Removing policy costs from electricity bills, referred to as ‘rebalancing’, is the most effective way to reduce energy bills in the near term while supporting households to access the benefits of clean heating systems. As we build more sources of low-carbon British power, clean heating systems will provide households with more stable prices and reward them for using energy flexibly.
In this paper, Energy UK analyses the cost to HM Treasury of rebalancing policy costs on energy bills, and its economic and social benefits.
About this series
This is the first of Energy UK’s Clean Heat series of policy reports, which aim to show how the transition to clean heat can be delivered in a way that lowers bills for energy customers and boosts economic growth, jobs and skills across the country.
Other reports in the Clean Heat series will explore the themes of finance, regulation, jobs and skills, and consumer engagement and protections.
To discuss this series – or any of our analysis – in more detail, please email
press@energy-uk.org.uk or louise.shooter@energy-uk.org.uk.
Contents
Options for removing policy costs from electricity bills
Addressing the distributional impacts of full rebalancing
Delivering truly targeted energy bill support
Executive summary
Energy bills in the UK are too high. The effects are clear across society, holding back growth, and damaging living standards. ‘How to Cut Bills’, an Energy UK report published in March 2025, included detailed analysis of why bills are so high, and what is required to tackle the issue of energy affordability.[1]
One of the key areas that must be addressed to ensure fair energy prices, are policy costs. Successive Governments have opted to finance key infrastructure through energy bills rather than through general taxation. These policy costs pay for now-closed legacy schemes to incentivise renewables alongside ongoing schemes to improve housing energy efficiency. In addition to causing higher overall energy bills, most of these costs land on the electricity element of bills, which disincentivises electrification. This is particularly problematic for the transition to clean heat. It has also played a role in exacerbating fuel poverty; users of electric heating (which are predominantly old, inefficient storage heaters) are currently twice as likely to be in fuel poverty as users of gas heating.[2] There are multiple benefits to modern clean heating technologies, including higher energy efficiency, cleaner air in the home, and better energy security under a clean power system. However, the distribution of policy costs mean that electricity bills in the UK are disproportionately expensive, artificially inflating the cost of operating technologies, such as heat pumps and heat networks.
The Government is currently finalising the ‘Warm Homes Plan’, a strategy to improve energy efficiency and accelerate the decarbonisation of homes. This is supported by a manifesto commitment of £13.2 billion of funding this Parliament. While this is a significant figure, it is a much-needed investment in energy affordability, security, and decarbonisation, following the collapse of funding for similar schemes in the mid-2010s. The focus of the Warm Homes Plan, and the broader move to clean heat, must be to deliver the transition at lowest cost.
Implementing some form of policy cost rebalancing is critical to achieving this. Moving all or some policy costs to general taxation is the fairest approach, although this is likely to prove challenging in the current fiscal environment. Energy UK has expanded its analysis to evaluate the impact of moving the policy costs currently levied on electricity onto gas (‘full rebalancing’), while implementing targeted energy bill support. The effects of such a policy would be transformative for both the decarbonisation of homes and energy affordability.
New Energy UK analysis shows that over a 15-year timeframe, full rebalancing would ensure a typical household using an air source heat pump could save up to £7,000 versus a household using a gas boiler. It would also enable the Government to reduce the grant rate for heat pumps under the Boiler Upgrade Scheme to £3,200 by 2030, a level that may not be possible to achieve at all during the transition if rebalancing is not pursued.
A full rebalancing scenario would entail distributional consequences for some households, which would have to be addressed. Targeted energy bill support of between £650 million and £750 million per year would ensure no low- to middle-income households are left worse off. In fact, many would be significantly better off. This figure would likely decrease to less than £300 million by 2030.
Despite this cost, the overall package of measures would be fiscally positive. Even including targeted energy bill support, full rebalancing would enable the Treasury to spend £40 billion less on the transition to clean heat by 2040 compared to a situation where policy costs are not removed from electricity bills. In addition to significant Government savings over the next 15 years, a full rebalancing scenario would significantly accelerate the adoption of heat pumps in the near term. It could enable an extra 300,000 heat pumps installations per year in 2030.
The transition to clean heat offers huge benefits to society, underpinned by an increasingly clean, secure, and lower-cost electricity system. Achieving the goals of warmer homes and lower energy bills will rely on our ability to remove unnecessary and unfair barriers to the uptake of clean heat technologies. Rebalancing policy costs is crucial to lowering bills for households, phasing down fiscal support for clean heating, and accelerating the pathway to warmer homes across the country.
