Christmas is right around the corner and business owners across the country are nervously waiting for a much-needed gift from the government. Chancellor Jeremy Hunt is expected to announce this week an extension to a support program to help businesses pay their energy bills, which is due to end in March. Hunt faces a choice between racking up additional costs for the Treasury or seeing companies fail 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 Program to complement the Energy Price Guarantee, which limits the cost of household bills. The program launched on October 1 and will run until March 20. It covers all ‘non-domestic’ contracts, including businesses, charities and public sector organizations such as schools.
How does the diet work?
The government grants a rebate on the unit prices of energy used by businesses. This is calculated by comparing the estimated wholesale price a business will pay over winter with a ‘government backed price’, set at £211 per megawatt hour for electricity and £75 per megawatt hour for gas . Companies under a variable contract benefit from a discount representing the difference between the price supported and the wholesale price.
The maximum discount was initially suggested 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 system was “incredibly complex to implement” and that there is still confusion among some providers about how to properly bill their customers.
What happens now?
When announcing the scheme, the government said some industries would continue to receive support beyond March. However, three months later, there is no clarity on which sectors are likely to be covered. Reports over the weekend suggest 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 much less generous. Treasury sources said “lots of options” remain on the table. Hunt said last week that an announcement would come “either just before or just after” Christmas.
Which sectors are most affected without support?
Manufacturers who make everything from steel and chemicals to paper and glass are part of an industry group of energy-hungry users.
Rob Flello, chief executive of the British Ceramic Confederation, said: “While we welcomed the government’s non-domestic energy bill relief scheme as a lifeline, their announcement of a review has raised concerns. We warned that if government support was reduced, this industry would be on the brink. The government must not leave us in a precarious situation.
Beyond manufacturers, the hospitality industry has been vocal in asking for additional support. Data compiled for the British Beer and Pub Association showed that energy bills returning to their normal rate from April would mean a 20% loss on average for pubs and brewers.
What are the options?
Extending the existing system, covering all sectors at the same level, appears to be the simplest option, but also the most expensive. It has been estimated that the six-month program alone could cost up to £48billion. The fact that wholesale gas prices have not fallen sharply – and are expected to remain high next year – does not help the government’s cost outlook. Hunt may decide to continue adapting the program, but industry sources warn that not all providers 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 businesses.
In his autumn statement, Hunt extended the energy price guarantee for another year from April, but made it less generous (typical annual bills will drop from £2,500 to £3,000) . He could choose to replicate that with business. Tony Jordan, senior partner at consultancy Auxilione, says: “Companies will want to see a continuation of the current program 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 the discount.