What is the business energy price cap, and is it enough to keep struggling firms afloat?

After months of uncertainty, UK businesses have finally been given the lifeline of an energy price cap ahead of a difficult winter.

Businesses are hit hard by volatile energy prices because their use is not included in the price cap of the regulator Ofgem, which only applies to residential properties.

Leading figures in the hospitality industry have warned of massive job losses due to lack of aid, while the sector is still reeling from the impact of the coronavirus.

After mounting pressure and the introduction of a domestic energy cap, ministers have now announced that business energy prices will be capped until March 2023.

The government says it will cut bills for UK businesses in half in the next six months, but industry figures warn more aid will be needed after the winter.

This is Money takes an in-depth look at the utility bill support offered to businesses, how the scheme works and what could happen when it expires in March.

What does the energy support package look like?

Last week, the Department for Business, Energy and Industrial Strategy said wholesale energy costs will be capped at £211 per megawatt hour (MWh) for electricity and £75 per MWh for gas.

These rates are the basic costs with other surcharges, such as standing charges, which are added by energy suppliers.

Energy consultancy Cornwall Insight said the cost cut represents a 45 percent discount from closing wholesale prices late last week, bringing the market back to spring levels.

The support will no doubt be a welcome relief to the thousands of companies gearing up for a catastrophic winter.

It comes after the government expressed its support for households earlier this month and was widely welcomed by trade associations and businesses alike.

Matthew Fell, chief policy director for the Confederation of British Industry, said: “We welcome the government’s swift and decisive action to provide heavily pressured companies with a substantial short-term solution to a long-term problem.

“The package will allay concerns about otherwise viable businesses closing shop and especially smaller businesses will benefit from the discounted rate.”

It is hoped that the price cap will allow many businesses that have faced closure, particularly in the hospitality industry, or that have had to lay off staff, to continue trading throughout the winter.

Can the support be used in a more targeted way?

The limit applies to fixed rates agreed since April 2022, as well as flexible and variable rates, and businesses are not required to apply as the discounted wholesale price is automatically reflected in their invoices.

However, there are concerns that companies will still suffer this winter, even with this general price cap.

For example, those expiring on long-term fixed contracts are still facing big increases in their bills due to the massive price increases since signing their contract – even with the new support.

There are also concerns that support will not come soon enough. The savings will first be seen in October bills, which are typically received in November.

“The exact level of support will vary widely from company to company depending on the details of the contract, so some will inevitably do better than others,” said Shevaun Haviland, director-general of the UK Chambers of Commerce.

“We need to take action now to pass these savings on to business as quickly as possible – every day some companies will get closer to the edge and they won’t be able to last much longer.”

For many small businesses, the support will be seen as too little too late, especially for those still struggling after the pandemic.

dr. Jackie Mulligan, expert on the government’s High Streets Task Force and founder of ShopAppy, said: “This announcement comes too late for many small businesses, and the length of time it takes them to wait for retroactive payments will the already critical cash flow problems they face.

“While it’s good that some support is finally being announced, small businesses, especially those on our high streets, need help now. There is no time for delay.’

Companies that have paid higher bills since April will struggle, notes the Federation of Small Businesses. This is because government support will only begin for use in October, which will be billed in November.

The FSB calls on energy suppliers to allow those customers to switch to new permanent contracts free of charge.

The aid has also been criticized for not being better targeted.

Darren Jones, chair of the Department for Business, Energy and Industrial Strategy Committee, said: “Capping the price for all businesses is a waste of taxpayers’ money, which should be directed to those who need it most. Why should British taxpayers collectively get even more indebted to transfer public funds to Amazon?’

What happens after six months?

The scheme will help avert a winter crisis, but with support waning in March, some companies are already worried about how they will cope.

The government has hinted that further aid will be offered to vulnerable businesses in need of support after March, but the lack of certainty has created a precarious position for companies.

Little to no detail is known about eligibility for further support, although Liz Truss said the government was looking for additional help for the hospitality industry.

“What I can say is that for companies that are vulnerable, that don’t have the resources to invest in their own energy supply, we will provide support in the longer term … And that also applies to companies like pubs,” she said in a statement. a speech.

Kate Nicholls, chief executive of UKHospitality, warned the government should avoid a cliff when aid ends in March.

“This intervention is unprecedented and it is extremely welcome that the government has listened to hospitality businesses facing an uncertain winter,” she said.

“The cabinet has recognized the vulnerability of the hospitality industry as a sector and we will continue to work with the cabinet to ensure that there is no cliff edge if these measures are removed.”

Haviland added: “For those who benefit from this, six months of support is not enough for most companies to plan for the future. We understand there are some uncertainties for the government when looking ahead, but without that reassurance very few companies will plan to invest or grow.”

The six-month support threatens to cripple businesses that have to make decisions based on what their long-term costs will be.

It is quite possible that some companies will be forced to cut production and lay off staff without a concrete plan in place after March.

Jonathan Dudley, head of production at accounting firm Crowe, added: “Support for just six months won’t stop important strategic decisions being made. It’s a plaster on a bleeding wound.’