A fairer electricity pricing system is two birds, one stone for the government
By Dr Garry Felgate, CEO, The MCS Foundation.
Moving social and environmental levies from electricity bills into general taxation would cut costs, reduce fuel poverty and make heat pumps more affordable, outlines Dr Garry Felgate, CEO of The MCS Foundation – helping the government tackle the cost of living and speed the clean energy transition.
In last Autumn’s Budget, the Chancellor took a significant step towards tackling fuel poverty and increasing the incentive to transition to heat pumps. By moving some environmental and social levies off electricity bills and into general taxation, the government took action to cut energy bills by £150 a year.
However just six months on and the energy price cap is set to increase once again, with household bills set to rise by £200 from July. More must be done to both help households struggling with the cost of living and to get off the rollercoaster of fossil fuel dependency that has driven this crisis.
The government is clearly committed to accelerating the rollout of renewables. The £15bn Warm Homes Plan and the Future Homes Standard, which will require the majority of new homes to have solar panels and heat pumps, are welcome and will help cut costs for millions of households. But these policies will take time to take effect. People are struggling now.
That is why the government should extend the action it started last autumn and move all social and environmental levies off electricity bills and into general taxation permanently.
These levies are driving up costs for businesses and households alike. Roughly 9 per cent of a household’s electricity bill is made up of social and environmental levies, with the most vulnerable being hit the hardest. People who rely on electric heating, such as electric radiators, are more than twice as likely to be in fuel poverty than households who can afford central heating and pay a much higher proportion of their income on levies than dual fuel households. In fact, MCS Foundation research shows that some low-income households spend more on levies than on fresh vegetables.
It’s important to make the case that the money raised by levies funds essential programmes that support those at risk of fuel poverty and are used to invest in critical renewable energy infrastructure. But the way funds are collected is regressive. There is a fairer way to fund these levies – through general taxation.
Moving levies into general taxation could save the average household around £120 on their energy bills – and would be a move away from a regressive system to a more progressive one.1
Moving levies into general taxation wouldn’t just help the government cut energy costs for households, it would also accelerate another of its key priorities: accelerating the move to homegrown energy. Heat pumps can be four times as efficient as gas boilers, and because they run on electricity, are critical for shifting households away from fossil fuel heating. However, the high cost of electricity – currently almost four times as much as gas – means UK households are less incentivised to install low-carbon heating systems like heat pumps, meaning the government is at risk of not meetings it target of installing 450,000 heat pumps a year by 2030. Moving levies off electricity would cut the “spark gap” – the ratio between electricity and gas prices – and unlock greater financial incentives for households to switch to efficient, electric heat pumps.
Ultimately, moving levies will cut costs for households, benefit the most vulnerable and help more households transition to renewable technologies. The Chancellor has already opened the door to this reform. To make immediate and lasting change, it’s time to go the whole way.
Reference
- MCS Foundation; Coalition of businesses, charities and think tanks call for levies to be moved off electricity. https://mcsfoundation.org.uk/news/actions-uk-could-be-taking-to-reduce-energy-bills-media-briefing/
This article was originally published in The Path To Net Zero supplement circulated alongside The House magazine. To find out more visit The Path To Net Zero hub.
