Explaining the new gas tax of 2021
Announced in March 2020 the new Green Gas Levy (GGL) was designed to help support the UK’s target to achieve net-zero greenhouse gas emissions by 2050. Following the previous decade’s success in beginning to decarbonise the electricity industry, the government are now turning their attention to heat.
This legally binding goal means that there must be significant decarbonisation within the heating industry as most of the fuel comes from non-green gas.
The government cannot increase costs exponentially, nor all at once, without risking crippling the competitiveness of the industry. Companies must have time to adapt to the increase in production costs, as the switch is made to gasses enriched with biogas or hydrogen.
The GGL is the latest move to decarbonise the UK’s industries, but what does it actually mean?
WHAT IS IT?
The Green Gas Levy is a tax which will apply to all licensed gas suppliers. The money levied will fund the injection of biomethane into the UK grid’s gas supply. Essentially it aims to increase the amount of green gas being produced so that more can be supplied to customers.
The government’s intention is to split the costs of the GGL across suppliers according to the number of meter points they serve. This choice was made because it was considered the simplest to implement as the levy rate could be applied uniformly across all meter points.
The approach has the downfall that, because all customers will be splitting the magnitude of the levy equally, a domestic household are expected to contribute the same amount as a supermarket.
However, as is expanded upon below, this is expected to be changed in the future.
WHEN WILL IT START?
The GGL is expected to launch in Autumn 2021 and the first levy collection would be intended for April 2022.
By 2024/25, or as soon as possible thereafter, the government hope to transition to a volumetric levy in exchange for the flat-rate proposal, currently. This transition would help to accommodate the clear benefits of billing aligned to gas consumption. Benefits include:
- increased accuracy for the supplier,
- bills based precisely on consumption for customers.
This change in billing would reduce the prices for domestic households from £6.90 to around £5.10 per annum.
WHAT WILL IT COST?
The levy rate is calculated by dividing the maximum projected Green Gas Support Scheme spend for the upcoming year by the projected total of meter points in the market for that year, then multiplied by 365. This gives a price per pence per meter.
The government estimate that after the GGL comes into effect in 2022 the first annual addition to a domestic consumer’s gas bill will be significantly less, with the peak charge expected to occur in 2028.
|Year||Expected Charge Applied to Energy Bills|
As is clear in the government’s consultation there were a few methods of taxation initially proposed other than the chosen flat-rate, per-meter option.
Another suggested method was to use a tiered system in order to relieve some of the cost from domestic and micro-business users.
Unfortunately, the below table illustrates that there wasn’t a particularly substantial impact on the amount charged to domestic and micro-business consumers.
However, there was a disproportionate amount of the charge shifted to the businesses who use the most gas (but not enough to quantify how much they’d be charged).
|Tier||Approximate price at peak in 2028|
|Option 1 (flat rate)||Tier 1: Domestic and micro-business gas consumers||£6.80|
|Tier 2: Remaining gas consumers||£21|
|Option 2 (tiered system)||Tier 1: Domestic and micro-business gas consumers||£6.50|
|Tier 2: 90% of non-domestic consumers not in tier one||£21|
|Tier 3: Remaining 10% of non-domestic consumers not in tier one||£220|
WHAT WILL IT AIM TO DO?
The scheme was introduced to help move the UK towards the net zero greenhouse gas emissions target by 2050. The GGL is expected to lead to carbon savings of 21.6MtCO2e over the lifetime of the scheme. The government have suggested it will also create jobs within this new sector of the energy market, though no figures were provided.
As a part of the consultation process for the GGL, many energy companies had a lot to say and to recommend to the government about the scheme. Below are the main areas I believe that the government could improve upon within the propose GGL.
- Introduce and electrification plan alongside the levy.
- Implementing further, additional schemes which aim to make electricity cheaper compared to gas. This would incentivise the use of electrical heating solutions as opposed to gas and reduce the carbon emissions of the heating industry through reduced gas consumption, generally.
- Increase support for green gas plants
- The government have planned to add only 2.9TWh of green gas to the grid in the next decade; this is less than is currently in the UK grid, which is only meeting 1% of demand at the moment.
- Suppliers are already struggling to increase the amount of green gas they can supply because there isn’t enough being produced. There is the capacity in the UK to produce 20TWh by 2030, and doing so would improve the capacity that gas suppliers’ fuel mixes have to include green gas.
- There are currently no checks in place to make sure the levy is only applied to the non-green gas suppliers provide
- Should a supplier provide 6% green gas to their customers then surely they should only pay the levy on the 94% of the non-green gas used in their fuel mix.
- Additionally on this, there are no incentives for companies that are already decarbonising their supply.
- Perhaps suppliers who do supply some green gas to their customers should be charged less in order to create a financial incentive for suppliers to decarbonise their fuel mixes.