Introduction to Onward\u2019s Energy Commission<\/p>\n
Onward is developing an implementable energy strategy for a future incoming government with the goal of achieving UK energy abundance, prioritising affordability, security and a market-led approach towards energy supply.<\/p>\n
The first report in this series examines the suite of policy costs imposed by the state at various stages of the supply chain. This includes taxes, levies and regulations applying to UK energy producers, which constrain overall supply. It also includes policy costs that apply at the supplier stage, including network costs, subsidy mechanisms for renewables investors and social schemes, which end up passed through to consumers through bills. Finally, it includes taxes and carbon pricing that increase the cost of energy for consumers, particularly industrial users of energy.<\/p>\n
This is a policy choice. But an alternative approach is possible \u2013 and necessary. This first report in Onward\u2019s series reveals where the state adds unnecessarily to energy costs for households and businesses, and identifies where policy-driven costs could be stripped back immediately.<\/p>\n Foreword<\/p>\n There is no such thing as a high-growth low-energy country. Cheap, reliable, abundant energy is why the United Kingdom has prospered for two centuries. The Industrial Revolution was fuelled by our plentiful supply of coal and Mrs Thatcher\u2019s boom years from our oil and gas resources in the North Sea.<\/p>\n We now stand a quarter through a new century, living with the consequences of a dangerous experiment. One which has waged a crusade against necessary parts of our energy system, which has chosen a system that needs to build ever more capacity for less productivity and which has distorted the market to benefit energy developers over consumers. As the energy-hungry growth opportunities of AI and an increasingly dangerous world zooms into closer focus, it is time for us to bring energy realism back to the debate.<\/p>\n This is seen most clearly in our electricity policy which has led to Britain having the most expensive industrial electricity in the developed world. Whilst this has been done in the name of climate change, it is in fact hindering not helping the situation. Moving people on to electricity to heat their homes or run their cars is one of the key planks of decarbonisation, and yet pursuing the cleanest electricity in the world no matter the cost is precisely what is driving up bills. There could be no better achievement for decarbonisation than to make electricity significantly cheaper, even if it wasn\u2019t 100% clean. This is a clear and indisputable truth but one which net zero ideologues refuse to engage with.<\/p>\n The Labour Government blames soaring energy costs on wholesale prices, but this is not borne out by the facts. This report from Onward makes clear that taxes, levies and renewables subsidies imposed by the state now make up a third of consumer bills. Stripping out carbon taxes on gas power alone \u2013 which have soared under Labour and are due to rise even further \u2013 would cut families\u2019 electricity bills by 10% tomorrow.<\/p>\n There is a wider question at hand. The UK is responsible for just 1% of global emissions. If a fanatical approach to net zero leaves us poorer, more reliant on imports, with higher energy costs and fewer jobs, which of the countries that make up the 99% of emissions \u2013 still rising around the world \u2013 will want to follow our lead? The UK has done more than any other major economy to cut emissions, but we have become a warning rather than an example to the rest of the world. For the UK to have any impact at all, ministers must prioritise the cheap electricity and energy resilience we need for industry to succeed and to improve living standards.<\/p>\n Axing the Carbon Tax, backing the North Sea, streamlining nuclear regulations that put the needs of newts over our need for reliable, land-dense energy, and being honest about the true cost of renewables would be a start.<\/p>\n I welcome Onward\u2019s work on this brand new energy commission to bring energy realism back into the debate. This first report illustrates where the state adds unnecessary costs onto bills. That is a welcome first step towards an energy system which puts cheap, reliable energy first.<\/p>\n ~ Rt Hon Claire Coutinho MP<\/p>\n Shadow Secretary of State for Energy Security & Net Zero<\/p>\n Executive Summary<\/p>\n While decarbonisation to tackle climate change may have had laudable intentions, it has been achieved in highly damaging ways. Britain has eradicated coal as a dispatchable source of energy, and reduced its domestic supply of gas by punishing North Sea production, before it has either the renewable energy infrastructure or the grid capacity to complete full energy transition. In fact, wind and solar generators are currently paid to take power off the grid in periods of excess capacity. Britain has failed to invest in adequate nuclear power, lagging far behind France, where nuclear energy provides for three-quarters of electricity demand. Britain\u2019s overall energy supply has been reduced without a plan to replace it.