Treasury considers cutting green levy to ease cost-of-living crisis for UK households
A green levy on energy bills covering the cost of insulation for the poorest households could be cut to reduce the burden UK households are facing from ultra-high gas prices.
According to The Times, the Treasury is reviewing the Energy Company Obligation (ECO), a £1bn scheme which pays for insulation and new boilers.
This follows 20 Tory MPs and peers publishing a letter in The Telegraph calling for environmental levies and VAT to be scrapped.
ECO is currently viewed as an important part of the government’s attempt to hit net zero carbon emissions by 2050, as it provides a £290 yearly saving for the 200,000 UK households that have been improved under the scheme.
However, the levy also adds £29 to the average annual energy bill for consumers who are not improving the energy efficiency of their homes.
Making homes more energy efficient is a key target for the UK government, which has also rolled out plans to offer £5,000 grants to up to 90,000 British households to replace gas boilers with environmentally friendly heat pumps.
As it stands, approximately £159 of the current consumer price cap of £1,277 for average energy usage is spent on governmental social and environmental schemes with a further £61 on VAT.
The price cap is expected to rise by as much as 50 per cent in April to reflect soaring wholesale gas costs, which have contributed to 25 energy firms collapsing or falling into administration since last September.
While the Treasury is reviewing all green levies, including more substantial ones for renewable energy, many of them are subject to binding contracts.
This means the government would still have to pay them even if they were taken off bills.
One government source told The Times that the Department for Business, Energy and Industrial Strategy is opposed to cutting the levy, which it believes would be a “retrograde” step.
“Cutting it would be short-termist,” the source said. “Ultimately this is about reducing costs.”
Government scrambles for cost-saving measures as energy market meltdown begins to bite
Business Secretary Kwasi Kwarteng held crisis talks with energy industry bosses last month, with both parties agreeing consumers needed to be protected from rising costs, but no specific policies were agreed.
Energy suppliers are desperate for the price cap to rise so that they can pass on wholesale gas prices, which rose above £4 per therm last month.
However, without any reforms to the cap or protective measures announced, the rising bills will fall squarely on domestic consumers.
Investec has already estimated that UK households are already on the hook for £3.2bn from the energy market meltdown – including the required £1.7bn in public money to prop up Bulb over the winter, after its de-facto nationalisation.
Meanwhile Prime Minister Boris Johnson met with the Chancellor, Rishi Sunak, on Sunday to discuss options for dealing with the cost of living crisis.
One idea being considered is an expansion of the Warm Homes Discount Scheme which offers a £140 saving to 2.2m of the UK’s poorest households, however this would not offset a potential whopping £700 increase in annual bills.
Sunak is now set to hold talks with MPs on four consecutive nights this week to discuss concerns over the cost-of-living crisis, with relationships between backbenchers and The Treasury already inflamed by announced increases in national insurance payments.
The Times also reports that officials are drawing up plans for a windfall tax on oil and gas companies, a scheme that has been proposed by Labour and would raise £1.2bn.
However, ministers fear increasing taxes on energy producers could disrupt supplies further and consequently burden the consumer with more long-term costs.
Labour will also put pressure on the government to cut VAT on energy bills, and will put forward a motion in an opposition day debate to try and force MPs to vote on the proposal.
Ed Miliband, the shadow climate change secretary, said it was time to support families through the “growing cost-of-living crisis”.
Labour has proposed cutting VAT on energy bills for a year, alongside a windfall tax on the North Sea oil and gas industry – a policy reminiscent of the Blair years when New Labour taxed the profits of utilities.
The government has so far resisted making moves on VAT, with education secretary Nadhim Zahawi arguing oil and gas companies were “already struggling”.
However, Labour said the industry was expected to report a near-record income in 2021/22.
It has also pointed to pledges made by Johnson and levelling-up secretary Michael Gove.
Both politicians in the run up to the EU referendum in 2016 described VAT on energy bills as unfair, and said leaving the bloc would allow the UK to scrap them.