Energy affordability: how to reduce bills for majority of households

Energy is unaffordable for too many households in the UK. Bills remain £600 above their pre-energy crisis average, and energy debt is at an all-time high (Marshall, 2025). In the coming years, bills are set to rise even further as additional policy costs are passed on to consumers.

This affordability crisis is eroding living standards. The pressure is most acute for those on the lowest incomes, with fuel poverty rates remaining stubbornly high. But high energy costs are also placing pressure on household finances much further up the income distribution, with 15% of households on middle incomes reporting that they are struggling to heat their homes.

It is therefore unsurprising that the cost of energy is at the top of the public’s mind when they think about the cost of living crisis. This is having a wider political impact. The high cost of energy, and the perceived failure to bring these costs under control, is eroding trust in the Government, fuelling a sense that mainstream politics is not working and is contributing to a fraying public consensus around net zero.

Clearly, there is a strong moral, economic, and political imperative for the Government to take action to bring the cost of energy bills down.

The affordability crisis demands a bold response

This imperative to act has led to the development of a number of proposals designed to address energy costs. This paper assesses these options against a set of principles that we think should guide any policy intervention to address high energy bills:

• maximising progressivity
• redistributive efficiency
• delivering support to the majority of households
• supporting the transition to net zero
• feasible to deliver under existing conditions.

We assess 5 approaches to reducing energy bills: delivering support through the social security system through an increase to the Warm Home Discount, introducing an income-based social tariff, removing VAT from energy bills and introducing a rising block tariff (RBT).

Each of these proposals has strengths, but when assessing them against our principles, we find most are beset by 1 of 2 issues. Either they are targeted very narrowly on the lowest-income households (the Warm Home Discount) and therefore do not reach all those who are struggling with their bills. Or they rely on targeted support based on household incomes, which requires data that is not currently available, undermining their feasibility.

This is perhaps why removing VAT has become a much-discussed option pre-budget. While removing VAT from bills would overcome feasibility issues and deliver support broadly, it also has limitations. It is regressive, with the largest cash savings going to higher-income, higher-consuming households. This is both inefficient in redistributive terms and also potentially in tension with action to reduce carbon emissions. It is also capped as an amount of support, and once removed it leaves little room for further adjustment.

In contrast, we found that an RBT produces progressive outcomes while delivering support to the majority of households with relatively low barriers to implementation.

RBT means targeted, progressive support for the majority

An RBT works by splitting bills into a series of ‘blocks’, each with a different unit price. Typically, each block corresponds to a certain amount of energy consumption. For example, households might be charged a lower unit rate for the first 40 kWh of energy they consume and then a higher unit rate for the energy they consume above that point.

Commonly, the RBT is designed as a means of both distributing and funding a discounted block of energy. However, as the debate around the standing charge and energy policy levies has shown, raising money via energy bills is far from ideal. While the RBT provides a mechanism for doing so that is more progressive than current approaches, this has nonetheless led to critiques of the policy. These typically focus on the risk of creating a small number of low-income, high-energy consumption households that lose out.

We discuss how this can be overcome in two ways. First, by introducing carve-outs for those on means-tested and disability benefits and offering higher allowances for households with children, which allow consumption to more accurately track income. Second, by funding the lower unit cost – in part or in whole – through government subsidy, thus eliminating or reducing the creation of losing households.

In practice, this means the Government could offer a universal cut to energy bills, delivered as an initial block of subsidised energy.

In comparison to removing VAT, implementing an RBT would maximise progressivity. If the same level of funding needed to remove VAT from energy bills was used to fund an RBT instead, it would lead to more progressive outcomes, with the bottom decile saving £128 (compared to £104 under the VAT cut) and the top decile saving £89 (compared to £128 under the VAT cut).

The Government faces 2 key challenges in relation to the energy system: affordability and the transition to net zero. Over the next 10 years, investment in renewable generation will make energy more affordable, but with bills £600 above the pre-crisis average, households across the UK cannot afford to wait (Marshall, 2025). At the same time, attitudes towards climate change are shifting. Recent polling for ‘The Times’ found that 25% of adults in Great Britain feel the risks of climate change have been exaggerated, up from 16% in 2019 (Wright, Vaughan and Bradley, 2025). Climate sceptics have long argued that net zero is responsible for the UK’s high energy bills. The longer that energy affordability is left unaddressed, the more opportunity there is for these arguments to shape public debate. To build public consent for the transition to net zero, the Government and the energy industry need to take energy affordability seriously.

