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UK Government steps in to discount energy prices for businesses

© Shutterstock / Melinda NagyBig Ben and the United Kingdom's flag.

The UK government has set out plans to cover half the expected rise in wholesale energy prices in a bid to soften the impact on businesses and non-domestic energy users.

The scheme will see the government administer a discount on wholesale gas and electricity prices for all non-domestic customers including businesses and charities, as well as public sector organisations such as schools and hospitals.

The ‘Energy Bill Relief Scheme’ will be equivalent to the ‘Energy Price Guarantee’ put in place for domestic households, and will apply to fixed contracts agreed on or after 1 April 2022, as well as to variable and flexible tariffs and contracts, the Department for Business, Energy and Industrial Strategy (BEIS) confirmed.

Ms Truss announced the support for households earlier this month, capping the average cost of energy at around £2,500 for the next two years – rather than the £3,549 increase expected under the Ofgem price cap mechanism in October.

Announcing the new support measures for businesses on Wednesday, Business Secretary Jacob Rees-Mogg said the scheme would help prevent unnecessary insolvencies and protect jobs.

To manage this support, the government will set a discounted ‘supported wholesale price’ – expected to be £211/MWh for electricity and £75/MWh for gas.

BEIS said these rates would be “less than half” of the wholesale prices expected as energy costs continue to soar over winter.

Consumers will then receive a per-unit discount on energy costs, up to a maximum of the difference between the supported price and the average wholesale price over the duration of the scheme.

The maximum discount expected is likely to be around £405/MWh for electricity and £115/MWh for gas, subject to wholesale market developments.

All users will be eligible for support provided their energy contract was agreed on or after 1 April 2022, though the exact level of price reduction for each business will vary depending on their contract type and circumstances.

The reduction also includes the removal of green levies paid by non-domestic customers who receive support under the scheme.

The discount will apply to energy usage from 1 October 2022 to 31 March 2023, running for an initial six-month period for all non-domestic energy users. The savings will be first seen in October bills, which are typically received in November.

As with the household guarantee, BEIS said energy customers would not need to apply or take any action to access support, and the discount will automatically be applied to energy bills.

A parallel scheme which offers similar support but recognises different market fundamentals will be established in Northern Ireland.

Similarly, BEIS said equivalent support will also be provided for non-domestic consumers who use heating oil or alternative fuels instead of gas, with further details to be announced.

Emergency legislation is being introduced to underpin the scheme, with a review planned in three months’ time ahead of any decisions on the future of the scheme beyond March 2023.

‘Huge pressure’

Prime Minister Liz Truss said she understood the “huge pressure” faced by businesses, charities and the public sector organisations in light of soaring energy bills.

“As we are doing for consumers, our new scheme will keep their energy bills down from October, providing certainty and peace of mind,” she added.

“At the same time, we are boosting Britain’s homegrown energy supply so we fix the root cause of the issues we are facing and ensure greater energy security for us all.”

During her first appearances in the Commons as prime minister, Ms Truss outlined plans to expand North Sea licensing and make “net energy exporter by 2040”.

Household help extended

Wednesday’s announcement also contained further details on the household energy bills support scheme, with confirmation that a £400 bill discount aimed at the most vulnerable users would be extended to park home residents and tenants whose landlords pay for their energy via a commercial contract.

The Government will introduce legislation to make sure landlords pass the EBSS discount on to tenants who pay all-inclusive bills.

An additional payment of £100 will also be given to households who are not able to receive support for their heating costs through the energy price guarantee, such as those living in an area not served by the gas grid. This payment is to compensate for the rising costs of alternative fuels such as heating oil, BEIS said.

£25bn pricetag

Robert Buckley, Head of Relationship Development at market analysts Cornwall Insight suggested the structure of the scheme would likely cap the cost to government at around £25 billion.

“It will be difficult to pick out the likely aggregate impact on business resilience and the economy and it is also hard to know what impact this will have on energy demand. But on the basis the support is at the more generous end of expectations, we could expect more demand from businesses than maybe the commodity markets are pricing in. This could act to support prices in the traded gas and power markets,” he said.

“Structuring this as fixed discounts on wholesale energy costs caps the cost of the scheme for government at around £25bn. There will also be a strong incentive for businesses to move from out of contract to negotiated contract terms, which acts to maintain the integrity of the market. This will be very important for what emerges after these six months have elapsed.”

The scheme was welcomed by a range of sectors across the economy, including hospitality and manufacturing.

Director general of the Institute of Directors, Jonathan Geldart, said the intervention offered “much-needed reassurance.”

“We look forward to working with the government in the coming months to ensure that further relief is targeted at those industries and sectors whose survival is most threatened by current economic conditions.

“Ultimately, however, business and government will need to work hand in hand to develop domestic energy sources and reduce consumption and dependency on expensive fossil fuels.”

Stephen Phipson, CEO of manufacturers’ organisation Make UK, also praised the scheme for its simplicity but warned that “industry will need support for a longer period to protect jobs and remain competitive, so the further announcement of a review on future support at the 3 month stage is reassuring.”

The PM and her cabinet are reportedly putting the finishing touches on a mini-budget, due to be delivered on Friday, which may provide further detail on other plans to help households and businesses.

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