Energy affordability options: establish a price ratio target
www.nesta.org.uk/feature/energy-affordability/establish-price-ratio-target/
www.nesta.org.uk/feature/energy-affordability/establish-price-ratio-target/
Electricity is too expensive, both in absolute terms and relative to the price of gas (the price ratio). Reducing the electricity-to-gas price ratio is the single most important change the UK government can make to help households switch from gas boilers to more efficient electric heating technologies. This is because it shapes real-world decisions for households and businesses: whether it’s cheaper to run a heat pump than a gas boiler, or how attractive electrification looks across different sectors.
But doing this is difficult and successive governments have shied away from directly intervening to rebalance the relative prices of electricity and gas. As a result the average price ratio has varied between three and five, with most of the variation driven by volatility in the gas price.
In the wake of the conflict around the Strait of Hormuz, along with UK government action to reduce electricity bills in the November 2026 Budget, the price ratio has fallen to 3.6. But this is still too high to make heat pumps an attractive choice for most households.
The lack of a clear target for the UK government to aim towards has been a long-standing issue. The direction of travel is clear – a lower price ratio is always better for electrification. But reducing the ratio gets increasingly difficult as it gets smaller. Ministers and officials currently do not have any way to judge whether marginal improvements in the price ratio are worth the particular tradeoffs involved. This is where a formal target would help.
Price ratio since 1996 (quarterly)
This line chart tracks the UK domestic energy price ratio (electricity vs. gas costs) from 1996 to early 2025 across a scale of 2 to 6. It plots actual historical data (DUKES, in dark grey) alongside the official Ofgem price cap (dark blue), a short-lived green line for the temporary Energy Price Guarantee, and a light blue dashed line projecting a hypothetical historical Ofgem cap. A vertical dotted line marks the start of the late-2021 energy crisis, which triggered the most volatile swings on the chart.
Historically, the ratio fluctuated between 3.0 and 5.3, trending downward in the early 2010s before climbing to an all-time peak of 5.73 under the Ofgem cap in October 2020 when gas prices were exceptionally low. Following the onset of the energy crisis, the ratio collapsed dramatically due to soaring gas prices. It fell to a price cap low of 3.52 in late 2022 and hit an absolute low of 3.22 under government intervention in April 2023, before stabilizing around 3.5 to 4.2 heading into 2025.
A price ratio target would bring two concrete benefits: it would help officials and ministers judge whether a proposal is sufficient to deliver on clean heat policy priorities and it would help coordinate decision making across departments.
Firstly, a price ratio target would make it easier to gauge whether a policy is sufficient to deliver particular outcomes, such as increasing the number of homes where a heat pump is either cheaper to run, or even cheaper to install and run than a gas boiler. For example, we expect that the tipping point where it costs the same to heat a home with a heat pump or a gas boiler is around a ratio of 3.3. If policies can reduce the ratio below that point then the UK government can be confident that any low-income household that gets a fully-funded heat pump via a public scheme is guaranteed to save money, or at the very least pay no more than they did before. In many situations they could be substantially better off – especially if the heat pump delivers higher efficiencies, or is combined with other electrification technologies, such as solar PV and batteries.
Secondly, a price ratio target would also help to coordinate policymaking within government. The price ratio is an abstract, technical concept that does not always travel well from the Department for Energy Security and Net Zero (DESNZ) to No 10, the Treasury (HMT), or other departments. Creating a point of consensus could make it easier to understand why one department favours a particular set of energy policies over another.
A useful target has to do two things at once: give ministers and officials real certainty about how it will change the economics of home heating, whilst remaining achievable. A higher price ratio will be easier to deliver, but have a smaller impact.
Our analysis suggests that a price ratio of 2.9 is within reach and would immediately make heat pumps the most affordable way to heat a typical British home.
In order to assess what figure the UK government should land on for the price ratio target, we must consider the link between the price ratio and the affordability of switching to electric heating technologies. To do this, we use two scenarios to think about the economics of home heating:
For households that get a fully-funded heat pump, the key thing is that their energy bills do not rise. This includes people living in private rented accommodation, some social housing and any household eligible for a government-backed scheme (such as Warm Homes: Local Grant, or whatever replaces the Energy Company Obligation). For these people all that matters is that their heat pump costs less to run than an equivalent gas boiler. We call this condition ‘running cost parity’.
