Early implications of the Energy Bill Discount Scheme  

People are beginning to take in the changes from the business Energy Bill Relief Scheme (EBRS) to the Energy Bill Discount Scheme (EBDS) that are scheduled for the end of March. As we outlined in our release earlier in the week, the government support is to be scaled back significantly. A new category for greater support of Energy and Trade Intensive Industries (ETIIs) has been identified. But for other businesses not only will the wholesale price threshold for support increase markedly—from £211/MWh to £302/MWh for electricity—but the unit support value will also be scaled back—to £19.61/MWh for that fuel.

Fears are already being expressed that the cutback scheme could force some businesses to shut up shop for good. It is hard to say how many businesses this relates to, but we do hear that those fears are having some resonance amongst business energy suppliers. Always opaque at the best of times, the business energy market is currently particularly hard to read. Very high wholesale prices have reportedly been accompanied by a widening of notional supplier margins, especially for out of contract terms where the regulator is apparently now taking an interest. As their name suggests, these set out the terms on which energy will flow to those customers who cannot or will not negotiate a supply contract and are typically very high priced, noting that this reflects risk-based pricing to cover the chances of business default. Struggling businesses will have the most difficulty negotiating a contract, leading to arguments about whether out of contract terms exacerbate the difficulties these businesses already face.

Suppliers face genuine risk here too. Failed businesses leave energy contracts behind them and perhaps debts too, with suppliers being liable for any hedges. They can trade out these hedges; gaining or losing depending on the movements in the wholesale market between the point of contracting and the point that the hedges are unwound.

This winter’s prices are supported by the government but come 1 April businesses will be back to prices in their contracts that are much more market related. They could well see very substantial price rises. Those who entered fixed contracts at high points in the market, where the term over-hangs the transition to the EBDS, could see their bills doubling in some cases, at least until their contracts come to an end. It will be of little consolation to those customers that the wholesale energy market has halved since last autumn. It could well be very destabilising for their supplier if they are left with volumes that they have to sell back to the market at losses given the moves in the wholesale market since hedges were placed.

Any increase in market instability will also be tracked very closely by the credit insurers who are key to allowing suppliers to quote to businesses with whom they may not have a track record.

Last autumn our insight paper Weathering the storm: Mitigating the impact of energy price hikes for businesses suggested there would be sectoral and regional differences in the impact of the energy price surge on the UK economy. The EBRS has bought a little time for many businesses to adapt to that surge, but it looks like that time is now running out, with heightened uncertainty for them and the supply industry that serves them.

A theme for 2023, for domestic and non-domestic energy markets, will be how challenging withdrawal of bill support is, and how there are unlikely to be outcomes without some casualties.

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