UK Energy Crisis: A lifeline or simply ‘kicking the can down the road’?

The UK government has, as part of its new Energy Plan published on 21^st September 2022, proposed a six month scheme for businesses, voluntary sector organisations (such as charities) and public sector organisations (such as schools and hospitals), known as the Energy Bill Relief Scheme (the “Scheme”). The Scheme seeks to provide protection to businesses equivalent to that afforded to domestic household consumers under the Energy Price Guarantee mechanism.

For businesses struggling in this challenging economic environment, including managing the effects of the Covid-19 pandemic, rising interest rates and high inflation, the measures proposed by the Scheme will likely be welcome. However, it is not clear whether or not the Scheme will be sufficient to support companies in the long term or whether, it is simply a temporary support which will not be enough to remedy the underlying structural issues.

The Scheme

The Scheme will apply to energy usage by businesses in the period 1^st October 2022 to 31^st March 2023, with the relief applicable to businesses on fixed price contracts agreed on or after 1^st April 2022, as well as those businesses that are on deemed, variable or default tariffs.

As part of the Scheme, the UK government will provide a discount on businesses’ electricity and gas unit prices. At the heart of the calculation of the discount is the concept of a “Supported Wholesale Price”, which is a price set by the UK government that will be lower than currently expected wholesale prices this winter. For all non-domestic energy users in the UK, the Supported Wholesale Price is expected to be £211/MWh for electricity and £75/MWh for gas.

To ensure consistency with the domestic and non-domestic schemes, the Supported Wholesale Price is based on the implied wholesale element of the Energy Price Guarantee for domestic customers. It will not be the same as the final per unit price paid by non-domestic customers, which will also reflect other costs such as operating costs, as well as the impact of competition between suppliers.

Applying the reduction

• Under the Scheme, suppliers will apply reductions in pence per kilowatt hour to the bills of all eligible non-domestic customers, and this will be automatically reflected on customers’ bills as follows:
  
  
  • Fixed price contracts: the per unit energy costs payable by the business customer will be reduced by the difference between the Supported Wholesale Price and what the customer actually pays its supplier (which is set at the date the contract is entered into with the supplier).
  • Deemed, variable or default tariffs: the support proposed is the difference between the Supported Wholesale Price and the average expected wholesale price over the period of the scheme, up to a maximum discount of £405/ MWh for electricity and £115/MWh for gas.
  • Flexible purchase contracts (which, typically, are heavy energy users): the level of support will be calculated by suppliers according to the specifics of a customer’s supply contract and, in any event, subject to a cap.

The UK government will compensate suppliers for the reduction in wholesale gas and electricity unit prices that they are passing onto non-domestic customers.

A short-term lifeline, in need of clarity and more forward thinking?

Whilst the scheme will, at first glance, be helpful to many businesses in the short term, there are a number of issues to consider:

1. The support being offered is for a six month period only. There is a lack of clarity as to what happens thereafter and, in the current incredibly challenging economic environment, this uncertainty around future funding needs and cashflow management, is going to make it difficult for businesses to plan ahead.
2. The UK government has stated the Scheme will help prevent “unnecessary insolvencies”. Whilst it is clearly important to support viable businesses through challenging commercial and economic cycles, whether or not the State should step in with  blanket approach is a matter of opinion. However, it is also unclear what is meant by “unnecessary insolvencies” or, indeed, what the long term economic benefit of such an approach is. Does an insolvency become “necessary” in six months’ time once the support is potentially no longer available? Clarification is very much needed as to what will happen once the six month period ends.
3. Certain aspects of the Scheme remain vague. For example, the Supported Wholesale Price remains to be confirmed, as does the determination of the “average expected wholesale price over the period of the scheme”. The support potentially available to flexible purchase contracts is particularly unclear.
4. What is the cost of the Scheme to the UK government and therefore the taxpayer, and does this constitute “value for money”? This is very difficult to determine at this point in time, particularly given the vagueness of some aspects of the Scheme and the lack of clarity as to the Scheme’s funding. For example, if the UK government relies on borrowing to pay for the Scheme, the cost will be passed onto taxpayers at a later date, thereby creating future strain on public finances. The blanket approach of the Scheme also means that the support is not targeted to companies who  have a viable business, but will also benefit many so-called ‘zombie’ companies who do not have a sustainable underlying business but can nevertheless utilise this government backed support to continue to trade.
5. There is still a risk of further supplier failures. Whilst the Scheme proposes payment from the UK government to bridge the delta between the Supported Wholesale Price and prices actually payable by business customers, the fact remains that suppliers are having to hedge their exposure in the volatile wholesale market and this, in turn, requires potentially significant collateral to be posted. Is there sufficient liquidity in the market to meet collateral obligations, particularly when one considers the regulatory restrictions that govern what may actually be posted as collateral. Also businesses that previously may not have been particularly “cash focused” need to become so given the demands on working capital that will be made to accommodate some of the demands of supply arrangements.
6. There is significant potential liability on energy suppliers. A number of suppliers have already failed, and the Supplier of Last Resort scheme – introduced in 2002 to ensure that when supplier failure occurs, affected domestic customers are guaranteed continuity of supply - has been used on multiple occasions. Bulb has also gone into Special Administration. There is, however, no “shipper of last resort” in the gas shipper world. Energy suppliers are obliged to provide an undertaking to the gas transporter that, in the event of a gas shipper failure and no replacement arrangements are able to be put in place with an alternative gas shipper, the energy supplier is responsible for to the gas transporter for all charges that the gas shipper would otherwise have paid.

So whilst the Scheme does indeed provide some short-term relief to UK businesses who are facing ever increasing energy bills, the question remains whether this is a true lifeline or rather whether the UK government is simply ‘kicking the can down the road’. The fact remains that any long-term solution will also require ESG focussed initiatives to reduce energy demand and improve energy efficiency, both of which the Scheme fails to address.