What can be done to reduce Britons’ energy bills and accelerate decarbonisation?
Environmental levies in Great Britain fall disproportionately on electricity bills rather than gas bills, and thus electricity is artificially expensive relative to gas. This matters enormously for the economics of low-carbon heating. The time to reform energy bill structure is now, before rising policy costs associated with the clean energy transition make the problem harder to solve, write Shefali Khanna and John Cui.
More than a simple commodity charge, energy bills bundle together wholesale market prices, network infrastructure costs, environmental levies and supplier margins. The way these components are structured is helping to keep bills high and hampering the transition to clean energy. With the electricity to gas price ratio (4.2 since April) still well above the level at which heat pumps become cost competitive with gas boilers (3.3 based on analysis by Nesta), the current bill structure is actively working against the Government’s net zero ambitions.
The 2022 energy crisis – triggered by the gas price shock – exposed not only the UK’s dependence on volatile international fossil fuel markets but also deep structural problems in how bills are constructed and costs spread across consumers. Prices remain elevated and energy costs continue to be a key contributor to inflation.
Non-domestic consumers face related pressures including reduced competitiveness relative to international rivals and the passing of unmanageable costs onto end customers. And although high electricity costs are not the main consumer-reported barrier to adopting low-carbon technologies, they remain a significant factor, particularly through their effect on payback periods.
Why bills are high
Understanding why bills are high requires unpacking their structure. A dual-fuel domestic bill typically comprises: wholesale (commodity) costs; network charges; policy levies; supplier operating costs; VAT; and other costs. Each component is recovered either through the unit rate (p/kWh of energy consumed) or through a fixed daily charge. The regulator Ofgem has stated that both network and policy costs can be allocated 50:50 to the unit rate and fixed charge, with the choice influenced by policy design, regulatory requirements and considerations around consumer impact.
Wholesale costs reflect the price set in electricity and gas markets, determined by the marginal generator needed to meet demand at any given moment. In normal conditions, the wholesale cost equals the short run marginal cost of the marginal unit, but during tight system conditions, scarcity uplifts are added to form the final wholesale cost. Carbon tax and the Carbon Price Support (CPS) also add to the final wholesale cost when the marginal generator is fossil‑fuelled. This dynamic explains much of the volatility seen in 2022.
Network costs cover three regulated charges: Transmission Network Use of System (TNUoS), which recovers the cost of the high voltage national grid; Distribution Network Use of System (DUoS), which covers the local network; and Balancing Services Use of System (BSUoS), which pays for the real time balancing of supply and demand (now payable only by final demand users). Under the current price cap structure, DUoS is the largest of the three, representing around 15% of a typical bill, compared with roughly 5% for TNUoS and 6 to 7% for BSUoS. Since the 2022 energy crisis, Supplier of Last Resort mutualisation costs have also contributed to the rise in DUoS charges, spread across all GB energy customers. The current cost allocation is not evenly distributed between distribution and transmission connected generators. Smaller generators (below 100 MW) connected to the distribution network can avoid paying the TNUoS charge, and may even receive payments from TNUoS when they export electricity that helps support the local network.
Policy costs – environmental levies passed through by suppliers – fund government mandated policies and mechanisms. From April 2026, seven separate levies will be applied to the unit rate of electricity bills: the Renewables Obligation, Feed-in Tariff, Network Charging Compensation, Capacity Mechanism, Contracts for Difference, Nuclear Regulated Asset Base and Warm Home Discount (which will move to a volumetric basis). Gas bills carry just two levies: the Warm Home Discount on the unit rate and the Green Gas Levy on the standing charge. This asymmetry has significant consequences for consumer behaviour.
The 2022 energy crisis also exposed structural weaknesses in the retail market. Many suppliers operated with high-risk business models and were over-reliant on customer credit balances as working capital. Ofgem’s subsequent financial resilience reforms now require suppliers to put their own capital at risk rather than relying on customers’ money. When suppliers fail, the costs of positive credit balances and renewable obligations are spread across all customers in Great Britain through the Supplier of Last Resort process. Evidence suggests these transfers often flow from disengaged, lower-income customers to those who previously benefited from lower tariffs offered by riskier suppliers.
Figure 1. Bill structure for typical domestic consumers in Great Britain based on Ofgem’s April 2026 price cap
The electricity to gas price ratio is holding back the transition to low-carbon heating
One of the most consequential and most underappreciated features of the current bill structure is the electricity to gas price ratio, in which electricity is artificially expensive relative to gas.
