Reducing heat pump running costs is crucial to make clean heat affordable, desirable and accessible for all UK households. A targeted exemption on levies for electric heating would reduce bills for an electrically heated household by £130 a year if implemented in 2024. This would make heat pumps as affordable to run as a gas boiler, and support a significant number of fuel-poor homes that use direct electric heating.
High electricity prices in the UK discourage households from switching to a heat pump, which frustrates heat decarbonisation. Despite heat pumps being around three times as efficient as a gas boiler, average running costs are more expensive. The cost of electricity also places unfair costs on the 2.3 million homes heated with direct electric.
E3G has assessed options to rebalance levies to support the decarbonisation of heat and alleviation of fuel poverty. While noting the benefits of incentivising economy-wide electrification through shifting levies from all electricity bills into general taxation, as a near-term step, we propose a targeted exemption for electric heat users – a clean heat discount. We find that an exemption on 3.5 MWh of electricity per year for electrically heated homes would reduce running costs by around 15% for heat pumps and 5% for direct electric heating.
Revenue foregone for this measure should be paid for as a part of wider government spending to support decarbonisation and alleviate fuel poverty. Given the sluggish uptake of heat pumps and unprecedented heating challenges faced by many users of direct electric heating, this rapid, targeted intervention is justified.
Exemption from policy costs can be undertaken as an interim measure as part of a longer-term suite of retail market reforms to bring electricity prices down, including via the review of electricity market arrangements (REMA). Additionally, tariffs adjusted by time of use, and investment in renewable generation and distribution, will be crucial to developing a more affordable electricity system.
Our briefing sets out the options for rebalancing the policy costs levied on electricity and gas in the UK. It outlines a potential design for a clean heat discount, which would offer targeted support so that more homes can enjoy the long-term benefits of owning a heat pump.