Various solutions to this dual challenge have been posed, from rebalancing policy levies or removing VAT to introducing a social tariff. Each of these solutions is underpinned by 2 key questions: who pays? And who benefits? At the moment, energy affordability policy — in the form of the Warm Home Discount — suggests that all households should pay equally towards support that is given to households in receipt of means-tested benefits. However, recent polling from More in Common suggests that public consensus around this approach is at risk of breaking down. The polling found that households that were struggling to pay their bills but were ineligible for government support reacted negatively to energy affordability initiatives that only targeted the most vulnerable (More in Common, 2025). As a greater number of households struggle to afford their energy bills, the Government lacks the policy mechanisms it needs to take action.

In this paper, we explore the development of a majoritarian support system and compare it to more targeted approaches to support. We assess support through the social security system, an income-based social tariff, a cut to VAT on energy bills and an RBT against the following policy principles: progressivity, efficiency, majoritarian impact, alignment with net zero and feasibility. The paper then focuses specifically on the RBT based on its potential to deliver support to the majority of households in a progressive way. We assess the various trade-offs associated with an RBT and begin to chart a path to overcoming them – looking in particular at alternative methods for paying for the support.

In the current political and fiscal context, it can be tempting to focus on pragmatic tweaks to the existing system, but the scale of the challenge the Government faces demands an ambitious response. We need an energy system where all households have access to the essential energy they need to live their lives. This will require a fundamental change in how we think about energy — that is, moving from a system in which energy is used according to ability to pay, to one in which everyone’s essential needs are met. Getting there will not be easy, but we hope that this paper — and the new modelling included within it – will help to advance the policy debate.

The high cost of energy in the UK is being driven by a variety of factors, including the marginal pricing system, the UK’s reliance on the volatile international gas market, the accrual of policy costs on energy bills and the way that private ownership extracts dividends from the system. The impact of these structural problems is exacerbated by a regressive billing system that means that lower-income households spend a higher percentage of their bills paying for fixed costs than higher-income households.

The combination of these factors has produced an affordability crisis. In the latest round of our cost-of-living survey, 23% of low-income households said they had not been able to keep their home warm (Milne et al., 2025). Data from Ofgem shows that households in arrears now owe on average £1,600 to their energy supplier. This equates to £4.43 billion worth of debt across the energy market (Ofgem, 2025). People have been forced to make difficult choices to deal with energy unaffordability. Our latest cost-of-living polling found that 24% of low-income households in energy debt reported visiting a food bank in the last 6 months and 67% reported going hungry in the last 30 days (Milne et al., 2025).

These trade-offs are reflected in the experiences shared in our grassroots poverty action group. In January of this year, one member said:

I have a medical condition, so I need to keep the heating on at a higher level. It’s not a luxury, it’s so I can make life liveable. I haven’t turned my hot water on for 2 years so that I can afford to heat my house.

Age 50–59, North West England

Over the last 12 months, energy bills have been the biggest driver of the cost of living crisis for low-income households while also contributing to ongoing inflation in the rest of the economy (House of Commons Library, 2025).

However, households on the lowest incomes are not alone in suffering the effects of the cost- of living crisis. Analysis carried out by the Nuffield Politics Research Centre found that ‘around 18.5 million adults in Great Britain feel economically insecure, greater than the proportion in poverty and equivalent to around 35% of the eligible British voting population’ (Nuffield Politics Research Centre, 2025).

