IFS responds to £150 cut to energy bills pledged in Rachel Reeves’ Budget – will it work?
An influential think tank has questioned Rachel Reeves’ Budget promise to cut the average household energy bill by £150 by scrapping the energy efficiency scheme.
Speaking at Wednesday’s financial event, the chancellor said the energy company liability (ECO) scheme would be ended to remove the taxes the scheme adds to energy bills. At the same time, the government will cover most of the cost of subsidies for older renewable energy projects for three years and remove it from energy bills.
The Treasury claims the measures will save an average of £154 from next April. But the Institute for Fiscal Studies (IFS) said these savings will fall to just £39 from 2029/30 when the temporary subsidy ends.
IFS director Helen Miller said: “Although it has made some significant tax cuts on energy bills over the next few years, the longer-term proposals are much less significant, with bills being cut by just £39 a year from 2029/30.”
The finding will be a blow for the chancellor, who said in the Budget that the high cost of energy was “one of the biggest drivers of the increase in the cost of living”.
Announcing the change, the chancellor said: “The Conservatives’ ECO plan was presented as a plan to tackle fuel poverty.
“Household bills cost £1.7bn a year and for 97 per cent of fuel-starved families this scheme has cost more than it saves.
“This is a failed plan, so I’m canceling this plan as well as deducting other old costs from the bills.”
Climate campaigners reacted negatively to the move, describing the move to abandon the energy company’s liability (a scheme providing efficiency measures such as insulation for fuel-starved homes) as a “devastating blow” that cut off funding for measures that would permanently reduce bills.
The government has also announced it will provide an additional £1.5bn of capital investment to tackle fuel poverty through the warm homes scheme, on top of the £13.2bn of funding allocated in the spending review earlier in the year.
Reducing the cost of electricity, where most taxes fall relative to gas, is seen as key to encouraging people to switch to clean electricity technology such as heat pumps and electric cars.
But while the chancellor’s decision to remove renewable energy subsidies from bills was welcomed, campaigners said scrapping the ECO would reduce funding for green homes from £20bn to £15bn over the course of this parliament.
Ed Matthew, campaign director at independent climate change think tank E3G, said: “Cutting taxes off electricity bills is a crucial step towards helping people switch to clean energy.
“But this is overshadowed by the morally indefensible decision to scrap the national home insulation scheme ECO.
“This is exactly the kind of stucco policies the government has promised to end, and it fatally undermines the best long-term solution to fueling poverty.
“It will also cost 10,000 jobs and prevent a million families from insulating their homes over the next four years.”
The latest version of the ECO scheme failed due to inadequate regulation and inspection, leaving thousands of homes with poor quality and even dangerous solid wall insulation; However, E3G argues that the obligation should be reorganized, not canceled.
Chaitanya Kumar, head of economic and environmental policy at NEF, said: [renewables obligation] Costs from bills will help in the short term, but the chancellor is wrong when he says the ECO plan costs more than it saves. The problem is not the principle of helping people reduce their energy bills in the long term, but a broken replacement supply chain.
“The Budget cuts £6.4bn of ECO support and replaces it with a £1.5bn fund, potentially stranding thousands of low-income households in cold, inefficient homes and depriving them of the lasting savings that energy efficiency reliably delivers.”
