UK to cut business energy prices by more than half

The UK will cut the wholesale price of energy for businesses and public organisations by more than half this winter, the government said on Wednesday, as it announced new subsidies to try to ward off a wave of company insolvencies.

Chancellor Kwasi Kwarteng said the government had “stepped in to stop businesses collapsing, protect jobs and limit inflation” in a move that is expected to cost tens of billions of pounds.

But business leaders warned that some companies were still exposed to steep increases in their bills, and highlighted how the support scheme is only due to run for six months from October.

Stephen Phipson, chief executive of Make UK, the manufacturers’ trade body, said prices would probably “remain high for many months to come”, meaning “industry will need support for a longer period to protect jobs and remain competitive”.

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The UK is battling the worst cost-of-living crisis in a generation, and the government is scrambling to try to contain inflation stoked by Russia’s restriction of gas supplies to Europe following its invasion of Ukraine.

Liz Truss, the prime minister, this month announced a huge energy support package estimated to cost £150 billion, under which the government pledged to help UK households and companies with surging gas and electricity bills.

She said domestic energy bills would be capped at about £2,500 per annum for the typical household during the next two years, but the details of the business arrangements were delayed because of challenges in devising it.

The government said on Wednesday its emergency energy support scheme for businesses would mean certain companies secured a drop of up to 50 per cent in their gas and electricity bills compared with if ministers had not intervened.

Under the scheme the government said wholesale energy prices for businesses were now “expected to be £211 per megawatt hour [21.1p/kWh] for electricity and £75 per MWh [7.5p/kWh] for gas, less than half the wholesale prices anticipated this winter – which is a discounted price per unit of gas and electricity”.

UK electricity and gas contracts for this winter are currently trading at about £490 per MWh and £170 per MWh respectively, when averaging supplies for delivery between October and March.

Jacob Rees-Mogg, business secretary, said the cost of the government’s company support scheme would be “tens of billions of pounds unquestionably”.

There was some criticism of the blanket nature of the UK support, which will assist every business, from sole traders such as hairdressers to multinational companies.

Darren Jones, Labour chair of the House of Commons business select committee, said helping all businesses was a “waste of taxpayers money”.

Under the scheme the level of “price reduction for each business will vary depending on their contract type and circumstances”, said the government.

Most companies are on fixed price energy deals and will benefit from the wholesale price cap covering both gas and electricity. But those businesses on variable tariffs – about 25 per cent of the market – will receive a per unit discount on energy costs up to a maximum of “around £405 per MWh for electricity and £115 per MWh for gas, subject to wholesale market developments”.

By imposing a maximum discount for those on variable bills the government has limited the risk of taking on a completely uncapped liability.

The scheme will apply to all energy contracts signed with suppliers since April 1st and will last for six months from October 1st.

Although the scheme is time-limited, Ms Truss has vowed that subsidies will be extended beyond March for the most vulnerable businesses, including pubs and shops.

She has ordered a three-month review by officials to identify which industries should be granted extended support.

The total cost of the government’s household and business energy support schemes is thought to be about £150 billionn, but the government will not produce its own estimate until Friday when Mr Kwarteng unveils his mini-budget.

Bruegel, a think-tank, said on Wednesday that the UK had announced more state support than any other country in Europe to reduce the impact of soaring energy prices, with expenditure expected to reach about 6.5 per cent of gross domestic product compared with 2 to 3 per cent for Germany, France and Italy.

– Copyright The Financial Times Limited 2022