Green levies on energy bills scrapped in the Budget but Rachel Reeves opts against cutting VAT

Households could save up to £150 on their energy bills over the course of the year, under plans announced by the Chancellor in the Autumn Budget.

It had been rumoured that she would scrap VAT on domestic energy bills, which meant households could save an average of £87 on their bills.

Instead, she has announced that certain green levies added to electricity bills will be scrapped and moved into general taxation.

While wholesale prices have come down in recent months, standing charges have increased, largely driven by the cost of policies like the Warm Homes scheme.

Rachel Reeves hopes that cutting the levies will bring down bills for millions of households, but they may not save as much as they hope with price increases on the horizon.

Green levies scrapped: Chancellor announced households will save £150 on their bills 

How much will you save?

Energy suppliers charge for the wholesale cost of electricity and gas, but also for all the other associated costs, which come in the form of standing charges.

These have ballooned in recent years, as green levies have been piled onto people’s energy bills to help pay for schemes like the Warm Homes fund.

The grant offers free energy improvements to low-income, privately owned homes with low EPC ratings.

The Government will no longer fund the Energy Company Obligation (ECO) on bills after March 2026, and will instead direct funding to households facing fuel poverty.

The Treasury estimates that this will save the average household £150 on their energy bills from next April.

Greg Jackson, founder of Octopus Energy, welcomed the government’s announcement.

He said: ‘This cut in electricity bills is a positive step in the right direction for customers. Making electricity cheaper is also crucial for people adopting electric heating and electric vehicles.

‘The ECO scheme had become simply too wasteful, adding high costs to everyone’s bills and only delivering meagre savings for recipients. A reset through the Warm Homes Plan is the right approach.’

Removing green levies will reduce your bill, but the exact amount will depend on your usage and the type of home you live in and how much energy you use.

Why bills could still rise in 2026

On the surface, scrapping levies on energy bills is a savvy move for Reeves. Not only will it help to bring inflation down, but it will also help with the cost of living.

The Government committed to bringing overall bills down by hundreds of pounds by 2030, but this might prove difficult even with today’s announcement.

Ofgem figures show that policy costs – which include social and environmental levies – make up just 11 per cent of an average electricity bill.

While wholesale prices for gas and electricity have stabilised somewhat, standing charges are only set to increase, driven by higher network costs and major upgrades.

These costs, which include the transmission and distribution of electricity, make up 48 per cent of energy bills. 

In January, the price cap will rise by £3 to £1,758 but Ofgem has warned it is likely to increase by more in April.

The regulator said it would spread the cost of the Warm Home Discount scheme over a longer period to keep bills stable, estimating an extra 57p per month on bills.

Last week, expert forecaster Cornwall Insight said it ‘marks the beginning of a potential trend in which non-energy costs could emerge as the primary driver of household energy bills, rather than the wholesale market’.

While the Government will fund 75 per cent of the Renewables Obligation to households until 2029, and therefore bringing bills down, it does not fix the structural inefficiencies in the market.

Joe McDonald, founder of Tem Energy told This Is Money: ‘The reduction of green levies will help reduce bills in the short-term, [but] we’re stuck in this cycle of short-term subsidisation, which simply ends up levying costs onto other people.

‘This was an opportunity to prove the Government really gets it and is ready to fix the structure. 

‘It seems today that they’re trying to plaster over the cracks to ensure that on a short-term basis we’re mitigating the ever-rising costs of energy bills.

‘We’ve proven we can’t build nuclear and renewables cheaper than most nations on earth, so relying on this strategy to bring down bills will resign the UK to a tourist state.’

Why it’s a good time to fix your energy bill

With so much uncertainty about where energy prices might be next year, even with a 5 per cent reduction, it’s a good time to opt for a fixed tariff.

The price cap should be considered an important safety net, but there are better ways for customers to pay less for their energy.

There are plenty of fixed tariffs on the market that undercut the current price cap, and still offer savings in January as well.