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Today, Chancellor Rachel Reeves delivered the budget at Parliament. Among several changes in economic policy, there were notable changes in energy policy, particularly around costs on household bills and the removal of the Energy Company Obligation (ECO).

Professor Rob Gross, Director of UKERC, commented:

The decision to remove some ‘legacy costs’ from household bills in today’s budget was widely rumoured, but with so much speculation on the bigger tickets in the budget package it was best to wait to see for sure. It is significant news that the government will remove the costs of the Renewables Obligation (RO) from billpayers, moving this to taxpayers instead. In practice, it seems that the government proposes to rebate suppliers for the RO costs borne by consumers. This mechanism should be relatively simple to implement, though the details of it remain to be seen and will be subject to UKERC analysis at a later date.

However, it remains no less significant a cost. And so UKERC’s proposal to replace the RO with a ‘Pot Zero’ Contract for Difference (CfD) remains important. This can still save up to £8bn per year, and £8bn off taxation is still worth having. Indeed, it is possible that the CfD’s private law characteristics might make energy companies even keener to benefit from the reduced political risk that a change of government in 2029 might represent. This could then drive low bids for pot zero, and help to lower overall wholesale price component of the bill. This is explained in a recent discussion paper launched in the run up to the budget.

Overall, it seems that with the RO changes an important precedent has been set, in moving policy costs off bills, and with a significant saving for consumers of around £100 per year for a ‘typical’ house. This is without compromising any of the aspirations of the government to continue to expand clean power. Indeed, in her speech, the Chancellor made a point of underscoring the role of renewables and nuclear in delivering secure and affordable energy.

The story for the Energy Company Obligation is a bit different. Much unloved and arguably the wrong approach (an obligation on suppliers to implement energy efficiency has been controversial since the inception of such schemes more than a decade ago), it has been criticised for inefficiency and inequitable outcomes. Nevertheless, was scrapping a major plank of energy efficiency policy the best response?

I am reminded of precipitous policy cuts of previous governments, such as the removal of the micro-generation FiT for household solar and similar. Whilst it is right to remove overly expensive or ineffective policies, it is important not to leave the many small businesses who might have invested on the back of them high and dry. Hopefully, the provisions in the Warm Homes Plan will help to obviate this risk (and replace an inefficient scheme with a more efficient scheme), but that remains to be seen.

In all, this is an interesting budget for the energy sector. One that signals that energy prices matter greatly to the bigger picture of macroeconomics and party politics, cuts bills materially, but leaves the central energy policy goals of this government largely unchanged.