The UK government has unveiled a new plan to help businesses struggling with soaring energy costs — but the support is far less than what had been on offer before.
Exchequer Secretary to the Treasury James Cartlidge told the UK Parliament that the government will commit up to £5.5 billion to the new support programme, which will run from the start of April this year to the end of March 2024.
“It is not sustainable for the Exchequer to continue to support large numbers of businesses at the current level, " Mr Cartlidge told MPs.
“No responsible, serious government anywhere in the world can permanently shield businesses from this energy price shock.”
Eligible UK businesses will receive a per-unit discount to their energy bills, which will have a maximum and will only be applied if wholesale prices are above a certain threshold.
For electricity, the discount will be £19.61 per megawatt hour (MWh), with a price threshold of £302 per MWh. For gas, it will be £6.97 per MWh with a price threshold of £107 per MWh.
The discounts and thresholds are higher and lower, respectively, for those companies deemed to be intense energy users.
For high-energy users, the electricity discount will be £89 per MWh, with a price threshold of £185 per MWh, while for gas, the discount will be £40 per MWh with a price threshold of £99 per MWh.
Mr Cartlidge said a typical small retail store that uses 2 MWh of gas and 1 MWh of electricity each month could receive up to £403 of taxpayer-funded support in the 2023/2024 financial year.
A long time coming
The government had hinted that the money available beyond April this year to support businesses with their energy bills would be considerably less than was available for the six months from last October.
By the time the current Energy Bill Relief Scheme has run its course at the end of March, it is estimated that the government will have spent in the region of £18 billion.
“It’s unrealistic to think the scheme could stay affordable in its current form, but some firms will undoubtedly still find the going hard,” said Tom Thackray, director for decarbonisation policy at the Confederation of British Industry.
“The government has done much to protect businesses through the energy crisis. It must remain open, flexible and pragmatic in its approach to volatile wholesale energy markets as the year unfolds.”
Gareth Stace, director general of UK Steel, said: “There will be concerns that the newly announced support falls short of that of competitor countries, including Germany.
“The government is betting on a calm and stable 2023 energy market, in a climate of unstable global markets, with the scheme no longer protecting against extremely volatile prices.”
Currently, the government has a Supported Wholesale Price of £211 per MWh for electricity and £75 per MWh for gas.
Much of the calculations behind setting support at these levels was based on predictions made back in August and September last year.
Wholesale gas prices in Europe spiked in March following Russia's invasion of Ukraine and even more so in August, when worries emerged about the amount of gas that had been stored and the predicted demand for the coming winter.
At one point in August, the price of gas in Europe soared to about €340 euros per MWh.
But in recent weeks, the relatively mild weather has led to loosening of demand and gas prices have fallen. By last week, they were back down to levels not seen since the Russian invasion of Ukraine.
In addition to the mild weather, European nations have been successful in filling their storage facilities with liquefied natural gas (LNG), imported from regions around the world including the Gulf. This has eased concerned about gas supplies this and next winter.
However, none of this helps businesses or households in the near term. Energy companies buy most of their gas and electricity as futures contracts, which allows them to fix their costs.
Some of the futures contracts for natural gas on the Dutch TTF market for delivery later in the year are more expensive than the current wholesale price.
“Forward prices continue to see the market at similar levels to the current TTF benchmark, all the way to at least March 2025,” Tom Marzec-Manser, head of gas analytics at ICIS, told The National.
“So we are not out of the woods, even with prices recently falling and the fundamentals for the remainder of this winter improving.”
Glen Kurokawa, power sector lead in economics at the global business intelligence company CRU, told The National: “Europe will need to build up gas inventories for next winter first, and there are some potential headwinds here.
“Europe will likely receive less piped Russian gas imports in 2023, and there will likely be more competition for LNG from China as its economy picks up after pandemic-related restrictions.”
Other analysts point to the predicted profits of the big oil companies in the next few years as a reason to be optimistic about energy prices.
“For the moment, analysts seem inclined to believe that oil [and gas] prices are going to fall in 2023 and 2024, because they are forecasting a one-third fall in operating profit from the West’s seven oil majors between 2022 and 2024,” said Russ Mould, investment director at AJ Bell.
Nonetheless, energy prices remain high by historical standards. Even given the recent falls, they are still four to five times higher than they were two years ago.
Chancellor of the Exchequer Jeremy Hunt said: “Wholesale energy prices are falling and have now gone back to levels just before [Russian President Vladimir] Putin's invasion of Ukraine.
“But to provide reassurance against the risk of prices rising again, we are launching the new energy bills discount scheme, giving businesses the certainty they need to plan ahead.
“Even though prices are falling, I am concerned this is not being passed on to businesses, so I've written to Ofgem [Office of Gas and Electricity Markets] asking for an update on whether further action is needed to make sure the market is working for businesses.”
Consumer advice groups, price comparison websites and switching companies are urging businesses to check their current contracts and be absolutely sure they understand the terms of any new contract they might be about to enter into with their current or a new energy provider.
“Any business looking for a new deal must ensure they understand the terms of their contract before signing,” said Jack Arthur, business energy expert at Uswitch for Business.
“They should also be reminded to check their contract end date as failing to secure a new agreement can add eye-watering costs to a business's energy bill.”