Before we get into the specifics of what was announced in the Budget, it is worth reflecting on the process itself. Waves of contradictory briefings and leaks have dragged it out for months. As late as Tuesday evening, we were hearing conflicting messages about what would happen to the Energy Company Obligation (ECO) scheme.

Regardless of whether this is good politics, it’s bad for business. We only have to look at the sudden impact the OBR had on the markets when it made the serious error of releasing its reaction to the Budget before the Chancellor had even announced it. For SMEs, leaks and briefings are a considerable risk. An SMEs’ entire business model can be written off as a result of an unsubstantiated report in the press. Moreover, SMEs lack the resource to engage with all of the rumours or navigate the corridors of power to influence decisions.

Lowering the cost of electricity

Moving on to what has been announced, a clear priority for this Budget was to reduce the cost of UK electricity – amongst the highest in the developed world (see figure 1). The government has taken initial steps by moving 75% of the costs of the Renewable Obligation (RO) from electricity bills to the Treasury’s balance sheet, and scrapping the ECO scheme.

The RO scheme provided funding for early-stage deployment of renewable generation technologies. Our CEO Guy Newey has argued it should not be subsidised by the fuel poor, businesses or energy billpayers generally.

With the scheme now closed and the costs set to decline from 2027, this was an opportune time to address the long-standing concern that these additional costs on electricity bills (and not on gas bills) undermine efforts to electrify heating. The government will now directly fund 75% of the schemes’ costs until 2028/29, and there is a parallel consultation on options to reduce the cost of the scheme.

Together with the decision to scrap the ECO scheme (more on this below), the effect is estimated by the Treasury to lower energy bills by around £130 per household.

Addressing the cost of energy is both urgent and essential, but we mustn’t let short-term savings on bills distract us from the need to build a smarter, more flexible electricity system. The above reductions are expected to be largely offset by an increase in network costs (Ofgem estimates these will rise by around £100 per household by 2031) and new schemes such as funding the construction of Sizewell C (estimated to add £4.4 billion to electricity bills over the same period).

The only way to deliver sustained lower bills is by addressing the underlying distortions in the system, by clearly signalling when and where electricity is most valuable. For example, prices could rise in areas with local grid congestion during the early evening peak, encouraging flexible demand to shift to later hours when the system is less strained.

Supporting low-carbon homes

Decarbonising homes is one of the great challenges of the energy transition – as reflected in the government’s ambition to increase annual heat pump installations to the hundreds of thousands this decade.

The measures announced today slightly lower the ratio of retail electricity costs compared to gas (the so-called ‘spark gap’). But, at over x4, the UK’s spark gap remains the largest in Europe and acts as a brake on the heat pump market, and other low-carbon systems such as heat networks, when competing with the cost of gas.

The current design of the ECO scheme has proved ineffective and has resulted in some very poor consumer outcomes – as laid bare in the National Audit Office’s recent report on botched insulation installations. With the scheme now discontinued, it leaves a significant gap that needs to be addressed by the upcoming Warm Homes Plan. The Budget allocates a further £1.5 billion of capital spending to the Warm Homes Plan for fuel poverty measures (taking the overall WHP budget from £13.2 to £14.7 billion over the rest of this Parliament).

But difficult decisions remain for the government in terms of how to allocate the Warm Homes Plan’s budget across energy-efficiency measures, low-carbon technologies, and what segments of the population should be covered by the scheme. Further details are expected before the end of the year.

Decarbonising homes remains highly dependent on policy interventions. But more can be done to make it easier for low-carbon offerings that are tailored to households’ specific needs to compete with gas boilers. This includes addressing the spark gap. We favour extending the UK Emissions Trading Scheme to cover gas use in the home, as well as the regulatory barriers on who can sell bundled packages to consumers.

Helping industry decarbonise

As with households, UK electricity prices for industry are amongst the highest in the OECD. The big policy intervention here was announced with the Industrial Strategy, and consists of expanding the scope of businesses eligible for subsidies on their electricity prices, as well as increasing the size of those subsidies. Known as the British Industrial Competitiveness Scheme, these subsidies are being consulted on by the Department for Business and Trade.

The government has confirmed that a Carbon Border Adjustment Mechanism (a tax on high-carbon imports) will be introduced in 2027, but initially the scheme will exclude indirect (Scope 2) emissions. The CBAM is a key part of helping UK industries remain competitive as they decarbonise. But long-term competitiveness depends on deploying and integrating clean, cheap electricity. Addressing the distortions in the current market design is as valuable to industry as it is to households.

Electric vehicles go mainstream

Fossil fuels used in road transport make up a significant source of revenue for government. The shift to electric vehicles, which now make up a quarter of new car sales, requires a fundamental rethink of transport taxation.

Judging when to introduce a tax on EV ownership or use was always going to be a tricky tightrope for the government to walk. Alongside the Budget, the government has launched a consultation on introducing an Electric Vehicle Excise Duty – set at 3p per mile for EVs and 1.5p per mile for hybrid cars. Our analysis suggests that the 3p per mile tax could result in a 5% reduction in EV sales compared to a no-tax counterfactual.

But there are conflicting messages. The Budget has extended the electric car grant and provided chargepoint operators with relief from business rates.

It is also difficult to reconcile this new tax with the decision to maintain the 5p cut to fuel duty, on top of the base level being unchanged since 2011!

What does it all mean?

Government Budgets are so wide-ranging that it would be foolhardy to impose a single narrative on the totality of today’s announcements. What is clear, is that the government is currently focused on the cost of living and on stabilising public finances. These two aims can pull in different directions, resulting in a package of measures that sometimes appear contradictory.

The truth is that big many decisions are still outstanding – especially on electricity market reform and the Warm Homes Plan. The government has taken some positive initial steps today but it still has major moves to make.

Over the coming weeks, we will be reflecting on what has been announced and taking time to update our effective carbon prices model. We will share our insights in the New Year.