Are ‘green levies’ going up in April 2024?

Green levies, officially known as ‘policy costs’ by Ofgem, help to pay for both social and environmental policies, they are not purely ‘green’.

These policies help to install energy efficiency measures into low income and vulnerable households, fund the Warm Homes Discount which gives elderly people £150 off their winter heating bill, and support British renewable projects that have seen the costs of wind and solar power fall faster than any analysts predicted – with the Contracts for Difference scheme saving the UK hundreds of millions during the gas crisis.

At the start of the gas crisis, some media commentators tried to suggest that green levies were to blame for rising bills, whereas the cause was undoubtedly globally high gas prices. It took several months for these claims to gradually disappear despite their lack of credibility becoming ever more apparent. Obviously volatile gas markets forced gas bills up and, as 40% of the UK’s electricity is still generated from gas and there is a marginal pricing system where the most expensive generator (here, gas) sets the price for all generation, electricity bills too.

This means that despite a significant fall of around £240 for the average household’s dual fuel bill in April 2024, energy bills are still 50% higher than pre-crisis levels. The fall also partly relates to Ofgem’s model accounting for a likely decrease in consumption. [1]

From April 2024 [2], wholesale energy costs (the black bars in the chart below) will make up over 40% of a typical dual fuel bill or £700 per year (excl VAT). However, at times over the past two-and-a-half years of the gas crisis, this figure has reached a staggering £3,125 (excl VAT), equivalent at its peak to around 75% of the total bill.

Even as wholesale costs fall, if you add network and operating costs to wholesale costs from April 2024 these combined will account for around 75% of a typical dual fuel bill.

Green levy increases dwarfed by wholesale gas

Levies had remained fairly stable but are also changing come April. Rising by £30 per year for the typical household to £188 per year (excl VAT), the levies will make up just 11% of a dual fuel bill on average.

The increase will help to pay for programmes that drive down bills for households that have been struggling. The expansion of the Energy Company Obligation scheme – which has seen millions of homes fitted with energy saving technology since it began – will allow for more households to be eligible under the new Great British Insulation Scheme. In order to fund more energy efficiency installations, the typical household will see green levies rise by £16 per year. This may be a small price to pay compared to the bill savings that fuel poor households may make from having things like insulation fitted, which amount to hundreds of pounds per year off heating bills.

Also increasing in April, by £11 for the typical household, is the Renewables Obligation levy. This helps to pay for early renewable projects that have driven cost reductions for the newer technologies. The levy increase is due to renewable projects being saddled with inflationary pressures, ironically largely caused by high gas prices. In addition, industrial electricity users exemptions from the Renewables Obligation and Feed-in Tariff levies have been upped to 100% (from an 85% exemption) which has added a few pounds to every domestic customers bill.

The Contracts for Difference scheme was removed as a levy during the gas crisis, as high wholesale power prices meant that the scheme ended up paying consumers around £18 each in just one year. The scheme now falls under the wholesale part of the bill.

And there energy security is a focus, building out renewables has never been more important. The United Nations, International Energy Agency and UK’s Climate Change Committee have also stated that more homegrown renewables will deliver energy independence, because as the North Sea continues its decline, unless we move away from gas for electricity generation and heating, we will have to import more from abroad.

Distribution of levies between gas and electricity

However, the split of green levies between gas and electricity bills is unevenly distributed. Just 6% of a typical gas bill is from green levies, rising to 16% of an electricity bill, and 11% of the average dual fuel bill. With electricity increasingly from cheaper British renewables like offshore wind, electricity is the cleaner fuel compared to gas and there is a push to electrify both transport, through electric vehicles, and heating with solutions like heat pumps.

Government advisors the Climate Change Committee, have recommended that the green levies be re-distributed to ensure that consumers are not unfairly penalised for switching to the fuel that is cleaner and better for energy security, given supply of gas will increasingly come from abroad as the North Sea continues its inevitable decline. The Government has committed to reviewing the levies but the timescales are unclear.

Green levies are essential for supporting energy saving measures in people’s homes, and for building out our renewables to improve energy security. Without them, bills would be higher and we’d be more reliant on foreign gas.