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[1] Energy UK (2025), How to Cut Bills
[2] DESNZ (2025), Annual Fuel Poverty Statistics report 2025
Options for removing policy costs from electricity bills
The key principle underpinning any form of ‘rebalancing’ (removing policy costs from electricity bills) must be that low- and middle-income households on gas heating systems do not face higher bills as a result. Protecting these customers from any negative financial impacts from rebalancing, while incentivising households to make the move from fossil heating systems to clean alternatives is a crucial part of any approach.
- Recoup all energy policy costs through general taxation
Paying for policy costs via energy bills is regressive because they need to be paid by all users of the system regardless of how much energy they consume. Therefore, this approach penalises low-income households with high energy usage. Moving all policy costs to general taxation would be the fairest solution. However, it would cost the Treasury around £6.5 billion per year, which is likely to prove challenging in the current fiscal environment.[1] It would also not provide as strong an incentive to transition to modern electric heating systems as other rebalancing approaches because the electricity to gas price ratio would only fall from 3.9:1 to 3.3:1.
- Recoup some policy costs through general taxation
Recognising these fiscal constraints, the Government could choose to recoup some policy costs through generation taxation. This would be an effective way to reduce electricity bills in the short-term, while incentivising clean heat. In Mission Possible, Energy UK called for the Government to move the policy costs for Energy Company Obligation (ECO) and Great British Insulation Scheme (GBIS) into general taxation at a cost of £1.5 billion per year.[2] The remaining policy costs would be moved from electricity bills to gas.
The result would be a ratio of electricity to gas prices of less than 3:1, ensuring clean heat technologies are cheaper to run than fossil fuel alternatives. Funding ECO and GBIS through taxation would more than offset the impact on energy bills of the Government’s proposed expansion of Warm Home Discount (WHD) to all households receiving means-tested benefits.[3]
Taken together, an expanded WHD and policy cost rebalancing would support households and reduce bills. A typical household with electric heating could save up to £400 per year, or up to £550 for those eligible for WHD. Such an approach would result in a small increase in bills for some households that use gas for heating. Implemented correctly, however, no low-income household would be worse off including those who continue to use gas for heating.
- Rebalance all policy costs from electricity to gas bills, accompanied by targeted support
Starting from the same principle that no low- to middle-income household is worse off after rebalancing, Energy UK has expanded its analysis to understand the impact of moving the policy costs currently levied on electricity onto gas (‘full rebalancing’), while implementing targeted energy bill support. Full rebalancing would have negative distributional consequences for some households that use gas for heating. Targeted support to offset these distributional consequences for low- to middle-income households will be critical.
This produces the same result for electric heating, with total energy costs declining by up to £400 per year. However, Energy UK analysis shows that a typical household with a gas boiler would see their energy bills rise by around £40 rather than dip slightly if some policy costs are moved to taxation.
Figure 1: Annual energy bills for a typical household with a gas boiler, heat pump or other electric heating under the status quo and different rebalancing scenarios.
Moving all policy costs currently levied on electricity bills onto gas bills would provide a very strong incentive to adopt low-carbon electric heating technologies, as the electricity to gas price ratio would fall to around 2.5.
Figure 2 shows the lifetime costs of different heating systems under the status quo and a full rebalancing scenario. With full rebalancing, over a 15-year timeframe a typical household using an air source heat pump would spend around £15,500 (accounting for the saving from disconnecting from the gas network and thus avoiding the standing charge) versus more than £20,000 for households using a gas boiler.
Households that can heat their homes using a flexible time-of-use tariff would be able to achieve even larger bill reductions of around £7,000 over 15 years.[4] Installing complimentary low-carbon technologies, such as solar panels and batteries, would secure greater savings still, whilst providing additional power directly to homes further strengthening their own energy security.
Figure 2: Lifetime cost comparison of an air source heat pump and a gas combi boiler under the status quo and full rebalancing scenarios for a typical household.
While this analysis compares the costs of an air source heat pump relative to a gas boiler, rebalancing would also improve the affordability of ground source heat pumps, air-to-air heat pumps, and heat batteries. Energy UK has also proposed solutions for Government to lower the cost of electricity for non-domestic energy users, as this will help to reduce the cost of heat for households connected to low-carbon heat networks as well as business customers, ultimately driving growth and productivity by supporting investment in electrification, and lowering the costs of British made products.[8]
Although full rebalancing would create a strong incentive to adopt low carbon electric heating technologies, low- and middle-income households would struggle to afford the upfront cost, even accounting for the Boiler Upgrade Scheme (BUS) grants.[9] Therefore, if the Government were to adopt this policy, it should simultaneously introduce targeted energy bill support to remove the distributional impact on low- to middle-income customers.
