Cost of Energy

Wera Hobhouse Excerpts

Tuesday 11th February 2025 Westminster Hall

[Wera Hobhouse (Bath) (LD)]

I beg to move,

That this House has considered the cost of energy.

It is a pleasure to serve with you in the Chair, Mr Western. I thank the Backbench Business Committee for granting me this debate. The cost of energy is a problem that impacts all areas of our lives, from the homes we live in to the businesses we work for.

For far too many, high energy bills are an immediate daily concern. A recent poll published by Opinium highlighted that, on average, 88% of all adults thought it was important that the Government focus on reducing the cost of energy over the next two years, while 90% remained concerned about the increase in energy prices. The cost of energy has become a key strain for most households. For households in Bath and across the country, bills continue to rise at unprecedented rates, and many struggle to keep up.

Those rises will heap considerable pressure on millions of people who are still feeling the pressures of inflation over the past few years. That is simply unacceptable, and it is a crisis that we cannot ignore. The effects of high energy costs extend far beyond the immediate financial burden; the cost of electricity in the UK is also holding back our efforts to decarbonise the economy and to address the climate crisis, and we must not shy away from that debate.

At present, UK households pay roughly the same for both gas and electricity bills—around £850—despite using more than four times more gas than electricity, making electricity in the UK four times more expensive than gas. That price imbalance is not only creating financial hardship for consumers, but actively deterring them from making the switch to cleaner, more efficient heating systems. The UK currently relies on 25 million fossil fuel boilers to heat its homes, accounting for 16% of the nation’s entire CO₂ emissions. Decarbonising our heating sector is a significant opportunity for the UK to cut down on carbon emissions.

Take heat pumps, for example, one of the most advanced and environmentally friendly ways to heat our homes. Heat pumps are four times more energy efficient than gas boilers and could reduce CO₂ emissions by 75%, yet just 1% of UK households have a heat pump. Why? Because the UK’s electricity prices consistently undermine the financial incentive to install them. With the current cost of electricity, running a heat pump can be more expensive than running a gas boiler for larger households and as expensive for medium-sized homes, even though heat pumps are far more efficient.

In Sweden, more than 50% of single-family homes have heat pumps installed, while 95% of all new homes are now heated by heat pumps. The success of Sweden’s heat pump adaptation hinges on the country’s price ratio between gas and electricity, effectively incentivising electric heating systems compared with fossil fuel ones.

A range of other heating technologies can work alongside heat pumps. Alternative technologies such as heat batteries are another example where the price of electricity is significantly hindering the UK’s ability to move away from gas. Heat batteries have become a proven solution for about 20% of UK homes for which heat pumps are not suitable. Modern heat batteries can operate at equivalent temperatures to fossil fuel systems; they can make use of the existing pipes and radiators in the home, at a similar running cost to a heat pump, and embed valuable flexibility in the electricity system. Despite having such innovations at our fingertips, the Government continue to drive consumers into the arms of gas boiler manufacturers, because more often than not it is still cheaper to buy a gas boiler.

The disparity in energy prices between gas and electricity is not just a domestic issue; it is part of a broader trend in which the UK is falling behind other nations in the transition to low-carbon heating. In the first half of 2024, gas prices in the UK were 22% below, while electricity prices were 27% above, the EU average. In fact, the UK had the highest ratio of electricity to gas unit prices in the entire EU at that time. That pricing imbalance places the UK at a competitive disadvantage in terms of decarbonisation.

As the rest of Europe steams ahead with its effort to electrify heating, the UK is lagging behind due to our higher costs of electricity, something that not only affects individual households and businesses, but significantly undermines the UK’s position as a world leader of climate action. To achieve our statutory net zero goals, we need to make sure that the transition to clean energy is as affordable as possible for everyone. The current energy pricing structure is holding us back, and that must change.

The first and most urgent step is to reform the policy costs currently placed on electricity bills. The regressive and incoherent stack of levies on electricity bills has inflated the cost of electricity for consumers to the point that it is uncompetitive with gas. The Government’s current energy policies are therefore working against their own objectives, making clean technology more expensive than its fossil fuel counterparts.

