A £45 VAT cut is welcome but it’s time to fix the real problem
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Prime Minister Andy Burnham, has announced that VAT will be removed from household electricity bills from 1 October, initially for a 6 month period.
We’re pleased to confirm that, of course, we’ll be passing on the full VAT cut – from 5 to zero per cent – to all our electricity customers, whichever tariff you’re on.
What difference will I see in my bills?
For an average household as defined by Ofgem, this should result in a £45 yearly saving, but the exact amount depends on how much electricity you use.
The Prime Minister’s announcement is intended to offer some immediate relief ahead of winter, when energy bills rise because of heating.
Why we need to make bills even lower
Anything that takes some pressure off household finances is welcome news. But at under £1 per week, it’s only a first step in tackling Britain's cost of living crisis.
The reason our bills are so high compared to many countries is the way the energy market is structured. Our system for setting the price of electricity is a disaster – it’s tied directly to the price of the most expensive electricity source on the grid, which is almost always dirty fossil gas.
How PM Andy Burnham can save households £100s with one simple change
Wind and solar are now the cheapest forms of electricity on the planet. The more clean, home-grown power we build in Britain, the less reliant we are on imported fossil fuels.
The problem is that households aren’t seeing the financial benefit under the current system because even cheap green electricity (generated at a fraction of the cost of gas) has to be sold at the price of electricity made by fossil gas. It costs every household hundreds of pounds extra every year and means we have no control of the price, because the cost of gas is set by wildly fluctuating international markets.
That’s why we’ve been campaigning for years to Break the Link between the price of expensive fossil gas and the price of cheap green electricity. It’s a straightforward change.
We just need to move to a ‘pay-as-bid’ system where electricity generators bid to supply the grid and are paid the amount they bid – instead of giving everyone the price of the highest bidder. This would link the price of electricity to the cost of generation, which is much cheaper for green energy, instead of linking it to expensive fossil gas. As well as Breaking the Link, we can bring prices down by:
Giving North Sea operators a fixed, stable price for oil and gas using the same mechanism that has been so successful for green energy projects (Contracts for Difference).
Control network operators by capping their profits in line with the retail cap. Set them at 2 per cent instead of allowing the 40 per cent return they currently enjoy. These are foreign owned, total monopoly businesses making extraordinary returns, while failing to invest in our networks and hijacking our energy bills.
How does Breaking the Link help?
The key step, Breaking the Link, would enable green energy generators to pass the true, low cost of green electricity directly to households and businesses across Britain.
It would shield us from international surges in gas prices, unlock billions of pounds of savings for consumers and businesses and speed up the end of fossil fuels.
Prime Minister Andy Burnham says that he wants his government to be a 'cost of living government’.
Breaking the Link can make this a reality.
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