Burnham Government Signals Electricity Policy Levy Reform After VAT Abolition
Andy Burnham's new government has scrapped the 5% VAT on electricity bills, but advisers say policy charges worth up to 10% of household bills are the next target.
Those close to Andy Burnham's new government said on Sunday (2026-07-27) that the 5% VAT cut on electricity bills announced last week (week of 2026-07-20) is "just the start of a broader mission to bring down costs for households and businesses," with policy levies — currently 5% to 10% of the average household bill — identified as the next pressure point.5
The VAT removal itself was announced on Tuesday (2026-07-21), one day after Burnham walked into Downing Street. According to Rigzone reporting, the cut is designed to take effect from October 1, timed to hit "in time to impact the next Ofgem price cap." Funding is secured for this financial year only, with no commitment made beyond it.3,4
Policy levies falling disproportionately on electricity bills — rather than gas — have long undermined the economics of household electrification. Heat pumps, electric vehicles and induction hobs all compete against gas alternatives that carry a lighter levy burden. Removing VAT narrows that gap modestly. Shifting or eliminating the underlying policy charges would narrow it considerably more, which explains why those close to the new administration are pointing there next.5
The fiscal arithmetic of that next step is not small. When the Conservative government shielded consumers from the 2021-2022 energy shock, the exchequer spent £24bn, equivalent to 0.9% of GDP, according to Economist figures published in May 2026. That intervention was broad and expensive precisely because it was untargeted. The Resolution Foundation estimated in the same period that means-tested support could deliver average bill cuts of £275 for the poorest two-fifths of households at a cost of roughly £3.8bn — a materially cheaper route if protection of vulnerable consumers is the actual priority.1
The VAT cut sits well below either of those levels. The then-opposition Conservatives had proposed a three-year VAT waiver costed at approximately £2.5bn, according to the Economist's May 2026 analysis. Burnham's government is bearing that cost for one financial year, leaving the medium-term fiscal position open.1,4
Wholesale prices are not making the retail relief task easier. ICE Endex TTF front-month gas was at €63.76/MWh as of Sunday evening (2026-07-26), and ICE Brent crude front-month was up more than 5% on Monday morning (2026-07-27) at $91.96 per barrel. Heating oil was trading at $4.09 per gallon, also higher on the day. Upstream cost pressure on British suppliers is running in the opposite direction from the government's retail agenda.1
Cornwall Insight forecast in March 2026 that the Ofgem price cap would rise 18% on July 1 to £1,929 for a typical annual household bill — a projection made before Gulf conflict pushed gas prices to their current levels. If ICE Endex TTF front-month stays elevated through the autumn cap period, the savings from VAT abolition could be partially absorbed by higher commodity pass-through, leaving net bills little changed in cash terms by early 2027.1
The industry's preferred answer runs in a different direction entirely. Energy UK chief executive Dhara Vyas, speaking at a Climate Group event during London Climate Action Week on Tuesday (2026-06-23), urged the incoming prime minister to recognise the "huge potential" of the North Sea as part of any cost reduction strategy. The tension was visible immediately: demonstrators carrying "No New North Sea Oil" signs gathered outside Downing Street on Monday (2026-07-20) as Burnham took office, even as his energy team faces industry pressure to preserve North Sea investment.2,5
The government's framing — that October 1 is a beginning — implies further interventions on policy levies are being actively considered. Whether those take the form of shifting green levies off electricity bills onto general taxation, adjusting the Contracts for Difference mechanism, or restructuring Ofgem's price cap methodology is not clear from available statements. Each route carries different fiscal costs and different impacts on the investment signals new generation capacity requires.5
The concrete signal to watch is what Burnham's energy secretary does with policy levies in the autumn spending review — and how much of the VAT removal actually shows up in the October 1 Ofgem price cap once commodity pass-through is accounted for. One without the other tells a very different story about who ultimately bears the cost.4,5