E3G together with sixteen organisations, including Nationwide and energy giant EDF, have written to the UK Treasury calling on them to remove levies from a proportion of the energy bill for electrically heated homes.
The letter advocates for a targeted discount for consumers using electric heating, with revenue foregone paid for by the Treasury. This will make heat pumps more desirable and affordable, while supporting the significant number of fuel-poor homes currently using expensive direct electric heating. Using general taxation to pay for the policy is the most progressive option to cover the costs.
Electricity prices are higher than gas, due in part to the imbalance of social and environmental levies which are loaded disproportionately onto electricity bills. Per unit of energy consumed, levy costs are almost eight times more expensive for electricity than gas. Providing a ‘clean heat discount’ for electric heating users could help ensure households switching to a heat pump are able to feel the economic benefit of lower bills. Denmark already uses a similar dual tax rate for electric heating and has experienced a surge in heat pump installations.
Exempting electrically heated homes from paying an amount equivalent to 3.5 MWh (equivalent to the Renewables Obligation, Feed in Tariff, Energy Company Obligation and Great British Insulation Scheme levies) would save consumers on average £130 a year if implemented in 2024/25. Direct electric heating systems are used by a disproportionately high number of fuel poor homes. Therefore, making the exemption applicable to electric heating will deliver significant co-benefits for fuel poverty. The savings equate to 15% of heat pump and 5% of direct electric running costs. Maximum uptake of the scheme would amount to £390 million a year for all electric heating, or £90 million a year for heat pumps and £300 million for direct electric.
James Dyson, Senior Researcher at E3G, said:
“Per unit of energy used, electricity is currently loaded with almost 9 times as many levy costs compared to gas – which distorts the price of running a heat pump, despite this clean tech being many times more efficient than a gas boiler. To ensure everyone gets a fair deal as we transition towards clean heating, we need to modernise electricity pricing, and ultimately make it cheaper. Our proposal would save electrically heated homes £130 a year, making heat pumps as affordable to run as a gas boiler, while supporting a significant number of fuel-poor homes that use direct electric heating.”
