Energy Bill Relief Scheme – the devil is in the detail

The new government scheme will bring significant relief to many businesses and public sector organisations as they try to navigate the unprecedented energy rises. Economically it was important that government took action.

The reduction in energy costs will be substantial. As a proxy and noting the challenge of calculating a homogenous discount across so many contract types, this represents a 45% discount to closing wholesale energy prices as at the end of last week, noting that policy levies will still be chargeable to suppliers and thus consumers. The support effectively reverts the market back to where it was price wise in the Spring of 2022. It could work well for small and medium businesses that buy their energy on fixed price contracts. But the situation for larger businesses with flexible contracts will be more complex, as the Government alludes to in its guidance. With bigger businesses using a mixture of cheaper and more expensive energy, understanding what the scheme means for them will be a matter of individual assessment.

It will be difficult to pick out the likely aggregate impact on business resilience and the economy and it is also hard to know what impact this will have on energy demand. But on the basis the support is at the more generous end of expectations we could expect more demand from businesses than maybe the commodity markets are pricing in. This could act to support prices in the traded gas and power markets.

Structuring this as discounts on wholesale energy costs, the scheme would cost the government in the order of £25bn. There will also be a strong incentive for businesses to move from out of contract to negotiated contract terms, which acts to maintain the integrity of the market. This will be very important for what emerges after these six months have elapsed.

The scheme has been put in place very quickly and so has had to override some fundamental market structures and by necessity go with the grain of the existing market. We hope that in the longer term, reform of the energy market is given priority to avoid prolonged reliance on emergency interventions and return to normal market dynamics can take place.