Environmental levies fall disproportionately on electricity bills. A ratio of around 3.7 represents the breakeven point: at that level, running an efficient air source heat pump (with a Seasonal Coefficient of Performance of 3.4) costs the same as running an efficient gas boiler at 92% efficiency. The latest price cap data puts the actual ratio at 4.2 – down from 4.7 in the January cap, but still well above breakeven. As long as electricity remains this expensive relative to gas, households face a financial disincentive to switch to heat pumps, even where a heat pump would be the lower-carbon and, over its lifetime, potentially cheaper option. In addition, even with existing government heat‑pump support, some consumers still struggle to manage the cost of installing a heat pump. Innovative financial options would be valuable in helping consumers who face difficulties with the upfront capital cost.
This matters for the long-term trajectory of household bills. While the UK continues to exploit gas reserves in the North Sea, the limited size of these reserves and the fact that gas prices are set in international markets mean this has little impact on domestic bills. Households that lock in gas heating now face exposure to that volatility for the lifetime of their boiler. Reducing the electricity to gas ratio and accelerating the switch to heat pumps is therefore not only a decarbonisation objective but also one of improving long-term affordability.
Demand flexibility can lower bills – but the incentives need fixing
One of the most readily available tools for reducing bills is demand flexibility: shifting electricity consumption away from peak periods when system costs are high and towards periods when generation from renewables is abundant and cheap. As the share of variable renewables in the generation mix grows, the value of this flexibility will only increase.
The problem is that the current tariff structure provides almost no incentive to shift. Standard flat-rate tariffs charge the same unit rate regardless of when electricity is consumed, eliminating any encouragement to households or businesses to move their use of electricity out of peak periods. The widespread rollout of smart meters now provides the technical foundation for time-of-use tariffs at scale and smart technologies can automate load control. Smart electric vehicle chargers, heat pump controllers and home batteries can shift consumption to cheap periods without requiring active effort from the consumer. Pilot schemes consistently show that automated flexibility delivers more sustained load shifting than approaches that depend on consumers actively engaging with price signals.
There are, however, distributional concerns that must be addressed. Citizens Advice and Consumer Scotland have both documented the affordability challenges facing vulnerable households, and any tariff reform must be accompanied by measures to ensure the benefits of flexibility are widely accessible. The operator NESO’s Demand Flexibility Service, piloted in winters 2022/23 and 2023/24, has demonstrated that aggregated residential demand can provide reliable demand reductions at times of system stress, and at lower cost than an expensive and carbon-intensive peaking plant. Streamlining consumer and aggregator access to balancing and ancillary services markets would unlock further value, particularly for non-domestic consumers with higher demand that can be controlled and scheduled more easily than in households.
Shifting policy costs off electricity bills could accelerate decarbonisation
A more fundamental reform would reallocate the policy costs currently embedded in electricity unit rates – either into general taxation, or by redistributing them more evenly across electricity and gas bills. The rationale is straightforward: it is a structural anomaly that the levies used to fund the clean energy transition fall predominantly on electricity, the very fuel that the transition depends on consumers adopting more of.
The implicit carbon tax on electricity can exceed £200 per tonne of CO₂, acting as a brake on electrification, while the equivalent for gas used in buildings is closer to £50 per tonne – which in the case of household gas amounts to an implicit subsidy. Rebalancing would bring the electricity to gas ratio closer to the breakeven level, reduce the payback period for heat pumps and electric vehicles, and make the economics of electrification more transparent.
Funding subsidies for renewables through general taxation would also make the cost of the energy transition more visible to the public and Parliament. However, there is an important caveat: financing renewable systems via general taxation introduces political uncertainty. This uncertainty could increase the required working capital, potentially offsetting the benefits gained from removing policy costs from energy bills. Therefore, a careful impact assessment is necessary when considering a shift from bill-based funding to general taxation for renewable support schemes.
Reform is needed – and the window to act is now
The structure of UK energy bills is not a technical detail. It shapes the investment decisions of households and businesses, the competitiveness of industry and the pace of decarbonisation. Three reforms stand out as priorities.
First, Ofgem should move to make time-of-use tariffs the default for smart metered customers, backed by measures to ensure low-income households can access and benefit from flexible pricing.
Second, the Government, Ofgem and NESO should work together to reduce the electricity to gas price ratio to at or below the heat pump breakeven level by funding clean energy subsidies through general taxation.
Third, access to flexibility markets should be simplified for consumers and aggregators. The Demand Flexibility Service has demonstrated that residential demand response is technically viable; it should now be made structurally accessible.
Lower energy bills are not only a matter of social equity, though equity matters greatly. They are also a precondition for economic competitiveness, faster decarbonisation and greater energy independence. The current bill cost recovery system was designed for a different energy system. It is time to redesign it for the one we are building.