Running cost parity is achieved in all households once the price ratio reaches 3.3 or lower. At this point, a heat pump meeting a basic level of efficiency (a Coefficient of Performance, or COP, of 2.8) will cost the same to run as a typical gas boiler (which is around 85% efficient). Because of this heat pumps are roughly 3.3 times more efficient than the equivalent boiler and it will cost the same to provide a home with the same amount of heat provided that electricity is no more than 3.3 times the price of gas. Many households will make much bigger savings at this price ratio, because heat pumps are often much more efficient, and because smart tariffs can lower the cost of electricity further.
This running cost parity condition is simple and does not vary over time. It does not require households to use particular tariffs and should guarantee that all households save money on their energy bills with a heat pump, provided it is installed to a basic level.
The more important condition for governments to reach is ‘lifetime cost parity’. This means that a heat pump costs the same as a gas boiler over its lifetime, including installation and running costs. This matters for households who will pay some or all of the cost to install a heat pump in their home. Given that heat pumps have a higher upfront cost than boilers, these people need conditions that are better than running cost parity. They need to recover the difference in capital cost from bill savings, over the life of the heating system. That can only happen if electricity is not too expensive relative to gas.
To achieve lifetime cost parity for a heat pump installed in 2026, we recommend that the UK government targets a price ratio of 2.9 or lower in the short term. This takes into account current gas prices, heat pump costs, tariff choices and the £7,500 subsidy for replacing a gas boiler with a heat pump. Our assumptions for lifetime cost parity require a slightly higher standard of heat pump performance: a COP of 3.0, and using a time of use tariff to save 15% on electricity bills compared to the price cap.
Chart 2 shows the price ratio targets required for lifetime cost parity in a few different scenarios. A higher figure in this chart means it is easier to achieve lifetime cost parity - the price ratio can be higher while still reaching parity.
The chart includes a drop in gas prices back to 5.74 p/kWh (their level before the Iran War), alongside current gas prices, at 7.33 p/kWh. Lower gas prices generally make it harder to achieve lifetime cost parity. A price ratio of 2.9 would be sufficient to achieve lifetime cost parity with gas prices at current levels, as of July 2026. Many households would perform much better than lifetime cost parity, especially if they have higher quality heat pump installations or combine a heat pump with other electrification technologies and flexible tariffs.
2026 lifetime cost parity calculation
This bar chart illustrates the electricity-to-gas price ratio required for heat pumps installed in 2026 to achieve lifetime cost parity with gas boilers. The vertical axis measures this required price ratio from 0 to 3, while the horizontal axis compares two gas price scenarios: "5.74p (pre-Iran)" and "7.33p (post-Iran)". A horizontal dotted reference line marks a "Proposed 2.9 target" near the top of the chart.
Under the lower gas price scenario (5.74p), a lower electricity-to-gas price ratio of approximately 2.7 is required to achieve lifetime cost parity, falling just below the proposed target. Under the higher gas price scenario (7.33p), the required ratio rises to approximately 3.0, crossing slightly above the 2.9 target line.
A price ratio target of 2.9 is highly achievable with government policy change.
We recommend three policies that would, in combination, reduce the price ratio below 2.9 based on current energy prices, while also cutting the typical household bill by over £100 a year:
This would cost the Exchequer £1.7 billion per year until 2037 (when both schemes end) and would reduce typical dual fuel bills by £42. It would reduce the current price ratio to 3.34.
Removing VAT from electricity would reduce typical bills by £41 at a cost of £1.5 billion per year. By itself it would reduce the price ratio to 3.39.
Shift fixed gas standing charges onto unit rates. As a standalone measure, this would cut bills for 63% of dual-fuel households, significantly benefiting lower-income households while increasing the financial return on home energy efficiency upgrades. On its own, this would reduce the price ratio from 3.56 to 3.18 at no cost to the Exchequer. It would also reduce the typical dual fuel energy bill by £22 per year, although some high gas consumption households would see bills increase.
These three policies would be sufficient to meet the price ratio target of 2.9 and reduce the typical dual fuel energy bill by £103 per year. But the UK government could also go further to deliver a £130 annual bill saving:
Undertake an exceptional, one-off intervention to wipe out an unprecedented level of electricity debt that is currently socialised across all consumers’ electricity bills. This would cost between £1.2 billion and £2.7 billion to the Exchequer. As a standalone change it would reduce a typical dual fuel bill by £29 and the current price ratio to 3.45. This is not without risk, as forgiving debt at this scale could create a moral hazard, encouraging the expectation that future arrears will also be absorbed. But the bulk of this debt was accrued in the wake of the 2023 energy crisis, when many poor and vulnerable consumers could not avoid the additional costs. We believe that exceptional circumstance justifies an exceptional remedy.
