Journal article
Socioeconomic Inequality in Low-carbon Technology Adoption
Apr 2025
This blog was originally written for the University of Strathclyde’s Centre for Energy Policy.
This blog explores the key questions, challenges and insights on improving energy affordability and equity and driving economic growth from our initial research work on social tariffs and smart tariffs under the Distributional and Economy-Wide Impacts of Social and Flexible Tariffs project, as part of UK Energy Centre (UKERC) 2024-2029. This project builds from ongoing research by the Centre for Energy Policy (CEP) at the University of Strathclyde, where we use economy-wide modelling to understand the distributional and wider economic impacts of different tariff structures. An initial review of the existing literature highlighted a series of complex trade-offs when it comes to balancing the needs of vulnerable households, promoting equitable access to energy, and sustaining economic growth throughout the UK’s energy transition.
As the UK progresses towards net zero, energy tariff design represents a critical policy lever for balancing decarbonisation, affordability, and economic growth. Some fundamental questions sit at the heart of this policy challenge: “Who pays for the energy transition? How can we best protect vulnerable consumers in the energy market? Should we rely on cross-subsidies from other billpayers, funding through taxes, or energy companies’ contributions to lower energy costs and protect vulnerable consumers?
Current policies like the Warm Homes Discount provide fixed support to households (one-off £150 discount on the annual electricity bill) but do not account for specific needs, for example, disabilities or medical conditions. At the same time, the price cap offers broad but blunt protection, which is not targeted and is not designed to make energy more affordable for vulnerable groups. The rise of smart meters opens new possibilities for consumers, including time-of-use tariffs, which could help reduce overall energy consumption and associated costs. However, these solutions are not without challenges. Flexible energy use isn’t accessible to all households, especially those with special energy use requirements like care needs or disabilities. In fact, without careful design, adopting technologies and flexible energy schemes could widen the inequity gap by benefiting wealthier households that are more capable of adjusting their energy use patterns.
Our research asks: Can well-designed energy pricing support vulnerable households, enhance system efficiency, and deliver positive economy-wide outcomes? To answer this question, we are developing a set of scenarios that explore how different tariffs can affect different groups of society and the wider economy, focusing on two crucial strategies designed to reduce energy bills and promote efficiency: social and smart tariffs.
Social tariffs offer discounts to vulnerable consumers based on specific characteristics like income or vulnerability status, while smart tariffs adjust prices according to real-time energy demand and supply. We’re also exploring potential synergies between social and smart tariffs to understand if combining these approaches could lead to better outcomes for all households or if, for example, smart tariffs could reduce energy system costs in ways that might mitigate the cost of supporting social tariffs.
Social tariffs are schemes designed to make energy more affordable for consumers by offering discounts on the unit rate, standing charges, a bill rebate, or a combination of these. In the UK, major energy suppliers initially offered social tariffs voluntarily in the late 2000s but were eventually phased out when the Warm Homes Discount (WHD) was introduced. The delivery mechanisms for these tariffs vary, and each has its pros and cons:
Social tariffs present a promising way to provide targeted support, which could make energy more affordable for vulnerable consumers. However, they raise concerns about eligibility criteria, funding sustainability, and potential disincentives for energy efficiency.
Also known as dynamic or time-of-use (TOU) tariffs, they offer a more flexible approach to pricing by adjusting rates based on demand and supply conditions. These tariffs use smart meters to monitor consumption and incentivise energy use during off-peak hours when prices are lower, helping reduce strain on the grid and promoting energy efficiency. In this system, consumers face higher rates during peak hours, generally between 4 and 7 in the evening, and lower rates during off-peak hours, generally between midnight and 6 in the morning. These tariffs allow consumers to save money by shifting usage to off-peak times. Energy providers also benefit from the opportunity to manage grid demand better and reduce the need for more expensive generation (i.e. peaking power plants) and costly infrastructure upgrades.
Smart tariffs can vary according to consumption patterns, allowing consumers flexibility to decide on the most cost-effective timing for energy consumption based on their usage habits. These tariffs rely on consumers using smart meters to shift their energy demand. However, smart tariffs may inadvertently disadvantage consumers who cannot adjust their energy usage patterns or lack enabling technologies.
Our modelling examines how different approaches and levels within these tariff systems can impact household disposable incomes and wider economic performance. We are developing scenarios to assess the potential impact of different tariff mechanisms on households.
For social tariffs, the research looks at the detail of the tariffs like the types, levels and approaches, and the eligibility criteria going from benefits recipients only to broader vulnerability measures and the different funding mechanisms available, including consumer cross-subsidies, taxation, or supplier contribution. For smart tariffs, we’re simulating different rate structures and adoption levels to understand the system-wide benefits and distributional outcomes. Moreover, a critical area of the research focuses on exploring potential synergies between the two approaches. The aim is to understand if the efficiency gains from smart tariffs could reduce system costs in ways that ease the financial burden of supporting social tariffs. This area of research has the potential to show if the interaction between both types of tariffs can support the creation of a more sustainable and equitable energy system for all.
Our initial work on social and smart tariffs highlights the complex trade-offs involved in designing energy pricing policies that balance affordability, equity, and economic growth objectives. Social and smart tariffs can potentially support households with energy costs. However, careful design is essential to protect consumers, benefit energy producers, and limit unintended consequences, such as increasing the inequality gap between better-off and vulnerable households.
The Centre for Energy Policy is collaborating closely with stakeholders, and it’s planning a workshop this summer to ensure that our modelling reflects real-world constraints and opportunities and that our findings are relevant to both policymakers and industry. By using a general equilibrium economic framework to simulate various tariff designs, we aim to provide policymakers with robust evidence on distributional impacts and economy-wide outcomes. We want to hear from stakeholders and networks that share our interest in energy policy design that supports a just transition to a low-carbon energy system and ensures no one is left behind.
If you require further information or want to collaborate with the project, please contact Dr Christian Calvillo, CEP Senior Research Fellow, at christian.calvillo