<\/p>\n Cutting domestic emissions has been achieved to a large degree by deindustrialisation, which has resulted in emissions-generating economic activity being moved offshore. Net zero has therefore been pursued on the basis of cutting energy use, rather than achieving an abundant renewable supply. The process of \u201ccarbon leakage\u201d, where emissions are simply moved overseas, damages Britain\u2019s economy while doing nothing to lower emissions globally. This not only gets the balance wrong between environmentalism and economic security; it is actively irrational.<\/p>\n Britain is highly gas dependent. Advocates of a full and swift transition are unrealistic: 85% of British households still rely on gas for home heating, it remains vital for industrial processes, and the grid relies on gas-generated electricity as a firm, dispatchable energy source 97% of the time. Failure to produce enough gas domestically has left Britain highly import-exposed, with half of demand met by expensive and carbon-intensive imports of liquid natural gas (LNG). North Sea Production has been penalised, even as the UK continues to import gas from the same sites from Norway.<\/p>\n Finally, as well as taxing energy producers and imposing levies on suppliers, the state taxes the consumption of energy by businesses through carbon pricing and the Climate Change Levy. These policies are designed to incentivise industrial decarbonisation, but the reality is that they drive up electricity costs for businesses to unsustainable levels, leading to offshoring and industrial collapse.<\/p>\n The UK needs a radically different approach to energy policy, prioritising security of domestic supply and affordability for businesses and families. This will require more nuclear power, an economically sustainable and competitive renewables sector, and more abundant gas for the foreseeable future. It will also require reform of energy procurement, pricing and the auction system. Onward\u2019s energy commission will address all these problems in turn.<\/p>\n This first report focuses on fiscal policy choices that add to energy costs. None of the recommendations require new infrastructure, new investment by government or by the private sector, or any other physical change. Rather, they target additional, imposed costs in the energy system that a future government seeking to prioritise affordability and security could remove or radically reform.<\/p>\n 1) How the state increases costs for energy producers<\/p>\n Energy affordability is a function of supply<\/p>\n In a well-functioning, abundant energy market, greater supply should enable lower energy prices. This is the basic logic of supply and demand, which underpins the efficient functioning of markets.<\/p>\n Britain is experiencing energy scarcity<\/p>\n Energy consumption per capita is affected by a range of factors, not only the cost and scarcity of energy. Overall economic performance also affects industrial activity and output levels, for example, and deindustrialisation due to factors other than energy prices will cause overall energy consumption to fall.<\/p>\n Figure 1: Change in per capita energy use (%) in G20 economies, 2003-2023<\/p>\n Figure 2: UK energy consumption per capita (kWh), 1965 \u2013 2025<\/p>\n Gas scarcity and grid limitations both drive lack of supply<\/p>\n Given the constraints on Britain\u2019s grid capacity, increasing overall supply is not completely straightforward. How energy supply feeds through into consumer and industrial prices is also determined in part by Britain\u2019s energy auction system.<\/p>\n Britain is highly dependent on imports<\/p>\n Figure 3: UK energy net exports, 2000-2024<\/p>\n Figure 4: UK generation capacity, 2000-2024<\/p>\n Climate policies have targeted producers as revenue sources<\/p>\n Figure 5: Carbon emission intensity by country<\/p>\n Britain was hit harder by the gas shock due to policy choices<\/p>\n The 2021-22 shock to gas prices arising from the Ukraine war hit the UK disproportionately because policy had removed alternative energy sources. The UK\u2019s last coal plant closed in September 2024, removing a flexible, dispatchable source of electricity.<\/p>\n Figure 6: Coal-based generation of electricity in the UK, 2000-2024<\/p>\n Figure 7: Coal production, 1990 \u2013 2025<\/p>\n Figure 8: Total operable nuclear capacity, 1970-2025<\/p>\n This reliance on imports and exposure to international gas prices is the reason the UK was especially exposed to the gas price shocks resulting from Russia\u2019s invasion of Ukraine.<\/p>\n Figure 9: Pipeline imports, LNG imports and pipeline exports of natural gas, 2000-2024<\/p>\n Figure 10: Natural gas exports to the UK by country, 2000-2022<\/p>\n Figure 11: UK industrial electricity prices and comparator countries, 2021-2022<\/p>\n An overall reduction in energy supply has been exacerbated by the reduction in the share of dispatchable power within the overall energy mix.<\/p>\n Figure 12: Electricity generated by fuel type, 2000-2024<\/p>\n Government policies have penalised investment the North Sea<\/p>\n The two regimes differ not only in structure but in purpose: PRT aimed to collect revenue from production profits by capturing resource rents; the current regime is reducing the rents and profit incentives of production in the North Sea as a whole.<\/p>\n The fiscal impact to reduced domestic North Sea production then compounds: the decommissioning rebates themselves imply a fiscal cost to the Treasury, and once completed further tax revenues from profits then stop.