At last, energy support for business – of sorts.
The Energy Bill Relief Scheme will help businesses get through the coming winter.
The government has released much-awaited details on their assistance for non-domestic organisations (businesses, charities, schools, care homes, churches, etc) this winter. There are still some details that need clarification, but outlined below are our initial assumptions.
Meanwhile, you can read a brief outline of the government support plans for business, or read the the complete guidance on the government website.
You can now check the discount you should receive on your business energy bills. The government has released a complete spreadsheet of the relevant discount according to the wholesale price for every date back to 1 December 2021. Just look up the date you agreed the contract.
This will be updated every Monday or Tuesday, with the discount for contracts agreed the previous week. If you are agreeing a contract today, you won’t know the actual discount until the spreadsheet is updated next week. This is because the discount is based on an average of the wholesale price the week you agreed the contract – they need the full weeks data to work out the average. But the previous week should give you a good indication.
Please note that any thoughts below on future gas and electricity prices are purely speculation. Like you we can’t predict the future. Unfortunately.
Energy support for businesses
The wholesale price of gas and electricity this winter will be reduced for eligible contracts. Businesses on a fixed rate (agreed since 1 April) may see a discount on their bills. And variable rates (if you were waiting to see what would be announced) will receive a slightly different discount.
This will start on 1 October this year. And run through to 31 March.
This is significant, as it covers the entire winter wholesale period. If so, it will protect organisations from the incredibly high prices.
Note: the prices you will have seen in the news refer to the wholesale price of gas and electricity.
These rates are 21.1p per kWh for electricity and 7.5p per kWh for gas. The actual price on your bills will be higher as it will include third party charges. These include charges from the grid for keeping you connected, and transporting gas or electricity around the network. As well as government taxes and levies, and supplier costs.
Nevertheless, is it a very significant saving over energy prices available this winter.
General points about the Energy Bill Relief Scheme
We will refer to businesses a lot. The government energy support for business applies to all non-domestic sites, such as businesses, charities, schools, care homes, churches, village halls and even scout huts. Essentially, any site using energy that is not classed as domestic. For the purposes of this article, we will just use ‘business’ to describe all the above.
If your business is eligible, you don’t need to do anything. Your energy supplier will apply any discount your business is entitled to. Although if your contract has ended, or about to expire, you may wish to consider a fixed contract.
The government supported price is 21.1p per kWh for electricity and 7.5p per kWh for gas.
The price per kWh on your bills includes the wholesale cost of gas or electricity at the time you agreed the contract. In addition the kWh price also includes third party costs. These include government taxes and levies, charges from the network for transporting gas or electricity and keeping your site connected. And supplier costs as well. The government supported price only applies to the wholesale part of the unit price.
The wholesale element of your kWh price will be discounted. The discount will be the difference between the wholesale cost when you agreed the contract and the government supported price (see above). To assist with this, the government will release a table with the wholesale price of gas and electricity for every day from 1 April. Suppliers will use this for their calculations.
The wholesale element of the unit price is the only part of your business energy bill that is protected. Your standing charge won’t be. For businesses on Half Hourly metering, the Authorised Capacity charge is not protected either.
This energy support for business will run from 1 October 2022 to 31 March 2023. If your fixed contract continues beyond 31 March, the original contract price will resume from 1 April 2023.
What does the energy support mean for my business?
You may be halfway through a 3-year energy contract or recently signed a fixed contract. You may have ended up on out of contract rates with your supplier in recent weeks because they weren’t able to offer a contract due to volatile wholesale prices. Perhaps you are contemplating sitting on a variable rate for the next 6 months and see what happens?
So lets start with 1 April 2022, this is an important date:
I agreed a fixed contract before 1 December 2021
In this instance there will be no change. The Energy Bill Relief Scheme will only apply to contracts agreed on, or after 1 April 2022.
The government state that any contracts agreed before 1 April 2022 wouldn’t have been subject to volatile energy prices.
I agreed a fixed contract on, or after, 1 December 2021
In this instance your business may see a reduction in prices charged.
We say ‘may’ as it will depend on the wholesale price of electricity or gas at the time you agreed your contract. Don’t forget, the wholesale price is just a part of the unit price.
If the wholesale price at the time the contract was agreed (eg. 6 May) was higher than the government supported price (eg. 21.1p per kWh for electricity), you will see a reduction in your unit rate for 6 months.
