December 8, 2022

Liz Truss has announced a new package of support to cover the massive rise in energy bills this winter – this time for businesses. Earlier this month, it revealed an “energy price guarantee” that will freeze annual bills for average households at around £2,500. Helping businesses aims to provide similar assistance, and the price freeze is higher than it was last year, but much lower than it would have had without intervention. Companies have warned that they will have to cut jobs or be forced to close without government help. Here’s what the metrics mean for companies:

How it works?

The government will offer a discount on unit prices for energy used by businesses. This will be calculated by comparing the estimated wholesale price the company will pay over the winter with the “government subsidized rate”, expected to be £211 per megawatt-hour for electricity, and £75 per megawatt-hour for gas. The level of the discount depends on the type of contract, but consulting firm Cornwall Insight says it’s about 45%.

Who is eligible?

The scheme is deliberately broad, and includes all “non-domestic” contracts, including businesses, charities, and public sector institutions such as schools. It covers those fixed-price contracts agreed on or after April 1, 2022, those that signed new fixed-rate contracts in October, those subject to significant customs duties or out of contract, and companies operating on flexible purchase contracts.

Who could miss?

In theory, few companies should fall through the loopholes apart from the power generators themselves, including power plants. However, some companies will miss out if they sign contracts before April 1 when gas prices were already above record levels, but before they rose further. The Small Business Consortium called for these energy customers to be allowed to transition to new fixed contracts at no charge “if it makes a difference to the survival of small businesses.” It also highlights that those who have struggled with higher bills since April will not receive out-of-date support for those expenses. Those with fixed-price contracts below the cap level are not eligible.

What happens if you are on a fixed contract?

Energy suppliers will use government data to calculate the cost to those with a fixed-price contract. The discount offered will reflect the difference between the government subsidized price and the relevant wholesale price for the day the contract was agreed. The government will announce wholesale prices for each day since April 1.

What happens if I have a variable contract?

Companies with variable contracts will receive a discount representing the difference between the subsidized price and the wholesale price. However, this will be subject to a ‘Maximum Discount’ which will be set on September 30th, prior to the start of the system. It will be calculated using the expected average wholesale price for delivery over the six months of the scheme. This is expected to be around £405 per megawatt-hour for electricity and around £115 per megawatt-hour for gas.

How long is this in place?

The scheme will run for six months starting October 1, with some companies providing ongoing support immediately after that. The government has not yet confirmed which industries it could cover. A review of the system will be published within three months to inform a decision on continued support.

What should I do?

nothing. In theory, suppliers should now be able to automatically calculate a new company invoice and apply the discount accordingly.

What is the government cost?

Estimates vary, in part because of unpredictable wholesale markets but also because companies operate in a wide variety of contract types and lengths. However, Cornwall Insight has estimated the cost at around £25 billion. Martin Young, an analyst at Investec, said the cost depends on the mix of contracts and how long the support will last, but could be between £22 billion and £48 billion.

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