Energy bills are a major cause of public concern. We can address this, but the fact that electricity is four times the cost of gas makes fixing the issue harder.
Most of the energy we use is to heat our homes, and this could be done more cheaply if households used highly efficient systems like heat pumps, rather than inefficient boilers. The disparity between gas and electricity prices is due in large part to policy costs (specific levies on suppliers that fund a range of social and environmental schemes). These add billions to bills, but over 80% of this cost is on electricity.
We have tested how the government can intervene to make electricity cheaper and bills fairer. Any change involves tradeoffs, but our analysis shows how these can be managed. The government has options that would be much better than the status quo. The answer lies in levy reform that can help the UK end its costly dependency on imported gas, reduce electricity bills for all, address acute fuel poverty, reduce emissions, and manage the cost of subsidies.
What’s in the report
- The best approach the government could take involves a combination of rebalancing some policy costs from electricity to gas while expanding the scope of targeted bill support.
- Changing the Renewables Obligation and Feed-in Tariffs schemes so that they are funded from gas bills rather than electricity would reduce the price ratio from 4.1 to 2.7. This would reduce energy bills by hundreds of pounds a year for 4.5 million households.
- Expanding the Warm Home Discount, and supplementing the current rebate with a 0.5 p/kWh discount on gas and electricity bills, would ensure that 3.5 million of the poorest gas-using households also see a net bill saving after reforms.
- The government could further mitigate the effect of moving costs onto gas for other gas-using households. Removing the Great British Insulation Scheme or the Energy Company Obligation from bills and replacing them with taxpayer funding could ensure that any bill rises are minimised.
- Any changes could be phased in gradually. Timing changes so that they occur alongside a falling wholesale gas price would preserve the benefits of reforms while ensuring that gas-using households never see a direct increase in bills as a result of them.
Why we need levy reform
Reforming policy costs could reduce energy bills by hundreds of pounds for over 8 million households. It would also alleviate some of the most acute fuel poverty by making direct electric heating cheaper to run.
Reducing the price ratio significantly improves the economics of heat pumps, and could boost demand by up to 60%. By reducing the lifetime cost of owning a heat pump (relative to a boiler), the amount of subsidy needed is also reduced. This could save the government billions in capital spending over the coming years.
Supporting the electrification of heat complements the Clean Power Plan, which aims to reduce emissions and energy bills. It would directly improve the UK’s energy security while reducing emissions.
Ways to reduce bill impacts by removing some costs from bills
Image Description
A horizontal bar chart titled "Ways to reduce bill impacts by removing some costs from bills" shows three options for reducing energy bills, categorized by household type: "Gas-using, eligible for support" (blue), "Gas-using, ineligible for support" (red), and "All others" (green). The x-axis represents "Net bill change" from -£450 to £100.
Each option presents three horizontal ranges with a central dot, representing the range and weighted average bill change for each household type. A black dotted vertical line at £0 indicates no change.
Option 1: "Remove GBIS from both bills."
- "All others" (green): Range from approximately -£250 to -£150, with a weighted average at -£200.
- "Gas-using, eligible for support" (blue): Range from approximately -£120 to -£50, with a weighted average at -£85.
- "Gas-using, ineligible for support" (red): Range from approximately £20 to £30, with a weighted average at £5.
Option 2: "Remove GBIS from both bills and remove ECO from gas bills."
- "All others" (green): Range from approximately -£300 to -£200, with a weighted average at -£250.
- "Gas-using, eligible for support" (blue): Range from approximately -£130 to -£60, with a weighted average at -£95.
- "Gas-using, ineligible for support" (red): Range from approximately £30 to £20, with a weighted average at -£5.
Option 3: "Remove GBIS and ECO from both bills."
- "All others" (green): Range from approximately -£400 to -£250, with a weighted average at -£325.
- "Gas-using, eligible for support" (blue): Range from approximately -£200 to -£100, with a weighted average at -£150.
- "Gas-using, ineligible for support" (red): Range from approximately -£80 to £0, with a weighted average at -£40.
The caption states: "Points show the weighted average bill change for households with average energy use for all archetypes in group. Ranges show the archetypes with the highest and lowest bill changes for households with average energy use." The Nesta logo is in the bottom right corner.
