UPDATED: The Government has announced a new energy support scheme that cuts financial support for business energy costs by 85 per cent from April 2023 until March 31, 2024.
Chancellor Jeremy Hunt has said that the Energy Bill Relief Scheme, running until the end of March 2023, will cost £18bn. He added that the scheme was always going to be “time limited and intended as a bridge to allow businesses to adapt”.
The new 12-month energy support scheme will be capped at £5.5bn (based on estimated volumes) and “strikes a balance between supporting businesses over the next 12 month and limiting taxpayers’ exposure to volatile energy markets.”
Hunt announced its replacement, the Energy Bills Discount Scheme, “giving businesses the certainty they need to plan ahead”.
What is the Energy Bills Discount Scheme?
The Energy Bills Discount Scheme is open to businesses who are:
- On existing fixed price contracts that were agreed on or after December 1, 2021
- Signing new fixed price contracts
- On deemed / out of contract or standard variable tariffs
- On flexible purchase or similar contracts
- On variable ‘Day Ahead Index’ (DAI) tariffs (Northern Ireland scheme only)
Businesses will receive a per-unit discount to their energy bills during the 12-month period, subject to a maximum discount. The relative discount will be applied if wholesale prices are above a certain price threshold. For most businesses, these maximum discounts have been set at:
- Electricity – £19.61 per megawatt hour (MWh) with a price threshold of £302 per MWh.
- Gas – £6.97 per MWh with a price threshold of £107 per MWh
This means most businesses will receive discounts of only 0.7p per kilowatt-hour off their gas bills and 2p/KWh off their electricity bills from April.
UK wholesale gas prices have already fallen below that £107 per MWh trigger point, with contracts for delivery in late spring currently at about £63 per MWh, although some businesses are likely to have signed fixed cost contracts when prices were higher.
Energy-intensive and trade-intensive industries will be entitled to greater support. The maximum discounts and price thresholds for these sectors are:
- Electricity – £89 per MWh with a price threshold of £185 per MWh
- Gas – £40 per MWh with a price threshold of £99 per MWh
Suppliers will automatically apply the discounts to the bills of eligible business customers. However, the energy and trade-intensive sectors will have to apply for the greater support. The Government said that further details on this are to follow.
The discount will be applied in pence per kilowatt hour.
How does the new energy scheme compare?
At present the taxpayer is subsidising energy bills for the six-month period to April 2023 at a cost of £18bn by capping the price of electricity and gas at £211 per MWh and £75 per MWh respectively until the end of March.
Support is decreasing partly due to wholesale energy prices falling very sharply in the past few months. They’re now at a lower level than they were before Russia’s invasion of Ukraine. However, they’re still three to four times’ higher than their long-term average.
‘Catastrophic’ for small businesses
However, the Federation of Small Businesses described the move as “catastrophic”, creating a cliff-edge in support at the end of March and spelling “the beginning of the end for tens of thousands of small businesses, which have been relying on the government energy support to survive this winter”.
Martin McTague, national chairman of the FSB, warned: “Many small firms will not be able to survive on the pennies provided through the new version of the scheme. Two pence off a kilowatt-hour of electricity and half a pence of gas is totally insignificant for small businesses.”
He said the existing scheme had provided “certainty for a small business owner over their rates and has made a material difference to the survival of many small businesses”, but “the new scheme would do neither”.
Craig Beaumont, chief of external affairs at FSB, told the Financial Times: “From April, small firms will be hugely exposed to higher prices — with almost all protection now removed.”
He added that withdrawal of support would push up inflation as companies were forced to raise prices to cover the increased costs.
Nucleus Finance research from 500 SMEs showed that 39 per cent of businesses have already had to increase their prices to stay afloat, while 25 per cent have paused investment on innovation and growth to prioritise high daily running costs of the business. Almost a quarter (22 per cent) expect a decrease in their turnover by the end of 2023.
Shevaun Haviland, director general of the British Chambers of Commerce, warned the that the Government could end up having to make the new energy support package more generous anyway as business confidence erodes.
Haviland said: “Despite Government efforts, an 85 per cent drop in the financial envelope of support will fall short for thousands of UK businesses who are seriously struggling.”
Kate Nicholls, head of UKHospitality, which represents restaurants and pubs, also criticised the “sudden and sharp drop in support”. UKHospitality has estimated that the move will cost the sector an at least £4.5bn over the 12 months.