The table below shows the cumulative effect of these changes. All four changes would reduce the price ratio from 3.6 to 2.7, while saving the typical household £130 per year.
The table below shows the cumulative effect of these changes. All four changes would reduce the price ratio from 3.6 to 2.7, while saving the typical household £130 per year.
Table showing rebalancing options' cumulative impact and cost
Cumulative policy options for reducing the electricity-to-gas price ratio. Each row builds on the one above, showing price ratio, change in typical dual fuel bill, and HMT cost, all cumulative.
Status quo: price ratio 3.56, no bill change, no cost.
Remove remaining electricity levies (moves Renewables Obligation and Feed-in-Tariff costs onto taxation): ratio 3.34, bill minus £42, cost £1.7 billion per year until 2037.
And remove VAT on electricity bills (5% to 0%): ratio 3.18, bill minus £81, cost £3.2 billion per year.
And abolish the gas standing charge (shifted into unit rates, progressive): ratio 2.84, bill minus £103, cost £3.2 billion per year.
And forgive electricity debt (removes bad debt costs, one-off, raises moral hazard concerns): ratio 2.73, bill minus £130, cost £3.2 billion per year plus £2.7 billion one-off.
There are many factors that impact what the correct target price ratio is in the short term. Though we think 2.9 is the right short-term target for the price ratio, it is worth noting that lifetime cost parity depends on many different factors: energy prices, efficiencies, subsidies, tariffs, policies, finance and the lifespan of devices all affect the economics of heat pumps and boilers. We detail our assumptions across nine of the main variables in Annex 1.
Reducing the price ratio through interventions on bills is the most direct and effective way to reach a target. Adjusting subsidies is another, with major cost implications. But the UK government can and should also be trying to reach its target through other means. Working to improve the average efficiency of new heat pumps, especially those installed through government schemes, would have a major impact. Similarly, helping to reduce the cost of finance and supporting households to adopt cheaper time of use tariffs would also support this effort.
Although a target price ratio of 2.9 is sufficient to provide lifetime cost parity in 2026, the target will need to fall if heat pump subsidies are to be reduced over time. Nesta has previously recommended a trajectory for heat pump subsidies that sees them reduce to £5,000 in 2028/29, before gradually falling towards zero by the mid-2030s. This is likely to be necessary as heat pump installations scale up, as the cost to the Exchequer would increase dramatically as more heat pumps are installed.
This reduction in subsidies should be accompanied, however, by further falls in the price ratio, as the chart below shows. If the subsidy were to fall to £5,000 after 2028, the target price ratio would need to drop to 2.1 to maintain lifetime cost parity for a typical home (assuming gas prices stay at current levels). Shifting to zero subsidy in the mid-2030s would currently require a price ratio below 1, which is unlikely to be feasible.
Lifetime cost parity price ratio (excluding standing charge)
This step-chart illustrates the electricity-to-gas price ratio required for heat pumps to achieve lifetime cost parity with gas boilers, based on their installation year from 2026 to 2035. The vertical axis measures this ratio from -1.0 to 4.0, comparing two scenarios: a high gas price (green line, 7.33 p/kWh) and a low gas price (blue line, 5.74 p/kWh). The chart is segmented into time periods showing a declining upfront subsidy pathway—stepping down from £7.5k (2026–2028) to £5k, £3.75k, £2.5k, and finally to zero subsidy by 2034.
As the upfront subsidies decrease over the decade, the required operating price ratio drops sharply for both scenarios so that heat pumps can remain competitive. At the start in 2026 (with a £7.5k subsidy), the required ratio is relatively high, at approximately 3.0 for high gas prices and 2.7 for low gas prices. By 2034, when the subsidy is completely phased out, the required ratio falls drastically to around 0.8 for high gas prices and drops below zero (to roughly -0.2) for low gas prices, meaning electricity would have to be cheaper than gas per unit to achieve lifetime cost parity without government support.
