A local authority that threatened tenants with eviction if they could not afford a 350% hike in energy bills has delayed crediting them with a £1m government subsidy for more than 12 months, it has emerged.

Lambeth council is facing demands to pay compensation to residents who campaigners say have been forced into poverty by its conduct.

The council’s estates, home to some of the poorest households in the country, are heated by communal heat networks, with the cost added on to the weekly rental bill. Electricity is supplied and paid for separately.

The Labour-run authority increased the energy bills of more than 3,000 tenants by up to 350% in April last year.

Residents in one estate were told their annual heating and hot water charge was rising from £959 to £4,344 and some claim they have been forced to cut back on food to avoid losing their homes.

However, the council failed to reflect the government’s energy bills discount scheme, which launched last year to cap price rises for heating network customers. It also botched its application to the scheme, which should have reduced household charges by about 25%, according to the campaign organisation Heat Trust.

Residents have only now been informed that they are entitled to a share of a £1m subsidy, after a year of lobbying by Heat Trust. The sum will be retrospectively applied to the bills from the last financial year. Leaseholders will have to wait until September to receive the credit.

Communal heat networks provide estates with heating and hot water from a central generator. They are supposed to offer energy and cost savings but residents have to pay a set sum regardless of consumption and are unable to switch supplier to find cheaper deals. Heat networks are unregulated and bills are not subject to Ofgem price caps.

Critics claim that the council has forced impoverished households to pay the price for its own mistakes.

Residents were given four weeks’ notice to find the extra money and told that they could end their tenancies if they were unable to pay. Scores have since received letters threatening eviction.

“Lambeth council is erroneously and egregiously counting fuel debt as unpaid rent,” said Kirsty Oliviera, a tenant who has been threatened with eviction after her bills for heating and hot water rose from £18.45 a week to £83.55. The increase has left her £1,930 in arrears.

“I received a notice of seeking possession in September last year and in January a letter saying Lambeth were considering taking me to court. I have since had several letters telling me I am in arrears with my rent. I am paying my rent, I am just unable to pay the full heating and hot water charges. Lambeth should have taken the government discount into account before they started threatening us.”

The London Tenants Federation and Fuel Poverty Action campaign groups said it was unprecedented and potentially illegal for tenants to be threatened with repossession over energy arrears. They are demanding that Lambeth pay residents compensation for damaging their mental and physical health.

“We know for over a year, tenants have been missing meals and going into debt, yet the council has chosen to ignore the fact that it was due to receive a large sum from the government,” they said in a joint statement. “To our knowledge, eviction for energy bill debt has never been tested in a court of law.”

Stephen Knight, the director of Heat Trust, told the Guardian that he had repeatedly asked the council to factor in the subsidy when calculating energy charges last year. The discount was finally secured when Knight involved the Department for Energy Security and Net Zero.

“It is extremely regrettable that residents have had to wait 15 months, during which time many have fallen into payment arrears,” he said. “It’s essential that councils separate out rent, which is capped and subject to housing benefit, and energy bills, which are not.”

Lambeth council said the price increases had been driven by Russia’s invasion of Ukraine. It said it had applied for the government discount last July, just before the application deadline, and claimed it had offered extended payment plans to help struggling residents.

A spokesperson said: “Although the heating and hot water charges are a service charge, they are included as part of the weekly rent payable. The council has a financial responsibility to recover rent and service charges in line with the tenancy agreements, which means we have to enact the arrears recovery process. We have not evicted any resident who has fallen into arrears due to the energy charges.”

In April the government announced plans to regulate communal heat networks and to bring the protections for the 50,000 communal heat network customers into line with the rest of the energy sector.

• This article was amended on 18 June 2024 to refer to the energy regulator Ofgem, rather than the broadcasting regulator Ofcom.