How the government crisis will affect business energy bills
The financial markets might be more settled with the change of Chancellor but businesses still face great uncertainty over energy bills.
The Treasury confirmed this week that the Energy Bill Relief Scheme will remain in place until April 2023 as planned. Under the scheme, wholesale energy costs are capped at £211/MWh for electricity and £75/MWh for gas.
But UK companies are still none the wiser about longer-term frameworks for managing utility costs. The Treasury will launch a review of the methods for supporting energy bills after next April to design a new approach that Chancellor Jeremy Hunt said would cost the taxpayer “significantly less than planned”.
It’s starkly clear now that every business will have move quickly and comprehensively to minimise energy usage and so protect the under-pressure bottom line from rising gas and electricity costs. Energy efficiency is absolutely key to long term economic sustainability, and swift action now will help contain costs when market prices are applied to bills in six months’ time.
Non-commodity prices
The £150bn scheme, to have been funded by borrowing, was trumpeted by PM Liz Truss and former Chancellor Kwasi Kwarteng but has been widely criticised for lack of focus. The government had said that “vulnerable” industries such as hospitality would receive further support after April, but the detail and scale of this is now in doubt.
Hunt explained that “any support for businesses will be targeted to those most effected and the new approach will better incentivise energy efficiency” and significantly added that it was “not responsible to continue exposing public finances to unlimited volatility in international gas prices”.
While the scheme benefits apply to fixed contracts agreed on or after 1 April 2022, companies will have to continue to factor in non-commodity costs as the price cap only applies to the wholesale commodity component of an energy bill. These include network charges, government green levies and third-party costs.
Non-commodity costs accounted for around 36% of energy prices in 2011 but by last year it has risen to 64%. It could be that these costs will form around 70% of utility bills by the end of this decade.
Energy invoices are made up of a combination of the wholesale commodity cost (the fuel you consume, which has been capped by Government under the Energy Bill Relief Scheme) and non-commodity third party costs.
Third-party charges
Government-generated charges include the Feed-in Tariff and Electricity Market Reform items like Contracts for Difference and Capacity Mechanism. There are also third party charges such as Distribution Use of System, Balancing Services Use of System and Transmission Network Use of System.
According to UtilityWorks, the price cap still means that a fully delivered business electricity rate could easily exceed 30p/kWh, nearly a third more than the 21.1 p/kWh seen in media reports over recent days.
There’s no doubt that the relief scheme will be a timely help for businesses, all of whom are struggling with rising energy costs and it’s crucial to consider non-commodity costs that form a greater part of utility bills, which are added after the discount has been applied.
The Energy Bill Relief Scheme applies to fixed contracts agreed on or after 1 April 2022, as well as to deemed, variable and flexible tariffs and contracts. It will apply to energy usage from 1 October 2022 to 31 March 2023, running for an initial 6 month period for all non-domestic energy users. The savings will be first seen in October bills, which are typically received in November.
Fivefold increase in energy costs
The scheme is going to be a monumental task for energy suppliers and is certain to add to overall operating costs that could well be passed on to customers in the coming months and years. All UK businesses as well as the voluntary sector like charities and public sector such as schools and hospitals will continue to face huge challenges in managing energy costs.
It could be that after the six-month temporary reprieve, the cost of energy will be up to five times that being paid earlier this year, according to Cornwall Insight.
A recent survey showed that 50% of SME business owners felt they could improve energy efficiency measures but face challenges. Nearly a third (31%) of the 500 business owners surveyed said they do not have enough time to effectively run more sustainable measures, while 24% said they were not in a financial position to consider further energy-saving efforts.
And 31% said they did not have enough information on the potential measures they could take.
That’s where SaveMoneyCutCarbon will help. Our energy and carbon reduction experts will guide you on the best ways to reduce bills and meet emissions goals at the same time. Our free 30-minute Carbon Mentor call will offer guidance on where to start, what ROI to expect, budgets and what could be achieved. It’s open to any business no matter what sector or size.
