Budget 2025 introduced a shift of environmental and social levies from household energy bills to general taxation. This measure is expected to reduce typical dual-fuel bills by around £134–£154 from April 2026. Several alternative measures were proposed during debate but not adopted.

VAT on Domestic Fuel

A reduction or abolition of the 5% VAT rate would deliver an immediate and visible reduction in bills. However, the measure has substantial fiscal costs (estimated in the low billions annually) and is poorly targeted, with higher-income households receiving the same benefit as lower-income households. Additionally, the measure has a one-off price impact rather than improving structural affordability. For these reasons, the option was rejected.

Curbing Excess Profits / Windfall Tax Expansion

Further windfall taxation or direct interventions to cap supplier profits were considered. Such measures could generate revenue and respond to public concern, but they do not translate directly into lower retail prices because Ofgem’s price cap is cost-reflective. Additional taxation also risks deterring investment in network infrastructure and new generation capacity. Given the need for long-term stability, this was not pursued.

Reforming Ofgem’s Price-Cap Methodology

Proposals included amending standing charge calculations and altering how wholesale costs are passed through. While reforms may have merit, Ofgem’s methodology is technically complex and changes require extensive consultation. Rapid alterations risk destabilising the supplier market, as seen during the 2021–22 market failures. Government therefore maintained regulatory independence and avoided immediate structural changes.

Energy-Efficiency Schemes and Levy Reform

The Budget reallocates the cost of green levies to general taxation, improving fairness for low-income households who spend a higher share of income on energy. The government cited past delivery failures under ECO and committed to simplified, taxpayer-funded alternatives. Well-targeted efficiency programmes remain the most effective means of delivering durable reductions in household energy costs.

Conclusion

The government prioritised fiscal stability, structural fairness, and long-term regulatory predictability. Alternative measures each carry material drawbacks: VAT abolition is costly and poorly targeted; expanded windfall taxation risks investment; and rapid price-cap reforms risk market instability. Well-designed efficiency programmes represent the most sustainable path to lower bills.