Cornwall Insight Cuts Price Cap Forecast After VAT Reduction

The January 2025 energy price cap is now forecast at £1,697, £17 less than the previous estimate. That is the headline from Cornwall Insight’s latest revision, driven entirely by the government’s decision to cut VAT on energy-saving materials from 5% to 0%. For a typical household on a standard variable tariff, that shaves about 1% off the annual bill. But the real significance of this forecast is not the £17. It is what the VAT cut does to the cost of installing a heat pump, solar panels, or new loft insulation.

As Cornwall Insight reports, the forecast update reflects the Treasury’s decision to zero-rate VAT on energy efficiency and renewable heating products from 1 February 2024 until 31 March 2027. The £17 reduction on the cap is a mechanical knock-on effect: lower VAT on the standing charge and unit rate components that include these products. But for homeowners, the real money is in the upfront cost of upgrades.

What the VAT cut means for a typical heat pump installation

A 10kW air-source heat pump installation typically costs between £9,000 and £12,000. At the old 5% VAT rate, that added £450 to £600 in tax. At 0%, that saving is direct cash in your pocket. On top of the £7,500 Boiler Upgrade Scheme grant, the VAT cut makes the net cost of a heat pump around £1,500 to £4,000, comparable to a new gas boiler, which still attracts 20% VAT. The Energy Saving Trust calculates that a heat pump in a well-insulated 3-bed semi saves around £200 a year on heating bills versus a gas boiler, depending on the heat pump’s efficiency and the property’s heat loss. With the VAT cut, the payback period shortens by roughly 6–12 months.

Solar panels and battery storage, the numbers shift

A typical 4kW solar PV system with a 5kWh battery costs around £9,000 to £11,000 installed. At 5% VAT, that was £450 to £550 in tax. Now zero-rated, the saving is exactly that amount. With electricity prices still around 24p/kWh on the standard variable tariff, a household that uses 60% of its solar generation on-site can save £400–£500 a year on electricity bills, according to Energy Saving Trust figures. The VAT cut effectively knocks one year off the typical 10–12 year payback period. For homes with south-facing roofs and good daytime occupancy, the economics now look compelling, especially when paired with a time-of-use tariff like Octopus Flux or OVO’s Solar Plus.

Who qualifies, and who doesn’t

The 0% VAT applies to installations of heat pumps, solar panels, solar thermal, battery storage, wind turbines, insulation, draught-proofing, and smart heating controls. But there is a catch: it only covers installations in homes that have been occupied for at least two years. New-build properties do not qualify. The government also tightened the rules on battery storage: it must be installed at the same time as solar panels to qualify for the zero rate. Retrofitting a battery to an existing solar system still attracts 20% VAT. Homeowners planning a phased upgrade should factor this into their timeline.

The forecast from Cornwall Insight also shows the price cap is not a cap on total bills, it is a cap on the unit rate and standing charge. Households that use more energy will still pay more. The £1,697 figure assumes typical usage of 12,000 kWh for gas and 2,900 kWh for electricity. A family in a draughty 4-bed detached using 18,000 kWh of gas and 4,500 kWh of electricity could see a cap-implied bill closer to £2,400. For those households, the VAT cut on insulation and heat pumps is not a marginal benefit, it is a structural saving that could halve their heating costs.

But the VAT cut is temporary. The Treasury has not committed to extending it beyond March 2027. Homeowners who delay risk paying 20% VAT on a heat pump or solar system installed after that date. The window is three years. Given that heat pump installations can take 4–6 weeks from survey to commissioning, and solar installers in many regions are booked 3–6 months ahead, the time to act is now.

Households on standard variable tariffs can check their current cap rate on Ofgem’s website. Those considering upgrades should get at least three quotes from MCS-certified installers and compare the net cost after the VAT saving and any available grants. The £17 reduction in the cap forecast is a footnote. The real story is that the Treasury has made the maths on heat pumps and solar panels better than at any point in the last decade. Don’t let the small print, or the small headline, distract you from the bigger opportunity.