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.
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.