The British government is slashing the support it gives companies with their energy bills, but extending it for another year from April at a cost of £5.5bn, ministers announced on Monday.
The new package will ensure that all companies receive discounts on their electricity and gas bills and will offer more generous support for those businesses classified as “energy-intensive users”.
It is the latest attempt by ministers to prevent companies collapsing as a result of high global energy prices caused primarily by Russia’s invasion of Ukraine a year ago, even though the pressures have eased in recent weeks as wholesale prices have fallen.
But business groups warned that the flat-rate per-unit discount on bills would not give sufficient protection to companies if energy prices spiked again ahead of next winter. They said any extra costs would inevitably be passed on to customers.
Although the government said the new scheme was “a very significant fiscal intervention”, it represents a steep reduction compared with the existing package.
At present the taxpayer is subsidising energy bills for the six-month period to April at a cost of £18bn by capping the price of electricity and gas at £211 per megawatt hour and £75 per MWh respectively until the end of March.
From April, the government will replace the caps with discounts of £19.61 per MWh for electricity when wholesale prices are above £302 per MWh, and £6.97 per MWh for gas when prices are above £107/MWh.
UK wholesale gas prices have already fallen below that trigger point, with contracts for delivery in late spring currently at about £63 per MWh, although some businesses are likely to have signed fixed cost contracts when prices were higher.
“There will be people who are getting a discount at the moment who won’t be getting one from April, and others will see a massive reduction in support,” said Martin Young, analyst at Investec.
Mats Persson, partner at EY Parthenon and a former Downing Street adviser, said that even after the recent fall in prices the new scheme would mean companies were typically paying six times more for their energy than before the pandemic. “Business needs to reset expectations as to what the government can afford,” he said.
Energy-intensive industries such as steel and ceramics will be given more generous additional support with a “maximum discount” of up to £40 per MWh for gas and £89.10 per MWh for electricity.
Gareth Stace, director-general of industry group UK Steel, said that the support fell short of competitor countries such as Germany. “The government is betting on a calm and stable 2023 energy market, in a climate of unstable global markets, with the scheme no longer protecting against extremely volatile prices.”
The new package represents a change of stance from chancellor Jeremy Hunt, who in November said he planned to withdraw most support for business when the existing scheme ended in April because the subsidies were “not sustainable”.
Hunt backed down after business groups warned that losing most of the support would lead to companies collapsing and job losses.
Craig Beaumont, chief of external affairs at Federation of Small Businesses, criticised the reduced support package. “From April, small firms will be hugely exposed to higher prices — with almost all protection now removed.” He said the withdrawal of support would push up inflation as companies were forced to raise prices to cover the increased costs.
Kate Nicholls, head of UKHospitality, which represents restaurants and pubs, criticised the “sudden and sharp drop in support”. UKHospitality has estimated that the move will cost the sector an at least £4.5bn over the 12 months.
Nicholls said it would be “damaging to hospitality business who are still seeing significantly higher bills — suppliers are still loading additional retail charges and not passing through lower prices to business customers”.
Nicholls also warned that it would create “a further inflationary spike in April” as businesses passed on costs to customers “undermining government efforts to bring inflation back under control”.
“We have been warning the Treasury for some time of the damage this will do to business viability and jobs — and this dramatic reduction in support will accelerate not reverse that,” she added.