Rachel Reeves is eyeing a raid on funding for heat pumps and home insulation to help cut £170 off energy bills.
The Chancellor is under pressure to reduce costs for families in her forthcoming Budget, amid concerns in Downing Street that household bills will rise by at least £100 next April following a £35 increase last month.
In particular, Ms Reeves is said to be examining proposals to slash the green levies that pay for various government schemes, including the fitting of insulation and low-carbon heating systems for poorer households.
The move could potentially see money syphoned out of a flagship £13bn scheme championed by Ed Miliband, the Energy Secretary, known as the Warm Homes Plan.
One energy industry source said the Treasury was pressuring Mr Miliband’s Department for Energy Security and Net Zero (DESNZ) to come up with at least half of the £170 savings being sought but that officials were facing stiff resistance.
“The Prime Minister wants bills to be cut and the Treasury has said we’ll fund some of it but DESNZ have to fund the rest. But DESNZ have said no,” they said.
A source close to Mr Miliband declined to comment on “speculation” but said the Budget was a matter for Downing Street and the Treasury.
Cutting green levies while maintaining support for the Government’s net zero plans will be difficult.
The energy company obligation (ECO) is currently the main way insulation schemes are funded and adds about £60 to the combined cost of electricity and gas bills.
It will partly fund Mr Miliband’s Warm Homes Plan, which is designed to lower bills for poorer households by hundreds of pounds per year, making it a controversial option for Labour to pursue.
However, a recent report by the National Audit Office was highly critical of the way ECO money was being spent and warned that insulation fittings were being poorly carried out and were prone to fraud, potentially bolstering the case for slimming down spending.
Another way of cutting bills would be to reduce the amount paid to network operators who are upgrading the power grid for net zero, which adds a combined £177 to electricity bills per year.
Reforming another scheme known as the renewables obligation (RO), which adds about £98 per year, and changing VAT rates are other potential areas of savings.
Removing VAT from bills could also save a combined £86 per year, at a cost of £2.5bn that would potentially have to come from general taxation.
However, Treasury officials have raised concerns that a blanket move to scrap energy VAT would be both expensive and “regressive” because it would benefit owners of larger homes and energy intensive users the most.
Government sources insisted that Sir Keir, Mr Miliband and Ms Reeves were in “lockstep” on measures.
However, they added: “It’s normal for discussions to take place between departments.”
‘Action’ on bills
Ms Reeves told reporters last month that she was plotting “targeted action” to bring down bills in the Budget.
Insiders stressed no final decisions had been made, but suggested that reducing the burden of green levies on lower income households was the priority.
Separately on Wednesday, the prospect of further changes to energy bills angered the boss of Scottish Power, which runs the high-voltage power grid in central and southern Scotland.
Keith Anderson, its chief executive, said: “A long time ago in this country, we made a decision that every cost this sector incurs goes onto customer bills [not taxes].
“That was a conscious decision so if you now look at the average domestic bill, about £600 to £700 is the actual product. The other £1,000 is stuff we have chosen to add on.
“We’re on the start of a programme to rewire the whole country which was always going to cost £60bn at least. Where did anybody think the cost of that was going to come from? So these costs should not be a surprise.”
Chris O’Shea, the chief executive of British Gas owner Centrica, also told a London conference on Wednesday that he would like to see levies stripped from energy bills and moved to general taxation.
He said: “We support a full review of cost allocation, including removing policy costs from bills and funding them through general taxation.
“That’s how we could fulfil our ambition of protecting low income households.”
A Treasury spokesman said: “We do not comment on speculation around future changes to tax policy outside of fiscal events.”