As things stand, policy costs and levies currently account for 11% of a typical household’s total energy bill, but they are not allocated evenly. Policy costs account for 16% of a typical electricity bill, but only 5% of a typical gas bill. There is widespread industry and political support for reforming those policy costs and levies, but the argument over how to do so has been going on for far too long. The simplest options for reform would be to remove all levies from electricity and put them into general taxation. That would lower energy bills for every household in Britain, but at a very high cost to the Exchequer, which is currently not realistic.

Another option is to rebalance the levies by moving them from electricity to gas. This option would be good news for the 4.5 million households that do not use gas heating, but for the 22.5 million gas-using households, of which 2 million to 3 million are in fuel poverty, bills would rise by between £15 and £100 a year.

[Robbie Moore (Keighley and Ilkley) (Con)]

Some 17.6% of those who live in Keighley are in fuel poverty. Right now, Labour-run Bradford council wants to raise council tax by 10% and, with the removal of the winter fuel allowance, 64,000 pensioners across the wider Bradford district will be impacted. Does the hon. Member agree that, for the most vulnerable in our society, there needs to be more support not just with the cost of energy, but with making sure that they can keep warm during this winter period?

[Wera Hobhouse]

The hon. Member predicts my next point: it is important to emphasise the Government’s responsibility to look after the most vulnerable in our society and protect them during any efforts to rebalance gas and electricity prices. However, I cannot comment on the council tax bill to which he refers; that is, of course, a local matter.

It is imperative that any policy changes prioritise the needs of those vulnerable households, ensuring that they are not left behind as we look to electrify the UK’s heating system. A more focused way to adjust policy funding could be to collect revenue from levy-funded programmes through a single levy control system. Such a system would have two straightforward rates—one for electricity and one for gas—set by Ministers at an appropriate level. These rates would be based on the cost per kilowatt-hour, so more energy-efficient technologies would have lower taxable amounts, making them comparatively more affordable.

Unlike other rebalancing methods, this approach would allow the Government to directly manage the impact on households. As electricity is always more efficient than fossil fuels, its price would go down, encouraging more people to switch. Policy reform is an essential step towards addressing the unacceptable price disparity that currently exists in the UK between gas and electricity. I hope the Minister has listened very carefully to the proposal that I have just put forward.

The impact of Brexit on our energy system has been somewhat brushed under the carpet. The turbulence of covid and the shockwaves from Russia’s invasion of Ukraine have dominated the conversation and masked the quieter, but significant, effects of our departure from the EU’s energy framework. One of the most pressing issues is passive divergence: not following new EU regulations simply because we are no longer a part of the system.

That is not always a deliberate choice, but it is already creating challenges, particularly in electricity trading. The UK was once part of an integrated, efficient energy market with the EU, where electricity flowed freely, reducing costs and improving security. Now, without alignment, we risk inefficiencies, higher prices and reduced energy security. We need strategic decision making. Not all divergence is bad, but it must be a conscious, informed choice, based on clear evidence, not ideology.

When it comes to energy, the benefits of co-operation with the EU are overwhelming. Shared markets bring stability, common rules ensure fair trade and joint planning strengthens resilience against global energy shocks. The EU and the UK share the same fundamental energy challenges in securing affordable, clean and reliable power for the future. Our interests remain aligned and so should our approach. We must ensure that divergence, where it happens, is a decision and not an accident.

In addition, we need to focus on policies for community energy. We Liberal Democrats have long championed the idea of community energy. Community energy currently accounts for less than 0.5% of total UK electricity generation capacity. However, according to the Parliamentary Environmental Audit Committee, with the right Government support, the sector could grow 12 to 20 times by 2030, powering 2.2 million homes and saving 2.5 million tonnes of CO₂ emissions every year.

I welcome the Government’s inclusion of the local power plan in the Great British Energy Bill, which marks a welcome step forward for the community energy sector. The plan intends to deliver an ambitious target of 8 gW of renewable energy projects by 2030, in partnership with local authorities and communities across the country. To achieve that target, significant scale-up of local and community-owned energy will be required and we will need a support programme in place for community energy organisations in England, drawing on successful models from Scotland and Wales.

Bath and West Community Energy, a community benefit society, has reduced carbon emissions by an average of 3,300 tonnes per year with its around 31 renewable energy projects. Let us make sure every community across the country has something like Bath and West Community Energy in its patch. As we have repeated many times, community energy reduces bills, creates local jobs and accelerates the transition to a low-carbon future.

