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

After months of uncertainty, British businesses have at last been handed the lifeline of an energy price cap ahead of a difficult winter.

Businesses have been hit hard by volatile energy prices because their usage is not included in the regulator Ofgem’s price cap, which only covers homes. 

Leading figures in the hospitality industry had warned of mass job losses in the absence of any help, with the sector still reeling from the impact of 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.

Lifeline: The Government has introduced an energy price cap for businesses until next March, but there are concerns the package does not go far enough for the most vulnerable firms

The Government says it will halve bills for British businesses over the next six months, but industry figures warn further support will be needed after the winter. 

This is Money takes a detailed look at the energy bills support being offered to businesses, how the scheme works and what might happen when it ends in March. 

What does the energy support package look like?

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

These rates will be the base costs with other add-ons, like standing charges, being added by energy suppliers.

Energy consultancy Cornwall Insight said the reduction in costs represents a 45 per cent discount to closing wholesale prices as at the end of last week, bringing the market back to where it was in the spring.

The support will no doubt come as a welcome relief for the thousands of businesses who were bracing themselves for a catastrophic winter.

It comes after the Government outlined its support for households earlier this month and has been broadly welcomed by trade bodies and businesses alike.

Matthew Fell, chief policy director of the Confederation of British Industry, said: ‘We welcome government’s quick and decisive action to provide hard-pressed businesses with a substantial short-term fix to a long term problem.

‘The package will ease worries about otherwise viable businesses shutting-up shop and smaller companies especially will benefit from the discounted rate.’

It is hoped the price cap will allow many firms that were facing closure, particularly in the hospitality industry, or having to lay off staff to keep trading through the winter.

Could support be better targeted?

The cap applies to fixed tariffs agreed since April 2022, as well as flexible and variable tariffs, and businesses do not need to apply as the discounted wholesale price will be automatically reflected in their bills. 

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

Those coming to the end of longer-term fixed contracts, for example, still face big increases in their bills due to the huge price rises since they signed their contract – even with the new support in place. 

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

ARE STANDING CHARGES CAPPED? 

A standing charge is added to most gas and electricity bills to cover the cost of supplying energy to your property. 

It is a fixed daily amount that you have to pay, regardless of how much energy you have used.

The average unit price for domestic customers will be limited to 34.0p/kWh for electricity, with a daily standing charge of 46.36p, and 10.3p/kWH for gas, with a daily standing charge of 28.49p, inclusive of VAT, from 1 October.

Standing charges have become increasingly controversial, as even if you are conscious of your energy usage you will still have to pay for a bill.

There is no mention of a cap on rises to standing charges in the Government’s support package for businesses, however.

Shirley Leader, director of clothing boutique, Velvet & Rose said: ‘The help with energy bills is very much welcome…. We would also welcome capped charges for standing charges as well as unit charges, because after six months we will still be in a vulnerable position if this is not addressed.’

‘The exact level of support will vary greatly from business to business depending on the detail of its contract, so some will inevitably do better than others,’ said Shevaun Haviland, director general of the British Chambers of Commerce.

‘We now need action to get this saving passed onto business as soon as possible – every day will put some firms closer to the edge and they cannot hang on much longer.’

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

Government High Streets Task Force expert and ShopAppy founder, Dr Jackie Mulligan said: ‘This announcement has come too late for many small businesses, and the length of time they may need to wait for payments to be backdated will exacerbate the already critical cashflow issues they are facing.

‘Whilst it’s good to finally have some support announced, small businesses, particularly those that line our high streets, need to be helped right now. There is no time for delay.’

Businesses who have paid higher bills since April will struggle, notes the Federation of Small Businesses. This is because the Government’s support only kicks in for October usage, which is billed in November.

The FSB is calling on energy suppliers to allow those customers to switch to new fixed contracts without charge.

The support has also been criticised 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 targeted at those which need it the most. Why should British taxpayers collectively get into even more debt to hand over public funds to Amazon?’

What happens after six months?

The scheme will help to avert a winter crisis, but with support tailing off in March some businesses are already concerned about how they will cope. 

The Government has hinted that further help will be offered to vulnerable firms that need support beyond March, but the lack of certainty has created a precarious position for businesses.

There has been little to no detail on the eligibility for further support although Liz Truss said the Government was looking at extra help for the hospitality industry.

‘What I can say is that for businesses that are vulnerable, who don’t have the wherewithal to invest in their own energy supply, we will be providing support in the longer term… And that does include businesses like pubs,’ she said in a speech. 

Hospitality businesses have only just recovered from the impact of the pandemic and now face another difficult winter

Hospitality businesses have only just recovered from the impact of the pandemic and now face another difficult winter

Kate Nicholls, chief executive of UKHospitality, warned that the the Government must avoid a cliff edge when the support ends next March.

‘This intervention is unprecedented and it is extremely welcome that Government has listened to hospitality businesses facing an uncertain winter,’ she said.

‘The Government has recognised the vulnerability of hospitality as a sector, and we will continue to work with the Government, to ensure that there is no cliff edge when these measures fall away.’

Haviland added: ‘For those that will benefit, six months support is not enough for most firms to make plans for the future. We understand there are a range of unknowns for the Government in looking ahead, but without that reassurance very few firms will make plans to invest or grow.’

The six-month support risks paralysing businesses who need to make decisions based on what their costs will be in the long-term.

There may well be businesses who will be forced to slash production and let go off staff without a concrete plan in place beyond March.

Jonathan Dudley, head of manufacturing business for accountancy firm Crowe, added: ‘Support for just six months will not stop key strategic decisions being made. It’s a sticking plaster on a bleeding wound.’

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