Energy efficiency funds for poor households may be cut, No 10 confirms

George Osborne is understood to be keen to cut the Energy Company Obligation, which makes up 4% of an average annual bill. Photograph: Oli Scarff/Getty Images

Downing Street has confirmed that the government is looking at cutting financial support for energy efficiency in poorer households as part of a drive to bring down the overall cost of fuel bills.

As the government's own adviser on fuel poverty warned that it would be "completely inequitable" to target the Energy Company Obligation (ECO), No 10 confirmed that ministers were "looking across the range" to help consumers with their fuel bills.

George Osborne is understood to be keen to reduce the obligation, which costs billpayers £1.3bn a year and makes up 4% – or £47 – of an average annual bill, according to government figures.

Asked whether ECO was under review by No 10 or the Treasury, with a view to unwinding the measure, the prime minister's spokesman said: "In a context where people's budgets are squeezed – people are feeling the pressure – they would expect us to look across the range of what can be done. But we have already made an announcement [to address the rising costs of living] in the context of rail fares. We are going to continue that process of work."

Asked whether that was a yes to the question about whether ECO would be unwound, the spokesman said: "I would expect them to look across the full board, across the living standards space."

Asked whether green subsidies would be looked at, the spokesman said: "We are going to look across the board where we may be able to continue to do more to help families with the budget pressures that they face."

The remarks by the prime minister's spokesman are likely to infuriate the Lib Dem energy secretary, Ed Davey, who launched a pre-emptive strike against cuts to the ECO on Tuesday by writing to energy companies, most of whom oppose the ECO scheme, demanding greater transparency over how much the policy actually costs them to implement.

Davey's intervention came amid a political row over soaring energy bills, inflamed further by an 8% rise from the "big six" energy company SSE on Thursday. Companies including SSE and the British Gas owner Centrica have warned that the ECO could add £100 a year to bills because of the cost of finding eligible households. About half of the ECO funding is targeted at those receiving welfare benefits, including pensioners, disabled people and jobseekers.

But Derek Lickorish, chair of the government's Fuel Poverty Advisory Group, warned of the dangers of cutting ECO. He said: "It is completely inequitable to attack the only measure that is doing something for the fuel poor in England. It is unforgivable when we have energy prices that are going only in one direction."

In a letter to No 10, the Treasury and energy departments, seen by the Guardian, Lickorish labels the cuts "perverse", arguing that the fastest and cheapest way of reducing energy bills is through better insulation of the UK's ageing and draughty homes.

On Friday, the business secretary, Vince Cable, said it would be "short-sighted and foolish" to ditch green levies, which make up just under 10% of the average bill.

"The rise in energy prices is due to a whole variety of things, by far the most important of which is what's happening in world energy markets," he told BBC Radio 4's Today programme.

"We've had over a period of years very rapidly rising demand in Asia, particularly in China. We've had restrictions on supply from countries like Iran. A combination of these things has pushed up oil and gas prices and that is what has fed through to consumers."

His comments followed a suggestion from the CEO of SSE, Alistair Phillips-Davies, that his company's 8.2% price hike announced on Thursday was "helpful" to focus the nation's spending priorities.

Phillips-Davies told the Daily Telegraph: "A price rise is never a good thing to do, but if it focuses everyone on to a debate about what we as a nation should be spending money on, then in one way it will be helpful.

"We need to think about what people really want to pay for; maybe it's time to retreat from decarbonisation and focus more on the cost of living. I think we have to have a debate about it.

"Do we want to be replacing one bit of [energy] generation that we can keep going for a bit longer with a new bit of generation that's going to cost more?"

A Lib Dem source said the party would try to block Conservative cuts to the ECO: "The scheme is about improving the energy efficiency of the homes of poorer people and pensioners. If anyone is saying let's rip up ECO and stop thousand and thousands of homes getting energy efficiency measures … it's not happening." Conservative sources declined to comment. The coalition partners are also in dispute over the subsidies given to renewable energy.

Lickorish, who worked in the energy industry for more than 40 years including a period at EDF, said: "It's devastating how much energy prices have outstripped incomes. Fuel poverty has increased and it is well known that this is a contributory factor to the UK's unenviable record of winter deaths. We fully expect those deaths to have risen when the new figures are announced in November."

Jenny Saunders, chief executive of National Energy Action and a signatory of the letter, said: "The main reason our energy bills are so high is because we have some of the most energy-inefficient housing stock in Europe. ECO is the one policy that is helping cut fuel bills now rather than address longer term security of supply and reducing carbon to tackle climate change. It is vital we use ECO funds to improve heating and insulation for our poorest citizens."

On Thursday, SSE stated: "This year's ECO costs per customer will be over 5% higher than those of the similar government-imposed schemes last year." The company said the "cost of delivering ECO is expected to continue to increase as the scheme goes on". In a letter to party leaders on 1 October, SSE's Phillips-Davies proposed shifting the current £110 of annual green and social policy costs from customer bills into general taxation, "shifting the cost away from those [in fuel poverty] who can't afford to pay and on to those who can".

Lickorish agreed: "The most progressive way to pay for these measures would be through general taxation."

The National Insulation Association (NIA) warned on Thursday that the government's energy efficiency measures were "currently not delivering as expected by government with cavity wall installations 65% down and solid wall insulation over 70% down". In contrast to energy companies' call for a delay on meeting ECO targets, the NIA urged acceleration of ECO delivery.