The cost of energy is back in the spotlight this month, with household bills set to rise this winter and the UK government introducing means-testing for the Winter Fuel Payment. Although we’re unlikely to return to the days of the 2022 energy crisis, bills remain far higher than before the crisis. The cause is a familiar one: high and volatile gas prices.

It is worth restating just how much energy bills have risen. The typical household gas bill will be around £400 higher this winter than in the winter of 2020/21*. Gas prices have risen even more over the last 15 years – wholesale prices are now 3 to 4 times times what they were in 2009**. And they may rise further in future, because gas prices are volatile and affected by international events we cannot control. The status quo on energy bills is a very bad one.

This means that the only sustainable way to reduce energy bills in the UK is to stop using gas to heat our homes. That means replacing it with electricity, and using more efficient technologies like heat pumps. Unfortunately, there’s a major, self-inflicted policy problem that holds us back: our high taxes on electricity make it much less attractive for UK households to make the switch away from gas.

The UK adds levies to energy bills, which currently add around £140 to a typical household’s electricity bill, while adding only around £50 to a typical gas bill. This makes electricity much more expensive than gas and means the economics of heat pumps often don’t stack up.

These levies were added for good reasons, but in a piecemeal way. For example, the Renewables Obligation subsidised the early growth of renewable energy, while the Feed in Tariff did the same for rooftop solar. The Energy Company Obligation aims to tackle fuel poverty. But there is nothing rational about where the levies sit now. Now that the UK has much cleaner electricity, we need to start using it more widely, and the levies act as a block on doing that - almost the opposite of a carbon tax.

Other countries with cheaper electricity generally have more heat pumps, and are becoming much less reliant on gas. In the UK, we’re left in a trap. Most households can’t afford to switch to more efficient electric heating, but they’re left stuck with high and uncertain gas bills. We’re also at very high risk of missing our net zero obligations.

The solution in our view is to shift the levies away from electricity and on to gas. It is both possible and essential that this is done in a way that provides support for the most vulnerable households. If the government did this, we estimate the typical household could save around £400 on their energy bills by getting a heat pump - roughly the same as the rise in gas bills since early 2021.

But agreeing how the levies issue should be corrected is more difficult. One often cited route is to move electricity levies in to general taxation. This would mean electricity getting cheaper and gas getting no more expensive. However this would cost the Treasury around £5 billion a year – a huge sum in the context of what government currently spends on energy and climate change. The current UK fiscal stance makes this almost impossible and so moving all electricity levies onto general taxation is unlikely to happen.

The real debate therefore has to be about rebalancing levies between electricity and gas. Shifting some levies from electricity on to gas has two important advantages: it can be revenue neutral for government; and it reduces the electricity to gas price ratio more rapidly, because it makes gas more expensive as well as electricity cheaper.

But that is the key challenge in rebalancing levies: it makes gas more expensive.

For some, this is a red line that cannot be crossed, but to stick with this status quo commits us to continuing with our current model of high and volatile energy bills and a shift towards clean heat that is moving too slowly if we are to meet our net zero targets.

It’s important to stress that every UK household has an electricity bill. So anything which makes electricity cheaper will provide a benefit to everyone. The problem is about the distribution of costs.

For the 4.5 million British households that don’t use gas, revenue-neutral rebalancing offers nothing but good news. This is particularly beneficial for households who use direct electric heating (there are 470,000 in England). As a group they are struggling with energy costs more than any other. The average fuel poverty gap (the amount their energy bill would need to fall to take them out of fuel poverty) for households in England using direct electric heat is £857 per year, compared to £299 for those using gas.

But a revenue-neutral approach means that any savings on electricity bills have to be balanced with increased costs on gas. And while every gas-using home has an electricity bill, there are some homes which use a lot more gas than electricity and could see a net increase in bills as a result of this shift. The increase would be fairly modest in most cases - importantly, it would be far less than the £400 increase in gas bills we’ve seen over the last 4 years - but for a household already in fuel poverty, there is a risk that any increase would fall too heavily on those who can least afford it.

What is needed then is to rebalance levies, but provide targeted support to low income homes who lose out. The government could adopt a social tariff or expand the Warm Homes Discount to offset any rises in gas bills. The government should expand funding for fuel poor households and social homes to switch to low carbon heating - taking advantage of much cheaper electricity prices. The government could also look at setting a ceiling on gas prices so that the last homes to switch to low carbon heat do not face very high gas bills. That would mean supporting more vulnerable households in the short term, and moving towards lower, more stable energy bills for everyone in the longer term.

Doing nothing, and leaving levies untouched, is a poor option and leaves fuel poor homes trapped with rising gas bills. We must support fuel poor and vulnerable households, and the best way to do that is to switch from gas to electricity. We cannot achieve that without raising the unit price of gas, and we should focus on doing that in a way that supports those most in need.

* The price cap in October 2020 - March 2021 for gas bills in a typical home was £523 (including standing charge). For October - December 2024, that will rise to £926. Figures from Ofgem, assuming 12,000 kWh consumption.

** Ofgem data shows Day Ahead gas wholesale prices in October 2009 as 25p/therm and at 102p/therm in October 2023. The most recent figure. For July 2024, is 94.18p/therm.