Clean power vs. cheap power: Can the UK have both? 

By Tom Gosschalk – Senior Account Director

When Labour took office last year one of its most eye-catching offers to voters was to reduce household energy bills by £300 by 2030. Despite criticism from political opponents and scepticism from the industry, the Energy Secretary, Ed Miliband, has doubled down on his pledge, arguing that the transition to clean, homegrown energy is the best way to reduce bills for the long term. 

But with the polls starting to nip at Labour’s heels, Labour has pulled other levers to help bring down bills in the short-term. In the Autumn Budget Rachel Reeves set out a package to save £150 on the average household bill, giving the government a chance of meeting its £300 target.  

Pre-budget speculation suggested the Chancellor was looking at scrapping the 5% VAT on energy bills and we knew the Department for Energy Security & Net Zero (DESNZ) was reviewing the different policy costs that fund green and social schemes, which make up around 16% of electricity bills and 6% of gas bills. We now know that the Energy Company Obligation (ECO) scheme will be scrapped, and 75% of the domestic costs of the Renewables Obligation scheme will be moved from energy bills and into general taxation.  

Moving these policy costs into general taxation is a proposal long recommended by the Climate Change Committee and a move that Energy UK modelled would reduce the average energy bill for households with a gas boiler by around £220. 

This week’s announcement will undoubtedly give the government some headroom in the short-term, and silence political opponents who’ve criticised them for not making headway in this area. However, the impact could be short lived, and is likely to be met with the sobering reality that in order to achieve DESNZ’s other flagship policy, clean power by 2030, the cost of upgrading the grid and the renewables projects awarded contracts in the next Contracts for Difference allocation could keep bills inflated.  

This reality came to a head at a recent Energy Security and Net Zero Select Committee session with the ‘big six’ energy suppliers. The key takeaway from the session: even if wholesale prices halve, or are near zero, energy bills would be 20 per cent higher or the same level they are today, respectively due to increased spending on policy costs and network investment. Rachel Fletcher, director of regulation at Octopus Energy told the Committee that: ‘non-commodity costs are adding about £300′ to energy bills each year.  

This tension highlights a critical issue – policy and network costs. The levies fund essential programmes such as Contracts for Difference, but they do make electricity disproportionately expensive compared to gas. As the UK shifts towards electrification for heat and transport, these unbalanced costs hinder the UK’s progress towards net zero.  

Knowing the impact that rebalancing these costs could have, DESNZ is further reviewing how these costs are structured, and yesterday the government confirmed that it is committed to doing more to reduce electricity costs for all households and improve the price of electricity relative to gas. More information on how the government will do this is expected to be published in the long anticipated Warm Homes Plan. Earlier this year reports suggested that the publication of the Warm Homes Plan was delayed due to the main area of contention between DESNZ and HMT being the rebalancing of these policy costs. 

The path to cheaper energy bills is anything but straightforward, and Government will be carefully assessing the best way to meet the seemingly contradictory manifesto commitments of clean power by 2030, reducing energy bills by £300 and maintaining fiscal responsibility.