Energy suppliers including British Gas, Eon and Octopus have called on the UK government to move a swath of charges from customer bills into general taxation as they face growing pressure to lower soaring costs for households.
With UK gas and electricity bills forecast to reach as high as £5,000 a year next spring, four times the level before the energy crisis, suppliers have argued that the quickest way to reduce the hit to households would be to strip out many charges unrelated to the rising price of wholesale gas.
Greg Jackson, chief executive of Octopus, the UK’s fourth-biggest energy supplier, said energy bills had become a “catch-all basket” for charges ranging from support for poorer homes to levies to support investment in renewables.
Wholesale gas and electricity costs currently account for just 57 per cent of the typical dual-fuel annual bill of £1,971 under the price cap, or around £1,077, according to regulator Ofgem. The rest — almost £900 — is made up of transmission costs, the standing charge and a plethora of other fees.
Companies have long argued that some of these extra charges are necessary but also regressive as they hit the poorest households hardest. They say that some would be better paid for through tax, which would put more of the burden on higher earners.
“For decades, whenever a scheme is announced, the cost is loaded on to bills,” Jackson said.
“These costs are now making high energy bills even higher, and need to be slashed as part of market reforms.”
Eon, which is also calling for an energy efficiency drive, has calculated that moving various charges into taxation and cutting VAT could lower bills by more than £420 in October, when the UK’s energy price cap is expected to rise to around £3,500 for a typical household, from £1,971 today.
That is more than the planned £400 in support being provided by the government to all UK households.
The £420 total includes £176 in VAT (if bills reach £3,500), £153 for social and environmental levies, and removing the £94 cost per household of transferring customers from dozens of failed energy suppliers.
The proposal would trigger an estimated £10bn-£15bn cost to the taxpayer.
Chris O’Shea, chief executive of Centrica, owner of the UK’s largest supplier British Gas, said it was “unfair” how charges were structured.
“Funding environmental costs through the bill means every customer pays the same amount, regardless of how rich or poor they are,” he said.
The total savings on bills could surpass £500 if the cost of the temporary nationalisation of Bulb, the biggest of the failed energy suppliers, was paid through tax rather than spread across all households as expected next year.
The call from suppliers, which have also backed additional government support to the poorest households, comes after electricity generators were summoned to an emergency meeting with prime minister Boris Johnson and cabinet colleagues this week, which sought solutions to an energy crisis that threatens to trigger a deep recession.
The meeting did not yield any decisions but people who attended have said there were “creative” proposals to be examined in the coming weeks. No decisions are expected until after the Tory party leadership vote in early September.
Electricity generators, particularly those not reliant on gas for power generation, are worried that they could be hit with a windfall tax on excessive profits to help fund additional support for households. They have seen revenues soar as gas has pushed up power prices, while the cost of generating electricity from renewables and nuclear has barely risen.
Wholesale gas prices, driven to about 10 times normal levels by Russia restricting supplies following its invasion of Ukraine, are by far the largest driver of soaring household energy bills.
They could make up around 80 per cent of the total by the spring if bills approach £5,000 as predicted.
Household bills also include around £300 of transmission and network charges, which the energy suppliers are not suggesting be moved into general taxation.
Campaigners such as Fuel Poverty Action are calling for the abolition of the so-called standing charge, which adds around £371 a year to bills for connection to the energy networks, regardless of whether any gas or electricity is used.
Both Tory leadership candidates Liz Truss and Rishi Sunak have indicated that they would suspend VAT from household bills. Truss has also said that she would remove environmental levies. Sunak has indicated that he believes that households will need additional support this winter.
Longer term, energy suppliers are pressing for the electricity price to be decoupled from the cost of gas to better reflect the impact of renewables on the market.
“The UK has a single wholesale electricity price every half-hour — usually set by the price of gas,” said Jackson. “So even if cheap renewables are in use this doesn’t filter through to consumers, which is bonkers.”
A government spokesperson said: “The high global gas prices and linked high electricity prices that we are currently facing have given added urgency to the need to reform Britain’s electricity market. We are already consulting on a wide range of options for reform — including decoupling clean energy from the marginal gas price — and will carefully consider the impact of options on consumers and suppliers.”