Chancellor John Healey is preparing a £1billion-plus package to help households cope with another sharp rise in energy bills.
The support could see some low-income households receive an extra £100 off their bills, as ministers scramble to limit the impact of soaring energy prices caused by the conflict in Iran.
Energy bills are currently forecast to rise by £276 in January, taking the typical annual bill to £1,999. However, some forecasts suggest the energy price cap could increase by as much as £442.
Such a rise could wipe out the savings households received from the Government’s earlier decision to cut VAT on electricity bills.
Mr Healey is now understood to be considering additional support in this month’s Budget, with help expected to focus on lower-income households receiving certain benefits.
According to The Guardian, no final decisions have been made, but energy support is expected to be a major part of a Budget focused on easing cost of living pressures.
One of the main options being considered is an increase to the Warm Home Discount. The scheme currently gives eligible households a £150 discount on their electricity bill.
Mr Healey is reportedly considering increasing the support by another £100. Unlike the existing £150 discount, which is funded through charges included in customers’ energy bills, the additional £100 would be funded by taxpayers.
The potential intervention comes after government sources previously indicated that the VAT cut would be the final energy support offered this year.
However, Energy Secretary Miatta Fahnbulleh is reportedly pushing for the Government to go further. Her proposal would remove all levies from household energy bills, potentially cutting costs by as much as £120 for every consumer.
Mr Healey is reportedly considering increasing the support by another £100
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PAThese levies currently help pay for renewable energy and energy efficiency programmes. Under the proposal, those programmes would instead be funded through general taxation.
Mr Healey is expected to reject the plan, which would cost up to £3.2billion and would prove difficult to reverse should energy prices eventually fall.
Ms Fahnbulleh defended her position in an interview with the Guardian last week, saying: “If we want a system that is resilient, if we want a system that can cope, if we want a system that ultimately can deliver the diversity of energy that we want, what is the fairest way in which we pay for it?”
She added: “Every other country is asking that question, and ultimately we’ve got to come to a fair deal.”
Higher bills have contributed to household energy debt climbing to almost £7billion | PA
Beyond the Budget, energy department officials are also developing more radical reforms to the way companies charge customers.
One option under consideration is a “social tariff” that would compel suppliers to offer lower per-unit electricity prices to poorer households.
Creating such a scheme would require extensive data-sharing between tax authorities, the Treasury and energy firms, making it impossible to deliver within weeks.
An alternative model, known as a “rising block tariff”, would charge less for a basic level of “essential” energy use and more once consumption exceeded that threshold.
The idea was originally proposed by the New Economics Foundation when Ms Fahnbulleh led the thinktank.
Alex Chapman, head of economic and environmental policy at NEF, warned: “A serious price spike is coming, and without action, bills will exceed the peak of the last crisis.”
Alfie Stirling, director of policy at the Joseph Rowntree Foundation, said: “Energy support for this winter needs to tick three boxes. It needs to support the majority of households; within this, it needs to target the most support towards those in greatest need; and as far as possible it needs to actually lower the price, thereby bringing down inflation.”
Mr Healey faces significant fiscal pressures elsewhere in the Budget. He needs to find an additional £4.7billion for defence spending while rebuilding his fiscal buffer, which has been worn down by rising borrowing costs.
Tax increases are expected to help cover the gap, with higher levies on banks among the options reportedly under consideration.
At the Labour conference last week, Mr Burnham signalled his broader ambitions for energy reform, declaring: “British businesses and bill-payers pay some of the highest energy costs in Europe. Within 10 years, I want those costs to be in line with our neighbours.”
He added: “This means reforming a broken energy market so it better serves the public interest.”
The VAT cut on electricity bills that Mr Burnham announced shortly after becoming prime minister saves households an average of £45 a year.
A Treasury spokesperson said: “As has always been the case, decisions on tax are a matter for the chancellor to set out at fiscal events, rather than routinely commenting on rumour, speculation or proposals.”