One-hit wonder? Assessing the government’s business support scheme

Subsidising the unprecedented cost of energy for both households and businesses came in at the forefront of the Chancellor of the Exchequer, Kwasi Kwarteng’s “mini-budget” last Friday. Described as “one of the biggest interventions ever made”, Kwarteng confirmed a three-step plan. Firstly, as announced on 8 September, the introduction of the Energy Price Guarantee (EPG) will limit the Default Tariff Cap to £2,500 for a typical UK household. Secondly, Kwarteng formally announced the Energy Bills Relief Scheme (EBRS) to support non-domestic customers with a unit price discount of “equivalent” support to households from 1 October 2022 to 31 March 2022. Lastly, the introduction of the Energy Markets Financing Scheme (EMFS), providing a 100% guarantee for commercial banks to offer emergency liquidity to energy suppliers. Estimated by the government at a cost of £60bn for the next six months, attention will now be turning to how this significant policy intervention will play out in practice across the retail energy market. Much focus has been given to the EPG scheme for domestic consumers, so here we turn our attention to the EBRS.

Don’t Worry Be Happy

Although the wait between the announcement of the EPG scheme for households and the EBRS scheme for businesses totalled less than two weeks, it would have felt like a long time for many businesses that desperately need support over this coming winter, as well as suppliers and third-party intermediaries (TPIs) required to communicate the implications of the new scheme to customers.

Tainted Love

The support set out is comprehensive. It covers all non-domestic customers in fixed contracts signed from 1 April 2022, as well as those signing new fixed contracts across the six-month period. Those on deemed or out-of-contract rates, variable tariffs, flexible purchase, or similar contracts will also have access to the scheme. Designed as a volumetric discount on a p/kWh basis, the extent of support for individual customers will be calculated as the difference between the value of the baseload wholesale element of the unit price for each customer (estimated by BEIS) and a “government supported price”. With this set by BEIS at £211/MWh for electricity and £75/MWh for gas, the wholesale market will effectively be reverted back to prices last seen in Spring this year.

The £211/MWh supported price for power contracts is a baseload wholesale price – the bulk commodity – flowing at a constant rate. Contracts from 1 October will incorporate a baseload power cost current on the day the contract was bought and applicable for the duration of the contract. For example, a 1-year contract signed on 14 August, for supply from 1 October 2022, will incorporate a baseload wholesale price based on 14 August, the day of contract purchase. To an electricity contract, the supplier will continue to add various costs including:

  • Load shape to reflect the differences in a customer’s power demand profile compared with the constant flow of baseload power. For example, a customer will use more when their business is open and when it’s dark.
  • Credit cost to reflect the commercial risk for suppliers taking on customers that may not pay.
  • Electrical losses – about 10% more power has to be generated than is consumed due to inevitable losses as electricity is transmitted through wires.
  • Metering and network costs.
  • Costs for policy, including renewables and the capacity market.
  • Profit and, where relevant, TPI commission.

A key difference between the EBRS and domestic EPG is therefore that the former targets only the wholesale element of non-domestic bills, while non-commodity costs will continue to be incorporated at their respective rates across the upcoming six months. In contrast, the EPG covers the entire cost chain, in the same way as the Default Tariff Cap. Suppliers will be working out the exact level of relief for each of the non-domestic entities eligible for support, with varying p/kWh rebates depending on the factors above, as well as contract type and energy consumption levels. We expect customers to see a price reduction in the order of 25-40% compared to what they would have paid without the intervention.

There She Goes

The combined schemes are estimated to cost in the region of £60bn by the government, with the actual figure depending ultimately on movements in the wholesale markets. The schemes to support both households and businesses are no doubt vital, and a level of support had to be implemented quickly.

However, as with any scheme offering blanket support, and particularly given the complexities of the non-domestic market, there will be winners and losers. The incentive for suppliers to hedge and beat the government benchmark price remains, so those with superior trading capabilities will benefit for the scheme. However, depending on the details of how finances are distributed, all suppliers could come under some strain. Applying the scheme to contracts for small businesses should be relatively simple, but given the bespoke nature of industrial and commercial (I&C) flexible supply contracts, suppliers with large I&C portfolios could face operational strains too.

For businesses, the wait to find out the extent to which they would be supported this winter would have been painful. The upcoming review to determine the efficacy of the EBRS, and its future beyond March 2023, cannot come soon enough.

Related thinking

Regulation and policy

Government Announces Record Budget for Contracts for Difference Allocation Round 6

The government has released the budget and reference prices, along with the auction parameters, for the upcoming Contract for Difference (CfD) Allocation Round 6 (AR6). As recently reported, there were considerable questions outstanding about the parameters which will be used in the auction and significant pressure was placed on AR6...

Regulation and policy

Two years on: How Russia’s invasion of Ukraine reshaped the UK’s energy landscape

Two years ago, on 24 February 2022, Russia launched a large-scale invasion of Ukraine. As well as causing widespread devastation and displacement, resulting in a humanitarian crisis, the ensuing conflict also had a wide range of consequences for the energy sector such as causing a structural change in European gas...

Low carbon generation

Latest developments in the TPI space

We recently published our 2023 Annual TPI report which provides an independent review and analysis of the market for TPIs, and the services provided by them. The report also looks at the current challenges and opportunities for TPIs, such as regulatory changes, competition with suppliers, and diversification of services. 2023...

E-mobility and low carbon

Paving the way: EV Country Attractiveness Index findings

Following the previous iteration of the EVCA Index, published in September 2023, the EV market has continued to grow across Europe. From October 2022 to October 2023, the EU, Norway, and the UK have seen a combined 29% year-on-year increase in battery electric vehicle (BEV) sales. Cornwall Insight have partnered...

E-mobility and low carbon

Driving growth: EV Country Attractiveness Index findings

Since the previous iteration of the EVCA Index, published in June 2023, there have been some changes to the electric vehicle (EV) landscape. The EV market has continued to grow with battery electric vehicle (BEVs) sales increasing across Europe. Cornwall Insight have partnered with law firm Shoosmiths to create the...

Regulation and policy

What’s going on with REGOs?

Renewable Energy Guarantees of Origin, more commonly referred to as REGOs, are certificates issued to accredited renewable generators for every MWh of electricity they produce over a year period. The initial intentions of these certificates were to provide suppliers a means to prove the level of renewable generation they received...

Home supply and services

Ofgem strives to improve consumer experiences across both the domestic and non-domestic sectors

Over the last week, a number of anticipated publications were issued by Ofgem that hold the potential to make a significant change to the requirements on both domestic and non-domestic suppliers. The findings of Ofgem’s non-domestic market review were revealed, alongside a policy consultation on the options available to address...

Home supply and services

Fixed tariffs and collective switching return to the market

With the Default Tariff Cap falling by 17% compared to the Energy Price Guarantee (EPG) at the start of the month, there has been a great deal of attention around the possible return of fixed tariffs for domestic consumers. Several fixed tariffs were indeed launched in recent weeks, representing a...