Energy system cost allocation and recovery review

What this is about

Ofgem is reviewing how the costs of running the energy system are split between electricity and gas consumers, and between different customer groups. The question is structural: does the current allocation — where electricity bills carry a disproportionate share of policy costs, network investment, and balancing charges — still make sense as the system electrifies?

The timing is not accidental. Electricity demand is expected to grow substantially as heat pumps and EVs displace gas boilers and petrol engines. But the current cost structure penalises the switch. Policy levies (Renewables Obligation, CfD, Warm Home Discount, ECO) sit almost entirely on electricity bills. Network reinforcement costs — driven by the transition itself — are recovered through electricity charges. The result is that electricity costs roughly 4–5 times more per unit than gas, even though the marginal carbon intensity of electricity is now lower. That price signal tells consumers to stick with gas. The CAR Review asks whether that signal should change.

This was a call for input, not a formal consultation. Ofgem was gathering evidence and views before designing specific policy options. It received 330 responses — an unusually high number, with 75% from domestic consumers, suggesting either effective outreach or genuine public anxiety about bills. Ofgem's stated intention is to consult on concrete policy options in spring 2026.

Options on the table

No formal options were presented — this was a preliminary call for input. But the review's scope and the responses received point to the options Ofgem will need to confront. These are the structural choices:

#### Rebalance levies from electricity to gas

The most discussed intervention. Policy costs (RO, CfD, WHD, ECO) currently sit on electricity. Moving some or all to gas bills — or to general taxation — would narrow the electricity-gas price gap, making electrification cheaper at the point of use.

Who wins: Electricity consumers, heat pump adopters, EV owners, industrial electrification projects. Anyone whose business case depends on the relative price of electricity versus gas.

Who loses: Gas consumers, particularly those who cannot switch (tenants, those in housing unsuitable for heat pumps, off-gas-grid consumers on LPG). There is a distributional problem: lower-income households are less likely to have heat pumps and more likely to remain on gas, so rebalancing levies onto gas bills is regressive in the short term even if it accelerates decarbonisation in the long term.

#### Move policy costs to general taxation

Remove levies from energy bills entirely and fund them through the tax system. This is the cleanest economic solution — policy costs are a quasi-fiscal choice by DESNZ and should sit with Treasury — but it requires a government willing to absorb the fiscal impact. The amounts are not trivial: environmental and social obligation costs on electricity bills were roughly £12 billion per year at last count.

Who wins: All energy consumers. The progressive structure of income tax means higher earners bear more of the cost than they do under flat per-unit levies.

Who loses: Treasury. The political difficulty is obvious: moving costs off bills and onto the government's books makes them visible in public spending figures. The current arrangement lets DESNZ spend without appearing to spend.

#### Reform network charging methodology

TNUoS and DUoS charges could be restructured to better reflect the locational and temporal costs that different users impose on the network. This is technically separate from the CAR Review but intimately connected — network costs are the largest component of bills after wholesale energy, and how they are allocated determines who pays for reinforcement.

Who wins: Consumers and generators in areas with spare capacity. Flexible demand that can shift load away from peak times.

Who loses: Consumers in constrained areas. Generators that impose high balancing costs. This option has distributional consequences that cut across the electricity-gas divide.

#### Targeted support replacing universal subsidies

Several respondents called for greater government-led targeted support rather than universal cross-subsidies through bills. The logic: if the concern is fuel poverty, address it directly through means-tested support rather than distorting price signals for everyone. Universal levy funding means a data centre in Slough cross-subsidises insulation in Sunderland through the same per-unit charge.

Who wins: Non-domestic consumers who currently pay levies that fund domestic social programmes. Consumers above the poverty line who currently cross-subsidise those below it through bill-funded schemes.

Who loses: The simplicity of the current system. Targeted support requires identifying and reaching eligible households, which has its own administrative costs and coverage gaps.

What the responses revealed

Ofgem summarised five themes from the 330 responses:

- Affordability — the dominant concern. Respondents want costs to be lower, or at least not higher. This is a constraint on any rebalancing: if moving costs from electricity to gas raises gas bills for those who cannot switch, the affordability test fails for that group.

- Fairness — contested. Fairness means different things to different respondents. For some, it means cost-reflectivity (you pay for what you use). For others, it means ability to pay. These two definitions produce opposite answers on most allocation questions.

- Protecting vulnerable customers — 75% of responses came from domestic consumers, and vulnerability was a consistent theme. Any reform that changes bill levels will be judged against its impact on prepayment meter users, pensioners, and fuel-poor households.

- Government-led targeted support — a clear signal that respondents want the state, not the energy system, to handle social policy costs. This aligns with the economic logic (policy costs are fiscal choices) but requires political will.

- Data-informed decisions — respondents want Ofgem to model the distributional impacts before choosing. This is reasonable but also a delay mechanism: modelling takes time, and every month of delay is another month where the price signal tells consumers not to electrify.

How to respond

This call for input is now closed. The deadline was 25 September 2025. Ofgem received 330 responses.

The next stage — a formal consultation on specific policy options — is expected in spring 2026. That consultation will be the one that matters, because it will contain the options Ofgem actually intends to implement.

What to watch for: The spring 2026 consultation will reveal whether Ofgem is willing to make the structural move (shifting levies off electricity) or will propose incremental adjustments within the existing framework. The 330 responses give Ofgem political cover for ambition, but the distributional consequences — particularly for gas-dependent households that cannot switch — will constrain how far and how fast any rebalancing goes.

The related workstream on [recovering the costs of energy infrastructure investment](https://www.ofgem.gov.uk/publications/recovering-costs-energy-infrastructure-investment-customers) runs in parallel and will interact with whatever the CAR Review proposes. The two should be read together.