The House | To lift families out of fuel poverty, Burnham must shift regressive levies off energy bills

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But amidst Strait of Hormuz closures and instability in the region due to the US’s ill-advised war on Iran, international oil and gas prices, to which Britain’s energy prices are mostly pegged, have risen, and so will energy bills.  

In the coming months, as colder temperatures return and households use more energy, further immediate action is needed to cut the cost of energy.  

Moving social and environmental levies, or what some call ‘policy costs’, off electricity bills and into general taxation could reduce energy bills quickly and in a way that benefits lower-income households. 

The funds these levies generate are vital, financing the building of future energy infrastructure and support programmes like the Warm Homes Discount. But the way they are currently distributed, charged at a flat rate per unit of electricity, was described by experts to the Environmental Audit Committee as regressive. This means that they disproportionately add costs to lower-income households with limited ability to invest in alternatives that could lower their bills or change how and when they use energy. It is absurd that households claiming the Warm Homes Discount are actually part funding their own subsidy through paying the levies. 

More progressive funding of policy costs by moving them to general taxation was one of the key recommendations from the Environmental Audit Committee to the UK government in our final report on the Seventh Carbon Budget. This measure would reduce electricity bills for all households and also better align affordability with decarbonisation objectives. 

A first step to reduce the policy costs on electricity bills was taken by Rachel Reeves at last year’s Budget, but this intervention is temporary, with Treasury support due to end in Spring 2029. Yet even after that, levies make up nine per cent of an electricity bill (in contrast to three per cent of a gas bill). Some low-income households continue to spend more than three times the proportion of their net income on levies than wealthier households.  

Not only does the current levy structure penalise low-income households, it also penalises those seeking to switch away from fossil fuels and install cleaner heating such as heat pumps. It is illogical that the UK still taxes homegrown renewable electricity more than imported fossil fuel gas.  

Research by The MCS Foundation has shown that levy reform could save households on average £120 every year, with low-income households using direct electric heating benefiting the most. This move would represent a significant strike on the cost of living, bringing more than 800,000 households across the country out of fuel poverty.  

It would also further incentivise the transition to clean heat, giving households confidence that switching to heat pumps and other renewable heating systems will reduce their running costs. High electricity prices in the UK act as a disincentive for households to switch to heat pumps. Analysis across European countries has shown there is a strong correlation between the spark gap – the ratio between electricity and gas prices – and heat pump deployment rates of a country. 

In the long run, transitioning to homegrown renewable electricity will protect British households from international gas price spikes, ensuring affordability in the long-term. The increasing amount of renewable energy in the UK has helped limit electricity bill rises, as compared to gas, and reduce the amount of time that gas sets the overall energy price. However, building more renewable energy, and expanding and upgrading the grid to connect this clean energy, will take time to take effect to reduce energy bills.  

In the short-term, moving policy costs off electricity is a decision that Andy Burnham could take immediately to significantly reduce household energy bills. I urge him to do so. 

Toby Perkins is the Labour MP for Chesterfield, and chair of the Environmental Audit Committee