What does the 2026 Budget mean for the energy sector? Jack Green-Morgan, Deputy Head of Political Intelligence and Principal Political Consultant for Energy, Utilities & Net Zero at Dods, examines the key announcements, outstanding policy questions and what the Budget signals for the future of UK energy policy.
What are the key takeaways for your sector?
Jack Green-Morgan: Energy was front and centre in this Budget, with announcements on affordability, structural reform, and a recalibration of the Government’s headline energy goal.
The clean power mission is now a cheap energy mission, with the recognition that renewable generation will be crucial for achieving more affordable energy. This represents a change in emphasis, although not a change in direction.
On cost-of-living relief, the Chancellor delivered more than expected. The extension of the VAT cut on electricity, and the £100 energy payment to selected households – costing £2.6bn – went further than the expected top-up to the Warm Home Discount. However, compared with the energy support provided by the Government in 2022, which cost around £50bn, the Chancellor’s immediate affordability support was limited.
The £100 payment is likely to be absorbed and exceeded by the energy price cap rise in January, representing a reduced increase, rather than a discount. The extension of the 0 percent VAT rate on electricity is worth another £50, also representing a cushion to any increase, rather than a discount.
In the longer term, the promised elimination of standing charges on gas – expected by the end of 2027 – will save the average household somewhere between £27 and £45 year.
The most substantive announcement is the planned cost control framework for taking levies off energy bills, due to be introduced at the 2027 Spending Review. While only accounting for around nine percent of bills, stakeholders have long called for levies to move off bills and onto general taxation as a way of bringing electricity costs down and incentivising the electrification needed to decarbonise the economy.
What has the Government not sufficiently addressed in the Budget for your sector?
Jack Green-Morgan: Immediate energy affordability, both for households and businesses, remains under-addressed. This has implications for the whole economy.
Households are already experiencing record energy debt, and the £100 payment – itself a targeted, rather than universal form of support – will not even cover the expected January energy price cap increase, forecast to increase by 16 percent, or £276, to £1999 a year.
Many households will continue to struggle this winter with the cost of energy, despite the support put in place. Energy poverty, energy debt, and lower disposable income are all drags on the wider economy, and also prevent households from investing in home improvements which could make them more resilient to high energy costs.
At the same time, businesses have been crying out for greater support on energy costs.
The UK faces some of the highest industrial energy costs in the world. Businesses and trade associations have been persistent in arguing that without redress, this will undermine the UK’s manufacturing competitiveness, harming employment, growth, and the security aspects of sovereign manufacturing capacity. The British Industrial Competitiveness Scheme targets some key sectors, but stakeholders calling for wider support beyond the currently eligible businesses were disappointed. Inaction on support for businesses could undermine the Government’s goals to re-industrialise, by deterring investment until more favourable conditions prevail, or by alienating investors entirely and losing them to jurisdictions with cheaper energy costs.
Have the Government’s priorities changed in your sector? Why?
Jack Green-Morgan: The Government’s priorities remain affordable energy for households and businesses, underpinned by a clean power system, as part of a managed path to a net zero economy.
Alongside the shift in emphasis to “cheap energy” over clean power, the main change has been the shift towards “pragmatic” decisions on oil and gas. This has been driven by the current international context, with energy prices increasing due to conflict in the Middle East.
The Jackdaw decision, alongside provisions on tiebacks promised in the Energy Independence Bill, prove that the Government is willing to consider further reform, or more nuance, to its position on North Sea oil and gas extraction. Reporting that the Chancellor favours consent for the Rosebank oil field is also significant.
The creation of the Energy Wealth Fund (EWF) is also notable. The EWF allows the Government to repurpose tax revenue from oil and gas into the investment required for a clean power system in the long-term. The establishment of the EWF could pave the way for further reform on oil and gas policy, allowing the Government to link oil and gas extraction with investment in renewables, potentially reconciling the tensions between its objectives on emissions reductions, energy affordability, energy security, a just transition and economic growth.
Any additional reflections?
Jack Green-Morgan: The approval of Jackdaw and the shift to prioritising cheap energy over clean power marks a change in approach from the new Energy Secretary. Where Miliband was perhaps more ideological in his energy policy, Burnham’s messaging about “pragmatism” seems to have filtered down to Healey and Fahnbulleh.
It is true that this is driven somewhat by circumstance. Fahnbulleh has been a strong climate advocate, but clearly feels the pressure amid spiking oil and gas prices to reinforce UK energy security through more North Sea extraction. Her climate-conscious credentials are supported by her reported opposition to approving Rosebank, which is more attractive for its potential tax revenues than for its contribution to UK energy security or consumer affordability.
The Energy Wealth Fund, or at least the concept behind it, looks set to determine the future direction of this Government on fossil fuels. If the Energy Secretary can accept the principle behind taxing new oil and gas to fund an accelerated rollout of renewable generation – and be convinced this will positively impact consumer affordability without harming the UK’s net zero obligations – then pragmatism may become the new guiding force in UK energy policy.