18th October 2022
Chris Bowden, MD, Squeaky
10 minute read
The government’s energy support package: 4 ways businesses can ensure long-term security
The energy support package for businesses is essential. It’ll save many from collapsing this winter. However, there are risks that come with such a huge bailout.
In this blog, you’ll find out about the unintended consequences of the energy support package for businesses. Plus, we’ll discuss the long-term measures you can implement to protect your business now and in the future.
Businesses receive energy support package from the government
After calls for urgent government action on rising business energy bills, the UK government announced its support scheme for non-domestic users:
Under the Energy Bill Relief Scheme, gas and electricity costs for UK businesses, charities and public sector bodies are to be capped for six months, with discounts applied to energy usage initially between 1 October 2022 and 31 March 2023.
In its announcement, the Department for Business, Energy & Industrial Strategy (BEIS) announced wholesale prices would be fixed for all non-domestic energy customers at £211 per MWh for electricity and £75 per MWh for gas for six months, with the scheme applying to contracts signed since December 1st 2021.
However, the reality is that the discount your business receives will depend on whether you are on a fixed or a flexible contract.
So, let’s clarify where your business stands:
How will the energy support package work for fixed-price contracts?:
The December 1st cut off is for fixed price contracts only, so any fixed price contract not started before December 1st 2021, will not benefit from the scheme.
Prices are not fixed to £211 per MWh for electricity and £75 MWh for gas. Instead, for fixed price contracts, a discount is applied to businesses’ rates, which is calculated by the government based on its interpretation of the difference between wholesale costs and the ‘government supported price’.
For example, two customers with the same usage who signed contracts on the same day, but have different suppliers, will receive the same discount per/kWh, but their costs will be different overall.
In essence, no matter the discount provided by the government, the total cost to you (excluding taxes) cannot drop below £211. The discount is a floor.
How will the energy support package work for flexible contracts?:
All flexible contracts will benefit and any hedges made before December 1st will be included in the weighted average price.
The discount for flexible contracts is the difference between £211 and the weighted average price for the business, up to a maximum discount of £345/MWh. The discount is only applied to metered volumes and does not include transmission or distribution losses.
The BEIS has shared a table, which will be updated on a weekly basis, to reflect market developments.
You can find this information here.
It outlines the daily discount rates available for business and other non-domestic energy users who are on both fixed and flexible contracts with their energy supplier.
Business energy support package will cost billions
There’s no question over whether the support is needed. It helps to cushion the biggest and most volatile cost pressure facing British businesses like yours. Without it, many firms would collapse and many more jobs would be lost.
However, we can’t escape the reality that this support package is a hugely expensive intervention and will cost billions.
Although the government has not outlined an overall price tag, consultancy Cornwall Insight, estimated the six month relief alone will cost up to £25bn.
And as I write this, businesses are still in the dark as to what happens when the six-month cap runs out. Undoubtedly, many businesses will need financial support beyond this initial period.
With that in mind, it’s likely the overall bailout for the energy crisis will be the biggest financial support package seen in history. The government’s support could stretch way beyond the billions pledged for the furlough scheme.
As a result, Capital Economics has forecast the UK’s borrowing will hit £165bn, or 6.5% of GDP, in 2022-2023, rather than the £99bn the Office of Budget Responsibility (OBR) forecast.
This is a worryingly high figure when we compare this with the borrowing amongst our European counterparts.
If one thing’s for sure, the UK has an immense bailout to manage.
And unfortunately, it’s one that doesn’t come without its consequences.
The unintended consequences of the energy support package
The Energy Bill Relief Scheme will undoubtedly save British businesses.
However, there is a risk that businesses will treat the scheme as a get out of jail free card for their lack of prudence ahead of the crisis. And one that gives them a green light to return to their old, energy guzzling practices.
Here’s the issue:
If business leaders operate under the proviso they will always be bailed out, it’s unlikely they will exercise caution on such important matters in the future.
With no incentive for businesses to manage the risk, it’s likely they will continue to use and waste huge amounts of energy. Consequentially stalling on the climate agenda and impacting the race to net zero, too.
Businesses must implement long term measures to protect themselves
Businesses that choose to treat the government’s support package as a get out of jail free card, risk leaving themselves exposed to future volatility.
Let’s be clear:
The energy crisis is entirely out of businesses’ control. But I urge corporate leaders to view this as a wake up call.
There are a number of measures businesses can implement in the long-term to reduce costs, mitigate risk and maintain their commitment to the climate.
Let’s take a look at four actions you can put in place for your business:
Reduce energy consumption
Energy crisis or no energy crisis, you should be doing what you can to reduce your use of energy.
The reality is:
You could save a considerable amount of money by looking at your current consumption practices. Although this could be said for all industries, it is perhaps most relevant in industrial and manufacturing firms where energy usage is at its highest.
New products and technologies, such as LED lighting and task lighting systems, can significantly reduce energy consumption across a workplace.
Change behaviours to waste less energy
Billions will be spent on bailing out bills. But there is much less focus on targeting the root of the problem:
Businesses waste huge amounts of energy.
Behavioural changes, such as turning lighting and electrical equipment off in unoccupied areas of the workplace and ensuring machinery is properly maintained, can make a huge difference.
Finding and eliminating energy wastage can yield dramatic results for businesses who are looking to reduce the impact on their finances and the environment.
Plan ahead and hedge wisely
Some firms have done a good job of hedging their energy. As a result, they have shielded themselves from the volatility of the energy crisis.
However, others have long chosen to bury their heads in the sand. But one mustn’t interpret that as a green light to put risk mitigation on the back burner.
Hedging is essential, even now.
Double-down on security of energy supply
Without a doubt, this is the time to double down on energy security.
One way to achieve that is with a Corporate Power Purchase Agreement (CPPA).
A CPPA is a long-term contract between an energy buyer and an energy generator. The two parties agree to buy and sell an amount of energy which is, or will be, generated by a renewable asset. A CPPA is usually agreed over a period of 10-15 years, although we are starting to see shorter terms. And there are MANY benefits. A CPPA will enable you and your company to: One, mitigate risk by protecting against price volatility and securing price certainty.
Two, buy energy at below wholesale market prices.
Three, lock in a long term supply of clean energy.
Four, trace your energy so you know it’s 100% clean.
Five, lock up REGOs for long periods of time.
Six, reduce Scope 3 Emissions.
Seven, accelerate your journey to net zero.
And finally, prove you are a purpose-driven organisation by demonstrating your commitment to CSR.
Talk to us about risk mitigation
In this post, we have outlined the unintended risk of the energy support package for businesses. As well as the measures you can put in place to protect your firm in the long term.
Of course, if you’d like to find out more about how to mitigate risk and ensure your business is shielded from rising energy costs, reach out.
We’d love to talk with you.