Analysis by Energy UK shows that the Government would need to spend between £650 million and £750 million per year on targeted energy bill support to ensure 13 million dual fuel households on low- and middle-incomes using gas for heating would experience no overall change in their energy bills following full rebalancing.[10],[11] Due to the decline of legacy policy costs from 2027 onwards,[12] this could fall to less than £300 million by 2030.
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[1] Energy UK (2025), How to Cut Bills
[2] Energy UK (2024), Mission Possible
[3] DESNZ (2025), Expanding the Warm Home Discount Scheme, 2025 to 2026: consultation document
[4] Cornwall Insight (2024), Domestic heat pump flexibility modelling
[5] GOV.UK (2025), Apply for the Boiler Upgrade Scheme: What you can get
[6] DESNZ (2025), Boiler Upgrade Scheme statistics: April 2025
[7] BOXT (2025), Boiler Efficiency Ratings: Everything You Need to Know
[8] Energy UK (2025), Reducing non-domestic electricity prices to drive economic growth
[9] GOV.UK (2025) Apply for the Boiler Upgrade Scheme
[10] Data sources: Energy UK analysis of Ofgem energy consumer archetypes (2024) and Ofgem Annex 4 Policy cost allowance methodology V1.20
[11] Low and middle-income households are assumed to have an annual household income of up to £55,200:
ONS (2025), Average household income, UK: Financial Year Ending 2024
[12] NESO estimates that legacy policy costs on electricity will have reduced by £10/MWh in 2030:
Addressing the distributional impacts of full rebalancing
Energy UK analysis based on Ofgem customer archetypes shows that shifting all policy costs from electricity bills onto gas would lower energy bills by an average of £290 for 4.5 million households, of which 4.2 million are low- to middle-income.[1] Combined with the proposed targeted energy bill support, 13 million low to middle-income households would experience no overall change in their bills. 9.5 million high-income households would see their energy bills increase by an average of £65.
Figure 3 illustrates how rebalancing will affect a range of households, and support available to them where rebalancing is implemented as part of a comprehensive Warm Homes Plan:
- Customer archetype A1 represents a lowest income household that will require targeted bill support under full rebalancing as a result of high gas usage. They are eligible for fully funded measures under the Energy Company Obligation (ECO). Therefore, they could have a heat pump or other clean heat technology installed and benefit from the lower bills.
- Customer archetype B4 represents a low-income household that currently uses an old, inefficient electric heating system, whose bills would drop by hundreds of pounds. These households are twice as likely to be in fuel poverty as those using gas for heating, so would benefit greatly from rebalancing.[2] Fuel poverty schemes should be designed to help these customers replace old systems, such as night storage heaters, with more modern, efficient clean heating systems that will be cheaper to run.
- Customer archetype E14 represents a middle-income household with children and high energy usage. These households would benefit from support under BUS in combination with a government-backed low-interest loan to enable them to afford a clean heat installation and cut their bills.
- Customer archetype J23 represents a high-income household with above average consumption due to having a large family, which would see its bills rise as a result of full rebalancing. They could reduce their bills considerably by taking advantage of BUS to install a heat pump or other modern clean heating system.
As the number of households adopting clean heat increases, the number of customers paying policy costs on gas bills will decline. This means that each household on gas will need to pay proportionally more towards the policy costs. However, the decline of legacy policy costs, including Renewables Obligation (RO), from 2027 onwards will more than offset this effect.[3] Energy UK analysis shows that targeted energy bill support to offset the distributional impact of full rebalancing could fall to less than £300 million by 2030. Furthermore, supporting low- and middle-income homes to switch to clean heat under Warm Homes Plan schemes, such as ECO and Warm Homes: Social Housing Fund, could enable the gradual withdrawal of targeted bill support that covers the increase in policy costs on gas bills.