While the trajectory set out in this chart should not be taken too literally, given the uncertainties inherent in forward projections, there are two key points policymakers should take from it:
The price ratio between electricity and gas is the single most important factor shaping the economics of home electrification. Historically, the ratio has varied considerably, between three and five, which has made it difficult for heat pumps to compete with gas boilers on a lifetime cost basis for many households.
Adopting a formal target of 2.9 would help address this. It is a figure grounded in the economics of real households: low enough to ensure that anyone receiving a fully subsidised heat pump saves money from the outset and low enough to make lifetime costs favour heat pumps for millions of "able to pay" households too. It is also achievable in the near term, through three costed policy options – abolishing the gas standing charge, moving remaining electricity levies onto general taxation and forgiving historic energy debt – which together would reduce typical bills by £92 a year while bringing the ratio down from its current level.
A target of this kind offers more than a number to aim for. It gives ministers and officials a shared reference point for judging whether a given policy is sufficient to meet clean heat goals and it gives departments across government a common framework for weighing different interventions against one another.
Although we think 2.9 is the right short-term target for the price ratio, it is worth noting that lifetime cost parity depends on many different factors. Prices, efficiencies, subsidies, tariffs, policies, finance and the lifespan of devices all affect the economics of heat pumps and boilers. This annex runs through our assumptions across nine of the main variables.
The price of gas has a big impact on the economics of heat pumps, with lower gas prices making heat pumps less attractive, even if electricity prices are also lower. This is because heat pumps have a higher upfront cost than gas boilers and need to save money through running costs to recover the difference in capital costs. This is easier when energy prices are high. For example, if gas is 1 p/kWh and electricity is 2 p/kWh (a price ratio of 2.0), the total amount of savings that can be realised is far smaller than if gas is 7 p/kWh and electricity is 17.5 p/kWh (a higher price ratio of 2.5).
Future gas prices are inherently unpredictable, so our analysis uses two scenarios: a high gas price (7.33 p/kWh, the rate in the July - September 2026 price cap and (5.74 p/kWh, the April - June 2026 price cap rate). In both cases we assume a constant gas price over the lifetime of the heat pump for simplicity. At the higher gas price (7.33 p/kWh), a price ratio of 3.0 is sufficient to achieve lifetime cost parity for a typical heat pump installed in 2026. At the lower gas price (5.74 p/kWh), the price ratio needs to be lower, at 2.7, to reach lifetime cost parity.
We think the UK government should take steps to stabilise household gas prices to limit the impact of their volatility on electrification, as well as its wider impact on the economy. Our proposal for a Gas Price Stabiliser will be set out in a separate paper, to be made available here.
The amount of heating used by a home also affects lifetime cost parity. In general, homes that use more heat find it easier to reach lifetime cost parity for a heat pump, because they can make bigger savings on running costs to offset the upfront cost. Although it is also the case that homes which need more heat typically need bigger (and more expensive) heating systems. The costs of a replacement boiler and a new heat pump do not exactly scale 1:1 as heat demand increases, so this creates an added sensitivity in any analysis.
In our analysis, we assume that heat demand for a heat pump is the same as for Ofgem’s typical medium household prior to the July 2026 price cap, which used an estimated 11,500 kWh of gas per year. However, this value has fallen to 9,500 kWh of gas in the latest Ofgem price cap, due to an overall fall in gas use. However, as air to water heat pumps are typically installed in larger homes, we are using the larger 11,500 kWh figure.
The efficiency of heat pumps can vary significantly depending on how well they are installed, and this has a direct impact on running costs. This is the main determinant of whether a system can reach running cost parity, which is a step towards lifetime cost parity.
In our analysis, we assume that gas boilers have an efficiency (average Coefficient of Performance, COP) of 0.85, while new heat pumps have an average COP of 3.0. Higher efficiencies are possible and make it easier for heat pumps to achieve cost parity, while lower efficiencies make it harder.
One major potential saving from installing a heat pump is no longer paying the gas standing charge (currently around £106 per year) if the household fully disconnects from gas. However, we are proposing to abolish the gas standing charge, moving the costs onto gas unit costs and so we have not included gas standing charges in our analysis.
Ignoring the gas standing charge has a big effect on lifetime cost parity. If the gas standing charge were included (and removed upon installing a heat pump), a price ratio as high as 3.5 would be sufficient to ensure lifetime cost parity for a heat pump installed in 2026. Nonetheless, we think abolishing the gas standing charge is a better policy, as it will lower the price ratio while lowering energy bills for most households.
