More than half of the world’s population lives under an energy system that its advocates say can tackle fuel poverty, improve crumbling housing stock and reduce energy demand. And to cap it off – when properly designed – it would not cost the taxpayer anything.
The so-called rising block tariff or national energy guarantee system (NEG) are almost unknown in Europe but operate successfully in many other countries and regions – from Japan, South Korea and China to Bangladesh, India and California.
The idea is simple: the first block of energy, which is calculated to meet essential needs from heating to cooking and lighting, is either given at a reduced rate or free. The cost a unit then rises in additional blocks, meaning wealthier homes with excessive or non-essential consumption pay more.
According to its champions, the benefits that flow from this system are numerous: fuel poverty is reduced or eradicated with those on the lowest incomes getting affordable energy to cover the essentials – from heating to cooking and light. Excessive consumption – overwhelmingly linked to wealthier households – is charged at a higher rate, subsidising the cheaper tariff. And everyone is incentivised to reduce consumption and improve their homes through insulation, smart technology and other energy efficient measures in an effort to stay within the cheapest block.
A further advantage, its backers say, is that the lowest tariff could be directly linked to the rollout of renewable energy. In this scenario cheap wind and solar power would determine the size of the lowest tariff, which would then be split between all consumers, giving the public a direct stake in the transition to a low-carbon energy system.
Experts say the current energy pricing system in Europe and the UK needs an urgent overhaul, after the energy crisis caused by the Russian invasion of Ukraine drove tens of millions of people into fuel poverty.
The crisis forced countries across Europe to pump billions of pounds into the energy markets. In the UK alone the government introduced an energy price guarantee (EPG) costing about £20bn – thought to be the most expensive energy policy in the country’s history.
Michael Pollitt, an energy expert professor from Cambridge university, said: “We had one of the most expensive energy policies ever implemented. But this cap applied to all consumption which was crazy, because you were subsidising people with swimming pools whereas, actually, we could have done something more sophisticated and targeted and cheaper – which has all these other benefits.”
Governments in the UK and across Europe are now looking at wholesale reform of the energy market to reduce exposure to the international fossil fuel fluctuations, encourage a reduction in demand and rally support for renewable energy.
Enter the rising block tariff – also known as the increasing block tariff or the national energy guarantee. According to Alex Chapman, a senior economist at the thinktank the New Economics Foundation, who recently published a paper on the potential for a National Energy Guarantee scheme, there is growing interest in the idea in the UK and across Europe. “Over the next few years large amounts of cheap, new renewable energy will be connected to the grid, in the UK that is particularly thanks to the new government’s plans for onshore-wind and solar.”
He argues that rather than seeing this energy disappear into the mix of national consumption, it should be directed into a new rising block tariff.
“An initial block of ultra-cheap energy should be offered to every household in the country as a dividend on our national mission to net zero,” he adds.
However, some assessments of the system, which is widely in use for water and energy utilities around the world, have been less sure of its benefits. A World Bank paper that looked at different kinds of water tariffs argued that “they are a blunt instrument at best and at worst can produce perverse outcomes”, citing large poor families that use more water and end up paying the higher rates.
The report concluded that a “(simple) uniform volumetric tariff where water provision is charged at its full cost could improve social welfare by removing price distortions and would be easier for households to understand”.
Jörg Mühlenhoff, the head of the European energy transition programme at the German thinktank the Heinrich-Böll-Stiftung, said there was a growing interest in a radical reform of the energy market in the EU.
He backed some sort of rising tariff reform but said the “devil would be in the detail”.
“We need to think carefully about how you define the right quantity of electricity for the lowest block, what is a household, is it based on the number of adults, do you take health vulnerabilities into account – there is a lot still to work out.”
He said the ideal model would have a reduced cost block to cover the essentials, with the higher rates linked to fluctuating market rates and energy generation to incentivise not just energy efficiency but also to steer consumers away from using electricity at times of high demand or when renewable generation is low.
“We need to have a system that as well as tackling the cost of living crisis enables people to tap into the potential of renewables, meaning they have access to enough electricity for the essentials but that they also know that when there is a lot of wind, a lot of sun, there will be lower wholesale market prices, so that is the time to switch on your electric devices, your electric vehicle, your electric heat pump etc,” he says.
Mühlenhoff said there could be wider benefits to a reformed energy system in the context of the rise of populist parties across the EU and in the UK.
He says: “You really need to ensure that the benefits of the switch to renewables come to households and that people can see it on their bill. Otherwise, as we saw during the European election campaign, the far right, the populists will pick it up and campaign against the energy transition, when in reality if we get this right the transition to renewables, energy efficiency, is the answer to a lot of problems people are experiencing.”
In the UK Chapman said the reform of the energy markets is also on the cards under the new Labour government.
“Labour realise that the offer of a green dividend is paramount if they are to get the public behind their clean power mission. The NEG offers that and what’s more, it can do so in a cost-neutral way, not upsetting the chancellor in the process,” he says.
