A short summary

The UK has one of Europe’s highest electricity prices versus the cost of gas. As a result, low carbon heating is seen as less cost competitive and is proving to be a barrier for consumers when looking at more sustainable heating options.

The debate surrounding how to reduce the cost of electricity through levy rebalancing is a hot topic. In light of this, the SEA has developed some analysis for a clean heat tariff as a way to reduce the running costs of low carbon heating systems without raising prices for customers using fossil fuel heating.

Key outcomes:

• We developed four scenarios to compare how the electricity levy structure may change in the future.
• Our analysis found that reducing the running costs of all electrically fuelled heating systems (Scenario 4 in our analysis) would be the most beneficial policy, supporting those in fuel poverty the most.
• Scenario 4 would be particularly beneficial for those using direct electric heating, achieving ~£400 reduction in annual bills and ~£4,000 reduction in lifetime costs.
• We also found through our analysis that levy rebalancing alone will not be enough. A regulatory driver, such as our Carbon Intensity Standard proposal, would help to bring electric heating systems below the lifetime costs of fossil fuel heating systems.
• We recommend that the Government continues to provide support under existing grant funding programmes This should happen while implementing wider electricity market reform, increasing recognition of demand side response and flexibility within policy and increasing the efficiency of heat pumps and direct electric heating, as per E3G’s findings.

The high price of electricity in the UK is caused by wholesale gas and electricity prices, carbon taxes, and policy costs. The latter reasons are known as levies, which are currently placed on electricity bills to support social and environmental initiatives. Currently, electricity prices in the UK are four times more expensive than gas.

11% of households in England were in fuel poverty in 2024, and this is exacerbated for households using old, less efficient, and/or non-smart direct electric heating systems. Fuel poor households are also more likely to rely on electricity as the fuel for their main heating systems. This shows that electricity prices are not just inhibiting the rollout of low carbon heating systems but are also worsening fuel poverty for homes across the country.

Our rebalancing scenarios consider both the upfront cost and running costs of different heating systems to calculate a lifetime ownership cost across a 15-year period from 2027 to 2041.

Our key findings suggest that levy rebalancing alone is not sufficient to bring the lifetime costs of electric heating systems below the lifetime costs of fossil fuel heating. Furthermore, additional risks exist if subsidy schemes reduce in value, or if they become politically unfavourable and are scrapped.

To even out the playing field for low carbon technologies, the SEA suggests implementing levy rebalancing as outlined in today’s proposal, alongside a regulatory driver and wider reforms that will outlast subsidy grant programmes while providing long-term certainty for the sector.

Our Carbon Intensity Standard does just this, gradually reducing the number of fossil fuel heating systems being installed overtime. It provides a market driven approach, while providing space for low carbon alternatives, such as heat pumps, infrared, radiant heating, smart storage heaters, and more.

To read about our levy rebalancing proposal in further detail, or to learn more about our complementary regulatory drivers to support this initiative, visit our publications page.