First, the government will take £2.3 billion worth of levies off electricity bills and on to taxpayer funding. Second, it will abolish the Energy Company Obligation (ECO) levy, which funds upgrades to fuel poor homes.

The first change is to take 75% of the Renewables Obligation (RO) off electricity bills. This is a legacy subsidy from the 2010s that supported the construction of renewable power generation. The Treasury will do this by compensating energy suppliers for the cost of the levy, who will then pass the lower costs on to consumers. This will cost the Exchequer around £2.3 billion per year, but is only funded for three years from April 2026.

This is a very important and welcome step, because it is the first time the Treasury has taken targeted action to reduce electricity bills. Britain is unusual in placing a lot of taxes - including the Renewables Obligation - on electricity bills, but not on gas bills. Removing some of these taxes will benefit all households and help to make clean electric technologies - such as heat pumps and electric vehicles - cheaper to run.

The second change is to abolish the ECO levy when the scheme ends in April 2026. ECO currently adds around £1.7 billion per year to energy bills, split across electricity and gas bills. It funds upgrades, such as insulation and clean heating installations, for fuel poor households.

Abolishing the ECO levy will reduce energy bills, but it will also take away the main source of funding for upgrading fuel poor homes.

The Treasury estimates these changes will reduce the average household energy bill by around £150 a year. According to HMT, £88 of this comes from RO, £59 from ECO, with a further £7 from not paying VAT on these measures. The Treasury’s definition of an average home varies slightly from the “typical” home used in Ofgem’s price cap though - using the Ofgem definition, the bill saving is £133 per year.

As the chart below shows, the savings will vary for different types of household. A household that uses less energy (Ofgem’s “low” consumer) will see a saving of just over £100, while a high energy using household will save over £200. The biggest savings, though, are for households that use electricity for heating: a typical heat pump household will save over £200, while a household with an electric storage heater will save £250. This is because most of the bill reductions made by the Chancellor fall on the electricity bill.

A key benefit of the Chancellor’s decision to remove some levies from electricity is that it makes electricity cheaper relative to gas. This is crucial for encouraging the adoption of heat pumps and other clean heating, something that will be a centrepiece of the government’s forthcoming Warm Homes Plan.

However, there are two issues that dampen this benefit. First, abolishing the ECO levy lowers gas bills by a bit more than electricity bills, so this change increases the price ratio. Second, the new price cap for January already included a significant jump in the price ratio (from 4.2 to 4.7) due to new costs on electricity bills and falling gas prices.

If these measures took effect from January they would reduce the price ratio back from 4.7 to 4.3 - marginally higher than it is at the moment. However, these changes will actually be implemented in April 2026, when electricity bills are expected to increase yet again. So while they are a welcome intervention, their benefit could quickly get lost.

There is something else the Treasury is considering, though, hidden in the Budget documents. HMT could also choose to rebalance the remaining 25% of the RO levy on to gas bills. This wouldn’t affect the bill savings much, but it would lower the price ratio further, from 4.3 to 3.9. The Chancellor should go ahead with that additional move and get best value for these reforms.

The decision to abolish the ECO scheme and levy is far more contentious. ECO has been the government’s main programme for upgrading fuel poor homes for many years and abolishing it will take away £1.7 billion per year from this work. The current scheme is set to end in April 2026 and details of its replacement were due to be announced as part of the Warm Homes Plan. This makes it clear that there will be no ECO5.

The government has added £1.5 billion over 3 years (averaging £500 million per year) to the Warm Homes Plan to compensate for the loss of the ECO levy. While this is a much smaller amount, it gives the opportunity for the UK government to develop a more effective, albeit much smaller, scheme for upgrading fuel poor homes.

The ECO scheme has had significant issues in recent years. As the chart below shows, the amount spent on ECO has grown dramatically recently. Before 2021, it was typically around £700m a year, not far off the new replacement funding. It has also upgraded fewer and fewer homes over time, as a result of doing deeper, more expensive retrofits and finding it harder to find eligible homes. On top of that, ECO has been beset with quality problems, most notably the scandal of defective solid wall insulation.

While funding upgrades for fuel poor homes is very important, it is clear that ECO needed reform. The government has chosen the radical option of abolishing it altogether and developing a new programme.

This comes with some significant risks. Ensuring that there is no cliff edge after April 2026 will be important, as will seeking to minimise job losses within the insulation industry. Equally, households that received substandard installations also need remediation, most likely from the existing supply chain. And the major reduction in funding could make the new programme much harder to deliver.

But a clean break could create space to fundamentally reimagine how the Government upgrades the homes of Britain’s poorest households. A new scheme could address the risks by changing the delivery model to be less dependent on middle-men, to find new sources of funding, and innovate on the overall approach to improvements. A shift to electrification, focused on clean heat, solar PV and batteries would be more forward-looking. The government has the opportunity to create a fuel poverty programme that delivers better outcomes at much lower cost to households, especially if it can find a little more funding in the Warm Homes Plan.

All of this makes the forthcoming Warm Homes Plan (WHP) even more important. The WHP will set out the government’s strategy for both decarbonising home heating and tackling fuel poverty, and it will need to fit these changes into a plan that can deliver.

We previously set out seven key tests for the Warm Homes Plan, and two of them stand out as especially important in the light of the Budget: make electricity cheaper; and provide a credible plan for local delivery.

If the Warm Homes Plan can build on the Budget announcements, develop an effective replacement for ECO and keep making electricity cheaper, it has a high chance of further lowering energy bills over the rest of this parliament. If the plan is delayed or lacking in ambition, it could end up making things worse. We hope to see it launched in the coming weeks.