The Prime Minister has asked the Chancellor and Energy Secretary to look into removing the standing charge from gas bills.

At a first glance, such a measure appears to have a negative impact on the transition to heat pumps, since removing gas entirely and hence no longer paying the standing charge is one benefit of the transition to low carbon heating.

However, the actual impact of such a move very much depends on how the shortfall in revenue is recovered. Currently, the gas standing charges cover: day-to-day operating costs for suppliers including metering services, the warm home discount and green levies, supplier profit and risk management, and leveling costs across different payment methods. 

There are two possible ways to meet the shortfall, the first is to cover the costs through general taxation, the second through increases to unit rates.

There are about 23 million domestic gas meters in the UK, and the standing charge is about £108.30 per year, so the total revenue is about £2.5 billion. This is a lot to cover through general taxation at a time when there are many competing demands on taxpayers money. The alternative is to increase unit rates. Ofgem estimates that the average gas usage is now 9500kWh per year for domestic consumers. Hence shifting the cost of removing the standing charge onto unit rates would increase the latter by about 1.14p per unit. 

How does this help the transition from gas boilers to heat pumps?

In Jan 2027, gas unit prices are forecast to be 9.76p with electricity unit prices at 30.28p (Cornwall Insight). Removing the gas standing charge and recovering the lost revenues through higher unit rates would lead to prices of 10.9p per unit for gas and 30.28p per unit for electricity. This gives a spark gap of 2.78, much less than previously.

Assuming that an air-to water heat pump can be run 50% on half price electricity and 50% on full price electricity (a reasonably conservative assumption about time of use tariffs) and that the achieved efficiency is 3.5 (a stretch but not impossible) and a gas boiler has an efficiency of 0.9, we have the following:

Gas heating cost per year for 9500 kWh input is 0.109 x 9500 = £1035.50

Heat pump heating cost per year for 9500 x 0.9 kWh output is (0.75 x 30.28) x 9500 x 0.9 / 3.5 = £554.78

Saving is £480.72

Over a 15 year life, that amounts to a saving of £7210. 

This is getting close to the level at which Govt could replace the BUS grant with an interest free loan for all of the costs of a heat pump upgrade, repayable over the lifetime of the heat pump (15 years). The saving in energy bills during that time would contribute over £7200 on top of the cost of around £3000 for a new gas boiler, so £10k to fit a heat pump and be overall cost neutral versus gas. This is the sort of argument that could just about work.

To really make it work, steps would need to be taken to ensure that the spark gap does not creep up above 2.8 again. This could be done by loading more costs onto gas unit prices - for example 20% VAT rather than 5% and use the additional revenues to reduce the unit price of electricity. This would leave Ofgem average customers no worse off overall, but create a stronger incentive to transition to low carbon heating.

It will be interesting to see what steps Govt takes in this area in next week's budget.