On the chopping block: Why rising block tariffs aren’t the way forward for energy pricing

The energy regulator, Ofgem, has launched a major review of how the costs that make up our energy bills are shared out. That might sound technical, but the outcome could have a big impact on how much different people pay — and how fair our transition to net zero is.

While there are some good options under consideration, we’re concerned that rising block tariffs are in the mix. These risk pushing energy costs even higher than they already are for some vulnerable people on lower incomes, and increasing the cost of decarbonisation by making the energy system less efficient.

How are energy bills changing?

Energy bills cover a mix of different costs, which generally flow through to our energy bills in the form of:

• unit rates — the amount you pay per kWh of electricity or gas you consume
• standing charges — a fixed daily fee you pay no matter how much energy you use

Suppliers have some choice about how they set these costs, though for default tariffs they also need to ensure they are below Ofgem’s price cap. However, almost all tariffs charge a daily fee as this enables suppliers to recover the fixed costs of supplying their customers.

As we move toward net zero, these costs are likely to shift. Wholesale electricity costs should come down thanks to cheaper renewable energy — and hopefully lead to lower unit rates.

At the same time, the cost of networks and policies to support renewables are likely to rise as we upgrade our infrastructure. At Citizens Advice we spend a lot of time working to ensure these costs are as fair and efficient as possible, but some increase is likely. Under the current system much of this increase will end up on the standing charges that we pay.

This comes after a period where electricity standing charges have already been rising. This has sparked some concern — particularly for people who don’t use much energy, who’ve seen a larger proportional increase in their bill.

Ofgem previously looked at quick fixes to reduce these charges — but if this is by simply moving costs onto unit rates it means prices no longer reflect the underlying cost to serve customers. This risks unintended consequences and unfair outcomes, with Ofgem’s own analysis finding that increasing unit rates could make 2.3 million low income families worse off. The new review is taking a more comprehensive and long term look at the costs that make up the bill and how these risks can be avoided.

So what are Rising Block Tariffs?

One option included in Ofgem’s review is to recover some or all costs through a Rising Block Tariff (RBT). This means the more energy you use, the higher the price per unit. Everyone gets an allocation of units which are cheap — or even free — but after a certain threshold, they get more expensive. There are varied design options from a simple annual allowance of units to an adjusted daily allowance to account for seasonal changes in energy use.

Supporters of RBTs — including some backbench MPs — say this would enable us to reduce or even eliminate standing charges and encourage energy saving. But we think they would lead to even worse outcomes than Ofgem’s previous proposals that would have increased unit rates:

1. People with higher energy needs pay significantly more

While lower energy users may benefit, households who need to use more energy would see steep bill increases. Millions of people using traditional electric heating have particularly high electricity usage, and are often on low incomes. These heating systems are more common in social or private rented homes, where people can’t change their heating system.

Ofgem analysis suggests RBTs for gas might avoid the worst of these risks, as people on low incomes tend to have lower gas usage. However, there are people on low and moderate incomes who live in leakier homes or need to keep their home warmer because of their age or for medical reasons, who’d pay higher prices than they do today.

Our own research found that 1 in 4 of the poorest households could lose out under RBTs. Findings in recent research by Public First for Scope were even worse — over a third of low-income and disabled households would see their bills increase, with the poorest who lose out being over £400 worse off.

2. It’s not possible to fully mitigate unfair outcomes

Proponents argue that targeted bill support can prevent people on low incomes paying more than they do today. However, modelling in our research saw 1 in 5 of the poorest still lose out, even if £2bn in targeted support was put in place, and the data matching needed to identify at-risk households is not currently available. Any support for people on low incomes would still leave a cliff edge where some people on moderate incomes would pay more than they do today.

There would also be some more affluent people who gain from the changes. People with second homes would pay less overall, as their overall energy usage (which could be large) is spread across multiple properties. Households with solar panels (especially if they also have home batteries) could avoid more expensive blocks — meaning they effectively don’t contribute towards policy costs which may have subsidised their home technology in the first place.

3. The changes would make the electricity system less efficient

RBTs for electricity would discourage switching to heat pumps or EVs, which increase electricity use but are crucial for net zero. They would also reduce incentives for people to use electricity at times when there’s lots of renewables available, increasing the cost of the overall energy system and all our bills.

RBTs for gas could make it more attractive for higher gas users to install a heat pump or insulation. But not everyone has the same ability to make changes in their homes, particularly renters.

Could they work in practice?

As well as the unintended risks, RBTs in energy are also difficult to deliver for a number of reasons:

• Seasonality — If the same pricing structure applies all year round, costs during winter — when people use most energy — would rise. This would increase the risk of self-disconnection for people who prepay, and mean people building up larger account debits in winter which make it harder to switch supplier and increase the risk of debt. Adjusting the number of free or cheap blocks available across the year could avoid this, but would make the tariff more complex to understand and deliver.
• Metering — Smart meters will make it much easier for consumers to be able to monitor their usage and avoid expensive blocks, and would be essential for a seasonal RBT to work for people who prepay. However, the latest government plans suggest up to 1 in 7 households might still be without one by 2030.
• Price risks — Energy companies might make windfall profits during very cold winters when people use more energy than expected, and face shortfalls in warmer ones — making prices more volatile. If there are billing errors, consumers could be hit with much larger catch-up bills than they are today, because they’ve unknowingly used expensive usage blocks.

Are people likely to want them?

RBTs have not been widely used in the UK before. Research by Severn Trent to support trials of these tariffs in the water sector show that public reaction to the idea can be negative. People worried that they’d be penalised simply for having larger families or medical needs, while others disliked the lack of choice or control. As one participant put it:

“The whole concept just seems unfair. Larger families have no choice but to use more, and this system feels like it’s targeting us specifically.”

Better ways forward

While Ofgem’s review of charging is an important and necessary step, rising block tariffs aren’t the answer for electricity, and we’re unconvinced of the case for gas. They may sound good in theory, but the real-world impact could be deeply unfair and slow down the energy transition.

Other reform options on the table take account of how and when we use energy, or introduce fairer ways to share out costs. Unlike RBTs, these could make the system work more efficiently or support those who struggle with energy costs, while avoiding some of the risks. We’ll return to these in more detail in a follow up blog.