Powering the switch to green energy
21 Sep 2022
The UK government has today (21 September) announced details of its business Energy Bill Relief Scheme. There are still many questions that need answering, but here’s what we know so far…
Energy bills are made up of a number of different costs. The part that makes most of the headlines is the wholesale energy cost – the price your supplier pays for the electricity or gas they sell to you. But there are other parts, too:
The Energy Bill Relief Scheme will cap the wholesale costs, and also cover most of the policy costs from this list (more often referred to as ‘green levies’), but won’t reduce the rest. As a result, the government estimates the savings impact of the Energy Bill Relief Scheme (for those businesses eligible for support) will be between 20% and 50% of what you would otherwise have paid. The actual size of the saving depends upon the procurement choices you’ve made, the sort of tariff you’re on, and the size of your energy bills. The graphic below shows how the reduction will work for a typical electricity bill.
The support is open to any organisation with a commercial meter, including charities, schools and hospitals, but there are some exceptions:
The wholesale element of business bills has been capped at £211/MWh (21p/kWh) for electricity and £75/MWh (7.5p/kWh) for gas. So, if your tariff includes a wholesale element at, say, £450/MWh for electricity, you’ll save £239 for every MWh you use during the period the scheme is operating.
The relief is designed to get businesses through the worst of the anticipated peak in this winter’s wholesale energy prices. It will cap the wholesale part of your energy bill between 1 October 2022 and 31 March 2023. After that, you’ll revert to the standard charges payable through your arrangement with your supplier at the time. So, if you’ve fixed your prices, you’ll continue to be protected by those fixed rates should prices remain high in April 2023 or beyond.
The government has indicated that some business sectors, including pubs and restaurants, are likely to receive further help beyond April 2023.
We’re still waiting on some of the details for how relief will be calculated for eligible businesses on fixed rate contracts. That’s because, when you sign up to a fixed rate contract, your supplier commits to buy the energy they’ll sell to you for the term of the contract in advance, at whatever are the prevailing wholesale prices at that time. Future prices vary depending on when you’ll be using the energy, and how much energy the market thinks will be available at that time. That’s why prices over the winter have been expected to be very high – because demand is highest in the colder months, and supply of energy was still expected to be restricted across Europe.
The amount of relief you get will depend upon the wholesale market cost of buying energy for use during the winter of 2022/2023 at the time you signed your fixed contract. You will receive the difference between that wholesale market cost, and the wholesale cap imposed by the Energy Bill Relief Scheme. The government is due to announce the wholesale costs they’ll use to calculate these savings in the days ahead.
The underlying causes of high energy prices haven’t gone away, and businesses will still have some exposure to market extremes. That’s because there is a maximum relief available under the new scheme (expected to be £345/MWh for electricity and £91/MWh for gas). If you’re on a variable rate contract and prices rise sharply over the winter, the maximum relief may not be enough to cover the increases, and you could see even the wholesale element of your energy bills go up. The government’s guidance states:
If wholesale prices rise above the combined government supported price and maximum discount then your prices will increase.
That has to be balanced with the chances that prices won’t spike sharply over the winter, and longer term prices will soften as we head into the spring. That could mean that better value fixed rate deals are available at that time. That decision will come down to your attitude to risk. Talk to us if you’d like to discuss your options.