Christmas is just days away and business owners across the country are nervously awaiting a much-needed gift from the government. The chancellor, Jeremy Hunt, is expected to announce an extension as early as this week of a support scheme to help businesses with their energy bills, due to end in March. Hunt faces a choice between piling on further costs to the exchequer or seeing companies go bankrupt without intervention.
How did we get here?
After months of pressure and warnings that businesses would be forced to close without support, former Prime Minister Liz Truss announced the energy bill relief scheme to complement the Energy Price Guarantee, which caps the cost of bills for households. The scheme was launched on 1 October and runs until 20 March. It covers all “non-domestic” contracts, including businesses, charities and public organizations such as schools.
How does the scheme work?
The government gives a discount on the unit prices for energy used by businesses. This is calculated by comparing the estimated wholesale price a business will pay over the winter with a “state-supported price”, set at £211 per megawatt hour for electricity and £75 per megawatt hour for gas. Companies on variable contracts receive a discount that represents the difference between the supported price and the wholesale price.
The maximum rebate was initially proposed at £405 per MWh for electricity and £115 for gas, but was later reduced to £345 for electricity and £91 for gas. Industry sources said the scheme has been “incredibly complex to implement” and there is still confusion among some suppliers about how to bill their customers.
What happens now?
When the scheme was announced, the government indicated that certain industries would continue to receive support beyond March. But after three months, there is no clarity on which sectors are likely to be covered. Reports over the weekend suggest that support may remain in place for all industries. The Sunday Times said the support could be extended for up to a year – but the package could be far less generous. Treasury sources have said “many options” remain on the table. Hunt said last week that an announcement would come “either right before or right after” Christmas.
Which industries are worst affected without support?
Manufacturers who make everything from steel and chemicals to paper and glass are part of an industrial group of energy-intensive users.
Rob Flello, chief executive of the British Ceramic Confederation, said: “While we welcomed the government’s energy bill relief scheme as a lifeline, their announcement of a review sparked concern. We warned that if government support were downgraded, this industry would be on the edge of a cliff. The government must not leave us in a precarious position.”
Beyond manufacturers, the hospitality sector has been vocal in calling for additional support. Data compiled for the British Beer and Pub Association showed that energy bills returning to their normal price from April would see pubs and brewers lose 20% on average.
What are the possibilities?
Extending the existing scheme, which covers all sectors at the same level, would appear to be the easiest option, but also the most expensive. It is estimated that the six-month scheme alone could cost as much as £48 billion. The fact that wholesale gas prices have not fallen sharply – and are expected to remain high next year – does not help the outlook for costs to the government. Hunt may decide to continue tailoring the scheme, but industry sources warn that suppliers do not all have data on the sectors in which their customers operate.
Another option could be to provide additional subsidies to energy-intensive sectors as well as hospitality and consumer-oriented businesses.
In his autumn statement, Hunt extended the energy price guarantee by a year from April, but made it less generous (typical annual bills will rise from £2,500 to £3,000). He could choose to replicate this with businesses. Tony Jordan, senior partner at consultancy Auxilione, says: “Companies will want to see a continuation of the current arrangement in the same form. I expect it to be extended in the same way as the domestic scheme, at a less generous level with a higher bar in terms of discounting.”