Few households have escaped the impact of high energy prices. Data from the 2023/24 Family Resources Survey shows that the struggle to maintain a warm home extends up the income deciles, with over 15% of families in the fifth income decile experiencing heat deprivation:

We believe that energy affordability support should be shaped by 5 key principles:

1. Progressivity. The billing system must evolve from the current regressive pricing structure to a system that maximises progressivity. Any redistribution of costs should minimise the losses and maximise the gains for low-income households.
2. Redistributive efficiency. Any affordability intervention should be tested on how efficiently it delivers progressive outcomes. This means assessing both sensitivity — the extent to which the intervention reaches households that need support, and specificity — the extent to which the intervention supports households that do not need support.
3. Support the majority. In addition to supporting those on the lowest incomes, energy affordability support must also be designed to bring down bills for the majority of households. This will play a crucial role in building public consent for the transition to net zero and tackling broader living standards pressure.
4. Policy infrastructure and the transition to net zero. The energy system is set to change significantly over the course of the next 5 years — with increasing investment in renewable generation, upgrades to the energy network, widespread roll-out of demand-side flexibility and adoption of low-carbon tech like heat pumps and electric vehicles (EVs). Any change to the energy billing system should work to accelerate the transition while protecting households through a period of change.
5. Feasibility. All policy interventions should be assessed for their feasibility under current conditions. That means that the infrastructure needed to enact the polcy change should already exist or could feasibly exist.

While a variety of approaches to energy affordability exist, this paper will focus specifically on options that amount to direct support for bills. Existing policy proposals related to direct bill support generally fall into 1 of 3 camps. The first focuses on offering bill support through the benefits system, the second on creating an income-based means-testing system within the energy market and the third on using consumption data to implement an RBT. There are several ways of designing each of these interventions. Broadly, support through the benefits system would entail offering a rebate to households in receipt of means-tested benefits, an income-based means-testing system would deliver support to households below a particular income threshold (either via a flat payment or a unit-rate discount) and an RBT would offer a discount for an initial block of energy consumed, followed by a higher unit price for consumption above that threshold. We will also analyse a proposal to remove VAT from energy bills (currently charged at 5%), which the Government is rumoured to be considering.

Modelling

We have analysed the impact of each of these policy solutions using a model generated by the Joseph Rowntree Foundation (JRF) and the Institute for Public Policy Research (IPPR). The model uses data from the living costs and food survey from 2018–2022 alongside the IPPR tax-benefit microsimulation model. Energy consumption data is derived from expenditure estimates and average price information. Consumption in kWh per week is estimated by dividing each household’s gas and electricity expenditure for each payment method by the average price for that payment method in their region of residence. As a result, the standing charge is incorporated into the unit rate in the model. Further details on the modelling can be found in a separate technical appendix.

Assessing the options  

The table below provides an assessment of each of the policy options in relation to the principles outlined above.

Delivering support through the benefits system is progressive and would be easy to administer using the existing Warm Home Discount eligibility criteria. However, analysis of the Family Resources Survey 2023/24 found that around 40% of households that could not keep their homes warm were not in receipt of means-tested benefits. This means a significant proportion of households that are struggling would miss out on support. More broadly, delivering support through the benefits system has no positive impact on the transition to net zero, either in terms of incentivising certain forms of consumption or creating future-proof policy mechanisms.

Income-based social tariff 

An income-based social tariff is also a progressive way of distributing support and has the significant benefit of reaching households beyond the benefits system. How efficiently the policy is targeted would depend on the income threshold selected and the extent to which the eligibility criteria were able to reflect variations in costs of living and household composition. The same question about income threshold applies to the majoritarian principle, though it is worth noting that an income-based social tariff would, in principle, be capable of delivering support to a majority of households. Previous recommendations for income-based social tariffs have set the income threshold at £25,000 per household, which is unlikely to meet the majoritarian criteria (SMF, Citizens Advice and Public First, 2024). Instead, we modelled the effect of distributing £3 billion of funding via an income-based social tariff (equivalent to £216 per household) to all households with incomes of £33,000 and below (after deductions) and saw a strongly progressive trend with the biggest wins for the lowest income households and winners at the median (Figure 2).

The key question, therefore, and one that is a consideration for all the policy interventions we assessed, is how to pay for this support – whether from support through the benefits system to a cut to VAT. Under the current system, energy affordability support is funded through the billing system via the standing charge. This is regressive because low-income/low-consumption households spend a higher proportion of their bills on the standing charge than high-income/high-consumption households do. In contrast, if policies are funded through additional charges on the unit rate, they risk penalising those low-income households that have high levels of energy consumption. It seems obvious, therefore, that support should be funded from outside of the billing system. However, in the current context, there are political and fiscal constraints on funding and a desire to look for fiscally neutral approaches.

