Household energy bills include green levies. What are they and why do we need to pay them?
www.nesta.org.uk/household-energy-bills-green-levies/
www.nesta.org.uk/household-energy-bills-green-levies/
When energy providers set tariffs for gas and electricity, the price includes a range of costs. In addition to covering the cost of the energy itself, the costs of running and maintaining gas and electricity networks, and various business expenses, the government also requires energy companies to collect levies from customers to fund environmental and social programmes.
These levies make up 16% of the final price of electricity and 5.5% of the final price of gas. For a typical household, they add about £140 to the annual electricity bill and £50 to the gas bill.
Currently, 82% of the revenue raised from domestic levies comes from electricity bills and only 18% from gas bills, despite households consuming around three times as much gas each year.
A typical household's electricity bill includes three times more policy costs than a gas bill
Column chart comparing policy costs relative to total electricity and gas bills for a typical household. Policy costs make up 16% of the £884 electricity bill and 6% of the £833 gas bill.
This disparity contributes to electricity being much more expensive than gas, and essentially acts as a tax on low-carbon energy (opposite to a carbon tax) now that the UK has much cleaner electricity (due to the elimination of coal-burning power stations and the continuing increase in renewable energy).
So why do we have to pay levies and what are they?
Energy bills have included what the energy regulator Ofgem calls ‘policy costs’ for well over a decade.
This arrangement has allowed the government to raise a significant amount of funding for schemes that would otherwise require public spending.
Six separate schemes funded through household bills have been developed between 2002 and 2021.
Some schemes provide ongoing support to vulnerable households, while others recover costs for environmental investment schemes.
Levies raised £5.9 billion from household energy bills in 2024.
The Renewables Obligation (RO) funds ongoing commitments to earlier renewable generation projects. It raises £3 billion from household bills a year at a rate of 3.2p per unit. The specific annual cost is based on the number of existing contracts with renewable energy generators. This scheme will taper down as these contracts gradually expire from 2027 onwards. It is the largest policy cost on electricity bills, adding £86 to the annual bill of a typical dual-fuel household. Additional RO revenue is raised from non-domestic electricity bills.
Feed-in Tariffs (FiT) pay back households who installed renewable generation technology between 2010 and 2019 for each unit of electricity they produce. This is covered with £689 million a year from levies on domestic electricity bills at a rate of 0.7p per unit. This scheme is closed to new applicants and will wind down by 2039, with the revenue requirement declining over that period. Like RO, an additional portion of FiT revenue is raised from non-domestic electricity bills.
The Energy Company Obligation (ECO) is the main government scheme helping low-income households with insufficient insulation reduce their energy costs. ECO currently provides £1.1 billion per year for heat and efficiency measures. Since 2022, this levy has also raised a further £475 million for the Great British Insulation Scheme – a similar insulation scheme that is targeted more broadly. The levy raises equal amounts from domestic gas and electricity bills, adding 0.3p to each unit of gas and 0.87p to each unit of gas.
The Warm Home Discount (WHD) levy raises £553 million a year to help vulnerable households cover the cost of energy over winter. Eligible households receive a £150 annual rebate towards their total energy bill. This is funded through a £10.91 levy included in both the electricity and gas standing charges.
Assistance for Areas with High Electricity Distribution Costs (AAHEDC) is a minor levy that supports electricity distribution costs in Northern Scotland. It is charged per unit of electricity. It raises £40 million annually, adding only £1.14 to the typical household’s annual electricity bill.
The Green Gas Levy (GGL) funds the production of biomethane (a carbon-neutral, renewable fuel) injected into the gas grid. It raises around £9 million annually from households via a levy included in the gas standing charge. This only adds [£0.38] a year to a typical domestic gas bill. These costs will rise until 2028 as the scheme is expanding.
Alongside the levies listed here, bills also include policy-related costs classed as ‘wholesale costs’ such as Contracts for Difference and the Capacity Market. These schemes add a further £1.8 billion and £1 billion to domestic bills a year. However, as these help ultimately make electricity cheaper by supporting the market, they don’t unduly increase bills.
Annual policy costs raised from the fixed (standing charge) and consumption-based components of gas and electricity bills.
Total annual amount collected on levies through gas/electricity bills on the standing charge vs energy units
Treemap showing the total annual amount collected through levies on gas and electricity bills in 2024. Electricity levies dominate, with £4,535 million collected on unit costs and £299 million on standing charges. Gas levies are smaller, with £812 million on unit costs and £264 million on standing charges.
The historical reason for the split of levies between gas and electricity is that electricity bills carry the policy costs associated with clean electricity generation while gas bills support the production of ‘green’ gas.
Environmental levies account for 62 % of all levy revenue. Social schemes, like the Warm Home Discount and the Energy Company Obligation (ECO), account for the remaining 38 %.
These revenues raised by levies are split evenly between gas and electricity bills even though households use a lot more gas than electricity. This is because the rate of levies placed on units of energy (namely ECO) is three times higher on electricity (0.87 p/kWh) than on gas (0.3 p/kWh).
The current approach to levies means that the small subset of households who rely more on electricity – those with electrical heating – end up shouldering a disproportionate share of the cost.
This is also a fuel poverty problem as well as a fairness problem. Many poor households with inefficient electrical heating are forced to spend sizable portions of their income on electricity.
Because similarly sized lower-income households use broadly as much energy as average-income households, they end up contributing a larger portion of their income through levies. This makes levies regressive, compared to general taxation.
The chart below shows levies paid through bills as a share of income for different types of households. Household archetypes are grouped based on their heating fuel, energy consumption, income and other characteristics.
Hover over columns to see descriptions of household archetypes.
Total gas + electricity levies as a share of net income of different archetypes
Bar chart showing total gas and electricity levies as a share of net income across Ofgem consumer archetypes, from low-income (left) to high-income (right). Low-income households with direct electric heating (green bars) face the highest burden, exceeding 1.5%, while wealthier archetypes experience a much smaller share.
Another negative consequence of the distribution of levies is that it creates a disincentive to using electricity-powered technologies over gas even though electricity is a much cleaner fuel. The financial barrier to shifting towards low-carbon heating traps households with gas boilers so that they stay reliant on imported gas for longer.
Businesses also pay environmental levies as part of their energy bills, with charges that vary by sector and energy use. The Climate Change Levy is a specific charge which only applies to non-domestic consumers. The Renewables Obligation and Feed-in Tariffs are funded by both households and businesses.
Other taxes on energy include VAT, applied at 5% for domestic use and 20% for most businesses, and fuel duty, which makes up around 19% of the unit price of heating oil. Unlike levies, which directly support environmental and social programs, these taxes contribute to general public funds.
As the UK moves toward net zero, there’s growing debate over how levies are structured. Shifting them to general taxation or spreading them more evenly across gas and electricity could incentivize the transition to low-carbon heating powered by electricity. Rebalancing levies will be key to making the green transition affordable for everyone.
