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Opinions differ on the effectiveness of chancellor Rachel Reeves’ Budget. But on one thing almost everyone agrees: UK energy prices are intolerably high. That is something the Budget’s cut to household energy bills has failed to fix.
Amid a smorgasbord of hits and handouts, annual energy costs for a UK household were reduced by an average of £150. The “typical” gas and electricity bill will fall about 8 per cent owing to Reeves ending a scheme to make lower-income households more energy efficient, and moving about three-quarters of the cost of old renewable incentive schemes out of household charges and into general taxation.
At first blush, that may look like good news. After all, £150 is not an insignificant amount. And electricity bills get more relief than gas. That is sensible given the country’s decarbonisation objectives rely on rolling out heat pumps, electric vehicles and the like. The bad news, however, is that neither the size nor the composition of the cut addresses the UK energy system’s underlying problems.
Take the relative competitiveness of gas and electricity bills. The UK’s new policies reduce the price of electricity more than gas because it was electricity bills that bore the burden of renewable subsidies. But even after that, electricity remains not far off four times more expensive on a per-unit basis than gas, making it very unlikely that more consumers will be nudged into forgoing their boiler.
In terms of the overall cost of electricity, too, the government is fighting a rising tide. The UK is building lots of new transmission lines to bring renewable power to consumers, with an £80bn five-year investment plan up for approval from the regulator.
Over time, costs should slowly fall as new transmission infrastructure cuts the amount of renewable power that goes to waste. But that still leaves UK households with a sticky few years. Rising network costs are one reason why electricity bills in 2030 will be even higher than they are today, according to independent energy analyst Ben James.
One idea to address that hump is to stop charging power stations a carbon tax for burning fossil fuels. After all, the main objective of the charge was to tip the scales from polluting coal to natural gas, which has already been accomplished. Scrapping it would cut the cost of gas-fired electricity by well over 40 per cent, calculates think-tank Aurora Energy. Given that gas so often sets the marginal price for electricity, the measure alone could lop perhaps £60 off household bills, Lex calculates.
Such radical ideas are hard to pursue, not least because they look like compromising on the shift to clean energy. There are more palatable ones too, like moving even more of the policy burden from electricity bills into general taxation. Such shuffling has benefits beyond window dressing. If electricity can compete with gas, that will increase demand, reducing the impact of infrastructure on consumers’ bills. Since last week’s Budget stops short of either, expect complaints over too-high charges to continue.