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Assessing the Business Energy Price Cap

A week on from the announcement that finally clarified how energy prices will be capped for British businesses this winter, we examine whether it is fit for purpose and what the generation picture looks like for the expected crunch period of early December.

The Energy Price Cap

The fallout from the wider ‘mini-budget’ has been an economic disaster for the UK, with high levels of borrowing spooking markets to the point that pound sterling fell to a record low against the dollar, as well as making significant losses against a basket of other currencies. The Bank of England has already warned that it is prepared to increase interest rates to curb inflation.

The news of a cap on business energy prices came a couple days ahead of the budget itself. The initial response seems to have been generally quite positive, with increasingly worried businesses relieved to finally have some clarity on how they will be protected. However, as energy industry specialists combed over the scheme in more detail, concerns have grown that it isn’t the magic bullet that was hoped for.

One issue arises from how the price cap will be implemented. While the huge variance between businesses in different sectors and of different sizes meant a price cap along the same lines as the domestic one was impractical, some experts have questioned the mechanic that has been settled on instead. The business support scheme will cap electricity at 21.1p/kWh for electricity, and 7.5p/kWh for gas, running from October until April.

However, this applies to wholesale energy prices. While the increase in wholesale electricity and gas costs has been the primary driver for rising bills, non-commodity costs still make up a significant percentage of bills. While some green levies have also been frozen, the overall impact of the cap on prices is likely to be less than Government headlines would suggest.

As with the domestic cap, the new scheme still represents an increase in overall energy costs for most businesses. Rather, it limits the total level of increase. For businesses that are already struggling to deal with the spike in their energy costs, it will still prove a difficult winter. Many businesses, particularly in energy-intensive sectors or those with particularly tight margins, will face a further, nervous wait for the results of a three-month review by BEIS into which sectors will receive additional support.

The Winter Generation Gap

Earlier in the year, several reports into the UK’s winter generation mix suggested a risk of demand exceeding supply during January, with a potential for load shedding or energy rationing in a worst-case scenario. Liz Truss has ruled out the latter completely, and attention has generally shifted away from the risk of a winter energy crunch.

Attention shifted back to it this week, after a report from Lane, Clark and Peacock highlighted that despite bringing mothballed coal power stations back online, the UK is still looking at a wafer-thin capacity margin, particularly during early December. It concluded that demand is likely to exceed supply for a total of around 10 hours across this period, with the likely response being energy-intensive end users being forced to reduce their demand. For many manufacturers that have faced an extremely difficult two-year period already, it would add yet further disruption.

The backlash to the mini-budget means that we could see a rapid return to the drawing board, and the provision for business energy support may change in the coming weeks and months. To keep up to date with the changing energy industry and the evolving picture for the winter energy crisis, keep up to date by following Powerstar on Twitter or Linkedin, or  by signing up for our industry newsletter.