Chancellor John Healey’s first Budget accepts that policy costs belong off electricity bills and that the electricity market needs deep reform. That gives the government a platform to cut bills for good, deliver a clean power system and boost growth.
UK household energy bills could increase by as much as a quarter, or by £470 a year, in January 2027 due to the closure of the Strait of Hormuz and the resulting surge in global gas prices. This will hurt for households who are already struggling with a cost-of-living crisis. It is also a stark reminder of the UK’s continued dependence on international gas markets and the urgent need to move to a cleaner more-resilient energy system.
The Chancellor’s response has been to provide a £100 payment to 20 million households. While this support will offer some short-term relief, it is a one-off measure that does little to reduce long-term dependence on gas or encourage the switch from gas boilers to heat pumps. Reliance on gas means the UK will remain vulnerable to economic shocks and military threats.
Reform of electricity pricing is needed in the UK to move away from volatile fossil fuels
But the Chancellor did offer some hope, setting out a clear goal: “to get UK energy costs down in line with Europe”, and he recognised that this would take “deep reform” of our energy system.
The Budget makes a start. A new Cost Control Framework will govern what can be charged to energy bills, and no new policy costs will be added until it is in place. The government are offering fixed-price contracts to legacy renewables to lower their windfall profits – though to get a good price for consumers, the government needs to increase the windfall tax on these generators. VAT stays off household electricity until July 2027, the gas standard charge will be abolished, and, as previously announced, 10,000 industrial energy users can apply for energy bill discounts worth a quarter of their current costs.
This falls far short of a package which will get UK electricity costs in line with Europe’s. We recently outlined how the UK could lower its electricity prices by 20% by 2030. The government now needs to release a similar strategy as to how it will achieve this aim.
To accelerate the UK’s transition legacy electricity taxes should be moved into general taxation
The measures announced at the budget accept a principle that E3G, industry and energy experts have long argued for: the cost of public policy should be met by the taxpayer, not loaded onto electricity bills, where it falls hardest on lower-income households and inflates the cost of clean electricity. Before the budget, more than 120 businesses and civil society organisations called for the remaining levies on electricity to be moved into general taxation. This would save households around £100 a year and cut business electricity prices by up to 20% in every postcode.
Last year’s Budget moved 75% of Renewables Obligation costs off household bills. This year the government has stopped new levies being added to energy bills. The next step at the 2027 Spending Review is to move all the remaining levies off all electricity bills.
Affordable heat pumps are integral to a resilient UK electricity system
Cheaper electricity only pays off if people can use more of it. To do that it is essential that households can overcome the upfront costs of buying heat pumps. In this respect, the Budget takes steps backwards.
To help fund the Defence Investment Plan, the Department for Energy Security and Net Zero has cut £2.5bn from the Warm Homes Plan, cutting funding from the heat pump budget by £1bn and cutting £1.5bn of funding to support green loans intended for social housing, innovative businesses and community energy.
These cuts weaken national and economic security. Electric energy systems with rooftop solar, domestic batteries, and electric heating are more difficult for hostile actors to attack compared to gas pipelines and terminals. Every home that moves from a gas boiler to a heat pump reduces the UK economy’s exposure to volatile international gas markets, the source of the price shocks households have faced since 2021 and which have cost the UK £183 billion.
Three priorities for the 2027 Spending Review
System reform committed to at this budget is a platform to make electricity more affordable, and over the next year the government should take the next steps:
- Use the Cost Control Framework to move all remaining policy costs off electricity bills.
- Maximise take up of fair-priced fixed-price contracts for older renewables projects, by increasing the Electricity Generators Levy and by weakening the link between gas and electricity prices,
- Boost funding for local government to help households install heat pumps.
The Chancellor was right to make affordability the north star for energy policy and right to point out that clean power is the way to get there. Over the next year and at the 2027 Spending Review the UK government must deliver the radical changes to the electricity system to ensure all households at last fully benefit from cheaper renewable power in their bills.
