Cabinet office minister Ed Miliband will be secretary of state at the Department for Energy and Climate Change, taking some of the briefs from the Departments for Business (Berr) and Environment, Food and Rural Affairs (Defra).
Current environment secretary Hilary Benn will remain in the reduced food and rural affairs department.
Mandelson, who was twice sacked from the cabinet, returns to London from his role of EU trade commissioner.
He will be given a seat in the House of Lords in order to take up the position, as he is no longer an MP.
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