Rachel Reeves is looking at scrapping VAT on fuel bills and reducing green levies as Labour faces pressure to deliver on its promise to cut the cost of household energy.
The chancellor is focused on bringing down the cost of living as part of a fight back against the rising popularity of Nigel Farage’s Reform UK.
It is likely to pitch Ms Reeves into a tussle with Energy and Net Zero Secretary Ed Miliband who critics accuse of driving up the cost of energy.
Lowering or axeing the 5% VAT rate on domestic energy bills would slice £86 off consumers’ annual energy bills.
However, it would cost the Treasury an estimated £1.75 billion a year – based on the current energy price cap – at a time when Ms Reeves is looking to raise income to fill the black hole in the public finances.
Energy costs are a key battle line between Labour and Reform UK which has pledged to scrap the net zero target it blames for higher energy bills and the loss of jobs, not least in north east Scotland.
Removing green levies would remove £215 a year from an average household bill, but the Treasury doubts this is possible within the current financial net zero regime.
Mr Miliband has imposed a moratorium on new exploration licences in British waters, and has also promised to reduce energy bills by £300 by 2030, partly by shifting to using more energy from wind farms.
Households and businesses, however, have seen energy costs rise and are not convinced that he will hit his targets.
A Treasury source told The Sunday Times that the Chancellor and the prime minister are determined to tackle inflation and “get serious about bringing down energy bills.”
The prime minister wants the cost of living to be the focus of the budget on 26 November, providing a positive message in the weeks before Christmas.
It comes as the public becomes more sceptical about green targets and angry that bills continue to rise. The energy price cap for a typical household paying by direct debit will increase by 2% to £1,755 a year from 1 October.
Labour’s failure to hit a key election promise have seen its ratings collapse and it has been trailing Reform in national opinion polls for months.
A report by the Resolution Foundation think tank found about a million households were behind on their gas and electricity bills, and there had been a rise in energy debt over the past decade.
Reform argues that green energy companies are taking advantage of subsidies which do not encourage innovation. The party says these firms shoud operate on a commercial basis, and not rely on taxpayer handouts.
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