Members of Rishi Sunak's government argue it's unrealistic to keep capping business energy costs, given other Treasury aims, including tax cuts. Photo / Getty Images
By Ben Riley-Smith of The Telegraph
United Kingdom Prime Minister Rishi Sunak is poised to cut energy bill support for businesses by 85 per cent in a blow to millions of struggling companies, as ministers scramble to protect the public finances.
Number 10 and Number 11 have agreed to overhaul support for businesses in April after spending as much as £18 billion on a six-month package of comprehensive support.
It is understood that help for the following year will drop to around £5b. This equates to £2.5b every six months, a fall of 85 per cent.
The new plan is due to be revealed early next week and costings have largely been agreed, according to multiple government sources tapped into negotiations.
At present, businesses’ wholesale energy costs are capped at 21.1p per kilowatt hour (kWh) for gas and 7.5p per kWh for electricity, with the Government paying the difference between that level and high real prices. However, this level of support is to be reduced.
The UK Prime Minister and Jeremy Hunt, the Chancellor, need to give the deal the final sign-off, with the exact figure for the reduction in gas and electricity prices not yet fully locked down.
The UK Treasury will argue that the reduction is in part a result of recent falls in wholesale gas and electricity prices, meaning less taxpayer money is needed to keep bills low.
Government sources have also defended the move by arguing it is unrealistic to keep capping business energy costs, given other Treasury aims, including cutting taxes.
But some business industry figures have argued that the drops in wholesale prices are not being fully passed on in the prices being offered by energy firms to companies.
A senior government source familiar with the plans said: “The Government is subsiding every household and business with their energy costs.
“It is not sustainable in the long run. It means the Government has less space to focus on other priorities like lowering the tax burden. That is the raw reality.”
The huge interventions in the energy market, both for households and for businesses, were bought in by Liz Truss shortly after becoming prime minister in September.
The future plan for households was announced before Christmas, with an energy price guarantee continuing to April 2024.
A typical annual household bill will be £3,000, up from £2,500 this winter.
The plan for businesses is expected to be announced next week. It too will be continued for a year, taking the support to April 2024, but there will be a sharp drop in the scale of support.
The Telegraph understands the plan will remain universal, meaning all UK businesses will continue to get some support, as they currently do.
There will also be a more generous offer for energy intensive industries such as steel, ceramics, paper, glass and cement.
Wholesale energy prices have dropped this week with the unusually warm weather and are expected to continue falling in the coming months, according to estimates used by the Government.
But the future of wholesale prices is unpredictable, especially given uncertainty over developments in Ukraine, and there are concerns energy companies will not pass on reductions to customers
Companies tend to be on fixed-term energy contracts, meaning any effect from the new support scheme will impact firms when those contracts are renewed.
Kate Nicholls, the chief executive at UK Hospitality, an industry body which represents 100,000 pubs, bars and restaurants, expressed concern over the change.
Ms Nicholls said: “Hospitality has been recognised by the Government as a particularly vulnerable sector because of the impacts of Covid lockdowns and rail disruptions from strikes. That means we are much more fragile than other sectors.
“Half of our businesses are operating at or below breaking even. For our members, energy bills have soared to become the determining cost for whether they are viable or not.
“Therefore any very rapid reduction in energy bill support will be particularly damaging. We have been making that point to the Treasury for weeks now.”
Other business figures accepted that the scale of support the Treasury is currently providing to cap energy bills is unaffordable for the government in the longer term.
A source at a leading business body said: “This extension will bring relief for many businesses, especially small and medium enterprises.
“The Energy Bill Relief Scheme has been a major plank of support but it’s unrealistic to keep it going in its current form due to the cost.
“The big question now will be whether additional support will be coming for those industries which are heavy energy users.”