Social tariffs: an essential tariff for essential goods?

Social tariffs: an essential tariff for essential goods?

Essential goods are becoming less affordable

The cost of living crisis has increased the number of households who cannot afford essential goods. Around 9 in 10 adults reported seeing cost of living as an important issue facing the UK and almost half reported their cost of living in November 2023 had increased compared to a month ago.

At the same time, other pressures including the need to adapt to our changing climate, deliver the net zero transition, and address our loss of biodiversity means that unprecedented levels of investments are needed in essential sectors, including water, energy, and transport.

The Second National Infrastructure Assessment (NIA2) lays out a series of recommendations for UK infrastructure in those essential sectors. The upfront cost of these changes will need to be funded by households and businesses, either via taxation, bills, or the price of goods. And whilst the NIA2 does not expect these changes to have a disproportionate impact on lower income households, this varies by sector. For example, according to the NIA2 increasing water bills are likely to disproportionately affect lower income households.

Social tariffs are one option in the policy toolbox for mitigating the impact on customers

This situation highlights a greater need to support low income families, to alleviate short-term financial pressures from the cost of living crisis and protect them from additional poverty that could be caused by higher bills.

Social tariffs are one of the tools that decision makers can use to support households in vulnerable circumstances. Social tariffs are lower priced packages which aim to support access to essential goods for households in vulnerable circumstances. Done well, they can limit the impact of immediate pressures as well as help to deliver a just transition to a more financially, environmentally, and socially sustainable future.

The decision to introduce social tariffs should take into account specific market considerations

Whilst social tariffs can help to alleviate financial pressure from low-income households, the cost of providing these will be borne by providers, either by reducing profitability or being recovered from other customers. The broader the take-up of social tariffs, or the discount offered, the greater the burden on non-eligible consumer groups. This means that policymakers should clearly consider distributional impacts when making decisions on social tariffs as well as ensure that they are targeted at households with the greatest need.

The introduction of social tariffs can also distort competition in competitive markets and as such they may be better suited to regulated sectors for essential goods where there is already limited competition.

Where social tariffs are appropriate, success depends on careful design

In order for social tariffs to work, the current social tariffs landscape needs to change in a number of dimensions.

Improving targeting of social tariffs

Our work for BT Group also finds that two million working age eligible individuals live in higher income households where social tariffs may not be needed, showing the importance of targeting. In the water sector, our work for some water companies also revealed that there are households on relatively high incomes that are considered ‘water poor’, according to a metric used by the industry based on the ratio of their bills to disposable income.

It would be important to consider whether other more targeted affordability measures are better suited at supporting those households.

Improving the take-up of the social tariffs

In the broadband and mobile sector, social tariffs were introduced to support consumers on low incomes, offering discounted packages across a variety of sectors. Despite current cost of living pressures, take-up of social tariffs in the broadband and mobile sector has been low, with the latest data suggesting that only 220,000 UK households use such tariffs.

There is surprisingly little information on who is eligible for social tariffs and how far income levels drive decisions about take-up. Analysis by Frontier for BT Group suggests that a million working age individuals potentially eligible for a social tariff live in households with such low incomes that, even at cheaper and cheaper prices, connectivity is unlikely to be a priority purchase.

Behavioural economics insights can help in identifying what these barriers are and then designing a set of potential strategies to overcome the barriers and motivate customers’ uptake. This is important as we know people do not always act in an economically rational way. Despite having alternatives that are best fitted for their needs, there are behavioural traits (such as lack of attention, loss aversion, heuristics, social proof elements or “what is easy to do”) hindering customers from moving to a social tariff which benefits them. Examples of using behavioural economics to improve include: taking advantage of loss aversion, default or opt-in vs opt-out options, and social proofs.

Reviewing best measures to support vulnerable customers in the energy sector

While vulnerable customers have access to social tariffs for using water and telecoms, the situation in energy is different. Social tariffs for energy were phased out in 2011 and replaced by the Warm Home Discount. A price cap was then introduced in 2019 and, more recently, the Energy Price Guarantee was introduced in 2022 as a temporary support mechanism for all customers in response to rising energy costs. With the cost of living crisis and continuing high energy prices, it would seem appropriate to review the best measures to support vulnerable customers, which may include an energy social tariff. The Government committed to consult on the topic in the 2022 Autumn Statement. A coalition of over 140 organisations and MPs have since published an open letter in September 2023 calling for a social tariff but so far no consultation has appeared.

How Frontier can help 

Frontier Economics has a team of regulatory economists and behavioural economics experts that regularly advises on issues related to affordability of essential goods, including social tariffs.  

Read more about our recent work: