From April, UK businesses and other non-domestic energy users will see a unit discount of up to £19.61/MWh applied to their electricity bill, the Government has announced.
Currently, businesses are benefitting from the Energy Bill Relief Scheme, which was first announced in September and came into force in October 2022. It provides a discount to energy bills of £211/MWh for electricity and £75/MWh for gas, to support non-domestic energy users amid the current crisis.
The Energy Bill Relief Scheme was designed to run for six months, with a three month review process. Following this, the new discount was unveiled yesterday (9 January), dubbed the Energy Bills Discount Scheme.
Along with discounting electricity, a unit discount of up to £6.97/MWh automatically applied to gas bills under the new scheme.
It will run from 1 April 2023 to 31 March 2024, and will be subject to a wholesale price threshold that is set in reference to the support provided to domestic customers of £107/MWh for gas and £302/MWh for electricity. As such businesses with energy costs below this level, will not receive support.
Customers will not need to apply for the discount, instead – as with the current support scheme – suppliers will automatically apply the reduction for eligible non-domestic customers.
The level of the Energy Bills Discount Scheme is expectedly lower than the previous scheme, with the government having noted that the Energy Bill Relief Scheme was “unprecedented in its nature and huge scale”. It was always set to be time-limited and designed as a bridge to allow businesses to adapt.
Over the winter, the scheme has cost £18 billion per the figures certified by the OBR at the Autumn Statement. This is equivalent to around three pence on people’s income tax.
The new Energy Bills Discount Scheme is capped at £5.5 billion, with the government stating it is looking to strike a balance between supporting businesses and limiting taxpayer expenditure.
“My top priority is tackling the rising cost of living – something that both families and businesses are struggling with,” said Chancellor of the Exchequer, Jeremy Hunt.
“That means taking difficult decisions to bring down inflation while giving as much support to families and business as we are able.”
Falling wholesale energy prices
The support comes as wholesale energy prices have fallen, with wholesale gas prices now at the same level as just before the Russian invasion of Ukraine. This means that they have almost halved since the current support scheme was announced.
“Wholesale energy prices are falling and have now gone back to levels just before 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,” continued Hunt.”
Despite the drop in the spot price, the fall in the level of support will likely have a significant impact, with businesses having “to take a lot of more energy price pain before any medicine is administered,” said Gareth Miller, CEO at Cornwall Insight.
“It is evident that the Energy Bills Discount Scheme [EBDS] will leave corporate energy bills much higher than before June 2021. This, and not when Russia invaded Ukraine, is when energy costs began to rise, gaining significantly throughout the autumn of that year and into the following winter. At the time of the February invasion 2022, they were already at historically very high levels and, even after recent falls, remain three to four times pre-June 2021 prices,” said Miller.
“The fact that costs have, for a short recent period, trended back to levels at the time of the invasion is welcome, but does not represent a return to energy bills that businesses experienced in the years prior to the recent crisis. The new scheme as proposed will necessitate a further fuller, and potentially, painful adjustment back to market prices.”
Recent analysis from Cornwall Insight found the fall in wholesale power prices driven by reduced demand over the mild winter, along with a strong period of renewable generation amongst other factors, could lead to domestic energy bills falling below the level of the governments Energy Price Guarantee support scheme from July.
As such, the price cap for domestic tariffs could fall to £2,800 from Q3 2023, should current trends continue. It is worth noting though, that while this is a significant fall from the current level of £4,279, it is dramatically higher than in recent years.
For example, the Default Tariff Price Cap for last winter was £1,277 and for the six months from last April it was £1,971. The same is broadly true for non-domestic customers, whilst a fall to the same level seen before the war in Ukraine is welcome, this level was still straining many as it was much higher than seen in previous years.
Additional support for Energy and Trade Intensive Industries
Along with the discount available to all eligible non-domestic bill payers, the Energy Bills Discount Scheme includes a separate rate of support for Energy and Trade Intensive Industries.
For those who fall into these categories, a maximum unit discount of £40.0/MWh for gas and £89.1/MWh for electricity will be applied. The discount will represents the difference between a price threshold and the relevant wholesale price, and be applied to 70% of energy volumes.
The price threshold will be £99/MWh for gas and £185/MWh for electricity, for energy intensive businesses.
This substantially higher level of support will be provided predominantly to manufacturing industries, along with others that have higher energy usage and are generally less able to pass on the cost of increased bills to customers due to international competition.
Unlike the general Energy Bills Discount Scheme, businesses may need to register to receive this higher level of support. Details of how to apply are set to be release “in due course”, however businesses can check if they will be eligible here.
Concern remains as further action eyed
In addition to the Energy Bills Discount Scheme, Hunt has written to Jonathan Brearley, CEO of Ofgem to support further action to tackle volatility in the market.
“Even though prices are falling, I am concerned this is not being passed on to businesses, so I’ve written to Ofgem asking for an update on whether further action is action is needed to make sure the market is working for businesses,” added Hunt.
The letter – which can be read here – asks for an update on the review into the non-domestic market in time for the upcoming Spring Budget.
This should include a suggestion of whether further action is needed to secure a well-functioning non-domestic market, following reports that businesses and other bodies were facing challenges around pricing and availability of tariffs, standing charges and renewal terms, and the ability to secure contracts.
The Energy Bills Discount Scheme has been poorly received by many, as concern around the impact of high energy bills remains significant. Trade association Make UK and PwC released their 2023 Executive Survey this week, which showed that 60% of manufacturers are experiencing growing concerns about blackouts in the coming months due to a lack of security in energy supply for example.
Additionally, as high energy bills impact businesses earning and cash flows over the coming year, it could lead to knock-on impacts within the wider economy as well as the push for decarbonisation.
“Aside from the impact on the financial integrity of businesses that will arise from the EBDS, the government must also weigh up the constraints on capacity of the UK business sector to invest significantly in the decarbonisation of business and industry. Ultimately, decarbonising industry and business requires investment of ever larger volumes of capital as the decade progresses,” continued Cornwall Insight’s Miller.
“From our research it is clear that many firms wish to do more on the green agenda, delivering greener and more socially responsible economy, with such a strategy helping to improve financial performance and reduce emissions. Some larger and more financially resilient firms will still be able to continue their plans. But many may now be unable to create borrowing capacity or free cash flow, at least over the coming few years, whilst they face this cocktail of cost challenges.
“It’s not about the will, it’s about the means. If the government is going to reduce direct support for business energy bills, then perhaps the policy focus should turn to how they can offset this by using tax and investment incentives, the design of energy markets, and greater financial reward for the demand side, allowing businesses to offset financial pressures, as well as maintain their pursuit of net zero.”