<\/p>\n The North Sea still has significant potential<\/p>\n Under a more supportive framework the UK has the potential to produce 50% of its demand via North Sea extraction to 2050.53<\/a> More pessimistic scenarios claim that only 15% would be supplied, owing to industry behaviour.54<\/a> However, industry behaviour is shaped by high taxes, regulatory uncertainty, and higher imposed production costs. As a result, extraction is projected to decline faster than geology requires.<\/p>\n Case Study: North Sea Oil Scenarios<\/p>\n Analysis commissioned by Offshore Energies UK and conducted by Westwood Global Energy Group in 2025 examined the remaining productive potential of the North Sea to deliver the country\u2019s oil and gas needs. It found that the UK has the potential to produce greater resources than government estimates suggest by up to 3.2 billion more barrels, which will be crucial for domestic supply even if the UK were to hit its climate targets on time by 2050.55\u00a0<\/p>\n Policy-constrained scenario (current trajectory)<\/p>\n Under current tax and regulatory conditions, only around 2.6 billion barrels of oil are expected to be produced by 2050.56 In a scenario that continues the current trajectory, decommissioning expenditure is forecast to exceed capital investment by 2028.57<\/p>\n Supportive-policy scenario58<\/p>\n Under a more stable and investment-friendly policy environment, up to 7.5 billion barrels could be recoverable. This equates to around 3.2 billion barrels more than current estimates. This level of production could meet up to 50% of the UK\u2019s oil and gas demand through to 2050.<\/p>\n The difference between these scenarios represents a substantial loss of national value, estimated at between \u00a3165 billion and \u00a3385 billion, depending on the policy path chosen.<\/p>\n North Sea output is in serious decline<\/p>\n Punishing producers \u2013 the Energy Profits Levy (EPL)<\/p>\n Ring-Fenced Corporation Tax and the Supplementary Charge<\/p>\n The structure of these two taxes further elevates the tax burden on North Sea operators. Ring-Fenced Corporation Tax applies a 30% rate to offshore profits and prevents companies from offsetting losses from other UK business activities. The Supplementary Charge adds a further 10% on adjusted profits while disallowing deductions for finance (borrowing) costs.<\/p>\n Together these measures operate as structurally higher and less flexible versions of standard corporation tax, ensuring that offshore extraction is consistently taxed more heavily than most other forms of economic activity, even after capital allowances are taken into account.<\/p>\n Figure 13: Tax rates on oil and gas producers, 1973-2025<\/p>\n The cumulative effect of this regime means that investment is discouraged, production declines faster than geology requires, and domestic energy supply is progressively replaced with imports.<\/p>\n Bans on new North Sea exploration<\/p>\n Although this approach aligns with the government\u2019s commitment not to award new exploration licences, reflecting climate goals, it perpetuates reliance on more polluting gas imports. The result is a contradictory policy environment: companies are encouraged to maintain output in theory, but face tax rates and general bans on new exploration that make doing so increasingly uneconomical in practice. This inconsistency further suppresses investment and accelerates decline beyond what geology alone would dictate.<\/p>\n North Sea viability is now in question<\/p>\n Carbon taxes and pricing add to the cost of gas<\/p>\n In addition to the taxes and regulatory restrictions on new oil and gas supply, the UK also imposes additional carbon taxes which add to the wholesale cost of gas, including gas generation of electricity.<\/p>\n These additional taxes are Carbon Price Support (CPS) and the UK Emissions Trading System (ETS). Originally intended to disincentivise the use of coal to cut domestic carbon emissions, these taxes now remain an additional burden on gas supply \u2013 despite the UK\u2019s high degree of exposure to gas.<\/p>\n Gas-fired generation remains essential for system balancing, meeting peak demand, compensating for renewables intermittency and ensuring resilience, but it is simultaneously penalised through additional taxes and carbon pricing.<\/p>\n Carbon Price Support (CPS) \u2013 an obsolete tax<\/p>\n This means the tax now raises the cost of every unit of electricity produced, including electricity from sources that pay no CPS at all, namely the renewables intending to lower energy costs, by increasing the price set by gas.<\/p>\n The UK Emissions Trading System (ETS) \u2013 a high and rising burden<\/p>\n This system was designed to use market forces to incentivise lower-carbon technologies for energy production by gradually limiting permitted emissions and subsequently increasing costs. In theory, the ETS should reward efficient producers and discourage high-carbon alternatives.