EDRC response to the Budget: Welcome news on lower energy bills and fairer transport measures but more needed on energy demand measures

The government announced its much awaited and debated Budget on 26 November.  At the Energy Demand Research Centre (EDRC) we are most interested in the latest government fiscal policy in relation to energy, transport, industry and, of course, the much-lauded focus on fairness.

In terms of energy-related announcements, the government has recognised the burden that high energy bills have had on people and businesses. The news on lower energy bills is welcome and will help the millions of households who have struggled with energy bills. Lower electricity prices are vital for supporting the shift to electric heating and electric vehicles.

The Budget was announced on the national Fuel Poverty Awareness Day, and the announcement of the removal of the two-child benefit cap on child benefit will provide much-needed help to alleviate child poverty. We know from research on fuel poverty, that it affects children in particular with long-term impacts on wellbeing and education.

The government announced several measures to reduce energy bills by reducing levies placed on these bills. Instead of being added to bills, 75% of the domestic cost of the legacy Renewables Obligation will now be paid via the Exchequer for the rest of the current spending review period from 2026-27 to 2028-29. In addition, the Energy Company Obligation (ECO) which is currently funded through energy bills, will end. The government estimates these measures will save £150 on an average household energy bill from April 2026. Moving these costs into general taxation is broader and more progressive than adding them to energy bills. This effectively socialises the cost of energy policy across society rather than concentrating it on bill payers, as reflected in new research supported by EDRC and the UK Energy Research Centre. However, no replacement to take over the function of ECO was announced. The government announced that they will expand the Warm Home Discount, which provides a direct rebate of £150 to eligible households, estimated to help around six million households. They also announced that further measures to help fuel poverty could include £1.5 billion of capital investment via the Warm Homes Plan (which would be additional to the £13.2 billion of funding allocated at the Spending Review 2025).

Scrapping ECO, which was much debated and had its problems, especially relating to the use of privatised delivery models that led to shoddy installations, is the right decision. It had become increasingly inefficient, adding significant costs to everyone’s bills while delivering only limited savings for those it was meant to help. However, the improvement of home energy efficiency must remain a priority. Publication and fuller details on the Warm Homes Plan are already overdue. It is vital that this plan can play a central role in replacing, and improving on, ECO, and that this investment is long term to provide certainty for both suppliers and households. EDRC’s research which compared direct energy bill support and energy efficiency measures, shows that energy efficiency measure bring long term benefits,  particularly for those households living in fuel poverty but also for the wider economy. Such programmes need careful design to factor in wider macroeconomic implications for the construction industry and its supply chains, as well as taking into account of skill availability, if they are to offer value for public money. They also require meaningful public engagement to encourage uptake, and should include tailored energy advice that takes account the local conditions, such as differences in local and regional cultures and housing stock construction. We look forward to seeing a long-term plan that ensures that everyone can live in a good quality and comfortable home that is protected from any future energy bill shocks because it is energy efficient. This will also support the aims to accelerate the delivery of new housing.

In other energy-related announcements, the government is saying it wants to increase energy security by capturing “the opportunities, jobs and investment that the transition to clean power and net zero presents in several ways”. This is generally welcome news in terms of announcements to reduce electricity costs for energy intensive and other businesses. We would argue, though, that energy demand side measures also contribute to improving energy security.

The government is also pushing forward with plans to build small modular nuclear reactors by “backing investment, unlocking innovation and removing the regulatory barriers that have slowed development and deployment”. They are also exploring sites for large-scale nuclear power. Alongside increased focus on nuclear, the government has published a North Sea Future Plan which includes Transitional Energy Certificates for existing oil and gas fields. They also announced a new Oil and Gas Price Mechanism (OGPM), which will acts as a windfall tax to deliver returns to the nation when oil and gas prices are unusually high (the Budget says this will be revenue-based and apply an additional tax rate of 35% above price thresholds of $90/barrel for oil and 90p/therm for gas). Phasing out fossil fuels is required to achieve Net Zero, but this needs to follow the principles of just transitions to ensure acceptance from businesses, as well as the general public. This focus on nuclear, and oil and gas, however, is a missed opportunity for the Budget to instead focus on demand side measures that can contribute to delivering net zero, energy security and other benefits.

