Cabinet Office minister Ed Miliband is to head a new energy and climate change department.
The younger brother of the Foreign Secretary has impressed colleagues and civil servants during his short time in government and has been rewarded with his own department.
It will take over the energy duties of the Department of Business, Enterprise and Regulatory Reform and the climate change responsibilities of the Department for the Environment, Food and Rural Affairs.
The 38-year-old, who was first elected just three years ago, will be joined in Cabinet by Margaret Beckett, who has served as a minister under Labour Prime Ministers Harold Wilson, James Callaghan and Tony Blair.
She left the government when Gordon Brown took office but is set to return.
She has been an MP since 1974 and served as Foreign Secretary under Blair.
Her new role as housing minister allows her to attend Cabinet.
The Defence Secretary is to leave the government.
It is understood that Des Browne was offered another role but turned it down. He was also Secretary of State for Scotland.
Confirmation that Shaun Woodward would continue as Secretary of State for Northern Ireland brings to an end rumours that a so-called “minister of the regions” would be created and combine the Wales, Scotland and Northern Ireland roles.
Peter Mandelson is to return from Brussels to replace John Hutton as Business Secretary.
Mr Hutton is the new Secretary of State for Defence.
The Chancellor Alistair Darling, Home Secretary Jacqui Smith, Foreign Secretary David Miliband, Schools Secretary Ed Balls, Environment Secretary Hillary Benn and Health Secretary Alan Johnson will all remain in post.
Geoff Hoon is to move from Chief Whip to replace Ruth Kelly at Transport.
Ms Kelly is to stand down as an MP at the next election.
It is expected that Nick Brown, one of the most prominent out gay politicians in Britain, will replace Mr Hoon as Chief Whip.