Reducing the impact of the ETS on UK Energy Bills

Download the full report here.

Research commissioned by the Energy Competitiveness Unit has found that changing how carbon pricing feeds through Britain’s electricity market could have cut household and business energy bills by almost £2.3bn in 2025.

The first report from the new Energy Competitiveness Unit proposes a “Decarbonisation Rebate” that would recover the extra money paid to some older low-carbon generators when carbon costs push up electricity prices and return it to households and businesses. This would cut bills without scrapping carbon pricing or reducing Treasury revenue.

The report finds that gas generated 32% of Britain’s domestically generated electricity in 2025 but set the wholesale price 82% of the time. When gas sets the price, its carbon costs are reflected in the wholesale price received by other generators, including certain low-carbon plants that do not face the same costs.

Analysis for the Energy Competitiveness Unit’s estimates that, between 2023 and 2025, every £1 raised by carbon taxes on the power sector cost consumers around £2 on domestically generated electricity.Generators operating under Contracts for Difference would be excluded because their revenues are already linked to an agreed strike price. Imported electricity and storage would also be excluded to avoid double charging or distorting the market.

The report describes the proposal as a targeted reduction in revenues associated with the carbon-price uplift, rather than a threat to generators’ viability. It finds that Renewables Obligation generators would continue to receive substantial net support after the charge was applied. The Government announced on 21 July that VAT on domestic electricity bills would fall from 5% to zero from 1 October 2026. It expects the measure to reduce the October Ofgem price cap by around £45 on an annualised basis and cost the Exchequer approximately £850m between October 2026 and March 2027.

If introduced before October, the Decarbonisation Rebate could save between £1.2bn and £1.5bn between October 2026 and March 2027.

This is 40% to 70% more than the VAT cut over the same period, without the direct cost to the Exchequer. Unlike the VAT cut, which primarily targets domestic consumers, the Decarbonisation Rebate would also lower costs for businesses. The report says this is a crucial advantage given Britain’s persistently high industrial electricity prices.

Under the report’s central assumptions about the future role of gas in setting electricity prices, the proposal could save between £2.1bn and £2.7bn in 2027, including between £1.3bn and £1.6bn for businesses and £24 to £31 for the average household.

Between 2027 and 2030, total savings for households and businesses could reach between £5.3bn and £7.3bn.