Home insulation is another key area to reduce energy costs, particularly in my Bath constituency, where much of the housing stock is old and in dire need of insulation. Insulation remains one of the most effective ways to reduce energy demand, lower bills and cut emissions, but the Government have significantly delayed the implementation of their warm homes grants. The scheme was not implemented this winter and will only operate from next winter. The Government must tackle the efficiencies of these schemes head-on, ensuring that residents receive retrofit measures that provide value for money and stand the test of time. The Select Committee on Energy Security and Net Zero will look into those issues tomorrow, and I hope people will listen very carefully.

To accelerate and de-risk delivery of the warm homes plan, the UK Government should create a national expert advice service for England so that households have the confidence to receive tailored advice to upgrade their homes. Doing so would deliver consistent outcomes across the country and end the postcode lottery in advice services.

I hope the Government consider the points outlined today. We need long-term solutions that will make clean energy affordable for all, meet our net zero targets and lift the pressures on families of rising energy costs.

[Matt Western (in the Chair)]

I remind Members that they should bob if they wish to be called in the debate.

--- Later in debate ---

[Joy Morrissey]

The hon. Member makes a wonderful point. Personally, I feel very strongly about this, and the glory of being in opposition is that I can hold the Government to account. I can have also a Backbench Business debate or an Adjournment debate of my choosing about my own passion projects. Not to digress, but if the hon. Member looks at the Water (Special Measures) Bill, he will see my passion project flourishing. I do not want to detract from this wonderful debate, but what I am saying is that we can find a cross-party solution to many of these issues. We want to be positive about the UK and its future.

[Wera Hobhouse]

I, too, would like some clarification from the Opposition. Is the hon. Member saying that renewable energy is a solution to lower energy bills and gets us to net zero, but that we do not really want it because it is too expensive? I was not quite clear whether her argument was for or against renewable energy. Could she clarify that?

[Joy Morrissey]

The hon. Lady makes an excellent point. The Conservatives have an excellent track record of putting in renewables. We were the first to bring in the coal-free plan to tackle energy, so that is an important way of moving forward. I would like to continue moving forward with cheaper energy bills to make sure that we protect our energy security while ensuring that costs are low for both the consumer and industry.

--- Later in debate ---

[Michael Shanks]

The hon. Gentleman makes a very good point. Upgrading the grid is important for transmitting the clean power that we want to generate in the future, but it is already 50 or 60 years old, and it is creaking under the pressures it has operated under for a very long time.

There is real need to upgrade the grid right across the country. The truth is that the previous Government recognised that that was important. They launched the idea of the great grid upgrade before we did, but they are now running away from a lot of that. That is hugely disappointing, but it will not get in the way of our moving forward to make sure that we build the grid of the future. Yes, we need to meet the demand for now, but we know that by 2050 electricity demand is likely to double in this country. If we do not build the infrastructure now, it will be the weakest part of our economic strategy in the future. It is essential we build it now, but we want to bring communities with us.

[Wera Hobhouse]

Is it not also true that although we need to upgrade an old grid, the challenge of the future is a decentralised energy system, and that that is so often misunderstood? We had big power stations; now we have decentralised and smaller energy providers. That is a big challenge that we all have to recognise rather than criticising a particular Government—as tempting as it is to just criticise the Government of the day.

--- Later in debate ---

[Wera Hobhouse]

I thank the Backbench Business Committee again for granting this debate, which has been very lively and engaged, and good-natured, despite some disagreements—but where would we be, if we all agreed? We would not need to debate.

I am grateful to everybody for their contributions and for the points that have been raised, and to the Minister for engaging very constructively on those points and concerns.

The bottom line is that energy costs and energy prices are too high for all our constituents and businesses. It benefits us all if we bring them down, not just to get to net zero and to bring costs down for consumers, but for the general prosperity of this country. Where will we be if we cannot make the costs at which we produce things and warm our homes and so on lower than they currently are? This is the beginning of a debate and there is much more to do. I thank the Minister and all Members for their constructive contributions; I am sure we will be here again soon.

Question put and agreed to.

Resolved,

That this House has considered the cost of energy.