<\/p>\n The cost of carbon taxes on household bills<\/p>\n Figure 14: Average Annual 3,100 kWh Household Electricity Bill by Component (\u00a3), 2025 Financial Year<\/p>\n Figure 15: Average Annual 3,100 kWh Household Electricity Bill by Component (%), 2025 Financial Year<\/p>\n Impact of the Carbon Border Adjustment Mechanism (CBAM) on refineries<\/p>\n Pursuing energy diversification by punishing domestic producers<\/p>\n The UK\u2019s strategy to diversify its energy mix is grounded in legitimate objectives: reducing carbon emissions, hedging against fossil fuel price volatility, improving energy security, and transitioning away from finite resources. These goals are not inherently in conflict with maintaining domestic energy production.<\/p>\n But a successful transition does not require the accelerated decline of domestic supply. On the contrary, domestic production can reduce global emissions by displacing imported LNG, which typically has higher lifecycle emissions. A balanced energy system, combining gas, nuclear, renewables, storage, and dispatchable capacity, depends on domestic producers remaining commercially viable throughout the transition.<\/p>\n Instead the UK has constructed an energy policy framework centred on reducing domestic emissions, suppressing energy use, and increasing prices to change behaviour, while assuming other countries will follow a similar path. The outcome has been a system in which abundance has been replaced by scarcity, firm capacity by intermittency, and stable investment by accelerating decline.<\/p>\n Prices have risen while capital investment has collapsed. Consumers bear higher costs, energy security has weakened, and domestic producers face growing disincentives to invest or remain in the UK market. The result is not a smooth transition, but a more fragile, more expensive, and more import-dependent energy system.<\/p>\n Recommendations<\/p>\n Abolish the Energy Profits Levy (EPL). Fiscal policy for oil and gas producers should be a single, stable regime. Windfall taxes reduce domestic supply and increase import dependence while generating uncertainty for investors.<\/p>\n Normalise corporate tax for energy producers. Align the corporation tax regime for oil and gas producers with that for the rest of the UK by abolishing Ring-Fenced Corporation Tax.<\/p>\n Abolish the Supplementary Charge. Overlapping taxes create complexity and perverse incentives. Corporation Tax is already charged on profits not revenues.<\/p>\n Commit to a minimum fiscal stability period. Arbitrariness and uncertainty are ruinous for investment decisions that are by definition multi-year and involve commercial risk. While no parliament can bind its successors, a stable fiscal framework should be enshrined in current law, ruling out retrospective tax changes and one-off windfall levies.<\/p>\n Resume regular, predictable licensing rounds. End the ban on further oil and gas exploration and remove approvals from short-term political decision-making, treating licensing as an administrative decision based on safety and mainstream compliance requirements, not climate targets.<\/p>\n Remove climate targets from decisions over domestic supply. Targets currently written into law should not affect domestic producers. Restricting production does not reduce UK demand or UK carbon consumption, but it does constrict supply and increase costs.<\/p>\n Abolish Carbon Price Support tax on gas generators. This tax was designed to disincentivise coal and has performed its role. An additional carbon tax on the power source that sets the marginal wholesale rate more than 90% is irrational and should be ended.<\/p>\n Abolish carbon pricing via the Emissions Trading System (ETS) entirely for gas generators. This represents a form of double taxation on gas, and feeds directly through into wholesale electricity prices. Gas-based electricity generation is a small percentage of UK overall emissions.<\/p>\n Apply equal regulatory and compliance costs to imports. Where domestic oil and gas producers face environmental or adjustment mechanisms such as environmental offset obligations, these should apply equally to those exporting carbon-emitting energy to the UK so there is a level playing field. UK refineries should be protected by CBAM.<\/p>\n Designate North Sea oil and gas as Critical National Infrastructure within the National Security and Investment Act 2021. Energy producers provide a vital role in the UK energy supply chain and in UK energy security. They should be designated as security assets within the Government\u2019s national Industrial Strategy and feature in overall supply chain resilience planning.<\/p>\n Remaining sector-specific taxes should have fixed sunset clauses. All taxes and regulations that specifically target oil and gas producers should be sunsetted so they expire unless Parliament explicitly renews them.<\/p>\n \u201cFull expensing\u201d should apply for oil and gas producers, replacing more limited sector-specific allowances. The commercial risks associated with capital investment are considerable for investors and oil and gas producers should benefit from being able to deduct 100% of qualifying capital expenditure against corporation tax in year 1.<\/p>\n 2) How state-imposed costs on energy suppliers affect bills<\/p>\n In addition to taxing production the state imposes various taxes and levies on energy suppliers, which are the companies that buy energy and then sell to consumers through household and commercial bills.<\/p>\n These levies are passed on to households. Wholesale costs only represent 34% of a typical bill. Businesses are largely protected from levies, but their energy consumption is taxed in other ways, through carbon pricing and the Climate Change Levy, explained in Chapter 3. Carbon pricing and taxes are also levied on gas generators, which is reflected in the wholesale price of gas generated electricity when sold to energy suppliers.