Cost of Living Bill: economic background

1. Energy prices

Despite the decision of the UK Government to introduce the Energy Price Guarantee from 1 October 2022, which will cap the typical household energy bill at £2,500 for the next two years,^[1] compared to the previously announced Ofgem price cap of £3,549, this represents a further increase from the £1,971 cap in April 2022, and an even larger increase from the £1,277 cap in October 2021. Even taking into account the £400 Energy Bills Support Scheme payment, which is available in Winter 2022/23 (although not beyond), the increases in energy bills will be substantial, as set out in Table 1, which also sets out the changes relative to a cap of £2,500 since this will continue to apply in subsequent years.

The following mitigations are being provided:

• A £400 Energy Bills Support Scheme payment for all energy consumers to be paid over the period October 2022 to March 2023, discussed above.
• A £650 Cost of Living payment for those on means-tested benefits
• A £300 Pensioner Cost of Living Payment for those pensioner households who receive the Winter Fuel Payment
• A £150 Disability Cost of Living Payment
• A £150 Council Tax rebate for households in council tax bands A-D or that receive council tax reduction

However, these mitigations will not be sufficient to offset the impact of higher energy costs. The change in the energy cap from £1,277 in October 2021 to £2,500 in October 2022 equates to an increase of £1,223, which for the 2.5 million households in Scotland implies an increase in total energy spending in the region of £3 billion. The mitigations set out above are estimated to be worth in the region of £1 billion in Scotland, leaving a substantial gap.

The above impacts are based on typical household consumption levels, which in many cases fall short of what is regarded as an appropriate level of heating as set out in the Scottish Government’s Fuel Poverty definition. Table 2 illustrates the impact of these energy price changes, net of the mitigations set out above, on estimated fuel poverty rates. ^[2]

Source: Scottish Government analysis. See footnote 2 for more detail.

Note: Fuel poverty rates are normally calculated over the course of year, so the estimated rates for October 2021 and October 2022 show what fuel poverty rate would be if prices remained at these levels over the period of year.

Table 2 shows that there are significant increases in the fuel poverty rates, and that these increases are particular high in the private and social rented sectors, with around half of households in these sectors being in fuel poverty despite the Energy Price Guarantee. Table 3 shows a similar pattern for extreme fuel poverty rates.

Source: Scottish Government analysis. See footnote 2 for more detail.

Households on pre-payment meters will be particularly affected by the increase in energy prices, as around 80% of annual household gas consumption falls within the winter months,^[3] and these households are unable to spread the costs over a longer period. Table 4 shows that the share of households on pre-payment meters is much higher in the private rented sector (22%) and social rented sector (43%) than in the owner occupier sector (6%).

Source: Scottish Government analysis of 2019 Scottish House Condition Survey data.

Table 5 shows that within each tenure, households on pre-payment meters are more likely to be in fuel poverty than those paying by other means, with around three-fifths of households who live in the rented sectors and who have a pre-payment meter being in fuel poverty.

Source: Scottish Government analysis. See footnote 2 for more detail.