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Government business energy plan revealed

Author: ICAEW Insights

Published: 21 Sep 2022

Businesses will automatically receive a reduction in energy costs from 1 October 2022.

Non-domestic energy bills in Great Britain and Northern Ireland will be discounted to something in line with the government-supported price for electricity and gas for the next six months, as the government unveils its plans to help businesses with spiralling energy costs.

Firms in every sector and business size currently on a variable or default tariff, a flexible purchase tariff, signing new fixed contracts or those who have existing fixed contracts signed on or after 1 April 2022 are in scope for the discount.

Businesses on a fixed contract signed before 1 April 2022 are excluded on the assumption that they will have fixed at a level below the government’s current support. Eligible firms will automatically have a discount applied by their supplier, so there is no need for businesses to actively access the support.

The discount rate an organisation will receive depends on when it signed a fixed contract or if it is on a variable rate. The broad intention is to reduce the amount firms pay for wholesale gas and electricity to the government-supported price:

  • £211 pMWh for electricity (compared with the current wholesale price of £420)
  • £75 pMWh for gas (compared with the current wholesale price of £150)

The discount will be determined based on the date at which a firm signed a fixed contract, which would reflect market conditions at the time. Most will get the difference between their fixed price and the government discounted price.

The government has included some examples of how the scheme will work. For instance, a pub might use 4 MWh of electricity and 16 MWh of gas a month. If they signed a fixed contract in August 2022, their monthly energy bill would sit at around £7,000. Wholesale prices from six months after that date were expected to be higher than the government-supported price, so it is eligible for support. 

The difference between expected wholesale prices when they signed their contract and the government-supported price is worth £380 pMWh for electricity and £100 pMWh for gas, meaning they receive a discount of £3,100 per month, reducing their bill by over 40%.

Businesses that signed a ‘poor fix’ won’t be fully compensated in the same way. Firms fixed at a bigger discount relative to the government price won’t be forced to accept a smaller discount.

Organisations on variable contracts can remain on their existing contract and receive the discount. Considering that the price could go very high in this case, there will be a cap on the discount provided. BEIS is writing to suppliers to ask them to offer fixed contracts to those who find themselves in this situation. Further information will be provided on this at a later date.

The scheme will be reviewed halfway through the support period. This will particularly focus on identifying vulnerable organisations that might need longer-term support. Businesses and professional bodies will be able to engage in the review.

Iain Wright, ICAEW’s Managing Director, Reputation and Influence, said that the support package was a generous one, offering significant short-term relief to firms, which in turn will help to protect businesses and preserve jobs. However, there are questions about what happens once the support period ends, or if the UK experiences energy shortages. The government has said that the most vulnerable businesses will continue to receive support, but the criteria for that has not been announced.

“Our members are playing a key role in both running companies facing increases in costs of doing business, as well as helping firms up and down the country deal with the fallout from the energy crisis,” he said. “But continued uncertainty makes it extremely difficult to plan. We hope the government continues to respond flexibly to provide support where needed, otherwise firms will face a cliff edge in six months’ time, which can only mean price increases and real threats of company failures. This will feed inflation, harm the economy and hurt consumers.

“We will continue to work closely with BEIS and other government departments to raise and address any issues.”

The Chancellor must also set out how the generous package of measures will be paid for, said Wright. “Markets will be keen to learn this Friday what this means for a credible tax and spend plan, otherwise confidence in the UK internationally diminishes and the cost of selling gilts for the government on the international market increases, causing further strain on public finances.”

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