Figure 3: The impact of full rebalancing on a range of energy customers in a scenario where:
- all policy costs are shifted from electricity to gas bills, and
- targeted bill support means low- and middle-income households (earning up to £55,200) on gas heating experience no overall change
| Customer profile[4] | Annual energy usage (kWh) | Annual energy bill | With full rebalancing (Pre-targeted support) | Impact with full rebalancing post-targeted support | ||
| A1 (578,333 households) – Lowest-income household – On a Standard Variable Tariff | Electricity | 2,742 | £1,821 | £1,885 | £1,821 No change | Household would receive £64 targeted support to keep its energy bill unchanged. This household would likely be eligible for a clean heat upgrade through fuel poverty schemes e.g. ECO, and Warm Homes: Social Housing Fund. |
| Gas | 10,933 | |||||
| B4 (731,318 households) – Low-income household – Electricity usage only and electric heating (E7 meter) – Electricity consumption above average – On a Standard Variable Tariff | Electricity | 4,811 | £1,425 | £1,170 | £1,170 Cheaper by £255/year | Household would benefit from £255 annual energy bill saving. Household could be supported under ECO or Warm Homes: Social Housing Fund to replace its old, inefficient electric heating with a modern, efficient clean heating system. |
| E14 (1,178,684 households) – Middle-income household – Families with 2+ children – On a Standard Variable Tariff | Electricity | 4,070 | £2,437 | £2,501 | £2,437 No change | Household would receive £64 targeted support to keep its energy bill unchanged. This household could also access BUS in combination with a government-backed low-interest loan to install a clean heating system and cut its bills. |
| Gas | 14,606 | |||||
| J23 (1,956,103 households) – High-income household – Owner-occupier – Families with 2+ children – Consumption above average – On a Fixed Term Contract | Electricity | 4,532 | £1,912 | £1,984 | £1,984 Increase of £72/year | Household would incur an energy bill annual increase of £72. Household could take advantage of BUS to install a clean heating system and cut its bills. |
| Gas | 16,330 | |||||
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[1] Ofgem (2024), Consumer archetype
[2] Department for Energy Security and Net Zero (2025), Annual fuel poverty statistics in England
[3] NESO estimates that legacy policy costs on electricity will have reduced by £10/MWh in 2030:
[4] Standard Variable Tariff (SVT) data uses Ofgem Price Cap Q2 2025. Ofgem (2025), Energy price cap
Delivering truly targeted energy bill support
The current support mechanisms for helping struggling households with the cost of energy are inadequate. The Warm Home Discount (WHD) offers a £150 energy bill rebate, only £10 higher than when the scheme was introduced in 2011 and far lower than the average fuel poverty gap of more than £400.[1],[2] The proposed expansion of WHD will see the number of customers benefitting from the scheme rise from just over 3 million customers to around 6 million.[3] This is a positive development but the use of means-tested benefits to determine eligibility is a blunt tool that means many low-income households with high energy usage will miss out on the support they need.
As we saw during the recent gas price crisis, the ability to effectively target financial support is crucial. Between October 2022 and July 2023, with Energy Price Guarantee (EPG) and Energy Bills Support Scheme (EBSS), the Government spent £12 billion supporting households with s above £55,200, while it only spent £6 billion supporting households with gross incomes below £30,000.[4] Better targeting not only ensures that those who need support receive sufficient help with their bills, it also reduces unnecessary public spending in supporting affluent households.
In Mission Possible, Energy UK called for a long-term approach to developing a targeted support scheme that efficiently and effectively delivers aid to those who need it.[5] Responding to this recommendation, the Minister for Energy Consumers is chairing a Data Sharing Working Group, led by the Department for Energy Security and Net Zero (DESNZ), that convenes the energy industry and other key stakeholders with the aim of improving support for winter 2025/26 alongside developing a long-term aid mechanism. This mechanism would be a targeted support scheme that leverages household income, energy usage, and health data to deliver sufficient support to all households that are in need. The policy cost rebate required for low- to middle-income households under the full rebalancing scenario should align with the output of this Working Group. The most efficient way to do this would be to create a single mechanism that holistically addresses energy bill affordability.
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[1] DESNZ (2024), Warm Home Discount statistics, 2023 to 2024
[2] DESNZ (2025), Annual fuel poverty statistics report: 2025
[3] DESNZ (2025), Expanding the Warm Home Discount Scheme, 2025 to 2026: consultation document
[4] Data sources: OBR (2023), Ofgem energy consumer archetypes (2024), Ofgem – Annex 9 (2025)
[5] Energy UK (2024), Mission Possible
Unlocking the Warm Homes Plan
Regardless of whether some policy costs are moved into taxation or full rebalancing with targeted support is applied, the policy should be implemented as soon as possible. Rebalancing is integral to achieving the objectives of the Warm Homes Plan because lower electricity prices will have a considerable positive impact on consumer uptake of clean heating systems and low-carbon technologies.[1] Additionally, if the Government wants to deliver significant energy bill reductions this Parliament it will need to implement this policy no later than April 2027.
The Warm Homes Plan should help all types of households to move away from expensive fossil fuel heating systems, which undermine the UK’s energy security, and transition to clean alternatives. While clean heat already delivers lower energy bills for many households, rebalancing is critical for ensuring that all households that adopt clean heating systems benefit from lower bills.
