How might the phasing out of UK business energy support impact businesses?

Sophie Grosvenor April 26th 2023 - 3 minute read

Energy prices in the UK have soared since early 2022 due to multiple factors. Firstly, increased demand for energy during the world’s post-Covid reopening placed pressure on global gas supplies.

This global reopening came at the same time as Russia began its illegal invasion of Ukraine, placing a further squeeze on European gas supplies and cutting off crucial supply lines. This in turn pushed wholesale gas prices higher which prompted sharp increases in the amount charged to businesses and households.

The jump in costs has come alongside soaring inflation, labour shortages, and reduced household spending. UK businesses have previously warned that this cocktail of factors could drive more and more firms into insolvency.

In response, the UK government provided direct financial support to businesses to cope with the higher energy costs. The government capped gas and electricity costs for businesses, a measure which cost approximately £18bn over its sixth-month lifespan.

However, the end of March brings a paring back of the support provided to businesses. But why has the government made this decision? And what effect could it have on your business?

Why is the UK government paring back its support measures?

The support scheme for businesses, originally launched in October 2022, has been cited as ‘unsustainably expensive’ by UK Chancellor Jeremy Hunt.

The cost to the UK government is cited as the primary reason for the reduction in business energy bill support, with Prime Minister Rishi Sunak making the reduction of government debt one of his core pledges.

Addressing the change, a UK government spokesperson said:

‘Extending the scheme at current levels could cost tens of billions of pounds, with costs potentially doubling or tripling if international energy prices increase further than expected. It is vital that taxpayer’s exposure to volatile international energy prices is reduced.’

A fall in wholesale energy prices has also been cited by the UK government as a reason behind the decision. Although analysts have argued that the fall in energy costs has failed to translate into lower bills for business and households.

What might the effects be on UK firms?

According to UK market researcher Cornwall Insight, companies stand to see their energy bill rise by as much as 133% due to the sunsetting of the support package and the end of many fixed rate deals.

The British Chambers of Commerce (BCC), the UK’s leading business group, has outlined the additional pressures businesses are set to face as the new tax year begins. Changes to corporation tax, the living wage, and businesses rates could deepen the pressures faced by UK businesses.

Alex Veitch, Director of Policy & Public Affairs at the British Chambers of Commerce, said:

‘We have been signalling for months that many businesses will struggle to afford their energy bills when financial assistance reduces by 85%, with many receiving a fraction of their original support. Almost half (47%) of firms say paying bills will be difficult from tomorrow onwards.’

Small businesses that fall below the government’s threshold for support are set to be disproportionately affected by the decision. The Federation of Small Businesses (FSB) has estimated that around 370,000 small businesses could fall victim to the negative impact of higher energy bills.

Recent insolvency data has added to arguments that the cut in support is set to have a drastic effect on UK businesses. March’s insolvencies increased by 16% year-on-year due to the rising costs, with experts warning that the cut in support could see these numbers climb even higher.

How is the UK government now set to help businesses?

The UK government is now expected to only provide a discount to bills rather than the cap in energy prices. Businesses will now receive a discount of £6.97 a MWh for gas and £19.61 a MWh for electricity. Major manufacturers, such as steel and glass producers, will be eligible for an even greater discount.

Gareth Stace, the director general of UK Steel, said:

‘The scheme offers some important certainty and stability for steel producers’ production costs during this extremely difficult economic climate. However, there will be concerns that the newly announced support falls short of that of competitor countries, including Germany.’

Businesses whose energy costs fall below the government’s threshold will now receive no support whatsoever. A UK firm’s energy costs must surpass £107 a MWh for gas and £302 a MWh to qualify for the discount.

Alongside the change in support, the UK government has launched a campaign to inform small and medium-sized businesses how they can cut their energy costs. Suggestions have included putting heating and lights on timers, switching to more efficient lightbulbs, and adjusting boiler temperature.

The campaign has come under criticism from UK business heads though, with many seeing the measures nowhere close to addressing the reduction in financial support.

Written by
Sophie Grosvenor

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