Statements: Government announces Energy Price Guarantee for families and businesses while urgently taking action to reform broken energy market
Liz Truss became UK Prime Minister just over two weeks ago and it’s hard to believe how much has happened since.
The two contenders in the race for Conservative Party leadership leaned heavily on promises to kickstart the recovery of an ailing economy, but I doubt anyone could have predicted just how quickly the changes would come.
Even during a time of national mourning after the death of Queen Elizabeth II, it’s clear Truss and her cabinet have been working hard.
Here’s what’s been announced so far, and what we expect to come next.
The first issue to be addressed by the new PM was the impending energy price cap increase.
Ofgem was set to increase the cap to £3,550 a year – a move which could have left thousands in fuel poverty. But, just days into her appointment, Truss announced support, first for consumers, and a week later, for businesses.
Both schemes essentially see the government paying suppliers the difference in wholesale prices and end unit costs, so that billpayers are protected from increases.
The Energy Price Guarantee promises to reduce the unit cost of electricity and gas so that households pay no more than £2,500 per year for the next two years – roughly the same as prices before the proposed increase.
Announced shortly after, businesses too will benefit from a similar scheme.
Businesses aren’t covered by the energy price cap, meaning that non-domestic bills (dictated by wholesale costs that have increased in large part due to supply limitations caused by Russia’s war on Ukraine) have already tripled in just a few months. It’s feared further expected increases would devastate many businesses, as well as non-profits and public sector organisations.
The Energy Bill Relief Scheme has now been announced to mitigate some of this for non-domestic customers.
The scheme provides discounts on gas and electricity unit prices to March 2023, the level of which depends on the type and date of contract the customer is in.
The discount will be applied in pence per kilowatt per hour; for fixed contracts the discount will reflect the difference between the government supported price and the relevant wholesale price for the day the contract was agreed. For variable, deemed and all other contracts, the discount will reflect the difference between the government supported price and relevant wholesale price, but will be subject to a maximum discount yet to be determined.
This is available to everyone on a non-domestic contract, including businesses, voluntary, and public sector organisations, on contracts agreed on or after April 2022, on deemed or out of contract variables, on flexible purchase or similar contracts, and for those signing new fixed price contracts.
There are some exclusions, but these are sensible – for example, those who use power to generate power being sold back to the grid, such as power stations.
|Example of how the Energy Bill Relief Scheme would reduce the bill of a medium-sized manufacturing business
A medium sized manufacturing business uses 200 MWh of electricity and 1,600 MWh of gas each month.
They entered into a fixed contract in August 2022, giving them a current monthly energy bill of around £560,000.
At the time they signed their contact, wholesale prices for the next 6 months were expected to be higher than the government supported price of £211/MWh for electricity, and £75/MWh for gas, meaning they can receive support under this scheme.
The difference between expected wholesale prices when they signed their contract and the government supported price is worth £360/MWh for electricity and £90/MWh for gas, meaning they receive a discount of £215,000 per month, reducing their original bill by more than 35%.
Six months only
The Energy Bill Relief Scheme will come into force from 1st October for six months, with a half-way review.
The review will consider how effective it’s been in supporting vulnerable non-domestic customers, which groups remain vulnerable to energy price increases, and whether the scheme should continue for those identified vulnerable non-domestic groups (from the end of the initial six month support period – October 2022 – March 2023).
Other business support
No other new means of support have been announced by the new PM, but government has been at pains to remind businesses of existing schemes in place:
- the Industrial Energy Transformation Fund (IETF), which consists of £315 million live grant funding that supports manufacturers with high energy use to cut their energy bills and carbon emissions by investing in energy efficiency and low-carbon technologies
- a number of advice and support schemes that businesses may be eligible for, to help to improve the energy performance of buildings and processes and lower their energy bills. Search for local schemes that provide advice and grants
- the UK Business Climate Hubwhich provides practical steps on cutting emissions and saving money. If businesses are based in England, they may also be able to access support via local Growth Hubs, who they can get in touch with to find out more
- government has committed to freezing the business rates multiplier for a further year, which is a tax cut worth £4.6 billion to businesses over the next 5 years
- Green levies paid by non-domestic customers who receive support under EBRS have been removed
Officials can’t yet say how much these packages will cost the country, as it’s dependent on wholesale market prices between October and April, but some have estimated it will be around £25bn.
That, combined with tax cuts rumoured to be on the horizon (keep your eyes out for announcements this Friday, September 23), will push government borrowing to twice the level forecast for August by the Office for Budget Responsibility – at a time when the cost of borrowing is also on the rise.
Interest paid on government bonds rises in line with the Retail Prices Index measure of inflation, which hit 12.3% in August; the government has seen its interest payments rise by 22.1% since last year.
New chancellor Kwasi Kwarteng will deliver a mini-Budget announcement this Friday, September 23, in which it’s expected he’ll announce tax cuts and the reversal of existing and planned increases.
News reports are that the Chancellor may scrap the planned April 2023 rise in Corporation Tax, reduce VAT and Income Tax, and potentially reverse the Health and Social Care Levy introduced this April.
We’ll be watching closely on Friday along with many other business owners, and will share updates here and with our news subscribers and clients as soon as we can.