Heat pumps are typically more expensive to install than a replacement gas boiler (before subsidy), but have a much greater potential to get cheaper in the future. Our analysis assumes that installing a typical heat pump costs £13,100 (before subsidy) in 2026, while a gas boiler costs £3,000. However, we assume that heat pumps get 2.5% cheaper in real terms each year, while the real cost of gas boilers stays constant. This broadly follows the patterns of recent years, where heat pumps have not got cheaper in nominal terms but have seen costs fall by 11% relative to inflation.
How long the boiler or heat pump lasts defines the period of time over which the difference in capital costs can be recovered from bill savings. Longer lifespans allow for the difference to be made up more slowly. If the annual savings needed are smaller, then the threshold price ratio for lifetime cost parity increases. In addition, if the average lifespans are different, then this can change the relative difference in capital cost.
Our analysis assumes that heat pumps and gas boilers both last around 15 years before being replaced. But there is some evidence that heat pumps have a consistently longer working lifespan than a typical boiler, perhaps 18 years. If this is the case (or can become the case through improvements in heat pumps or their installation), then the difference in capital costs changes from 1 heat pump vs 1 boiler, to 1 heat pump vs 1.2 boilers. In the latter case we can reach lifetime cost parity with a higher price ratio than in the former. This is not included in our analysis, but could make the economics of heat pumps more favourable.
There is currently a £7,500 subsidy available to households replacing a gas boiler with a heat pump under the Boiler Upgrade Scheme in England and Wales, which is included in our analysis. A similar subsidy is also available in Scotland. The size of this grant has a big effect on the relative capital costs of boilers and heat pumps - 74% of the difference in our analysis. Reducing the grant has a significant effect on the price ratio needed for lifetime cost parity. We expect - and recommend - that this subsidy should be gradually reduced in future as heat pump uptake increases.
As a result, the price ratio target may need to get lower over time as subsidies reduce, or other improvements will be needed to offset this. We set out how we think the price ratio target should evolve as subsidies reduce in the next section.
Households with a heat pump can typically reduce their energy bills by using a time of use tariff - in which the price of electricity varies through the day - rather than a standard rate tariff. This is partly because heat pumps tend to use more of their energy outside peak periods than typical household electricity use. It also may be down to time of use tariffs being less risky for energy suppliers and therefore having a lower average cost.
In our analysis, we assume that households use a time of use tariff and get a 15% discount on running costs compared to the price cap. This reflects the results of modelling done by Cornwall Insights for Nesta, although other estimates find similar results. The Heat Pump Monitor website found that users saved over 30% by using the Octopus Agile tariff, suggesting even larger savings are possible.
These are the main factors affecting the level of any price ratio target and the ones that the UK government should focus on. They do not explain everything, there are other factors which have small effects, such as how much households pay for annual maintenance, or whether they have solar PV. But these have a smaller overall effect and can broadly be discounted.
| Installation year | A2W heat pump installation cost (£, nominal) | A2W heat pump installation cost (£, 2026 real) | Proposed BUS subsidy pathway (£, nominal) | Proposed BUS subsidy pathway (£, 2026 real) | Net A2W heat pump upfront cost (£, nominal) | Net A2W heat pump upfront cost (£, 2026 real) |
|---|---|---|---|---|---|---|
| 2026 | £13,100 | £13,100 | £7,500 | £7,500 | £5,600 | £5,600 |
| 2027 | £13,028 | £12,773 | £7,500 | £7,353 | £5,528 | £5,420 |
| 2028 | £12,956 | £12,453 | £5,000 | £4,806 | £7,956 | £7,647 |
| 2029 | £12,885 | £12,142 | £3,750 | £3,534 | £9,135 | £8,608 |
| 2030 | £12,814 | £11,838 | £3,750 | £3,464 | £9,064 | £8,374 |
| 2031 | £12,744 | £11,542 | £2,500 | £2,264 | £10,244 | £9,278 |
| 2032 | £12,674 | £11,254 | £2,500 | £2,220 | £10,174 | £9,034 |
| 2033 | £12,604 | £10,972 | £2,500 | £2,176 | £10,104 | £8,796 |
| 2034 | £12,535 | £10,698 | £0 | £0 | £12,535 | £10,698 |
| 2035 | £12,466 | £10,431 | £0 | £0 | £12,466 | £10,431 |