<\/p>\n How policy costs affect the supplier stage<\/p>\n Supplier-side costs are additional energy costs administered by suppliers such as British Gas, Octopus Energy, and OVO Energy. While these are charged to and administered by energy suppliers, they are almost entirely paid for by consumers, as suppliers recover nearly all policy-related obligations from billpayers.<\/p>\n These costs therefore comprise a major component of household energy bills. These layers of levies and charges include network costs, subsidies for renewable technologies, charges for smart meters, home-efficiency schemes, and levies to fund major infrastructure projects such as the Sizewell C and Hinckley nuclear power stations.<\/p>\n The exemptions will ensure that around 7,000 electricity-intensive businesses in manufacturing sectors like automotive, aerospace and chemicals will be exempt from levies such as the Renewables Obligation, Feed-in Tariffs, and Capacity Market charges (explained below), reducing their costs by up to \u00a340 per MWh.90<\/a><\/p>\n Additional costs have risen even as wholesale prices fall<\/p>\n Figure 16: Non-wholesale costs and projections for the average 3.1 MWh UK household<\/p>\n This is partially because of a projected increase in other renewables subsidies, including Contracts for Difference (CfDs). But it is also due to the introduction of new levies such as the Regulated Asset Base (RAB) model, which is used to fund the construction of Sizewell C, Carbon Capture Storage projects such as net zero Teesside, and new costs related to the British Industrial Competitiveness Scheme (BICS).<\/p>\n Full breakdown of costs passed on to consumers<\/p>\n The Renewables Obligation (RO)<\/p>\n The RO requires electricity suppliers to purchase a certain share of supply from renewable technologies. To do this, renewable obligation certificates (ROCs) are issued to renewable energy producers, and suppliers must purchase these from the renewable generators in order to prove that a certain amount of electricity has been generated from a renewable source. If a supplier cannot provide enough ROCs, it must pay a \u201cbuyout\u201d price for each ROC it is short.<\/p>\n Cost to Average 2025 Household: \u00a3102 (11% of household energy bill)<\/p>\n Projected (Real Terms) Cost to Average Household 2030: \u00a317 (2% of household energy bill)<\/p>\n Figure 17: Impact of Renewables Obligation on electricity bills for an average 3.1 MWh domestic household, 2019\u20132031.<\/p>\n Feed-in-Tariffs (FiTs)<\/p>\n Feed-in-Tariffs (FiTs) are a legacy subsidy for small-scale renewables which pay people for generating their own renewable electricity through solar panels, wind turbines, and other small-scale renewable technologies. The FiT gives two payments: one for each unit of electricity generated, and another for any surplus exported to the grid. Energy suppliers make these payments and the cost is recovered through consumer bills.<\/p>\n Cost to Average 2025 Household: \u00a323 (2% of household energy bill)<\/p>\n Projected (Real Terms) Cost to Average Household 2030: \u00a326 (2% of household energy bill)<\/p>\n Figure 18: Impact of Feed in Tariffs on electricity bills for an average 3.1 MWh domestic household, 2019\u20132031.<\/p>\n The Supplier Obligation and Contracts for Difference (CfDs)<\/p>\n During each CfD allocation round, the government sets an administrative strike price cap for each technology, which developers bid below. Each round has \u201cpots\u201d for different technologies: offshore wind, solar, and tidal, and contracts are awarded in order of lowest cost until the budget is used up. All winning projects in this pot receive the same strike price, which is determined by the highest-priced project needed to clear the auction.<\/p>\n Once set, this strike price is the guaranteed price per MWh for 15 years, adjusted each year for inflation from the 2012 benchmark. Once the contract is signed with the Low Carbon Contracts Company (LCCC), the government-owned arm\u2019s-length body responsible for administering CfDs, the generator starts producing, the strike price is compared to a reference market price.<\/p>\n If the market price is higher, the generator pays the LCCC the difference, and if the market price is lower, the LCCC pays the generator the difference. The LCCC funds payments through a levy on electricity suppliers which are then transferred onto the consumers through bills.<\/p>\n As a result, CfDs and wholesale prices have an inverse relationship. When wholesale prices rise above the strike price, generators pay back the difference, reducing costs for consumers and resulting in \u201cnegative CfD\u201d costs. This happened in 2022-23 when wholesale prices skyrocketed due to the Ukraine war.<\/p>\n The most recent CfD round \u2013 \u201cAR7\u201d \u2013 will increase electricity prices<\/p>\n This will consequently lead to higher consumer bills as the LCCC, and subsequently the consumer, will have to pay more in order to top up to the strike price. Also, as more CfD-backed generation comes online and more contracts are signed, more electricity is paid for at these higher guaranteed prices so the combined overall cost of CfDs will increase.