October 18, 2021

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How to escape new green taxes on your energy bill

Household energy bills are soaring thanks to a rise in wholesale prices, but a Government tax change would see gas bills increase even further.

The Government plans to move green energy surcharges, which are currently applied to household electricity bills, on to gas bills as part of its “net zero” drive. However, critics have warned this could add hundreds of pounds onto already large bills.

Plans are due to be announced next month, but ministers are expected to phase in the tax changes over a period of up to 10 years. They insist that combined energy bills will not increase in price.

However, the move could mean customers with traditional gas boilers will pay more tax than those with more expensive heat pumps, or hydrogen boilers. The proposals have already sparked controversy at a time when household energy bills are rising rapidly. 

But how much more will you pay, and what steps can you take now to cut your bill?

How much more will you pay in green taxes?

Household electricity bills are subject to 5pc Value Added Tax, as well as “environmental and social obligation costs”, according to regulator Ofgem. These levies make up about a quarter of the cost of an electricity-only tariff. 

This cost is made up of various charges which fund “decarbonisation” programmes, as well as social policies such as the Warm Home Discount scheme.

Gas bills are also subject to 5pc VAT, but environmental and social obligation charges are much lower. Around 15pc of the typical “dual fuel” tariff – including both gas and electricity – is made up of these levies, according to Ofgem.

Household energy prices are changing every day as suppliers increase the price of fixed-term deals, but before the current crisis hit the average electricity bill was £705 per year for customers on single tariffs and £582 for those of dual fuel tariffs, according to analysis of Ofgem data by comparison site Love Energy Savings.

If all environmental and social obligation costs were removed from electricity tariffs, the bill for those on single tariffs would fall by £176, to £529.

Meanwhile the average gas bill before the crisis was £552 for those on a dual fuel tariff and £642 for those on a single tariff. If environmental and social obligation costs were instead levied on gas bills at the level they currently are on electricity bills, the yearly cost for a single tariff could increase to roughly £835 – a rise of £209.

However, the Government may only move environmental levies to gas bills and not social charges. If this was the case the increase to gas bills would not be as large.

Should you change your boiler now?

A ban on the sale of new gas boilers has been mooted for 2025. However, after concerns were raised over the upfront cost to households, the Government is now considering a delay. Another proposal would see all gas boilers outlawed by 2035.

In May, the Department for Business, Energy and Industrial Strategy said it would “incentivise” people to switch to low-carbon alternatives, while making sure boilers are replaced in a way that is “fair, affordable and practical”.

To help reach carbon emission targets, 600,000 heat pumps are to be installed each year by 2028. Hydrogen boilers have also been mooted as an alternative, but these devices are still in development.

Air source heat pumps pull ambient heat from the air and increase the temperature using a compressor. This is then used to heat radiators and water. Ground source heat pumps are similar, but draw heat from pipes buried in the ground. These have higher up-front costs but run more efficiently.

For many households, these devices are prohibitively expensive. While a replacement gas boiler can cost around £1,000, an air source heat pump full system installation can cost between £7,000 and £14,000, with ground source heat pumps costing between £15,000 and £35,000.

Adding the current green tax burden on to gas instead of electricity could see bills rise for those who can least afford to make the switch.

Chris Stark of the Climate Change Committee, an independent public body, this month called for policy changes to make heat pumps a more realistic proposition for households.

Will the Government help you switch?

The Domestic Renewable Heat Incentive, a Government grant, can help to reduce the overall outlay of a low-carbon heating device. People who join the scheme and adhere to its rules receive quarterly payments for seven years for the amount of renewable heat that their system produces, to help offset the cost. This scheme will run until March 2022. 

The Government is launching Clean Heat Grants from April next year, which will replace the Renewable Heat Incentive and last for two years. It will offer grants of up to £4,000 to help install devices such as heat pumps.

What should I do to cut my bill? 

Changes to your home to improve its heat retention could help mitigate rising gas costs or improve the efficiency of a heat pump.

According to My Utility Genius, a comparison site, around 35pc of heat in an average semi-detached house is lost through its walls. Properly installed cavity wall insulation can save up to 15pc on heating costs. 

Homes built before the 1920s are more likely to have solid walls. These are more difficult and expensive to insulate but doing so can generate higher savings. My Utility Genius said that installing this type of insulation could cut the average energy bill by up to £350 a year.

In an uninsulated home, almost a quarter of heat is lost through the roof. Loft or roof insulation could save up to £175 on the average bill, the comparison site said. Insulating floors, by filling in gaps below skirting boards can reduce heat loss by up to 10pc, cutting £60 from the typical energy bill.

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