We consider both options, assess the trade-offs and propose a hybrid approach to funding that could move the debate forward.

The billing system

While the versions of the RBT modelled above do not levy an additional premium on consumption above the essential threshold, it is possible to do so. By increasing the premium on units consumed above the essential threshold, it is possible to create a fiscally neutral system of cross-subsidy that could deliver the equivalent bill saving as £3 billion worth of support. This cross-subsidy approach is how an RBT is typically conceived.

We modelled this approach using the following parameters:

An RBT funded through a combination of general taxation and network profits avoids some of the significant implementation challenges faced by a fiscally neutral version of the policy.

A fiscally neutral RBT relies on a cross-subsidy between high and low consumption households, and there are several ways that cross-subsidy could break down.

One way of understanding this risk is in relation to the differences in consumer profiles between suppliers. Suppliers with a higher proportion of low-consumption households might be faced with a choice between not recouping the costs associated with delivering the discounted unit rate or charging such a high premium on high-consumption households that they would no longer be able to offer competitive tariffs. Another iteration of this challenge relates to consumer switching. If an RBT were only applied to default tariffs via the price cap, high-consumption households would have a significant incentive to switch onto fixed-term tariffs. This would not be a problem if they were switching to fixed tariffs held by the same supplier because the supplier could use their discretion about how to recoup the costs of the discounted rate, whether from a premium on default tariff consumers or a premium on fixed tariff consumers. However, if high-consumption households all moved to fixed tariffs held by just 1 or 2 suppliers (and suppliers would have a significant interest in competing for these consumers), it would present a problem.

One approach to navigating this challenge would be for Ofgem to establish a cross-market reconciliation mechanism, similar to the system created to help level pre-payment meter and direct debit charges. This would allow suppliers to be reimbursed or charged depending on the profile of their consumers.

This process is far simpler if the discounted essential block of energy is funded from outside the billing system. It would simply require the Government to offer a rebate to energy suppliers based on the number of consumers they have and how much of the essential block they consume. If a hybrid RBT were implemented, a system of redistribution similar to the one outlined above would be necessary, but reducing the amount of money being recouped by the premium would lower the administrative burden placed on Ofgem and suppliers.

Net zero

An externally funded RBT also simplifies the interaction between the RBT and decarbonisation policy.

While a fiscally neutral policy that charges more for high levels of consumption discourages wasteful energy use, it also introduces complexities in relation to incentives around electrification. Namely, charging a premium on high levels of electricity consumption could increase the cost of adopting EVs and heat pumps, both of which are central to the Government’s approach to decarbonisation.²

However, while a blanket increase in cost for high levels of energy consumption may be undesirable, the RBT could be designed in a way to disincentivise particular types of high consumption — namely, gas.

Under the current system, policy levies primarily fall on electricity bills – artificially elevating their cost in relation to gas. The Government is currently considering how to address this imbalance. Some have proposed moving policy costs into general taxation (Marshall, 2025). The total cost of paying for social policies, the feed-in-tariff and the renewables obligation would amount to £4.3 billion a year (though this cost would fall over time).

If the Government wanted to maximise the impact of this spending, it could combine moving some policy costs into general taxation with an RBT to help distribute the remaining costs fairly. The logic is like that used in the hybrid funded model, whereby a small premium is used to generate additional funding in a progressive way. If a premium were introduced only on gas consumption above a certain threshold, it would also disincentivise high levels of gas consumption and encourage the adoption of low-carbon heating technology.

This approach would need to be assessed over time as increasing numbers of households transition to electricity-only heating systems, but it demonstrates how an RBT could be used flexibly to support the transition to net zero.

Every household should be able to meet its essential energy needs and have access to the affordable energy it needs to flourish. The current energy system is failing to deliver these outcomes, and the Government does not have the tools necessary to intervene. Support for those on the lowest incomes is vital, but there is a significant number of households further up the income distribution that are also struggling to heat their homes.

