The UK government recently consulted on a revised strategy against fuel poverty for England. There is a good reason for this – as more and more people struggle with high energy bills, the solutions in place are not helping nearly enough households.

In our response to the government’s consultation, we have advised that:

1. Low-carbon heat needs to play a bigger role in tackling fuel poverty.
2. Rebalancing levies to make electricity cheaper will resolve the tension between net zero and affordability.
3. Retrofit should move away from the “worst first” approach and instead prioritise cost-effective measures across a larger number of homes.

Despite considerable funding to improve the energy efficiency of low-income homes, fuel poverty rates remain stubbornly high. According to the government’s definition, 2.7 million households in England are fuel poor – though in reality, many more are struggling to afford adequate heating.

Over the last 20 years, insulating homes has been seen as the way to help people cut costs and reduce emissions at the same time. However, it is now not making enough progress on either. Firstly, the number of homes being treated has come down as most of the cheaper insulation measures have been installed. Secondly, net-zero targets now urgently require deployment of low-carbon heat, not just reducing the consumption of gas. This means that we need to shift away from the “fabric first” and “worst first” principles. We need a more balanced approach to supporting households that will combine clean heat with cost-effective fabric upgrades.

But one glaring issue is blocking the move away from “fabric first”, and that is the high cost of electricity. Expensive electricity means that the upgrades to homes that are most needed for net-zero goals – installing heat pumps – do not always cut costs sufficiently. At Nesta, we believe this tension can be eradicated. The key step to get there is to make electricity cheaper by removing green levies charged on electricity bills.

The UK has some of the most expensive electricity in Europe. Consumer prices are inflated by levies, which are disproportionately placed on electricity rather than gas.

Current prices make it rational for schemes to avoid installing heat pumps in low-income homes. Heat pump installations currently only significantly reduce bills for households that are not on the gas grid and using expensive fuels. They save on average £300 in oil-heated homes and £700 if replacing an electric storage heater.

Nesta analysis shows that if we moved the largest levies on electricity (Renewables Obligation and Feed-in Tariff) to gas, a typical household could be saving £400 per year by switching from a gas boiler to a heat pump, due to the change in relative prices of gas and electricity. Under current prices, the same household just about breaks even if they switch. Reforming levies is essential for lower-income households to benefit from the UK’s clean, home-grown power; and it is the only way to fully align fuel poverty strategies with net-zero goals.

With cheaper electricity, fuel poverty schemes would be able to use heat pump replacements of gas boilers as a core tool. Insulation will still play an important role, because it enables heat pumps to work better and further contributes to savings. But it will be part of a more pragmatic cost-effective package that includes clean heat.

Another issue with retrofit schemes is the prevailing “worst first” principle – the idea that they should prioritise deep retrofits of a small number of hard-to-treat homes. In reality, 83% of fuel-poor households live in homes rated EPC-D. These properties require fewer upgrades to get them to a decent standard than the F- and G-rated homes that dominate current policy attention.

Some upgrades are better value for money than others. Solid wall insulation, for example, was delivered in half the properties treated under ECO last year, despite offering the lowest return on investment. To a typical gas-heated home it will save £310 a year, but costs around £13,000 to install. By contrast, cavity wall insulation costs about £2,380 and saves £220 annually, while loft insulation costs less than £1,000 and saves on average £170 (based on gas saving estimates by Energy Saving Trust and the current price cap). If schemes prioritise the less disruptive fabric measures, they will be able to help more people.

The disparity in return on investment is why a new fuel poverty strategy should have a twin-track approach. One scheme should target the many D-rated homes, delivering high-return measures such as loft and cavity wall insulation alongside low-carbon heat. These homes are relatively easy to upgrade. A second scheme could focus on a smaller group of the lowest-income households in the greatest need, where deeper retrofits, such as solid wall insulation, can be justified.

This approach would treat more homes overall, make better use of public funding towards helping people and make faster progress towards meeting carbon budgets.

Rebalancing levies is not just good for the climate. It is a necessary condition for protecting people and bringing them along on the transition. In the long run, cheaper energy will do more for low-income households than marginally reducing the amount of energy they need now through insulation alone. A robust strategy for heat should address the need to decarbonise and cut living costs at the same time.

Why now? The role of electrification in tackling fuel poverty over the next five years will shape the actions needed after 2030. Taking decisive steps early towards affordable electricity could be the key difference between two futures – one where net zero and affordability go hand in hand, and one where they remain in tension.