Last week, Prime Minister Liz Truss announced her plan to cap the unit price of energy for domestic and business customers under a policy known as the Energy Price Guarantee. Most UK businesses will nevertheless face increased costs and may need to take further steps to reduce the cost pressures.
What is the plan?
While much attention has been given to the two-year price freeze for consumer energy bills, the government has also announced a six-month scheme, to take effect on 1 October 2022, to assist UK businesses. The new scheme limits the unit price to 34.0p per kWh for electricity and 10.3p per kWh for gas. The details of the scheme are set to be released in the coming days and weeks.
So far, the government has indicated that there will be no need for businesses to apply or contact their energy supplier to take advantage of the price cap.
If a business is on a standard variable tariff, its energy bills will, as of 1 October, automatically be limited to the Energy Price Guarantee rate. Many businesses on fixed tariffs should also benefit from the scheme, although the details are not yet known and users on expensive fixed tariffs will be keen to see how they might be affected.
Implications for businesses
The government has only provided businesses with a six-month price guarantee, unlike the two-year protection scheme afforded to UK consumers. The government will review the scheme in January 2023 to consider whether more support should be targeted toward those businesses which need it most, but there can be no certainty that further support will be extended beyond April 2023 or indeed as to the nature of such further support.
Secondly, even taking account of the price cap, high energy consuming sectors – such as manufacturing and engineering – will naturally be the most at risk to expensive bills by virtue of the sheer amount of energy they use. Many operating in these industries will face increased costs of three times the amount they paid in the winter of 2021.
Another struggling sector is the hospitality industry, with pubs, restaurants and hotels all set to face a long and challenging winter. With outgoings tripling, surging inflation and supply chain difficulties, the energy crisis may prove to be even more disastrous for UK hospitality than the Covid-19 pandemic.
Looking ahead
Companies should, of course, be looking for ways to minimise their energy usage wherever possible over the coming months and years. In the shorter term, companies should consider whether they can negotiate a fixed tariff with their energy supplier before the six-month scheme expires, although the continuing volatility in the market presents inevitable risks to agreeing a fixed rate.
The government expects prices to remain high into 2023 but thinks they should start to stabilise in the later part of the decade. This crisis should not be treated as a short-term issue and businesses should design long-term plans to aim to reduce their exposure to high costs over the next five years.
For many businesses, the net-zero agenda and sustainability issues are important elements of their planning and the energy price challenges will add further impetus to the drive to insulate premises, move to more efficient forms of energy and reduce carbon footprints as the work-from-home culture enables office accommodation to be downsized. The 2020s are shaping up to be a critical decade of change for the business community.
If your business needs advice in relation to its energy contracts or in planning for the future, please contact Tony Roberts, Head of our Corporate Team.
