The government have announced that the Energy Bill Relief Scheme (EBRS) will be replaced by a less supportive Energy Bill Discount Scheme (EBDS) from April 2023. The government have been managing expectations on reducing support levels for business energy costs now for several months and remain under pressure over control of public finances and inflation. The terms of reference for their review of the EBRS, released late last year, heavily trailed the idea that the scheme would be trimmed considerably, so the reduced level of support – coming now via a discount rather than a cap to wholesale unit costs – confirms what was widely anticipated.
In some respects, it surprises to the upside, with the fact the scheme will last 12 months rather than the originally considered six, a good example. It may also remove uncertainties from the supply market in general, with the announcement freeing up the closure of many energy contracts, and businesses will now also at least be able to plan with visibility of the level of support that they will receive on energy bills.
Ultimately, however the thresholds set for support under the EBDS versus the nature of support under the EBRS mean businesses will have to take a lot more energy price pain before any medicine is administered. As a result, we already see the EBDS being poorly received by some businesses and their trade associations.
Possible consequences for firms will be weighted differently for different sectors and regions within our economy, against the backdrop of recession that most think is likely to unfold. We will need to consider a prognosis of what this means for different sectors and regions within our economy before making any detailed comment, and are imminently releasing an insight paper on this topic. Our previous research suggests that outside of the more obvious examples such as energy-intensive industries as manufacturing and heavy industry, sectors already hit hard by the pandemic, such as hospitality and some retail, could be particularly vulnerable.
It is evident that the EBDS will leave corporate energy bills much higher than before June 2021. This, and not when Russia invaded Ukraine, is when energy costs began to rise, gaining significantly throughout the autumn of that year and into the following winter. At the time of the February invasion 2022, they were already at historically very high levels and, even after recent falls, remain three to four times pre-June 2021 prices.
The fact that costs have for a short recent period trended back to levels at the time of the invasion is welcome but does not represent a return to energy bills that businesses experienced in the years prior to the recent crisis. The EBRS was pitched broadly at those summer 2021 prices and shielded businesses considerably from the most extreme prices of 2022. The EBDS as proposed will necessitate a further fuller, and potentially, painful adjustment back to market prices. That market prices happen now to be broadly at the levels enshrined in the EBRS is a coincidence but at least show to businesses the kinds of costs they could expect were they to strike a contract now.
The EBDS does offer a differentiated and more beneficial level of support for certain energy and trade intensive industries (ETIIs) from April 2023, but not all firms that are sensitive to movements in energy costs will qualify for the more generous support levels on offer to ETIIs.
The government must be aware that we could now see some real impacts on business earnings and cash flows. Mirroring this, we doubt businesses anticipated an extension of support at the levels experienced under the EBRS. But aside from the impact on the financial integrity of businesses that will arise from the EBDS, the government must also weigh up the constraints on capacity of the UK business sector to invest significantly in the decarbonisation of business and industry. This is necessary to support the nation’s own net zero targets, and the success of this has been predicated on the private sector playing a significant role. While a lot of capital has already been raised for the net zero transition, much of this to date has been deployed into generation and storage infrastructure, rather than greening business and industry. Ultimately decarbonising industry and business requires investment of ever larger volumes of capital as the decade progresses.
From our research it is clear that many firms wish to do more on the green agenda, a delivering greener and more socially responsible economy, as such a strategy helps to improve financial performance and reduce emissions. Some larger and more financially resilient firms will still be able to continue their plans. But many may now be unable to create borrowing capacity or free cash flow, at least over the coming few years, whilst they face this cocktail of cost challenges.
It’s not about the will, it’s about the means. If the government is going to reduce direct support for business energy bills, then perhaps the policy focus should turn to how they can offset this by using tax and investment incentives, the design of energy markets, and greater financial reward for the demand side, allowing businesses to offset financial pressures, as well as maintain their pursuit of net zero.