<\/p>\n The cost to households of CfDs<\/p>\n It is argued by supporters of the CfD-funded renewables model, such as the current Energy Secretary, that they help to protect households from volatile gas markets, as when the wholesale price of electricity (which is usually set by the price of gas) rises above the CfD strike price, the generator in receipt of the CfD will pay back the difference to the LCCC, and the surplus is passed on to consumers as a credit.<\/p>\n Cost to Average 2025 Household: \u00a333 (3% of household energy bill)<\/p>\n Projected (Real Terms) Cost to Average Household 2030: \u00a370 (7% of household energy bill)<\/p>\n Figure 19: Impact of Contracts for Difference on electricity bills for an average 3.1 MWh domestic household, 2019\u20132031.<\/p>\n The UK Capacity Market (CM)<\/p>\n This is a scheme that pays generators to guarantee that they can supply power at times of high demand. The CM allows these generators, mostly gas and nuclear plants, to earn payments at a fixed kWh rate for supplying electricity at times when demand is high. If these generators fail to deliver when called on then they face penalties.<\/p>\n During times of high demand, known as System Stress Events, NESO \u2013 the public corporation responsible for managing the gas and electricity networks \u2013 issues generators with a Capacity Market Notice (CMN) to alert generators to potential shortfalls. CM contracts are allocated through annual auctions where generators bid to provide capacity, with those offering the lowest-priced bids winning.<\/p>\n For the average 2025 household, the CM costs \u00a328 and comprise 3% of the average household bill. In 5 years, the cost is projected to rise to \u00a345 and will comprise 4% of the average household bill.<\/p>\n Cost to Average 2025 Household: \u00a328 (3% of household energy bill)<\/p>\n Projected (Real Terms) Cost to Average Household 2030: \u00a345 (4% of household energy bill)<\/p>\n Figure 20: Impact of the Capacity Market on electricity bills for an average 3.1 MWh domestic household, 2019\u20132031.<\/p>\n Energy Company Obligation (ECO)<\/p>\n Cost to Average 2025 Household: \u00a327 (3% of household energy bill)<\/p>\n Projected (Real Terms) Cost to Average Household 2030: \u00a30 (0% of household energy bill)<\/p>\n Figure 21:\u00a0 Impact of Energy Company Obligation on electricity bills for an average 3.1 MWh domestic household, 2019\u20132031.<\/p>\n The Warm Home Discount<\/p>\n The Warm Home Discount (WHD) provides support to customers in receipt of certain low income benefits in the form of a rebate. This rebate, along with the costs of operating and administering the scheme, is funded through a levy on energy suppliers, which is ultimately passed on to consumers through energy bills.<\/p>\n Recent changes to the WHD have broadened eligibility to all households on Universal Credit, rather than just those with larger, older or otherwise energy inefficient homes, and the rebate has been increased from \u00a3140 to \u00a3150, alongside an Industry Initiatives element which provides additional support. As the cost of funding the scheme is recovered through a levy on consumer bills, this expansion has actually increased costs for all households. This means that someone who was already receiving the WHD now receives less support once levy costs are factored in.<\/p>\n Cost to Average 2025 Household: \u00a315 (2% of household energy bill)<\/p>\n Projected (Real Terms) Cost to Average Household 2030: \u00a320 (2% of household energy bill)<\/p>\n Figure 22: Impact of Warm Home Discount on electricity bills for an average 3.1 MWh domestic household, 2019\u20132031.<\/p>\n Smart Meter Charge<\/p>\n The Smart Meter Net Cost Charge helps to fund the installation of smart meters across the country. It cost the average household \u00a320 in 2025, and this cost is anticipated to remain broadly stable through to 2030.<\/p>\n Cost to Average 2025 Household: \u00a320 (2% of household energy bill)<\/p>\n Projected (Real Terms) Cost to Average Household 2030: \u00a320 (2% of household energy bill)<\/p>\n Figure 23: Impact of Smart Meter Charges on electricity bills for an average 3.1 MWh domestic household, 2019\u20132031.<\/p>\n Supplier margin and costs<\/p>\n This is the cost suppliers levy on households to recover their operating costs, such as customer service, billing, and other administrative activities. These costs are partly recovered through the standing charge and have increased in real terms over the past five years.<\/p>\n Cost to Average 2025 Household: \u00a3133 (14% of household energy bill)<\/p>\n Projected (Real Terms) Cost to Average Household 2030: \u00a3147 (14% of household energy bill)<\/p>\n Figure 24: Impact of supplier operating costs and profit margins on electricity bills on an average 3.1 MWh domestic household, 2019\u20132031.<\/p>\n Green Gas Levy<\/p>\n This places an obligation on all licensed fossil fuel gas suppliers to pay a quarterly levy which is calculated based on the number of meter points they serve. It funds the injection of biomethane into the gas grid, the Green Gas Support Scheme. Exemptions are available for suppliers who can prove their total gas supply is 95% biomethane or more.