Prime Minister Andy Burnham's administration has implemented a reduction in Value Added Tax (VAT) on household electricity bills, lowering the rate from 5% to 0%. This measure, effective October 1, is projected to save the average household around £45 per year, or approximately 90 pence per week.
This initiative coincides with the implementation of a new energy price cap by Ofgem, the energy regulator, on the same date. The price cap applies to households on default tariffs paying by direct debit. Energy supplier EDF Energy forecasts the October price cap to be £1,760 annually for an average household, an increase from the current cap of £1,663.
Experts have offered mixed reactions to the VAT cut. Some describe it as a "start but not a solution" or a "token gesture," suggesting that while any saving is welcomed, particularly by vulnerable households, it does not address the root causes of high energy bills. Others acknowledge that for those on lower incomes, even a small reduction can make a difference. However, concerns have been raised that the modest weekly saving might be perceived as a political misstep if not accompanied by more substantial economic changes.
Analysts suggest that households could achieve greater financial relief by fixing their energy tariffs. Currently, the cheapest fixed deals are approximately £210 below the existing price cap. When combined with the VAT reduction and considering EDF Energy's predicted October price cap, fixing a tariff could lead to savings of up to £352 annually for a household with typical energy usage.
Ofgem has recently updated its figures for average household energy consumption. The updated figures reflect a decrease in typical usage, with electricity consumption now estimated at 2,500 kWh and gas at 9,500 kWh annually, down from 2,700 kWh and 11,500 kWh respectively. Despite these revised consumption figures, the predicted October price cap of £1,760 is similar to last year's £1,755, indicating that overall energy costs may still be higher due to increased unit prices. The continued volatility in wholesale energy prices, partly influenced by geopolitical events in the Middle East, suggests that the October price cap could potentially increase.
The VAT reduction applies to electricity bills regardless of tariff type, including fixed deals. This means consumers who switch to a fixed tariff now will still benefit from the tax saving starting in October. Price comparison websites can help consumers find suitable fixed tariffs, some of which also offer electricity from renewable sources.