With winter tightening its grip and the energy price cap confirmed to rise, all eyes are on Chancellor Rachel Reeves ahead of the budget on 26 November. The central question for many households is whether the government will deliver on its promise to lower energy bills, and if so, how it will be paid for amidst widespread expectation of tax increases.
Potential Measures to Cut Energy Bills
The Labour party's manifesto pledged to reduce energy bills by £300 by 2030. To make progress on this goal, the Treasury is reportedly considering several options. One of the most straightforward would be to remove the 5% VAT currently applied to energy bills. This move could save the average household approximately £80 per year.
However, this policy is not without its critics. As a percentage-based tax, a VAT cut would provide a larger absolute saving to wealthier households who consume more energy, potentially clashing with the government's focus on supporting "working people". Furthermore, the Treasury would need to find an estimated £2.5 billion to cover the lost revenue, likely requiring a tax rise elsewhere.
Shifting Costs from Bills to Taxes
Another proposal gaining traction is to move government policy costs off energy bills and into general taxation. As explained by Sky News business and economics correspondent Paul Kelso, while wholesale energy prices have fallen, household tariffs are increasing due to charges for projects like the Sizewell C nuclear power station, the warm homes discount, and grid upgrades.
Think tanks and action groups argue that transferring these levies to the tax system would place more of the burden on those with the "broadest shoulders". This change could also save bill-payers around £80 annually. Combined with a VAT removal, the average household could see a total reduction of about £160 per year on their energy costs, but this would be directly linked to the anticipated tax rises.
The Net Zero Dilemma and Grid Challenges
The most contentious option involves the government's net zero targets. The ambitious goal of reaching net zero by 2030, championed by Energy Secretary Ed Miliband, is partly funded through levies on energy bills. Delaying this target could lower immediate costs for consumers by spreading them over a longer period, though it would prolong exposure to volatile gas prices.
Such a move, if imposed by the Treasury, could create significant political friction and even raise questions about Miliband's future in his role. Beyond policy, ageing infrastructure is also costing consumers. About £40 per year on every bill is paid as "curtailment costs" to green energy producers to stop generating when the grid, particularly in Scotland, cannot handle or transport the excess power.
The government is actively working to resolve these grid issues, but it is a complex challenge running parallel to its net zero commitments. With the Treasury refusing to comment on budget speculation, the nation awaits Chancellor Reeves's announcement to see which path she will choose.
