to isolate and consider the potential impacts of alternative actions, here with a focus on the dynamic impacts on household real incomes and spending and the wider economic landscape.

Our research finds:

1) Direct energy bill support (at a total cost of £9 billion) temporarily helps all households who are classed as living in fuel poverty and provides a transitory boost to the economy through the uplift to their non-energy spending. This boost peaks in the years 2030-31 with an additional 6,000 jobs and annual GDP gains of just over £600 million. However, all benefits quickly erode thereafter.

2) Redirecting the £9 billion pot to provide loft and cavity wall insulation for households in fuel poverty would deliver more permanent gains in terms of reduced energy bills for those receiving energy efficiency improvements. The impacts on those households’ real income and spending will support modest lasting GDP and job gains (around £100 million per annum/1,100 jobs). However, the pot is only sufficient to reach 64% of the 3.6 million households helped through direct energy bill support.

3) Public spending on delivering loft and cavity wall insulation means additional demand for an already busy UK construction industry. This could trigger more pressure on the cost of living and doing business in the period to 2030 than direct bill support does.

The key point is that new public spending constitutes additional demand in a constrained UK economy, not least because of persisting worker and skills shortages. The main implication is that some increase in the consumer price index (CPI) should be expected where the economy expands in response to either approach considered here. However, where government spends on construction activity for energy efficiency, the pressure on the CPI, and the cost of doing business during the period of public spending (to 2030) is exacerbated because the construction industry services investment demand in all sectors.