Rachel Reeves has reportedly been weighing up options to cut energy bills at next month’s Budget.
Cutting green levies, VAT and standing charges on energy bills are all options put before the Chancellor ahead of her announcements on 26 November.
Energy bills have remained around £600 higher in cash terms than before Russia’s invasion of Ukraine, up 25 per cent in real terms.
But energy company bosses warned MPs last week that rising electricity costs could increase household bills by a fifth within the next five years.
Jan Rosenow, Energy Programme leader and Professor of Energy and Climate Policy at the University of Oxford, described some of the policy proposals aimed at cutting energy costs as “progressive and equitable”, but warned others were “dangerously shortsighted”.
Here, The i Paper takes a closer look at options available to Reeves to cut energy costs in the Budget, as well as the benefits and drawbacks of each.
Cutting VAT
The Chancellor is reportedly considering cutting VAT charged on energy to bring down household bills, according to the BBC.
The Resolution Foundation think-tank estimated that scrapping the current rate of VAT – which stands at 5 per cent – could save each household around £44 a year, while National Energy Action chief executive Adam Scorer said savings could be as high as £85.
However, scrapping VAT would cost the Treasury around £1.75bn, adding further fiscal pressure on Reeves, who was earlier this week warned she may have to fill a funding gap of more than £20bn in the Budget.
Professor Rosenow said cutting VAT on energy bills “is a straightforward and easily implemented measure that would offer some immediate, albeit modest, relief to all households.
“However, its major drawback is that it’s an untargeted, blunt instrument. It provides the same cash saving to the wealthiest households as it does to those in severe fuel poverty who need the support most.
“While politically popular, it doesn’t address the systemic issues of affordability and is a costly use of public funds that could be better targeted.”
Paying for welfare and energy policies via tax – not bills
The Resolution Foundation has argued that energy and welfare policy costs should not be added to household electricity bills, but instead funded through general taxation.
In a report released this week, the think-tank pointed to the examples of the Energy Company Obligation, a scheme designed to tackle fuel poverty and help reduce carbon emissions, and the £150 Warm Home Discount paid by the Department for Work and Pensions to vulnerable households.
Rather than using electricity bills to fund the policies, the report argues they should be paid for through general taxation. “Doing so would save households £50 per year, at a cost of £1.3 billion, and fix a poorly designed system where energy bills have become a vehicle for delivering key parts of welfare policy,” the think-tank said.
It also said taxation should fund the Renewables Obligation (RO), which requires suppliers to purchase a percentage of their electricity from renewable sources, and the Feed-in Tariff (FiT), paid to those generating their own renewable or low-carbon energy.
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“Switching the cost of these important policies away from energy bills would deliver an average bill saving of over £100 to households this year, at a cost of £3bn”, the think-tank said.
Peter Smith, National Energy Action’s director of policy and advocacy, told The i Paper that removing levies off bills would be more valuable than VAT.
“Levies cost households around £250 compared to around £85 per year. If levies were removed from bills but are paid for by [the Treasury] this would be much fairer as the tax system takes account of household incomes, where as levies are charged at a flat rate,” he said.
Mr Smith said one of the the “major policy costs on the bill is that of older decarbonisation policies”, such as the RO and FiT, which he said customers are paying “an increasing amount” for.
“Existing winter support for the poorest is valuable but it isn’t deep enough for those already receiving it and the value of Warm Home Discount in particular is far too low to be meaningfully offset the impact of higher prices.”
Rosenow backed the remarks, telling The i Paper: “Moving social and energy policy costs, like the Energy Company Obligation and Warm Homes Discount, from electricity bills to general taxation is a far more progressive and equitable approach.
“Funding these through bills is inherently regressive, as lower-income households pay a disproportionately high share of their income on energy.
“These are essentially welfare and infrastructure policies, and it is fairer to fund them through a progressive tax system. This move would provide more significant relief to the households that are struggling the most and would correct a long-standing flaw in UK energy policy.”
Reducing green levies
Executives from Octopus Energy, British Gas owner Centrica, E.On, EDF and Ovo warned energy bills are on course to rise by hundreds of pounds this decade because of green levies.
Addressing the parliamentary Energy Select Committee on Wednesday, Rachel Fletcher, director for regulation at Octopus Energy, said green levies could add around £300 to a typical household’s electricity bill by 2030.
Meanwhile, Ofgem has said rising energy bills are partly the result of system costs, including switching generators such as windfarms on and off.
Responding to calls from the Conservative Party and Reform UK to scrap green levies, Energy Secretary Ed Miliband said the government’s commitment to deliver clean energy is “the best way” to lower bills,claiming the UK’s dependence on fossil fuels was its “Achilles’ heel”.
“Some people want to double down on this weakness – this government disagrees,” he said on Tuesday.
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“We believe that the sprint for clean power is the best way to reliably bring down bills for good and give us energy abundance.”
The Conservative Party last week pledged to scrap government legislation requiring it to reducing by 2050, after a law change passed in 2019 with cross-party support.
Rosenow warned that the argument to cut green levies is “dangerously shortsighted”.
He explained: “These levies are a critical investment in our long-term energy security and are the most effective tool we have to permanently lower bills. They fund renewable energy and energy efficiency programs that reduce our dependence on volatile and expensive international gas markets, which are the real driver of high energy prices.
“Slashing these investments for a small, temporary reduction in bills would be a false economy, locking us into a future of high costs and undermining our legally binding climate commitments. Many of these levies are also legacy costs from past programmes that cannot be cut due to contractual obligations.”
Reducing standing charges
One additional option available to the Chancellor is a reduction on standing charges, a fixed cost customers have to pay for connection to the electricity and gas networks, even if they use no energy.
Jan said that cutting standing charges would “primarily benefit households with low energy consumption”, but warned it could be a “double-edged sword”.
He explained: “The fixed costs of maintaining the energy grid must be recovered, and a reduction in the standing charge would likely lead to an increase in the per-unit cost of energy.
“This could penalise households with high energy needs, which often include vulnerable families living in poorly insulated homes who have no choice but to consume more energy to stay warm. It risks shifting the cost burden rather than solving the underlying problem.”
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