<\/p>\n Sizewell C levy<\/p>\n Cost to Average 2025 Household: \u00a34 (1% of household energy bill)<\/p>\n Projected (Real Terms) Cost to Average Household 2030: \u00a319 (2% of household energy bill)<\/p>\n Figure 25: Projected cost of Sizewell C levy\u00a0 on electricity bills for an average 3.1 MWh domestic household, 2025-2031<\/p>\n Assistance for Areas of High Electricity Distribution Costs (AAHEDC)<\/p>\n Cost to Average 2025 Household: \u00a31 (<1% of household energy bill)<\/p>\n Projected (Real Terms) Cost to Average Household 2030: \u00a31 (<1% of household energy bill)<\/p>\n Figure 26:\u00a0 Impact of Areas with High Electricity Distribution Costs (AAHEDC) on electricity bills for an average 3.1 MWh domestic household, 2019\u20132031.<\/p>\n Network Charging Compensation (NCC) Scheme and the Energy Intensive Industry (EII) Support Levy<\/p>\n Cost to Average 2025 Household: \u00a33 (<1% of household energy bill)<\/p>\n Projected (Real Terms) Cost to Average Household 2030: \u00a37 (1% of household energy bill)<\/p>\n Figure 27: Projected cost on electricity bills for an average 3.1 MWh domestic household of Network Charging Compensation Scheme \/ Energy Intensive Industry (EII) Support Levy, 2025-2031<\/p>\n Extra levy share to support heavy industry<\/p>\n Projected (Real Terms) Cost to Average Household 2030: \u00a35 (1% of household energy bill)<\/p>\n Figure 28:\u00a0 Projected cost of BICS levy on electricity bills for an average 3.1 MWh domestic household, 2027-2031<\/p>\n Carbon Capture Storage projects (CCS)<\/p>\n Projected (Real Terms) Cost to Average Household 2030: \u00a37 (1% of household energy bill)<\/p>\n Figure 29:\u00a0 Projected cost of Carbon Capture Storage projects (CCS) on electricity bills for an average 3.1 MWh domestic household, 2028-2031<\/p>\n VAT<\/p>\n Household electricity and gas bills are subject to VAT at 5%, applied to the total bill after all costs have been included.<\/p>\n Cost to Average 2025 Household: \u00a346 (5% of household energy bill)<\/p>\n Projected (Real Terms) Cost to Average Household 2030: \u00a350 (5% of household energy bill)<\/p>\n Figure 30: Impact of VAT on electricity bills for an average 3.1 MWh domestic household, 2019\u20132031.<\/p>\n Network charges<\/p>\n These are the fees for using and maintaining the grid infrastructure that transports gas and electricity across the country, and for ensuring that supply meets demand at any given time.<\/p>\n The main charges are Transmission Costs, Distribution Costs, and Balancing Costs.<\/p>\n Transmission Costs (TNUoS)<\/p>\n This is the cost to move electricity across long distances, moving power from generators to regional distribution systems. TNUoS charges are also used to fund the maintenance costs of high-voltage transmission infrastructure, such as pylons, substations, and other major infrastructure.<\/p>\n Cost to Average 2025 Household: \u00a352 (5% of household energy bill)<\/p>\n Projected (Real Terms) Cost to Average Household 2030: \u00a3105 (10% of household energy bill)<\/p>\n Figure 31: Cost to households of Transmission Costs (TNUoS) through bills, 2019-2031<\/p>\n Distribution Costs (DUoS)<\/p>\n DUoS is used to fund the maintenance and operation of the local electricity network, including wires, poles, transformers, and other essential infrastructure. This ensures electricity is safely stepped down from the high-voltage transmission network and safely delivered to homes and businesses across the country.<\/p>\n Cost to Average 2025 Household: \u00a3114 (12% of household energy bill)<\/p>\n Projected (Real Terms) Cost to Average Household 2030: \u00a3146 (14% of household energy bill)<\/p>\n Figure 32: Cost to households of Distribution Costs (DUoS) through bills, 2019-2031<\/p>\n Balancing Costs (BSUoS) \u2013 consumers pay suppliers to switch off<\/p>\n Electricity system balancing costs are levied by the Energy Systems Operator (ESO) for balancing supply and demand on a second by second basis. Costs are used to ensure that the grid has enough power at all times and does not get overloaded. This is because electricity cannot yet be stored economically and at sufficient scale, so the system must be \u201cbalanced\u201d to maintain a stable frequency.<\/p>\n Balancing costs are essentially the cost of energy intermittency, as energy sources are turned on and off. This is subsidised by the taxpayer and British industries.<\/p>\n Cost to Average 2025 Household: \u00a341 (4% of household energy bill)<\/p>\n Projected (Real Terms) Cost to Average Household 2030: \u00a391 (9% of household energy bill)<\/p>\n Figure 33: Cost to households of Balancing Costs (BSUoS) through bills, 2019-2031<\/p>\n Curtailment payments<\/p>\n There are two types of constraint costs: Curtailment costs (turn-off), and replacement costs (turn-on). Curtailment costs involve cases where generators \u2013 usually wind farms \u2013 are paid to turn off because the grid cannot physically transmit the amount of power they are producing. Replacement costs, meanwhile, are costs involved with turning generators on \u2013 usually Combined Cycle Gas Turbines (CCGTs) \u2013 during times when the grid does not have enough power. These costs are part of the wider balancing (BSUoS) costs administered by suppliers and passed onto consumers through bills.<\/p>\n NESO uses forecasting models to estimate future constraints and balancing costs. Forecasts are turned into fixed BSUoS tariffs, which are passed onto suppliers who then pass the costs onto consumers. Paid to turn on gas, paid to turn off wind.