UK Government to cut business energy bill support package by 85%

Written by Ben Riley-Smith of The Telegraph

UK Prime Minister Rishi Sunak is set to cut support for business energy bills by 85 per cent in a blow to millions of struggling businesses as ministers scramble to protect the public finances.

No 10 and No 11 agreed a review of support for businesses in April after spending as much as £18 billion on a six-month package of comprehensive support.

It is understood that aid for next year will fall to around £5bn. That equates to £2.5bn every six months, a drop of 85 per cent.

The new plan is due to be announced early next week, with costs largely agreed upon, according to multiple government sources involved in the negotiations.

Currently, businesses’ wholesale energy costs are capped at 21.1 pence per kilowatt hour (kWh) for gas and 7.5 pence per kWh for electricity, with the government paying the difference between that level and high actual prices. However, this level of support should be reduced.

The UK Prime Minister and Chancellor Jeremy Hunt are due to give the final signature to the agreement, and the exact figure for the reduction in gas and electricity prices has not yet been fully determined.

The UK Treasury will argue that the cut is partly the result of recent falls in wholesale gas and electricity prices, meaning less taxpayers’ money is needed to keep bills low.

Government sources also defended the move, arguing that it was unrealistic to maintain a cap on business energy costs, given the Finance Ministry’s other objectives, including tax cuts.

But some business industry figures claim that the drop in wholesale prices is not being fully passed on to the prices energy companies are offering businesses.

A senior government source familiar with the plans said: “The government is subsidizing every household and business with their energy costs.

“It is not sustainable in the long term. This means that the Government has less space to focus on other priorities such as reducing the tax burden. That’s the harsh reality.”

Huge interventions in the energy market, both for households and businesses, were accepted by Liz Truss shortly after she became Prime Minister in September.

The future plan for households was announced before Christmas, with an energy price guarantee until April 2024.

A typical annual household bill will be £3,000, up from £2,500 this winter.

A plan for businesses is expected to be released next week. And this will continue for a year, taking the support until April 2024, but there will be a sharp drop in the scale of the support.

The Telegraph understands the scheme will remain universal, meaning all UK businesses will continue to receive some support, as they currently do.

There will also be a more generous offer for energy-intensive industries such as steel, ceramics, paper, glass and cement.

Wholesale energy prices fell this week due to unseasonably warm weather and are expected to continue falling in the coming months, according to estimates used by the government.

But the future of wholesale prices is unpredictable, especially given the uncertainty surrounding developments in Ukraine, and there are concerns that energy companies will not pass on discounts to customers

Firms typically have fixed-term energy contracts, meaning that any effect of the new support scheme will affect firms when these contracts are renewed.

Kate Nicholls, chief executive of UK Hospitality, the industry body representing 100,000 pubs, bars and restaurants, expressed concern at the change.

Ms Nicholls said: “The government has identified the hospitality industry as a particularly vulnerable sector due to the impact of work stoppages due to Covid and rail disruption due to strikes. This means that we are much more fragile than other sectors.

“Half of our companies operate at or below the level of profitability. For our members, energy bills have skyrocketed and become the defining cost of whether or not they are sustainable.

“Therefore, any very rapid reduction in support for energy bills will be particularly damaging. We have been presenting this to the Ministry of Finance for weeks.”

Other business people accepted that the scale of support the Treasury currently provides to curb energy bills is unaffordable for the government in the long term.

A source in a leading business body said: “This extension will bring relief to many companies, especially SMEs.

“The energy bill relief program has been the main support, but it is unrealistic to maintain it in its current form because of the costs.

“Now the big question will be whether additional support will come for those industries that are heavy users of energy.”