In terms of focussed and placed based support for the much needed just transition, the Chancellor also mentioned an additional £14 million funding pot for low carbon fuel technology development at the Grangemouth cluster in Scotland, where so many jobs were recently lost with the closure of refining activity on the site. This commitment seems to be additional to funds already committed by the Scottish and UK governments. However, a clear and firm plan for allocating all funds committed needs to emerge soon if the required private sector investment decisions are to be made in a timely manner.

On public transport, we cautiously welcome news that the government has introduced a one-year freeze on regulated rail fares for the first time in 30 years. The government says this will save those who commute on the more expensive routes more than £300 per year. This will make choosing rail more attractive, but does not support the greater mode shift to buses and active travel recommended by the Committee on Climate Change. It is also imperative to consider how many people and where geographically will benefit from the rail fare freeze. The freeze is only for England and applies to England-based train operating companies. Geographically, London is likely to benefit the greatest given that 37% of Londoners use the train at least once a week. Nationally, 21% of people never use the train, while 27% use a train less than once every six months. Rail use is also correlated with income, so those with higher incomes will benefit more than those on lower incomes. Also, this freeze only applies to ‘regulated’ fares (season tickets, some flexible metro tickets around major cities, longer off-peak fares and Oyster PAYG), which means that people making journeys that do not have a regulated fare are unprotected and may suffer a greater percentage price rise as a result. Furthermore, there was no change to the £3 bus cap in England (which was previously extended to March 2027), even though buses are a more significant mode of travel for people on lower incomes.

In terms of announcements on cars, these are generally welcome but also raise further questions. A new mileage-based charge on battery electric and plug-in hybrid cars has been announced from 2028 (3p per mile for electric cars and 1.5p for plug-in hybrids, payable alongside vehicle excise duty). The government says this will help double road maintenance funding. Herein lies the challenge for the public purse. The vehicle excise duty and fuel duty have been the mechanisms through which road users contribute to the maintenance of the dense road networks that we have in the UK, even though the funds are not hypothecated. However, fuel duty has been frozen for 14 years which, whilst helping with cost of living is also promoting greater fossil fuel use. The budget will extend the 5p fuel duty cut until September 2026 with rates then returning to March 2022 levels by March 2027. With this freeze, the government has been receiving less money in real terms over time. This will accelerate as more people shift to electric vehicles which gives the Treasury an important hole in the public finances to fill. Those who can charge their EVs at home only pay domestic VAT of 5% on their energy bills, which can be less than half the price to charge your car. However, this gives government a tricky balancing act to manage. On the one hand they need to avoid deterring people from making the shift to EVs, while on the other making sure that road users pay a fair share of tax. One key issue to consider will be the cost of public charging. Not everyone can charge their EVs at home and it will be unfair if those who are reliant on on-street charging, which can be more expensive than petrol, are penalised on top of this.

The transport sector contributes around 29% of UK emissions and needs to be urgently decarbonised. Our analysis of the spending review showed a real-terms reduction in capital spending over the whole Parliament and larger reductions in day-to-day spending. It will take a while to assess whether any funding is really additional and will help with the scale of transformation required. As we transition to more sustainable options such as EVs, it is paramount that this transition is fair – particularly as there are subsidies available for people to buy EVs, and typically these are taken up more by people who are wealthier.

At a time of a financially challenging times, a key reflection on the Budget is that it missed out on doing more with energy demand related measures. Our research in EDRC shows that reducing energy demand across all sectors can bring multiple benefits – including a cheaper energy system that is more secure – and avoids embarking on potentially expensive energy technologies that have safety and waste legacy implications. Research shows that it is possible to reduce energy demand by around 50% by 2050 (compared with today) and maintain essential services and improve quality of life. EDRC’s latest evidence shows that policymaker-led scenarios can help to highlight the importance of energy demand in energy policy – with a reminder that the cheapest energy is the one that we do not use.