<\/p>\n Wind farms are turned off at times when the grid has lots of electricity, and the transmission cables cannot physically transmit the amount of power being produced.<\/p>\n Therefore, as transmission costs are higher in Scotland (these are further away from the demand for power) it tends to be the big Scottish wind farms that are paid to turn off.<\/p>\n Producers under the CfD and RO schemes are paid strike price regardless, even if they stop producing because they tell NESO they will only stop production if they are compensated to the amount they would have received had they kept generating. So BSUoS costs are essentially spent on topping them up to the strike price when they are not generating as the grid would be overloaded if they did.<\/p>\n This means there is no incentive for wind farms to buy batteries and store lost power. It just gets wasted.<\/p>\n Turn-on costs<\/p>\n BSUoS turn-on costs slightly different to the Capacity Market. The CM is a cost paid to generators to ensure they are available to provide power when called upon. BSUoS turn-on costs are the funds they are paid by unit of power provided when called upon.<\/p>\n Figure 34: Estimated 2025 constraint costs by month<\/p>\n In December 2024, 81% of potential power from Seagreen was curtailed, amounting to approximately 407,000MWh of power wasted.<\/p>\n Recommendations<\/p>\n End the Renewables Obligation and Feed-in-Tariffs. These are due to be wound down but should immediately be removed as levies on suppliers that are passed on to households.<\/p>\n No further Contracts for Difference auction rounds for wind and solar should be held. AR7 should be the last round of CfDs. After this, renewables generators should operate by selling electricity into the wholesale market. The Hinkley Point CfD should remain.<\/p>\n The RAB for Sizewell C should be retained unless and until an alternative funding mechanism can be found. Nuclear will become an increasingly important share of the UK energy mix and the current funding mechanism is important for project financing and delivery.<\/p>\n CfD contracts should be renegotiated or ended on a structured run-off basis. Investors losing out as a result would be able to recover a percentage of their loss, depending on the length of the contract, with a firm cap as a percentage of original project capital expenditure. Indexed gilts could be used as a compensation mechanism instead of up-front cash.<\/p>\n Contracts for Difference and the Capacity Market should ultimately be replaced with a Firm Power Auction system. This proposal, supported by Professor Dieter Helm in his Cost of Energy Review, would end the socialisation of investment risk and the cost of intermittency being passed on to consumers. This will be explored in a further Onward report.<\/p>\n 3) How policy costs affect consumers of energy<\/p>\n Climate policies target industrial energy users<\/p>\n Yet despite the energy-intensive nature of innovation frontier industries, and the inherently carbon-intensive nature of various important production sector industries, the UK policy framework has made industrial electricity more expensive, and deliberately targets carbon-intensive industries with carbon pricing and the Climate Change Levy.<\/p>\n Figure 35: Projected Data Centre energy consumption<\/p>\n This is a function of high unit costs as a result of constrained supply and of direct taxes on energy use.<\/p>\n Figure 36: 2024 Industrial gas and electric prices in pence per kWh (including taxes)<\/p>\n Source: DESNZ144<\/a><\/p>\n Figure 37: UK Industrial gas and electric prices in pence per kWh (including taxes)<\/p>\n The Climate Change Levy targets industrial energy users<\/p>\n This tax is charged to non-household users of energy, primarily industrial users. This includes manufacturing businesses and heavy industries but also the wider commercial sector, including the public sector.<\/p>\n Figure 38: World per capita energy consumption and world GDP per capita<\/p>\n Impact of the Levy on industry<\/p>\n Energy demand in heavy industry, and in energy-intensive frontier industries such as data centres, is generally inelastic, limiting the scope for energy use-limiting behavioural change. It also applies to both electricity and gas, so electrification does not provide an escape. This is perverse since incentivising a shift to cleaner energy was the original goal, not killing off industrial output.<\/p>\n Figure 39: Impact of Climate Change Levy (CCL) on industrial electricity prices<\/p>\n Figure 40: Climate Change Levy Receipts<\/p>\n Figure 41: Energy-intensive manufacturing industries gross value added (GVA), 1990-2025, Index 2015 = 100<\/p>\n Figure 42:\u00a0 Industrial electricity prices (per kWh) and the Net Rate of Return for Manufacturers (%), 2024 prices, 2008-2024<\/p>\n *Electricity prices (p \/ kWh) have been adjusted for inflation<\/p>\n The energy sector is also the worst-performing in the UK over the past six years. While Gross Value Add (GVA) per hour worked has increased by 2.8% across the whole UK economy, it has dramatically declined when it comes to the energy sector, falling by 53%.<\/p>\n Figure 43: UK productivity change by sector \u2013 2019 to 2025 (Output per hour worked calculated as GVA per hour worked)<\/p>\n