In a chaotic month of build-up with leaks, u-turns and then a final leak moments before the Chancellor stood at the dispatch box, yesterday finally saw Rachel Reeves announce the government’s financial plans in the Budget. The government argued that the steps taken in the budget were the fair and necessary choices to deliver on the government’s promises. But what did this mean for energy bills and the energy sector?
Energy Bills:
- Household bills will receive a 75% reduction on the Renewable Obligations (ROs) non-commodity charge, which alongside the scrapping of the Energy Company Obligation (ECO) scheme will take £150 off energy bills from April 2026.
- Energy Intensive Industries (EIIs) will receive increased support as part of the government’s Modern Industrial Strategy, with the compensation for Network Charges increasing from 60% to 90% from April 2026.
- Introduction of the British Industrial Competitiveness Scheme from April 2027 which will aim to provide energy cost relief for businesses in manufacturing, foundational manufacturing, automotive and aerospace industries.
- On November 22nd the government launched a consultation for the scheme which is proposed to run from April 2027 to 2035 and include exemptions on a range of non-commodity costs, in a similar manner to the current EIIC scheme. The scheme is hoped to reduce electricity costs by £35-40/MWh for those eligible.
- Main rates of the Climate Change Levy (CCL) to be uprated in line with the Retail Price Index (RPI) from 1st April 2027.
- Electricity used in electrolysis to produce hydrogen and natural gas used as a source in the CO2 production of sodium bicarbonate to be exempt from CCL from Spring 2026.
- Introduction of the Carbon Border Adjustment Mechanism (CBAM) from 1st January 2027 but with the inclusion of indirect emissions under the CBAM scope delayed until 2029.
- Carbon Price Support frozen at a level equivalent to £18/tonne of CO2 for 2027-2028.
- Introduction of the Electric Vehicle Excise Duty (eVED) which will implement a 3p-per-mile charge for electric vehicles from April 2028 and a 1.5p-per-mile charge for hybrid vehicles.
- Fuel Duty frozen until September 2026.
Energy Sector:
- Publication of the North Sea Future Plan which supports ongoing investment and opportunities in oil & gas in the North Sea, but government argues does so in a way that maintains their commitment to issuing no new licenses in the North Sea for oil & gas drilling.
- However, the North Sea Future Plan does allow ‘transitional energy certificates’ which enables new drilling to take place on new or existing fields which will only create a small amount of new fossil fuel extraction whilst ensuring that the fields remain economically viable and are managed for the entirety of their lifespan.
- Continued support for the UK’s nuclear industry, reaffirming commitments to building Sizewell C and adding nuclear energy to the types of energy eligible for the Green Financing Framework.
- Building of Small-Modular-Reactors (SMRs) in collaboration with Rolls-Royce in Wales, leading to the creation of 3,000 jobs.
- Supporting areas which will require support as the UK transitions away from fossil fuels to renewable energy, such as a £14.5m investment in Grangemouth in Scotland, with a particular focus on low carbon technologies.
- Introduction of a new Oil & Gas Price Mechanism (OGPM) from 2030 which will replace the existing Energy Profits Levy, known as the Windfall Tax, which currently taxes excess profits on energy companies. The mechanism applies a tax of 35% when oil prices are above $90/barrel and gas prices are above 90p/therm.
- Resolving under-investment in water infrastructure through introducing reforms and reinvesting the £29m earnt in fines from water companies since October 2023, helping clean up the UK’s rivers, lakes & seas.
LGE’s View:
The budget stated that the government would ‘subject any additional costs, including new levies, to enhanced scrutiny under a new framework to ensure they are affordable, represent value for money and do not impose unnecessary costs on households and businesses’. Yet it is existing costs that will be the real worry for UK businesses. The National Energy System Operator’s (NESO) latest five-year forecasts show large increases of around 50% on average to both the Balancing Services Use of System (BSUoS) and Transmission Network Use of System (TNUoS) non-commodity charges. It is these existing levies that are going to implement a burden on energy bills and therefore the productivity of UK businesses.
With the government’s mantra firmly still on emphasising growth, increased support for EIIs through greater compensation for their Network Charges and the plans for the introduction of the British Industrial Competitiveness scheme, are of course welcome news for the UK’s most energy intensive industries, particular those in foundational or manufacturing industries who do not currently comply with the eligibility requirements of the Energy Intensive Industries Compensation Scheme (EIIC).
However, will the government’s pursuit of growth via energy bill support for select industries become a double-edged sword? For example, the leisure & hospitality industry has for years called for targeted energy relief schemes from the government, yet these calls have fallen on deaf ears, and they have again in this budget with no new support announced. Chiefs at UK pub & brewery chain, BrewDog, highlighted this week that the chain would have to sell an extra 950,000 pints every hour to recoup the £1bn in additional costs faced by the sector over the last 12 months, with energy bills being a large part of this. As the government aims to shield some UK businesses from increased energy costs will the latent consequences of this be a counter-productive hit to UK growth as support for some comes at a great cost for others? Businesses in industries such as leisure & hospitality, amongst many others, may argue so as they must pay extra to support the compensation being offered to some UK businesses whilst also having to face increased BSUoS and TNUoS charges.
Little hope was also given for any reform to commodity costs. The UK has been burdened by some of the highest wholesale commodity costs in the world and with commodity costs still making up on average 30% of an energy bill in 2025/2026 it is disappointing to see this neglect. Many argue the reason for high commodity costs is straightforward: the UK’s reliance on gas, with electricity prices being pegged to the gas market. In the UK electricity pricing is set by gas a staggering 98% of the time, compared with 24% in Germany and just 7% in France, with both nations paying nearly half what the UK does per MWh of energy. However, some reform may come in the form of the government’s reaffirmed commitment to nuclear energy, through support for completing Sizewell C and the production of SMRs in Wales. With nuclear energy contributing towards two-thirds of France’s electricity, the introduction of greater UK nuclear capacity will be a welcome move that will hopefully help reduce wholesale commodity costs whilst also providing the UK more with a more dynamic energy mix as it moves away from fossil fuels.
If growth is the aim of the game, then this budget will do little to reassure UK businesses that growth is coming. With a combination of increased non-commodity costs and no reform to the pricing structure of commodity costs, many businesses will worry about the impact energy costs will have on their future. The UK government’s continued commitment to Great British Energy and investing in renewable technologies to ensure a net-zero future are always welcomed but the process for this will often seem slow for UK businesses with energy bills only forecasted to reduce in long-term, by which point some businesses will argue it is too late.
With pressure to create fiscal headroom but promises of no return to austerity, this very much felt like a budget of a government trying to scrape by.