UK Politics

Ministers to keep green levies in energy bill cut plan

Central heating thermostat
Image caption Rising energy bills have sparked a debate among the political parties

A free home insulation scheme for poorer households will be kept but implemented more slowly as part of a package of measures to cut fuel bills, the BBC has learned.

Ministers hope this move - and others - will cut annual bills by £50.

It comes in the wake of Labour's promise to freeze energy bills.

The Tories and Lib Dems have yet to agree all the details but expect to have a deal before the chancellor's autumn financial statement next week.

Ministers want to implement the Energy Companies Obligation (ECO) scheme that gives free home insulation to low income households more slowly, over four years instead of two. This would cut the annual cost by half.

They plan to fund another levy, the warm homes discount, out of tax rather than customers' energy bills.

Regulations could also be changed so the the cost of transmitting energy, which makes up about 20% of an average bill, could be cut.

Sources say they hope a reduction in bills will show that the government has made a substantial cut to the element of energy bills over which they have some control.

Officials say this figure is not designed to match Labour's planned saving from its pledge to freeze energy prices for 20 months if it is elected in 2015, which is about £72 per year.

They say they will not make the comparison because they do not accept that Labour's price freeze would save this amount of money.

Sources also expect the big energy firms to say how much they will be cutting their bills on the same day that the government announces the changes.

The average price of gas and electricity paid by UK households has risen by about 18% and 9% in real terms since 2010 and by about 41% and 20% in real terms since 2007. A series of recent energy price hikes by the major suppliers has continued to put the issue at the centre of political debate.

'Defensive measure'

The Conservatives and the Lib Dems have been keen to avoid their discussions becoming a big coalition row.

Both sides describe the plans as a "defensive measure" designed to take the heat out of the cost of living debate.

Image caption Cheaper forms of insulation may be used in future to keep costs of the ECO scheme down

One Conservative source said: "Nick Clegg realises that he doesn't want the Lib Dems to be the party on the side of high bills."

But there are some outstanding areas of disagreement.

The Lib Dems are pushing to ensure that there is no watering down of the government's carbon targets and are pushing for some kind of compensation for slowing down ECO.

One area being looked at is whether new incentives could be offered to encourage people to take up the Green Deal scheme, under which the government lends householders money to pay for energy saving improvements.

The householder pays the money back over many years through their energy bill during which, in theory, the consequent lower energy costs help offset the loan.

On Wednesday, the Climate Change Minister Greg Barker told BBC Newsnight he wanted to "marry up" ECO and the Green Deal which has thus far had a very poor take up.

State aid?

The ECO scheme began this year and obliges energy firms to pay for low income households to make their homes more energy efficient. The cost of this is transferred directly to everyone's energy bills.

ECO is a two year project that will expire in March 2015. But under the government plans, it would be extended until 2017. This would halve the amount that energy firms have to spend each year and that saving would then be passed on to consumers.

Further savings are expected to come by reducing the cost of ECO, which vary wildly from company to company.

The Department of Energy estimates it adds an average £47 a year to the average household bill. The government is expected to act to bear down on the costs of the scheme so that the cheaper forms of insulation are used - such as lagging - rather than more expensive forms of solid wall insulation.

The warm homes discount helps people in the most vulnerable, low income households by taking £135 off their annual energy bills. The costs are borne by the energy firms who pass them onto their customers.

The energy department estimates that the warm homes discount adds £11 a year to the average fuel bill and the government is planning to transfer the cost of this away from bills to general taxation.

There are questions about whether this would amount to a state aid to energy firms - something that is banned under EU law - and about how the government would choose to distribute the money.

But sources say that transferring the warm homes discount to taxation is far easier than doing the same with ECO.

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