Cornwall Insight has cut its energy price cap forecast in October following the abolition of VAT on UK electricity bills, although the new government’s wider energy approach remains unclear.
The expected price ceiling for an average household will be £1,699.59 from October to December 2026, according to Cornwall Insight, up from £1,906.27 in the previous forecast. The fall includes both the abolition of VAT on electricity costs, which stands at 5%, and Ofgem’s adjustment to its assessment of a “typical household” to reflect lower domestic energy consumption in recent years.
Despite the abolition of VATThe October cap will still be around 2% higher than the current rate (£1,663), due to “increased unrest in the Middle East”, pushing up wholesale gas prices, according to Cornwall Insight.
“The VAT cut will be particularly welcome as we head into winter, especially for anyone whose consumption is already high, whether that is due to a large family home, a home with electric heating or someone with a high demand for electricity due to a medical or health need,” said Craig Lowrey, principal adviser at Cornwall Insight.
‘A step towards rebalancing gas and electricity’
Although the removal of VAT from electricity bills will make only a marginal difference in household tariffs for the remainder of this financial year, it is a notable symbolic change.
This step will make the biggest difference for the lowest incomes and most vulnerable households, who have been hit hard by rising energy bills due to successive global shocks. It also narrows the gap between electricity and gas prices, which experts say could remove barriers to greater decarbonization.
“That gap should continue to narrow as households are encouraged to switch to electric heating and vehicles,” Cornwall Insight said.
In one post on LinkedIn Yesterday, Jan Rosenow, professor of energy and climate policy at the University of Oxford, said: “Britain has taxed and charged electricity for years, while gas came out lighter. That gap is discouraging people from electrifying their heating… Cutting VAT on electricity reduces that gap. It makes switching from a gas boiler to a heat pump cheaper to run, not just cleaner.
“It doesn’t solve the problem on its own. VAT was only 5% and the bigger distortions are in levies. But it goes in the right direction and suggests a government that understands that electricity prices are a barrier to heat decarbonisation.
“The question is whether this is a first step towards a good rebalancing between gas and electricity, or a stand-alone measure that stops here.”
Mattia Fahnbulleh – an unknown quantity?
New Prime Minister Andy Burnham has appointed Peckham MP Mattia Fahnbulleh as Energy Minister, replacing Ed Miliband who has become Foreign Secretary.
Fahnbulleh is a relative unknown, especially compared to Miliband, who is an outspoken and staunch supporter of Net Zero and renewables in Britain.
If Britain under Burnham is going to change its emphasis or approach to energy, the signals are currently mixed. Before he came to power, there were reports that Burnham would reopen permits for new oil and gas drilling permits in the North Sea – something Kier Starmer’s government, led by Miliband, had refused.
However, when she was CEO of the think tank the New Economics Foundation in 2019, Fahnbulleh called for a “global Green New Deal” and “net zero carbon emissions.” within ten to fifteen years”.
With only one new policy left to implement, the energy sector will be alert to any new signals from Westminster and DESNZ. According to reports, Andy Burnham will stick to Labour’s 2024 manifesto pledges, including the deployment of renewables and 2030 clean energy targets and expanded levies on energy profits.
However, as Rosenow explained, reducing taxes on electricity bills could specifically signal a government willing to focus on decarbonization and improving the impact of the energy transition for the public.
The renewable energy sector praises the cuts and calls for more
“Reducing bills is vital for the economy and will in turn encourage homes and businesses to switch from gas to electricity, which will be a boon for energy security,” said Chris Hewett, CEO of Solar Energy UK. “Solar energy and batteries are the key technologies that will deliver further deep cuts in energy bills for homes and businesses across the country.”
Stew Horne, group head of sector intelligence and external affairs at the Energy Saving Trust, said: “As Britain moves towards a low-carbon energy system, it is vital that electricity is competitively priced to drive the uptake of technologies such as heat pumps and batteries.
Energy UK CEO Dhara Vyas similarly said: “Making electricity cheaper compared to gas is key to encouraging the adoption of clean technologies in our homes, transport and businesses.
“There is much more work to do, but this is an encouraging first step and we look forward to working with the new government on these further measures.”
