Domestic energy bills

How high are UK domestic energy bills? 

Energy prices are now lower than their peak in 2022/23, but they still remain much higher than historical averages. The Ofgem energy price cap is currently set at £1,755 for a typical household using electricity and gas. Since the Russian invasion of Ukraine, higher prices have largely been driven by increases in the price of gas. ²² Nesta, Is gas still the reason energy bills are so high?, 2025, https://www.nesta.org.uk/blog/is-gas-still-the-reason-energy-bills-are-so-high/  But the government has also funded a range of policies through energy bills, such as expansion of renewables, solar and energy efficiency schemes and measures to support poorer households – so called “policy costs”.   

Making international comparisons is difficult because governments use a mix of taxes, reliefs, subsidies, benefits and other measures to influence energy costs, but UK electricity prices look high in a global context. The most recent data from the International Energy Agency suggests that households in the UK face some of the most expensive electricity among comparable countries.

Rising bills have the biggest impact on lower-income households since price rises eat up a greater share of their disposable income or they may not have enough income to cover the increased cost and have no choice other than to cut back on energy use or build up debt and arrears. Domestic energy costs form 6% of total household expenditure on average, but 10% of expenditure for the lowest income decile. ²⁴ Office for National Statistics, Family Spending in the UK: April 2023 to March 2024, 2025, www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/expenditure/bulletins/familyspendingintheuk/april2023tomarch2024  Energy costs also result in higher prices for other goods and services as businesses pass on their own higher energy costs to households.

What is the government doing to lower energy bills now?

The government already directly supports households through a range of energy bill discounts:

• Warm home discount: £150 off energy bills for low income households
• Cold weather payments (in England, Wales or Northern Ireland) or winter heating payments (in Scotland): additional bill reductions for eligible households
• Winter fuel payment: payment for people receiving the state pension (though those paying higher rate tax will have to pay it back with their tax bill)
• Low income households are eligible for the warm homes discount. Some households receiving benefits may also be eligible for cold weather payments (in England, Wales or Northern Ireland) or winter heating payments (in Scotland).

In addition, households can also access a range of funding to improve the energy efficiency of their homes:

• Energy company obligation: the government requires energy companies to support low-income households to improve energy efficiency through interventions such as installing insulation. Companies have some flexibility to determine what support they offer and to what extent households need to contribute to the cost of any work.
• Boiler upgrade scheme: government grants to help fund the replacement of fossil fuel heating with alternatives such as heat pumps.
• Warm homes grants: government grants to improve energy efficiency for households with low-incomes or in certain areas.

Some of these schemes have recently been criticised by the National Audit Office ³⁰ National Audit Office, Energy efficiency installations under the Energy Company Obligation, 2025, www.nao.org.uk/reports/energy-efficiency-installations-under-the-energy-company-obligation/  due to the poor quality of some of the installations they have funded. 

What more could the government do to cut household energy costs?

The Labour manifesto committed to saving households “hundreds of pounds on their bills”. ³¹ Labour, Make Britain a clean energy superpower, 2024, https://labour.org.uk/change/make-britain-a-clean-energy-superpower/  In the short run it is very difficult for the government to affect the wholesale cost of energy. Nevertheless, depending on what the government is trying to achieve, it has a range of options to cut the cost ultimately faced by households. ³² For a longer list of options, see Energy UK, How to cut bills: A crisis we can’t afford to ignore, 2025, www.energy-uk.org.uk/publications/how-to-cut-bills-a-crisis-we-cant-afford-to-ignore/

Boost lower-income households’ incomes

If the government is seeking to help those on the lowest incomes with their costs of living, then they could choose to increase the support those households already receive through the benefit system. This would not change energy bills but would make them more affordable for those who receive benefits.

Cutting Value Added Tax (VAT) on domestic energy bills

Domestic fuel and power already attracts a reduced rate of VAT of 5% compared to the standard rate of 20%. Removing this 5% would directly cut energy bills for all households quickly. This would reduce government tax revenues by £2.5bn a year and save a typical household over £80 a year. ³³ Nesta, Is removing VAT really the best way to cut energy bills?, 2025, www.nesta.org.uk/blog/is-removing-vat-really-the-best-way-to-cut-energy-bills/  In cash terms, it would benefit most those with the highest energy usage who are often, though not always, higher income households. It would also be a retrograde step in terms of the overall structure of the UK tax system.

Reduce or end government policies funded by energy bills 

“Policy costs” add around £215 a year to a typical household’s bills. ³⁴ Ofgem, Summary of changes to energy price cap: 1 October to 31 December 2025, 2025, www.ofgem.gov.uk/sites/default/files/2025-08/summary-of-changes-to-energy-price-cap-1-october-to-31-december-2025.pdf

The government can reduce policy costs on energy bills. It is reportedly considering ending the energy company obligation. ³⁶ The Guardian, Reeves considers cut to green levies in effort to reduce cost of energy bills, 2025, www.theguardian.com/uk-news/2025/nov/04/chancellor-considers-cut-green-levies-reduce-cost-of-energy-bills-rachel-reeves  However, there are two main downsides to ending or shrinking the policies which are funded through bills. The first is that these policies support government objectives through supporting low-income households and the net zero transition. The government would be trading off long term policy objectives for lower short run costs. The second is that some policy costs reflect long term commitments that cannot easily be wound down. This includes payments as part of long term contracts for renewable energy generation which will need to be funded in some way.

Move the funding of government policies to general taxation

Alternatively, the government could fund some of these policies from general taxation rather than energy bills. This would reduce energy bills but would result in higher taxes or lower spending elsewhere to make up the funding. But this would still benefit those struggling most with energy affordability as the tax system as a whole is more progressive than energy bills so lower income households would gain from this change.

Capping prices paid by consumers

In times of particularly high or volatile energy prices, the government has intervened to control bills directly. Most recently, the government did this from 2022 to 2024 through the energy price guarantee. This capped the price that consumers paid for a unit of energy at a lower level than the cost to energy retailers of supplying it, breaking the link between wholesale and retail energy costs. Any difference between the retail price and wholesale price was made up by the government, paid for either from general taxation or higher borrowing. As with moving policy costs onto general taxation, this sort of policy shifts rather than reduces the burden of high energy bills. This approach also creates a large and unpredictable ongoing cost to the government.

What move fits best with the government’s commitment to decarbonise the energy system by 2030 and achieve net zero by 2050?

The government’s clean power plan ³⁹ Department for Energy Security and Net Zero, Clean Power 2030 Action Plan, 2024, www.gov.uk/government/publications/clean-power-2030-action-plan  envisaged bills falling through a combination of:

• Reduced dependence on volatile international gas prices through generating more renewable energy
• More energy efficient homes and businesses
• More flexibility in the energy system so power is used when it is cheapest

If the government cuts bills in a way that slows progress on these goals, then they will find it more difficult to achieve their climate objectives and make long term savings for households. For instance, lower VAT on energy use or less support for energy efficiency measures might result in higher energy use and higher emissions than would otherwise be the case.

One change that would cut bills and support the government’s wider energy goals would be to move policy costs from electricity bills to general taxation. Currently policy costs fall more on electricity than gas and this makes electricity relatively more expensive and discourages households from switching to more efficient electric technologies such as electric vehicles and heat pumps. Indeed, the independent Climate Change Committee recently said that “Our number one recommendation remains to make electricity cheaper. This means taking policy costs off electricity bills.” ⁴⁰ Climate Change Committee, Response to the Government’s Carbon Budget and Growth Delivery Plan, 2025, www.theccc.org.uk/2025/10/29/response-to-the-governments-carbon-budget-and-growth-delivery-plan/