Nesta – the UK’s research and innovation foundation – has called on the Chancellor to implement a comprehensive tax-free electricity package that would cut energy bills by over £150 and reduce inflation by 0.3%.

The proposal, published today by Nesta, is designed not only to deliver immediate, meaningful relief for households but also to create structural changes to permanently drive down the cost of home heating.

Nesta - whilst welcoming reports the Government is considering making a significant intervention on energy bills - argues that a generic VAT cut (as rumoured) on all energy is an insufficient measure that fails to address fundamental imbalances in Britain’s energy prices. Nesta also argues that the full £13.2 billion in pledged funding for the upcoming Warm Homes Plan must be protected in order for the Government to further reduce bills in the long term.

Instead, Nesta proposes a strategic package that targets high electricity costs to benefit all consumers and support long-term Government initiatives on energy bills and decarbonisation.

The package would be delivered through three interventions:

1. Removing legacy subsidies from bills: Offsetting the cost of the Renewables Obligation and Feed-in-Tariff on electricity bills
2. Removing VAT from electricity: A targeted VAT cut to electricity bills
3. Taking the ECO levy off electricity: Adjusting the ECO levy to remove it from electricity bills, while protecting the majority of the scheme’s funding and without raising costs for the typical gas household

Together, these three policy interventions would deliver an estimated £150 annual saving for a typical dual-fuel household, with even greater savings for homes reliant solely on electricity.

Crucially, Nesta’s analysis shows that this intervention is a strategic fiscal move that directly combats inflation, reducing the headline rate by 0.3%.

With escalating costs expected to drive up electricity bills further in the next year, cutting VAT on both gas and electricity - the rumoured approach - risks losing genuine consumer impact within these wider market fluctuations.

Nesta’s proposals - totalling £5.4 billion in 2026/27 - ensures that the investment on energy bills is future proofed against wider market volatility, maintaining a longer term impact of this Government intervention and ensuring consumers continue to be protected from high electricity bills.

Making electricity affordable

The core challenge for consumers is that electricity, the cleanest and most abundant fuel in the UK, is disproportionately burdened with taxes and levies compared to gas. This structural flaw keeps bills high for consumers and is an obstacle to long-term affordability.

Nesta’s proposal would correct this by slashing the difference between electricity and gas prices, reducing the current ‘electricity-to-gas price ratio’ from 4.2 to 3.1.

This vital rebalancing is also the key to making electricity-powered home heating technologies, like heat pumps, definitively cheaper to run than gas boilers. This is vital for the 18% of households that do not use gas, who often face the highest energy bills and rates of fuel poverty and energy debt.

The approach creates the essential conditions for the upcoming Warm Homes Plan, making it easier to scale up efforts to tackle fuel poverty and secure a permanently lower-cost clean energy system for the UK.

Madeleine Gabriel, director of sustainable future at Nesta, said:

“The Treasury is rightly focused on intervening to lower the cost of energy for households. But there are better ways to do this than a simple VAT cut, while deep cuts to energy efficiency programmes would be a body blow to decarbonisation and fuel poverty targets. We want to ensure that any intervention delivers both immediate relief for billpayers and tackles the underlying drivers of high electricity bills.

“Our tax-free electricity proposal is a strategic investment in a more affordable energy future that offers a significant return to the Exchequer and makes electricity a competitively priced fuel for every UK home.”

[ENDS]

Notes to editors

1. Nesta has published its proposal today, Tax-free electricity, on its website here.
2. The ECO levy raises around £1.7 billion from energy bills and is separate but linked to the UK government’s £13.2 billion commitment to the Warm Homes Plan. This levy was increased by around £500 million in 2023 to create the Great British Insulation Scheme, which is scheduled to end in April 2026. Nesta proposes reducing the ECO levy slightly back to around £1.4 billion, and directing all of this funding to crucial upgrades for low-income households
3. For more information on the analysis or to speak to one of the experts involved, please contact Kieran Lowe, Media Manager, on 020 7438 2576 or [email protected]. Spokespeople are available for broadcast interviews.

About Nesta

Nesta is a research and innovation foundation that designs, tests and scales solutions for the biggest challenges of our time.

Driven by a vision to improve the lives of millions of people, our focus up to 2030 is on three missions: breaking the link between family background and life chances, halving obesity and cutting household carbon emissions.

We work with partners to develop high-potential solutions and test them as they evolve, drawing on expertise in qualitative and quantitative research, data science, behavioural science and design.

Once confident in the effectiveness of a solution, we take it to scale. We create national policy proposals, develop consumer-facing products and services, build and spin out commercial ventures and harness the power of the arts.

We work with two specialised units: BIT applies a deep understanding of human behaviour to help clients achieve their goals. Challenge Works designs and runs challenge prizes to spark innovation in science, technology and society. Find out more at nesta.org.uk