More than 120 organisations are calling on the government to cut the taxes and policy costs loaded onto electricity bills. Coordinated by Energy UK and E3G, the intervention comes as electricity costs remain around 70% higher than in 2021, squeezing household budgets and holding back business investment.
In this article, we’ll look at ways the government can get energy bills down. We’ll also explore another issue: how electricity compares with gas. Electricity carries a disproportionate share of policy costs, making electrification less attractive at the same time as the UK wants households and businesses to switch away from fossil fuels like gas. Could the key to lower bills lie in this paradox?
Why are electricity bills so high?
UK electricity prices remain high by international standards. Energy UK argues that while wholesale markets are largely beyond the government’s control, it can directly influence the taxes and policy costs added to electricity bills. The organisations behind the campaign want several charges moved away from electricity bills and funded through general government spending instead. These include:
- Renewables Obligation
- Feed-in Tariff
- Warm Home Discount
- Nuclear levy
Energy UK says removing these costs could cut electricity prices for most non-domestic users by more than 20%. Households could save around £100 a year, while electrically heated homes could see significantly larger reductions.
While these reductions could provide meaningful relief at a time when energy costs remain under pressure, these programmes still need funding. Moving the charges into the Exchequer would change where the money comes from rather than remove the cost altogether. The argument is that electricity bills may no longer be the right place to collect it. If high electricity prices are already holding back households and businesses, continuing to load policy costs onto bills risks making the problem worse.
The electricity vs gas dilemma
The way policy costs are currently applied makes electricity relatively expensive compared with gas. Because the UK is trying to encourage households and businesses to use more electricity as they move away from fossil fuels, this makes little sense.
Take heat pumps, for example. People like them because after an initial outlay, they’re cheaper to run than gas boilers. The same is true with electric vehicles. For consumers and businesses considering whether to switch to heat pumps or EVs, the financial incentive is weaker because electricity carries such a large share of policy costs. It’s harder to justify.
Energy UK argues that lowering electricity prices would make electrification more attractive for heating, transport and industry. In addition, the electricity system carries substantial fixed costs, which still have to be recovered whether demand is high or low. If more homes and businesses use electricity, those fixed costs can be spread across greater consumption. Energy UK describes this as a potential virtuous cycle: lower electricity prices encourage more electrification, while higher demand helps reduce the cost burden across the system.
Where to redistribute the costs
Moving policy costs off electricity bills would not make them disappear. Energy UK estimates that around £10 billion a year would need to move onto government finances instead, funded through taxation or wider public spending. The question is whether collecting that money through electricity bills still makes economic sense.
Energy UK and its supporters also point out inequalities in the current approach:
- Lower-income households spend around three times as much of their income on electricity levies as wealthier households.
- Bringing UK electricity prices closer to the G7 median could support an additional £250 billion of economic output over the next decade.
Ultimately, somebody still has to pay for these programmes. The choice is where to collect the money. If putting policy costs on electricity contributes to higher bills and discourages investment, shifting them elsewhere could reduce the wider economic damage.
Looking ahead
High energy bills remain a serious problem, and any way we could get them down would be welcome. The question, largely unexplored until now, is whether the structure of bills makes a difference. We’re told about the benefits of moving away from fossil fuels, yet electricity, which could be generated by renewables, currently carries a disproportionate burden of policy costs compared with gas.
Rebalancing that relationship could help make electricity more affordable today while improving the financial case to go electric in the years ahead. If the UK wants more people to choose electric for their home heating and next car, its pricing system needs to support that transition.