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Hidden tax on energy bills set to double over next decade

Filed under: House and Home, Families, Budgeting & Planning

Many people don't know that they are paying £84 a year in 'hidden taxes' on their energy bills to help meet the cost of combating climate change.

Mounting pressure could see these taxes more than double to £176 a year within the next decade, warns uSwitch.com, the price comparison and switching service.

Households currently spend an average of £1,194 a year on energy, with £84 or 7% of this going towards environmental levies. These include the EU Emissions Trading Scheme (£24), Carbon Emissions reduction Target (£45), Community Energy Saving Programme (£3) and the Renewables Obligation (£12).

Policies launched under the previous government are expected to add a further 6% in levies over the next ten years. This will cost consumers an extra £72 a year on their energy bills, resulting in the average household paying a whopping £156 a year in environmental taxes.

It doesn't end there though. The Treasury is already said to be considering an additional levy on electricity bills that could add a further £10-£20 to bills. If this happens, we could see the 'hidden tax' on our energy bills more than double to £176, accounting for 15% of the average household bill.

But this could actually be the thin end of a wedge. Ernst & Young calculates that investment in Britain's energy supplies will cost over £230 billion, potentially adding £548 onto household energy bills over the next 15 years.

While much of this cost can be expected to be recouped through higher energy prices, it could also have an impact on the amount being paid in levies. In fact, some of the levies already being charged on household energy bills are going towards meeting this investment cost.

Understandably, consumers are concerned. According to uSwitch.com research, 44% of people say that the commitment to cutting carbon emissions and moving to greener energy sources has to be balanced with the impact on people's bills, while almost a quarter (22%) say that affordable energy has to be the priority.

Three in ten say that the cost should be shared across government, industry, consumers and businesses. A further 14% say that it should be applied as a proportionate charge on energy bills, so that high users pay more, while those who consume less pay less.

That is the problem - while many people probably recognise that something needs to be done to combat climate change, you should be rewarded for cutting your energy use - not penalised. If suppliers charge environmental levies as a flat fee, people consuming less energy will find themselves paying proportionately more. So where is the incentive to save energy?

Ann Robinson, Director of Consumer Policy at uSwitch.com, called for greater clarity over what the 'hidden taxes' are for, a cap on how much consumers will end up paying and transparency over how the levies are being applied.

"If the levies are applied proportionately they will act as an incentive for households to cut their energy consumption," she said. "If not, then the industry will be sending out a very mixed message to consumers. Unfortunately, there is already a precedent here with low energy users generally receiving a smaller percentage price cut than high users earlier this year. Safeguards will also need to be put in place so that people who consume high amounts of energy for health reasons are helped rather than penalised.

She warned: "The important thing though is for consumers to grasp the longer-term implications of these levies - the only way household energy bills are going is up. It is crucial that we now all take steps to become more energy efficient and to ensure that we are paying the lowest possible price for our energy. This will help to mitigate the impact on our bills. I would also urge consumers to speak to their supplier to find out what support they can offer - part of the tax on our bills goes towards funding suppliers' energy efficiency programmes and they may qualify for help."

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