The origins of the energy price crisis predate this government, and it is true some contributing factors are global. The drop in production after Covid-induced demand shocks; the bounceback that saw demand outstrip supply; the controls on supply from Russia in retaliation for the war in Ukraine. Today’s geopolitical uncertainty is making a commodity prone to boom and bust even more volatile.
Wholesale energy prices have been high since late last year – but thanks to a combination of fixed price contracts and the price cap, it has taken a while to filter through. This year, the impact has hit home. Rishi Sunak announced his first energy package for households in the spring, reducing most bills by £400, but it was clear by the summer that was not enough.
The last PM and chancellor opted for the energy price guarantee. It works like the default tariff cap, by capping unit costs and standing charges to keep average household bills down to £2,500 per year. The government pays to make up the difference for energy providers. Without the intervention, the cap would have increased to the equivalent of £3,549 per year in October, and potentially more in January. The acute pressure was eased, but energy bills are still twice what they were a year ago and remain a real worry for many households.
For businesses, the package is the Energy Bill Relief Scheme. Suppliers freeze prices to business, then the government compensates the supplier. The support extends to anyone who contracted in at a higher price since December 2021. This package of support will last until April next year, and the government has committed to come up with a proposal for supporting the most vulnerable businesses beyond that date.
The support scheme for households was originally intended to last for two years. However, in one of many changes since the infamous mini-budget, Jeremy Hunt has announced that – like the business support scheme – universal support to households will last for six months only, with support targeted to the most vulnerable thereafter. Better targeting is crucial to keeping a lid on the cost to the taxpayer of both schemes, but it is easier said than done.
The Treasury will conduct a review to inform the difficult decisions around targeting. This will be important for identifying sectors in which energy costs are genuinely existential, requiring ongoing support if prices stay high. The government will want to help efficient businesses through a temporary crisis, but avoid propping up so-called ‘zombie businesses’ i.e. those kept alive in recent years only by low interest rates, covid support and now subsidised energy.
Crucially, the government will want an exit ramp. Backing out of price support schemes is politically very difficult. (A famous example is rent control in New York, introduced after World War II to help returning servicemen, and still in place today.)
So how might the government go about identifying those businesses that need further support? It will want to focus on businesses that can’t reduce their energy costs, can’t absorb them within profit margins, can’t pass them on through higher prices, and make an important economic or other contribution to the UK.
Key questions will include whether to look at ‘sector deals’ or try to identify eligible businesses on an economy-wide basis. During Covid, the government shied away from sector deals, but could take a different view this time around. It will also ask whether to focus support on small and medium-sized businesses, or offer support to large businesses as well, potentially in a different form.
Gas prices have been falling over the last month or so, and if that continues, there may be no need to extend support beyond April. But prices have yoyo’d all year, so the government will need plans in place to cope in case this luck doesn’t hold.
And of course, energy prices are not the only challenge facing businesses and government. Food and other prices are also rising, as are wage demands – plus the alcohol duty freeze has been scrapped. This impacts both the cost base of the food and drink sector, and customers’ disposable income.
Businesses looking to the government for support beyond April will need to explain their challenges in detail and make a compelling, evidence-based case for support. And they should start planning for it now. bill
Have your say
The Grocer is seeking industry reaction to this article and the topics raised in it. If you would like to submit your opinion to be considered for publication in our letters section, get in touch at youropinion@thegrocer.co.uk
No comments yet