There are only a few days left until Christmas, and business owners across the country are anxiously awaiting the much-needed gift from the government. The chancellor, Jeremy Hunt, is expected to announce an extension this week to a subsidy scheme to help businesses with energy bills, which is due to expire in March. Hunt faces a choice between piling more costs on the treasury or seeing the companies collapse on his own.
How did we get here?
After months of pressure and warnings that businesses would be forced to close without subsidies, former Prime Minister Liz Truss announced the Energy Bill Relief Scheme to supplement the Energy Price Guarantee, which limits the cost of household bills. The scheme launched on October 1 and runs through March 20. It covers all ‘non-domestic’ contracts, including businesses, charities and public sector organizations such as schools.
How does the system work?
The government offers a discount on unit prices for energy used by companies. This is calculated by comparing the estimated wholesale price the company will pay over the winter to the ‘government-subsidised rate’, which is set at £211 per megawatt hour for electricity, and £75 per megawatt hour for gas. Companies with variable contracts receive a discount that is the difference between the subsidized price and the wholesale price.
The maximum discount was originally proposed at £405 for electricity and £115 for gas, but was later reduced to £345 for electricity and £91 for gas. Industry sources said the scheme was “incredibly complex to implement” and there was still confusion among some suppliers about how to properly bill their customers.
what is happening now?
When the plan was announced, the government indicated that some industries would continue to receive support after March. However, three months later, it is not clear which sectors are likely to be covered. Reports released over the weekend suggested that support may remain in place for all industries. The Sunday Times said the subsidy could be extended for up to a year – but the package could be far less generous. Treasury sources said “a lot of options” were still on the table. Last week Hunt said an announcement would come “either before or just after Christmas”.
What industries are most affected without support?
Manufacturers who make anything from steel and chemicals to paper and glass are part of an industrial group of energy-intensive users.
Rob Flelow, chief executive of the British Ceramics Confederation, says: “While we welcomed the non-domestic government’s plan to ease the energy bill as a lifeline, their announcement of the review raised alarm. We warned that if government subsidies were cut, the industry would be on edge. It must not leave us.” The government is in an awkward position.”
Beyond the manufacturers, the hospitality sector has been vocal in asking for more support. Data collected for the British Beer and Pub Association showed energy bills returning to their usual rate from April would lose pubs and breweries by 20% on average.
What are the options?
Lengthening the existing chart, covering all sectors at the same level, will show the simplest, but also the most expensive option. It is estimated that the six-month plan alone could cost up to £48 billion. The fact that wholesale gas prices have not fallen sharply – and they are expected to remain high next year – does not help the cost outlook for the government. Hunt may decide to go ahead with designing the scheme but industry sources warn that not all suppliers carry data on the sectors in which their customers operate.
Another option could be to provide additional support to energy-intensive sectors as well as hospitality and consumer-facing businesses.
In his autumn statement, Hunt extended the energy price guarantee by a year from April, but made it less generous (typical annual bills would rise from £2,500 to £3,000). He can choose to repeat this with companies. “Businesses will want to see a continuation of the existing scheme in the same format,” says Tony Jordan, principal partner at advisory firm Auxilione. “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.”
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