To capture both the breadth and depth of need, support must be distributed in a progressive way that reaches those beyond the benefits system. The RBT provides a mechanism for achieving this, without constructing a new system of income-based data matching. However, it is not without limitations. Designing a fiscally neutral RBT produces intolerable numbers of losing households with significant redistributive inefficiencies at the top and bottom of the income distribution. When combined with external funding, however, it is possible to unlock the progressive potential of the RBT – helping to protect low- and middle-income households in a relatively efficient way through a single system.

£5 billion of funding would provide a bill discount of £150 for the median household, with low-income households receiving slightly more and high-income households slightly less, on average. This is a significant level of government spending, but it is not the only way the RBT can operate. We have demonstrated the impact of a range of funding levels and how they can be combined with cross-subsidy within the billing system to deliver different distributions of winning and losing households. When comparing a range of policy options — including a cut to VAT — the RBT maximises progressivity.

Targeting excess profits currently generated by network operators is one option for funding some of this support, but general taxation remains the most progressive and sustainable approach. Significant investment in an energy affordability mechanism should be a core part of the Government’s approach to improving living standards.

This is a time of considerable change in the energy system, and households must be supported throughout the transition. The Government needs a flexible policy lever that will allow it to respond to changing wholesale and policy costs while continuing to meet households’ needs. Introducing an RBT in the gas market to help progressively distribute some of the costs of rebalancing could be one place to start.

The RBT is a flexible tool that can respond to different levels of external funding in ways that vary the depth of support available and the level of cross-subsidy within the energy billing system, all while delivering progressive outcomes to the majority of households.

1. All of the groups which took place as part of this project were conducted online by More in Common in August 2025. Recruitment was based on a mixture of demographics, voting history, geography and segment allocation. More information on More in Common’s 7 segments can be found in The seven segments of Britain, by More in Common.
2. There are several approaches that could be taken to better align an RBT that places a premium on high consumption with the adoption of low-carbon technology. One would be to bundle energy efficiency measures so that households can add new electricity loads (EV charging, heat pumps) without proportionally increasing net grid consumption under an ‘energy-as-a-service’ model. Another approach would be to include additional allowances or adjustments for technology adoption within the RBT to avoid discouraging beneficial electrification. The New Economics Foundation, for example, has outlined a proposal for how households off the gas grid could receive a larger low-cost electricity allowance so they are not unfairly penalized for heating electrically (Chapman and Kumar, 2023).

Chapman, A. Kumar, C. (2023) The National Energy Guarantee

Citizens Advice (2025) Energy network companies pocket £4 billion in excess profits from cost-of-living crisis

End Fuel Poverty Coalition (2025) Ofgem Price Cap

House of Commons Library (2025) Domestic energy prices

Joseph Rowntree Foundation (2025) UK poverty 2025

Marshall, J. (2025) Splitting the bill

Milne, B. et al., (2025), A year of Labour but no progress: JRF’s cost of living tracker, summer 2025

More in Common (2025) The seven segments of Britain

More in Common (2025) Britain's high energy bills: The permacrisis that keeps on burning

Norman, A. et al. (2025) Closing the fuel poverty gap: A plan for targeted energy support

Nuffield Politics Research Centre (2025) Addressing key voters' economic insecurity is vital for all parties

Ofgem (2025) Average gas and electricity usage

Ofgem (2025) Debt and arrears indicators

Shepheard, M. (2025) Is removing VAT really the best way to cut energy bills?

SMF, Citizens Advice, Public First (2024) Future of energy bills

Wright, O. Vaughan, A. Bradley, S. (2025) Revealed: Global warming exaggerated, say soaring number of Britons

Research, investigation and analysis – Tilly Cook, Andrew Wenham
Writing – original draft – Tilly Cook, Alex Chapman (The New Economics Foundation)
Writing – review and editing –Darren Baxter, Maddy Moore, Chris Belfield, Alfie Stirling, Peter Matejic, Ann Crossley 
Data visualisation –Andrew Wenham, Isobel Richardson

If you are using this document in your own writing, our preferred citation is: Cook, T. Wenham, A. (2025) Energy affordability: how to reduce bills for majority of households. York: Joseph Rowntree Foundation.