The moves come as part of a major reshuffle of ministers in the Conservative Party ahead of a UK general election in 2015.
Fallon was appointed minister of state for energy in March 2013. He has been promoted to defence secretary in the reshuffle.
He has been replaced by Matthew Hancock, who was skills and enterprise minister. Hancock has been both an economic adviser and chief of staff to chancellor George Osbourne.
He was also one of 101 Conservative MPs in 2012 that signed a letter to the government expressing concern over onshore wind subsidy policy.
The letter said: "In these financially straightened times, we think it is unwise to make consumers pay, through taxpayer subsidy, for inefficient and intermittent energy production that typifies onshore wind turbines." It goes on to call for a "dramatic" cut in subsidies for onshore projects.
In other moves in the department, Amber Rudd has been made Parliamentary Under Secretary of State. Rudd was elected to parliament in 2010.
Fallon replaced former energy minister John Hayes last year and combined his role as energy minister with being minister of state for business.
Fallon echoed his predecessor's view the UK had enough onshore wind farms in the pipeline. In April, he confirmed the Conservative Party's manifesto for the next election would include a pledge to cut onshore wind subsidies.
At the RenewableUK's conference in Glasgow last month, Fallon said the government would favour renewable energy projects in the UK, which create jobs and source components locally. He stopped short of committing to local content requirements.
He also said the government would continue to aid the development of the UK's offshore wind projects. "We're supporting a significant volume of offshore wind deployment in this decade which will lay the foundations for cost reduction and a stronger national supply chain," he told the conference.
Climate change minister Greg Barker has stepped down from Decc and will not seek re-election at next year's general election.
Barker was shadow environment secretary in 2006, joining current prime minister David Cameron on his "fact finding" mission to the Arctic to look into global warming.
During his time at Decc, Barker was responsible for setting up the Green Investment Bank. It was set up to support renewable energy projects, most notably offshore wind, and encourage private companies to invest in the sector.