Review of gas and electricity levies and their impact on low-carbon heating uptake

There are a number of environmental and social policies in the GB energy market. Some of these are funded through commitments placed on energy companies. As part of their bills, domestic and non-domestic energy consumers face a number of levies intended to support measures such as the deployment of low-carbon and/or renewable sources and the installation of energy efficiency measures.

This review seeks to understand whether rebalancing of levies and charges between electricity and gas supplies might impact the deployment of low-carbon and renewable heat in both domestic and non-domestic settings.

Findings

• Evidence suggests that energy pricing is not the main consideration in the use of heating technologies by domestic or non-domestic consumers; other considerations including upfront costs are significant.
• Under current energy tariff structures, heat pumps are unlikely to offer running cost savings compared to gas boilers as a result of the electricity demand associated with running a heat pump. Indicative analysis highlights that the removal of levies in the current energy tariff structure would bring the running costs of heat pumps and gas boilers considerably closer together in a typical domestic situation.

There are a number of different potential options for reform that could potentially address this issue, subject to further consideration of their wider impacts. These include:

• Moving levy cost recovery to a non-energy volumetric basis. This could include a flat per household charge, or linkage to specific metrics such as location, income, or heating fuel.
• Splitting the recovery of levy costs between gas and electricity tariffs.
• Introduction of a ‘heating allowance’ to remove the levying of policy costs on energy used for heating purposes.
• Encouraging voluntary actions by suppliers to rebalance levy cost recovery away from electricity.
• Moving levy costs from energy bills to general taxation.