- Typical household will save an average of £1,000 a year on their energy bills, under a new two-year Energy Price Guarantee
- Businesses and public sector organisations will see equivalent support over the winter
- New plans will tackle the root causes of problems in the energy market by boosting domestic energy supply
- Package will boost growth and curb inflation rises
Prime Minister Liz Truss sets out decisive action to support people and businesses with their energy bills and tackle the root causes of the issues in the UK energy market through increased supply – ensuring the country is not left in the same position again.
Under new plans, a typical UK household will pay no more than £2,500 a year on their energy bill for the next two years from 1st October, through a new Energy Price Guarantee which limits the price suppliers can charge customers for units of gas. This takes account of temporarily removing green levies, worth around £150, from household bills. The guarantee will supersede the existing energy price cap.
This will save the average household £1,000 a year based on current energy prices from October. It comes in addition to the announced £400 energy bills discount for all households and together they will bring costs close to where the energy price cap stands today.
The new guarantee will apply to households in Great Britain, with the same level of support made available to households in Northern Ireland.
Those households who do not pay direct for mains gas and electricity – such as those living in park homes or on heat networks – will be no worse off and receive support through a new fund.
Today’s action will deliver substantial benefits to the economy – boosting growth and curbing inflation by 4-5 points, reducing the cost of servicing the national debt.
The historic intervention comes after a failure to invest in home-grown energy and drive reform in the energy market. Putin’s weaponisation of energy supply has exposed the UK’s vulnerability to the volatility of global markets, coupled with a regulatory framework which is no longer fit for purpose, which is driving up bills and holding back economic growth.
Prime Minister Liz Truss said:
Decades of short-term thinking on energy has failed to focus enough on securing supply – with Russia’s war in Ukraine exposing the flaws in our energy security and driving bills higher. I’m ending this once and for all.
I’m acting immediately so people and businesses are supported over the next two years, with a new Energy Price Guarantee, and tackling the root cause of the issues by boosting domestic energy supply.
Extraordinary challenges call for extraordinary measures, ensuring that the United Kingdom is never in this situation again.
As businesses have not benefited from an energy price cap and are not always able to fix their energy price through fixed deals, many are reporting projected increases in energy costs of more than 500%.
A new six-month scheme for businesses and other non-domestic energy users (including charities and public sector organisations like schools) will offer equivalent support as is being provided for consumers. This will protect them from soaring energy costs and provide them with the certainty they need to plan their business.
After this initial six-month scheme, the Government will provide ongoing, focused support for vulnerable industries. There will be a review in 3 months’ time to consider where this should be targeted to make sure those most in need get support.
The Government will provide energy suppliers with the difference between this new lower price, and what energy retailers would charge their customers were this not in place. Schemes previously funded by green levies will also continue to be funded by the Government during this two year period to ensure the UK’s investment in home-grown, secure renewable technologies continues.
Whilst the intervention will be funded by the Government, action is being taken to significantly reduce the cost over time, including:
- A new Energy Supply Taskforce – led by Madelaine McTernan who headed up the UK’s successful Vaccine Taskforce – has begun negotiations with domestic and international suppliers to agree long-term contracts that reduce the price they charge for energy and increase the security of its supply. The Taskforce and Department for Business, Energy and Industrial Strategy will negotiate with renewable producers to reduce the prices they charge as well.
- HM Treasury are announcing a joint scheme, working with the Bank of England, to address the extraordinary liquidity requirements faced by energy firms operating in UK wholesale gas and electricity markets. The Energy Markets Financing Scheme will enable stability to both energy and financial markets, and the economy, and reduce the eventual cost for businesses and consumers. The scheme will provide short term financial support and will be designed to be used as a last resort.
Learning from the mistakes of the past, the Government is taking action to accelerate domestic energy supply, increase our energy resilience and achieve our ambition to make the UK an energy exporter by 2040:
- Launch a new oil and gas licensing round as early as next week, expected to lead to over 100 new licences.
- Lift the moratorium on UK shale gas production. This will enable developers to seek planning permission where there is local support, which could get gas flowing in as soon as six months.
- Drive forward the acceleration of new sources of energy supply from North Sea oil and gas to clean energy like nuclear, wind and solar.
- Continue progressing up to 24GW of nuclear by 2050, with Great British Nuclear helping to set direction of getting new nuclear projects online in the UK.
- Undertake fundamental reforms to the structure and regulation of energy market through recommendations from a new review of the UK Energy Regulation.
- Launch a review to ensure we are meeting our Net Zero 2050 target in an economically-efficient way, given the altered economic landscape. Chaired by Chris Skidmore MP and reporting by the end of this year, it will ensure delivering the target is not placing undue burdens on businesses or consumers.
Chancellor Kwasi Kwarteng said:
Millions of families and businesses across the country can now breathe a massive sigh of relief, safe in the knowledge that the government is standing behind them this winter and the next.
The price of inaction would have been far greater than the cost of this intervention. Not only can we provide urgent support now, but the beauty of our scheme is that it will also bring down inflation, helping tackle wider cost of living pressures.
Business and Energy Secretary Jacob Rees-Mogg said:
The global headwinds caused by Russia’s war in Ukraine, Putin’s weaponisation of energy and the aftermath of Covid, have exposed the need to strengthen Britain’s energy security for the good of the nation and the millions of households and businesses who will struggle to meet the cost of bills this winter.
The action we are taking today will reduce that worrying burden in the short term and will invigorate the long term reforms we need to complete, to resolve the underlying problems in the energy market and ensure the British people enjoy affordable and plentiful energy in future.