It is welcome news that the energy price cap will fall again from the start of July. This will mean consumers’ energy bills will take another step to returning to normal. However, with the election campaign now in full swing, parties should promise to go further to reduce consumers’ energy bills by rebalancing levies on energy bills, further proving that they are on the side of hard-working families.
Britain’s renewable energy capacity has grown significantly, with around 40% of our electricity coming from renewable sources in 2023. Despite the lower running costs of renewable energy, UK households aren’t currently seeing the full benefit through reduced energy bills. This is partly because the price of electricity is linked to the price of gas, which causes significant price volatility and gives power over energy markets to petrostates like Russia, but the price of electricity is also raised disproportionately by the uneven application of green levies on electricity bills compared to gas bills. Given renewables not only help us reduce emissions, but also increase our energy independence, we should be doing all we can to make sure households benefit from their lower generation cost.
Environmental and social levies, commonly referred to as ‘green levies’, are applied to household energy bills and currently make up around 8% of a typical energy bill for a household using both gas and electricity - commonly known as dual-fuel households. They cannot be scrapped as this would involve breaking legally-binding contracts with energy generators, which would wreck investor confidence, inflate bills, and jeopardise new investment and jobs.
The social levies directly fund fuel poverty alleviation schemes, such as the Warm Home Discount and the Energy Company Obligation, which have saved recipient households up to £1,000 per year. Environmental levies pay to support the development of low-carbon energy, including the Contracts for Difference Scheme, which has supported 6.4GW of operational projects and the Renewables Obligation and Feed-in Tariff which supported the initial rollout of renewables. The renewable projects supported by these legacy levies have led the way, driving down installation costs and reducing our reliance on imported gas, helping to shelter UK households from the worst of the energy price crisis.
Whilst only accounting for 8% of a dual fuel bill, they predominantly fall on electricity bills, rather than gas, meaning electric-only households are disproportionately paying more. In the current price cap period, this means around 13.5% of an electricity bill is green levies, compared to only 3.6% of a typical gas bill. This pushes the cost of electricity up, disincentivising households to switch to be electric-only - which would have lower emissions.
Given the energy transition will likely see more households become electric only as technologies such as heat pumps are adopted, a greater number of households will be affected. By rebalancing these levies, so electricity does not bear the brunt of the cost, we could incentivise the switch away from gas and towards lower-carbon and British-renewable-powered, electrified heating. Not only will this incentivise the switch towards electrified heating, but also reduce running costs for households that, for example, have an EV.
The rebalancing of these levies, however, cannot be done in a way that just adds the cost on to gas bills. Instead, the Conservative Environment Network are proposing to shift some of the levies onto gas bills, with bills capped to ensure dual-fuel households aren’t penalised. Anything above this dual-fuel cost cap would be subsidised and paid for through general taxation. This would mean savings for the growing number of electric-only households and a market-based incentive to encourage dual-fuel households to electrify.
Whilst the cost of gas would therefore increase, the average dual fuel bill would be just £18 a year more, with this excess paid for through general taxation. Shielding households from this increased cost would cost approximately £463 million per year - around £12.50 per taxpayer, per year.
The benefits for electric households could be significant. The cost of running a heat pump, which despite its efficiency is often more expensive to run than a gas boiler, could reduce by over £200 per year -. This would provide a significant incentive for households currently sitting on the fence to make the lower carbon choice. It also means that as measures to increase the number of electrified heating systems, such as the Clean Heat Market Mechanism, come into force, households will not be forced to pay more to heat their homes
Politically, this could be a significant opportunity for parties at a time when voters are thinking more about their energy bills. As a method of bringing down the cost of clean energy, whilst not penalising households who can’t yet make the switch, rebalancing the levies on energy bills might just pose the answer.
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