The Warm Homes Plan should include the continuation of ECO beyond 2026, with a long-term, flexible scheme that focuses more on the installation of clean heat.
Full rebalancing with targeted energy bill support would cost the Treasury £650 million to £750 million per year, and could fall quickly due to the decline in RO costs. If implemented at the start of the 2027/28 fiscal year, it would cost no more than £1.3 billion to £1.5 billion during this Parliament. Alternatively, moving ECO and GBIS into taxation would cost around £3 billion in the Parliament. Either of these options would still leave sufficient capital to significantly increase the scale of existing schemes and introduce a low-cost green home loans scheme within the £13.2 billion manifesto pledge for the Warm Homes Plan. Therefore, the Government should use some of the Warm Homes Plan budget to deliver the rebalancing that is the key catalyst for the success of the entire strategy.
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[1] Octopus Energy (2025), Written evidence submitted by Octopus Energy
Creating a subsidy-free clean heat market
Rebalancing provides the Government with an ‘off ramp’ from grants without the clean heat market facing a cliff-edge in demand. BUS offers households up to £7,500 towards a heat pump.[1] The scheme’s budget was £205 million for 2024/25, it will be £295 million for 2025/26, and is expected to rise to £720 million in 2027/28.[2]
Rebalancing will drive growth in the clean heat sector, and as the market benefits from economies of scale, the upfront cost of installations will likely come down. Taken together with a reduction in running costs, this will create headroom in the overall lifetime cost of the technology to enable the BUS grant rate to be tapered down. We assume that BUS will be extended beyond 2028, and that there is a well-functioning low-interest green home loans market, enabling customers to spread the non-grant cost of clean heat installations over several years, supporting more middle-income households to adopt them. We will cover how to develop a thriving green home finance market in the next paper in our clean heat series.
Energy UK analysis shows that full rebalancing would enable the grant rate for air source heat pumps under BUS to be reduced to £3,200 in 2030, while still supporting a 10% lower lifetime cost compared to a gas boiler (not including potential smart tariff savings), and even further later in the decade.
Figure 4 shows the impact of rebalancing on the cost of BUS in 2030 under different heat pump forecast scenarios. The saving to the Treasury is greater than the expected annual targeted energy bill support of less than £300 million in 2030, assuming the same number of heat pumps are sold.
However, following rebalancing, the adoption of heat pumps would likely accelerate significantly. Assuming the rate increased from NESO’s Future Energy Scenarios counterfactual of 178,000 heat pumps being installed in 2030 to the Climate Change Committee’s (CCC) Carbon Budget 7 estimate of 480,000 units adopted, we estimate the total BUS budget would only be £185 million higher, despite supporting over 300,000 more installations per year.[3], [4]
Figure 4: Cost of the Boiler Upgrade Scheme in 2030 under the status quo and in a rebalancing scenario.
By 2040, more than half of existing homes in the UK will be heated using a heat pump, following the CCC’s Balanced Pathway.[5] To get there without rebalancing policy costs would require maintaining the BUS on air source heat pumps at a level of £7,500 for much longer than in a rebalanced scenario. Energy UK analysis estimates that, even including targeted energy bill support, full rebalancing would enable the Treasury to spend £40 billion less on the transition to clean heat by 2040 compared to a situation where policy costs are not removed from electricity bills.
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[1] Apply for the Boiler Upgrade Scheme: What you can get – GOV.UK
[2] Department for Energy Security and Net Zero, 2025, Proposed amendments to the Boiler Upgrade Scheme regulations
[3] NESO (2024), Future Energy Scenarios
[4] Climate Change Committee (2025), The Seventh Carbon Budget
[5] Climate Change Committee (2025), The Seventh Carbon Budget
Conclusion
Reducing the cost of electricity will lower energy bills this Parliament while underpinning the objectives of the Warm Homes Plan. The optimal approach is to ‘rebalance’ energy bills, by moving policy costs off electricity bills where they are predominantly placed at present. Energy UK’s principle during this analysis has been to ensure that no low- or middle-income household is worse off.
The most progressive approach is to move some policy costs into general taxation. If policy costs are instead fully retained on energy bills, and shifted from electricity to gas, Energy UK analysis shows that the Government would need to spend £650 million to £750 million per year on targeted energy bill support to protect low- to middle-income households on gas before they are able to switch onto clean alternatives.
Increasing the volume of clean heat installations in this Parliament is the best way to tackle fuel poverty, reinforce the UK’s energy security, and grow domestic manufacturing and installer job opportunities across the country.
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