With the Government’s Warm Homes Plan soon to be published, Energy UK has set out why cutting the cost of electricity is crucial to its success and how this can be done without making low-to-middle income customers worse off – and within the funding already pledged to the Plan.
A major barrier to supporting the take-up of clean heating alternatives, like heat pumps and other options that use electricity, are the policy costs that are currently and predominantly levied on electricity, making it artificially expensive in comparison with gas. These policy costs support programmes to improve energy efficiency in homes like the Energy Company Obligation, financial help for low-income customers through the Warm Home Discount, and investment in domestic renewable generation.
Moving these policy costs off electricity would be transformative – by making clean technologies far cheaper to operate and encouraging widespread adoption while also helping those existing users of electric heating who are currently twice as likely to be in fuel poverty than customers with gas boilers.
In today’s report – “Clean Heat: Balancing the Bill”, Energy UK has analysed the options for doing so while protecting the interests of low and middle income households. Although moving all or some policy costs to general taxation would be the fairest approach, this is likely to prove challenging in the current fiscal environment. Given these constraints, Energy UK has evaluated the impact of moving all policy costs currently levied on electricity onto gas (full rebalancing), while implementing targeted energy bill support.
A full rebalancing scenario would enable households with electric heating to save up to £400 per year on their energy bills. This would also result in a bill increase of around £40 a year for a typical household using a boiler – so targeted support would be required to ensure low and middle income customers would be no worse off as a result.
Energy UK estimates that the necessary support for the affected 13 million households would cost £650-£750 million a year and could be funded from the money already pledged for the Warm Homes Plan in the Government’s manifesto. This would still allow the Government to expand existing schemes under the Plan – in addition to new support with the upfront costs of switching to clean heating alternatives.
Reducing the cost of electricity in this way would mean a heat pump customer could save up to £7,000 over a 15-year period compared to a household using a gas boiler, accelerating the take-up of heat pumps by as much as 300,000 a year and enabling the Government to reduce the grant support for new purchases through the Boiler Upgrade Scheme much earlier than planned.
Additionally, as some legacy policy costs fall away,the amount of targeted support required for low and middle income gas customers would also reduce to less than £300 million by 2030. This support should be included in ongoing plans to tackle energy bill affordability with wider, long-term targeted support as set out in Energy UK’s recent paper – How to cut bills: A crisis we can’t afford to ignore.
This proposal is fiscally positive – full rebalancing would ensure that the transition to clean heat would be £40 billion cheaper by 2040 compared to a situation in which policy costs are not removed from bills.
This is the first of a series of papers on Clean Heat that Energy UK will publish over the summer with the next one looking at financing options for those buying heat pumps and other clean heating technologies.
Adam Berman, Energy UK’s Director of Policy & Advocacy said:
“Warmer homes and lower energy bills are not mutually exclusive. Helping customers switch to clean heating alternatives will reduce the UK’s dependence on volatile gas markets, improve air quality in homes across the country and support energy affordability.
“The major barrier to achieving these goals are policy costs, which make electricity artificially expensive. Rebalancing policy costs will ensure every household that wants to can make the switch to cleaner, cheaper heating alternatives.
“It’s vital that we do this in a way that doesn’t penalise low and middle income customers and that’s the overriding principle behind our analysis. This can all be achieved within the £13.2 billion funding pledged towards the Warm Homes Plan – while still meeting the Government’s aspirations. Rebalancing is the only way to ensure the Warm Homes Plan – and the broader move to clean heat – can be delivered at the lowest cost.”
“This will enable the transition to clean heat to delivered more cheaply, making it far more attractive for millions of customers and enabling them to benefit from the potential savings earlier – while also cutting the funding needed over the long-term through grant schemes to support new purchases.”
Notes to editors
- Energy UK is the trade association for the energy industry, representing companies investing billions of pounds to secure our country’s current and future energy needs. From growing start-ups to major electricity generators, grid and infrastructure developers and energy suppliers, our members are driving change across power, heat, transport and flexibility. We provide a collective voice for the sector working with governments, regulators, charities and other organisations to provide crucial insight that shapes policy, offers solutions and promotes best practice. Our broad view across the whole system supports evidence-based positions which are not tied to particular technologies, and are focused on delivering strategic benefits for people, businesses and the economy. We champion initiatives such as our Vulnerability Commitment, which pushes suppliers to go beyond regulation to support customers with additional needs, and TIDE, the industry’s drive for greater inclusion and diversity. Through our Young Energy Professionals Forum, we support the development of future leaders. We are equally committed to our team and are proud to be recognised as a ‘Gold’ Investors in People employer.