Chancellor Rachel Reeves is considering cutting green levies on energy bills to reduce household costs, according to sources. The plan, expected to be announced in the upcoming budget, could save households up to £170 annually. However, industry insiders have described the potential move as 'disastrous' for energy efficiency efforts.
The proposed package, worth around £3bn a year, includes eliminating the 5% VAT on domestic energy bills, which would cost £2.5bn annually and reduce bills by an average of £86. Reeves is also looking at reducing or scrapping the Energy Company Obligation, which funds home insulation and heating improvements. The Treasury is keen on the VAT cut due to its simplicity and speed of implementation.
Prime Minister Keir Starmer is particularly concerned about an expected £100 rise in energy bills next spring and wants to offset that. The government hopes the focus on energy bills will help improve Labour's poll ratings, counter the appeal of Reform UK, and mitigate the impact of expected tax rises in the autumn budget.
However, energy industry experts warn that cutting funding for energy efficiency would be counterproductive. The National Audit Office had already flagged fraud risks in the Energy Company Obligation last year. Some economists also caution that reducing VAT could disproportionately benefit larger homes and encourage higher energy consumption.
Reeves signalled her willingness to make controversial decisions in a pre-budget speech, stating she would not 'sweep challenges under the carpet'. She emphasised that easing the cost of living is one of her three main priorities, alongside reducing national debt and protecting the NHS. Cabinet ministers have stressed the need to clearly link any tax rises to tangible benefits for voters.
