New energy secretary Jacob Rees-Mogg announced this morning that businesses will have a six-month cap, their first ever, to curb rocketing energy prices.
A ceiling of 21 pence/kWh for wholesale electricity and 7.5 pence/kWh for wholesale gas will reduce retail business tariffs until April, backed by the promise of legislation compelling suppliers to observe the limits.
The structure and rates of ministers’ intervention today, named the Energy Bill Relief Scheme for businesses, will be reviewed at the cap’s mid-point after Christmas, seeking closer targeting on energy-intensive industries.
From October 1, the cap will benefit enterprises, schools, NHS facilities, charities and public authorities. The former secretary of state at the now abolished department for Brexit opportunities put no cost on the short-term curb, but it is anticipated to add in the region of £20 billion to the up to £150 billion in public borrowing already committed by Liz Truss to the price cap for homes.
Ministers chose not to give a statement in the Commons. Instead D-BEIS released details via a statement made jointly by Rees-Mogg with the Chancellor and the Prime Minister.
The Government’s Energy Bill Relief Scheme for businesses comes after yesterday’s confirmation of its Energy Price Guarantee for homes.
Businesses on fixed price contracts will benefit from the reliefs provided their contract was signed on or after 1 April this year.
Underpinning the Relief Scheme, the government has established a Supported Wholesale Price which is a discounted price per unit of gas and electricity. It is expected to be £211 per MWh for electricity and £75 per MWh for gas, equivalent to less than half wholesale rates anticipated this winter. This is equivalent to the wholesale element of the Energy Price Guarantee for households.
The government announces the removal of green levies paid by non-domestic customers. The levies assist in meeting costs of legacy support measures such as of the Renewables Obligation and Feed-in Tariffs. Today’s announcement makes no mention, however, of relief from far more burdensome business rates or VAT.
Businesses on variable or default contracts will receive a unit-based discount for amounts consumed up to a maximum of the difference between the government’s supported price and the average expected wholesale price over the six months. In practice officials expect this relief to amount to a maxmimum £405/MWh for power and £115/MWh for gas.
D-BEIS pledged to work with suppliers to ensure that businesses on variable rates were all offered fixed-rate deals.
Prime minister Truss said in the statement: “I understand the huge pressure businesses, charities and public sector organisations are facing with their energy bills, which is why we are taking immediate action to support them over the winter and protect jobs and livelihoods.
“As we are doing for consumers, our new scheme will keep their energy bills down from October, providing certainty and peace of mind”.
With no new measures announced to insulate the UK’s nortoriously leaky buildings, Truss wants instead to boost fossil fuel extraction. Up to 100 new development licences for the North Sea, plus more fracking in the shires, are expected to be confirmed in chancellor Kwarteng’s mini-budget on Friday.
Kate Nicholls, CEO of trade body UKHospitality said: “This intervention is unprecedented and it is extremely welcome that government has listened to hospitality businesses facing an uncertain winter.
“We particularly welcome its inclusiveness – from the smallest companies to the largest – all of which combine to provide a huge number of jobs, which are now much more secure.
“The government has recognised the vulnerability of hospitality as a sector, and we will continue to work with the government, to ensure that there is no cliff edge when these measures fall away”, said Nicholls.
Martin McTague, national chair of the Federation of Small Businesses, was also marshalled to praise today’s measures:
“Small businesses called for decisive action – now the government is delivering”, McTague told D-BEIS.
“With small firms the least able to avoid closure and 16 million employees relying on them, ministers have listened to our community and got this big call right. Now it’s up to energy retailers to live up to the high bar set today and make sure this help reaches those on the ground”.
Examples quoted of the measures’ effects include:
- A pub using 4 MWh of electricity and 16 MWh of gas a month. It signed a fixed contract in August 2022, giving a current monthly energy bill of about £7,000. At the time it signed the contact, wholesale prices for the next six months were expected to be higher than the Government Supported Price of £211/MWh for electricity, and £75/MWh for gas, meaning it can receive support under this scheme.
- The difference between expected wholesale prices when it signed its contract and the Government Supported Price is worth £380/MWh for electricity and £100/MWh for gas, meaning it receives a discount of £3,100 per month, reducing its bill by over 40%.
- A school using 10 MWh of electricity and 22 MWh of gas each month. It signed a fixed contract in July 2022, giving a current monthly energy bill of about £10,000. At the time it signed its contact, wholesale prices for the next 6 months were expected to be higher than the Government Supported Price of £211/MWh for electricity, and £75/MWh for gas, meaning it can receive support under this scheme.
- The difference between expected wholesale prices when it signed its contract and the Government Supported Price is worth £240/MWh for electricity and £70/MWh for gas, meaning it receives a discount of £4,000 per month, reducing their original bill by 40%.
For business energy retailer nPower Business Solutions, its chief operating officer Anthony Ainsworth welcomed ‘at least for the short term’ Whitehall’s remedial steps, but put them in context.
“The question is, what happens after six months?”, said the nPower boss.
“We have campaigned for more support for businesses. There is a real need to accelerate energy efficiency initiatives, whether through targeted incentives or extending schemes that provide tax breaks for installing more efficient equipment.”
Respected analysts Cornwall Insight calculate the business energy cap as costing up to £25 billion. Robert Buckley, the energy economists’ head of relationship development. said:
“The new government scheme will bring significant relief to many businesses and public sector organisations as they try to navigate the unprecedented energy rises. Economically it was important that government took action.
“The reduction in energy costs will be substantial. As a proxy, and noting the challenge of calculating a homogenous discount across so many contract types, this represents a 45% discount to closing wholesale energy prices as at the end of last week.
“The support effectively reverts the market back to where it was price wise in the spring of 2022”, Buckley observed.
“It could work well for small and medium businesses that buy their energy on fixed price contracts. But the situation for larger businesses with flexible contracts will be more complex, as the Government alludes to in its guidance. With bigger businesses using a mixture of cheaper and more expensive energy, understanding what the scheme means for them will be a matter of individual assessment.
“It is hard to know what impact this will have on energy demand,” the Cornwall Insight analyst judged.
“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”.
Released before the government’s figures were made public, a paper from Cambridge University’s Judge School of Business questions what effect taxpayer subsidies likely to surpass £150 billion would have on investment in generation, particularly renewables.
“The £150bn will be paid out to electricity and gas companies. Where will this money go and what effect will it have?” is the central question posed by researchers under Professors Michael Pollitt and David Newbery.
“We should be able to see where profits are being made in the energy value chain and whether this is stimulating beneficial long-term investment in the UK energy sector,” says the paper. It calls on both the National Audit Office and Ofgem to be immediately involved in monthly monitoring of these expenditure flows in the gas and electricity markets.
