finance

UK to cut business energy prices by more than half

The UK will cut the wholesale price of energy for businesses and public organisations by more than half this winter, the government said on Wednesday, as it announced new subsidies to try and ward off a wave of corporate collapses. The UK will cut the wholesale price of energy for businesses and public organisations by more than half this winter.

The business department said wholesale prices for businesses were now “expected to be £211 per MWh [21.1p/kWh] for electricity and £75 per MWh [7.5p/kWh] for gas, less than half the wholesale prices anticipated this winter — which is a discounted price per unit of gas and electricity”.

UK electricity and gas contracts for this winter are currently trading at about £490 per MWh and £170 per MWh respectively, when averaging those for delivery between October and March.

Kwasi Kwarteng, the chancellor, said the government had “stepped in to stop businesses collapsing, protect jobs and limit inflation”.

The government added that the scheme would initially run for six months from October to the end of March, but Liz Truss, the prime minister, has indicated the subsidies could be extended for the most vulnerable businesses.

The level of “price reduction for each business will vary depending on their contract type and circumstances”, the government said.

Truss introduced a domestic price cap of about £2,500 per annum for typical household use earlier this month. But she delayed the details of the business-focused scheme because of the greater complexity of corporate contracts and administration for the support package. The total cost of the domestic and business support scheme is estimated at about £150bn.

The UK is battling the worst cost of living crisis in a generation and the government is scrambling to try and contain inflation stoked by Russia’s restriction of gas supplies to Europe following its invasion of Ukraine.

The government has argued that containing energy-price driven inflation will not only support businesses but help lower borrowing costs, a key focus after government borrowing rose to twice the level the independent fiscal watchdog had expected for August.

Businesses and public bodies, including schools, hospitals and charities, on existing fixed-price contracts will be eligible for the new scheme for any contract agreed on or after April 1 2022.

Those on default or variable tariffs will receive a per-unit discount on energy costs up to a maximum of “around £405 per MWh for electricity and £115 per MWh for gas, subject to wholesale market developments”.

By imposing a maximum discount for those on variable bills the government has limited the risk of taking on a completely uncapped liability.

It suggests, however, that businesses on default or variable tariffs could still be exposed to much higher costs if gas prices soar again, with the current discount to winter wholesale gas contracts at about £95 per MWh.

Businesses have broadly welcomed the proposals but many still expect to see their bills rise substantially compared with previous years, given the extent of the rise in energy prices.

“Had nothing been done costs might have doubled versus current levels with costs for businesses spiralling out of control,” said Tom Gilbey, equity research analyst at Quilter Cheviot.

“[But] even with the scheme in place, prices will likely still cause significant issues for businesses over the winter especially those that are less well capitalised. In fact some companies have already flagged this isn’t enough to see them through the winter,” he added.

During the past decade, UK wholesale gas prices rarely traded above £30 per MWh.

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