What if we paid for electricity through taxes, not bills?

The UK government has announced that standing charges will be removed from gas bills and that it intends to also remove them from electricity bills. Standing charges are a fixed fee paid by every household, regardless of how much they use. Under the proposed change, the costs they cover would instead be covered through unit rates, thereby ensuring that the costs are spread more fairly among those using more or less gas. The budget also extends a temporary suspension of VAT on electricity and introduces a one-off payment of £100 to households in council tax bands A-D. Together, these measures might shave around £130 off the average annual energy bill for struggling households. In principle, this announcement is welcome. But with energy bills expected to increase by £400 annually from January, these measures raise a bigger question: how should Britain pay for the energy system transformation away from fossil fuels? What if more of the costs were covered through taxation rather than bills? Energy bills don’t just reflect the cost of supplying electricity and gas. They also include “policy costs”, which fund the greening of the energy system (around 60%) and support for vulnerable households (40%). These costs add around £300 a year to the average household bill, accounting for around 16% of a typical electricity bill and 6% of a typical gas bill, according to research by Nesta. Recovering these costs through electricity bills is a political choice that made more sense when electricity generation was mainly coal-fired and highly polluting. Now that the share of renewables is increasing steadily, we should reconsider how these policy costs are paid. Policy costs have roughly doubled in the past decade, making electricity relatively more expensive than gas, which slows the shift to electrified heating and transport. From bills to taxes The government has already taken steps towards shifting costs from bills to taxation. In its 2025 autumn statement, the government moved 75% of the costs of the Renewables Obligation – an old policy support mechanism for renewable energy – into general taxation. It also disbanded a flagship but discredited home insulation scheme entirely. This was expected to lower bills by around £150 per year, before geopolitical turmoil pushed prices up again. The latest budget provides a further example of this approach. Alongside the announcement to remove standing charges from bills, ministers have scrapped a planned levy on gas bills to fund hydrogen projects, deciding instead to pay for them through government funding. Wind turbines await deployment in the North Sea. But should electricity bills help pay for this? Sergii Figurnyi / shutterstock The UK’s official advisory Climate Change Committee has also recommended removing policy levies from electricity bills to make electricity cheaper and accelerate electrification. Energy UK, the industry’s main trade body, has gone further, arguing for shifting policy costs off electricity and onto a mix of taxation and gas bills. This would make gas relatively more expensive, encouraging electrification and renewable energy. Other groups, including parts of the chemical industry, warn that raising gas prices could make the industry less competitive by significantly raising industrial costs. But who pays? In principle, shifting costs from bills to taxation moves money between largely the same people. However, the distributional effects are different. Instead of a flat fee on everyone’s bill, a tax-funded system would be “progressive”. This means the more you earn, the more you contribute. By contrast, the current system of levies – with a fixed charge added to everyone’s energy bill – is “regressive”. Because those charges are the same for everyone, they take a much larger chunk out of a low-income household’s budget than a wealthy one’s. This means poorer households not only spend a greater share of their income on energy, but many of the green subsidies funded by the levies – such as support for electric vehicles or heat pumps – disproportionately benefit wealthier households. But why stop there? Analysts at the New Economics Foundation, a thinktank, argue for funding a basic level of energy use through taxation. The taxpayer would keep your lights on and your fridge running, but you’d think twice before charging your electric vehicle in the more expensive peak hours. Thinktank E3G’s work suggests this could cut household bills by around £300 a year, at a cost of £10-11 billion per year to 2030. Some of this could potentially be covered by higher tax revenues from oil and gas companies during periods of high prices, the thinktank argues. It would be an intervention on a similar scale to the £40 billion the UK government spent on subsiding bills during the 2022-23 energy crisis sparked by Russia’s invasion of the Ukraine. Another option is a rising block tariff, in which energy use is divided into tiers, or “blocks”, and households pay progressively more as their usage increases. Its proponents suggest block tariffs can make energy more affordable while aligning with wider decarbonisation goals. In practice, however, these tariffs are likely to be regressive, since people on lower incomes are more likely to live in poorly-insulated homes and rely on less efficient electric night storage heating. The government can do little to influence the effect of geopolitical uncertainty on energy prices, and drilling in the North Sea will do nothing to lower household bills. What it can do is change how those prices are passed on to consumers. Shifting policy costs to taxation is already under way. But maybe the time is right for a minimum or essential energy use supported through taxation. It is not a simple solution, and many trade-offs need to be considered, but an unprecedented shock to energy markets requires an unprecedented response.