Executive Summary
- Jan Rosenow, professor of energy and climate policy at Oxford University, has argued that, while by no means a clear sign, the proposed VAT cut on electricity could close the gap between gas and electricity on taxes and policy costs – which discourages people from electrifying their heating
- Cornwall Insight argued similar in a note forecasting that, despite the cut, households could still be looking at an approximate 2% rise on the current price cap
- The gap ‘needs to keep closing if households are going to be encouraged to switch to electric heating and vehicles,’ Cornwall Insight said: ‘without that shift, the wider transition to a low carbon energy system will be more challenging for customers’
One of the first acts of the new UK government has been to temporarily cut VAT tax on electricity bills from 1 October. The day after the new Prime Minister, Andy Burnham, officially took office, a government press release trumpeted the tax cut, claiming it will be funded from a cancelled digital ID programme. The overall effect will likely see around £45 taken off the yearly Ofgem price cap in October.
Naturally, the key line was around alleviating the cost of living crisis; the release noted that ‘by targeting electricity bills, more people will be supported with rising bills and the government is helping to keep inflation down.’ Yet looking further afield, could this have an impact on future electricity versus gas pricing, and build-outs of heat pumps and other installations?
Jan Rosenow, professor of energy and climate policy at Oxford University, has argued it can be seen as a step in the right direction, moving away from years where Britain has ‘load[ed] taxes and policy costs onto electricity while gas gets off lighter.’
“That gap discourages people from electrifying their heating,” Rosenow wrote on LinkedIn. “A heat pump is three to five times more efficient than a gas boiler, but if electricity costs several times more per unit, the running cost advantage shrinks or even becomes negative.
“Cutting VAT on electricity narrows that gap. It makes switching from a gas boiler to a heat pump cheaper to run, not just cleaner,” Rosenow added.
This viewpoint was echoed to an extent by Cornwall Insight, who noted that while electricity costs would ease, households could still be looking at an approximate 2% rise on the current price cap. The company attributed this to increased unrest in the Middle East.
“While bills will not be falling, an added benefit of the VAT cut is that it will slightly reduce the cost difference between electricity and gas, and that gap needs to keep closing if households are going to be encouraged to switch to electric heating and vehicles,” the company noted. “Without that shift, the wider transition to a low carbon energy system will be more challenging for customers.”
Rosenow was keen to stress that the ‘bigger distortions sit in the levies.’ “But it moves in the right direction, and suggests a government that understands electricity prices are a barrier to decarbonising heat,” he added. “The question is whether this is a first step towards proper rebalancing between gas and electricity, or a standalone measure that stops here.”
