Welcome to this week’s Europe Energy Risk Brief, IEEFA Europe’s weekly snapshot of the developments shaping the region’s energy system.
Andy Burnham took office as UK prime minister on Monday and made energy his first major policy act, scrapping value-added tax (VAT) on household electricity bills from 1 October 2026. IEEFA analysts think the relief, however welcome, does not address the main issue: Electricity prices are high because gas sets them, and a tax holiday does not change that. Meanwhile, European gas prices have reached a four-month high as the Iran conflict grows in intensity.
A VAT cut eases bills but does not fix why they are high
With analysis from Jonathan Bruegel
UK Prime Minister Andy Burnham announced on 21 July, his second day in office, that VAT on domestic electricity will be cut from 5% to zero from 1 October for six months. The government said the action will cost around £850 million in 2026/27 and save a typical household £45 a year. (UK government, ITV News)
Burnham framed it as immediate cost-of-living relief. The End Fuel Poverty Coalition said the cut does not address the scale of high energy bills that households face. Consumer finance journalist Martin Lewis noted the latest energy price-cap predictions, a 5.1% rise in 1 October on high wholesale rates, would wipe out the saving for most. (End Fuel Poverty Coalition, Money Saving Expert)
What this means:
The VAT cut applies demand-side relief to a supply-side problem. UK electricity prices are high because gas sets the marginal price most of the time. A tax holiday does nothing to change that. UK electricity costs roughly 3.6 times as much as gas per unit under the current price cap. That ratio, not the VAT rate, is why heat pump deployment is stagnating. IEEFA analysis suggests switching to electric heating remains uneconomical for most households given the electricity-to-gas price ratio, despite heat pump efficiency gains. The UK's coal exit is complete, and its stated strategy of replacing gas generation with clean power is clear. The gap is delivery. Grid capacity is not growing fast enough to lower the electricity-to-gas price ratio or to meet electrified heating demand. Unless the new government backs faster clean energy deployment and grid expansion, bills will stay high. A six-month tax holiday is not a power market strategy.
Structural volatility: Gas markets price conflict as a permanent condition
With analysis from Ana Maria Jaller-Makarewicz
European natural gas prices climbed above €63 per megawatt-hour this week, a four-month high, as renewed violence around the Strait of Hormuz raised concerns about the feasibility of transporting energy through the world’s most vital chokepoint. The latest spikes have fuelled fears that unrest in the Middle East will be priced in as a permanent feature of energy markets. (Politico, Trading Economics)
European liquefied natural gas (LNG) imports are falling sharply, and gas storage remains low. Since the beginning of July, the EU and UK have cut LNG imports by 32% year on year, while the US has supplied 61% of Europe’s LNG imports, followed by Russia with 17%. EU gas storage is 54.61% full today (24 July), 17% below the same time last year, when it was 65.65%. (Kpler, Gas Infrastructure Europe)
Europe's Russia policy is pulling in two directions. The EU's ban on importing Russian LNG takes full effect from 1 January 2027, with pipeline gas following from autumn 2027. Yet EU ambassadors agreed the bloc's 21st sanctions package on Thursday only after granting Greece a carve-out: EU companies may continue transporting Russian LNG to third countries for a renewable 12-month period, capped at 2025 volumes and limited to contracts concluded before February 2022. The request was backed by Dynagas, the Greek shipper whose tankers serve Russia's Arctic Yamal LNG plant. In exchange, Greece accepted a one-year freeze of the Russian oil price cap at $44.10 a barrel. (Council of the EU, Financial Times, Euronews)
The European Commission instructed EU governments to waive penalties for three years for oil and gas companies breaching its methane emissions law. This came after the US, Qatar, industry groups and most EU Member States warned that the rules, due to require imported gas to meet EU-equivalent monitoring from January 2027, could hamper supply security. (Reuters, European Commission)
What this means:
Global gas markets have become structurally volatile, with persistent geopolitical conflicts acting as a permanent risk premium rather than a temporary shock. Europe is competing with Asia for LNG cargoes, making gas storage refill significantly more expensive ahead of winter. Sustained volatility could push gas prices toward a tipping point where high consumer bills trigger demand destruction. While gas prices climb, the cost of renewables and battery storage keeps falling. Europe should strengthen its energy security by replacing gas consumption with clean alternatives rather than betting on LNG or easing methane emission rules.
Edited by Aniket Narawad and Jules Scully