Don’t forget, this is the wholesale price, third party costs will then be added by the supplier.
My business is on a variable rate, or soon will be
You will have a choice. You can either remain on a variable rate or agree a new fixed term contract. The same applies if your contract ends soon (after 1 October). Move onto variable charges or agree a fixed price for your energy.
As an example, let’s say the wholesale cost of electricity is 65p per kWh for October. With a variable rate, the Energy Bill Relief Scheme will reduce the wholesale part of your bill by a maximum of 34.5p per kWh. This is a maximum discount. The wholesale element can’t fall below the supported price (21.1p for electricity).
Note. Variable rates are usually higher than a fixed rate. Sometimes very much so, therefore you may prefer cost certainty of a fixed rate.
Applying the 34.5p discount to 65p means the wholesale part of your unit rate would be 30.5p per kWh. This is higher than the supported price of 21.1p per kWh, which you would benefit from on a fixed contract. Don’t forget third party and supplier costs will be added on top of this.
However, you must be aware that this will still be variable, so your prices could increase considerably if wholesale prices were to rise further. If the wholesale price rose to 75p per kWh, the same maximum discount will be applied (34.5p). But the final wholesale price will be 40.5p per kWh. Plus the other costs.
Variable rates also start extremely high in the business sector. They have always been much higher than a fixed rate to encourage businesses to move to a fixed contract. Suppliers then have more certainty and can offer better prices. Given a variable rate could be starting very high indeed, even a 34.5p discount may not help too much.
Every business is different, but we think a fixed contract could be the best option.
If you prefer to know what your business costs will be this winter, should you look at the short term or long term?
Use the energy support for business to lower costs for 2023 and 2024
Let us presume you don’t want the uncertainty of a variable rate for your business, during the winter. This leaves a fixed price contract, but how long should you fix this for?
Whichever option, I’m afraid the price will be very high.
Should I fix my business energy prices for a year or longer?
If your business energy contract has expired, or will end soon, a new fixed contract will reduce your (wholesale) energy costs this winter. The wholesale part of the unit price will be reduced to 21.1p per kWh for electricity. Instead of, perhaps, 60p per kWh.
However, please be aware that after 31 March you will then be charged the full unit rate.
This may cripple your business.
Ok, the government has stated some sectors may receive more energy support after 31 March. You can’t rely on this being your sector.
How about a very short energy contract for your business
If you have a contract ending in October or November, another option is a short contract to 31 March. Some suppliers will offer these.
With the government energy support for business, you will benefit from price certainty over what could be a very volatile winter. Being short term, the entire contract sits in the winter wholesale period (see more below). This means the wholesale price will be higher. But as it is a fixed price, the wholesale part will be reduced to 21.1p for electricity. And 7.5p for gas.
And your next contract will start on 1 April 2023.
This is the start of the summer wholesale period. Why is this important?
Typically, energy prices are a blend of different wholesale periods. The winter wholesale period runs from 1 October to 31 March. And the summer period from 1 April to 30 September.
Therefore the higher winter wholesale costs are not built into prices starting on 1 April or later. This reduces the unit price on your following contract. And perhaps helps you to plan a little more long-term.
Wholesale energy prices explained
A bit more detail on the above.
In normal market conditions, before the energy crisis, you would expect to pay more for your business energy the longer you fix the contract for. This is because there would be more risk further ahead (the unknown) and the markets set the price accordingly.
Now, though, there is a huge amount of risk upfront, right in front of us. And that is security of energy supplies this winter. Wholesale prices for a winter start date have surged.
But looking further ahead prices are lower for summer 2023 and lower still for winter 23/24. And then lower for summer 2024 and winter 24/25. And so on.
This is because the energy market is in ‘backwardation’. It is actually cheaper, the longer you fix prices for (but it is still an eye-watering figure given the energy crisis).
The price you pay per kWh is typically a ‘blend’ of prices from each wholesale period covered by the contract dates.
This is why a 2-year contract is a lower price per kWh, than a 1-year contract:
A 1-year contract starting on 1 October 2022 will include wholesale prices for winter 22/23 and summer 2023. But a 2-year contract on the same date will also include the lower prices for winter 23/24 and summer 2024. Once ‘blended’ together, the 2-year price will be lower as the prices further ahead, reduce the overall price.
Looking ahead to April 2023
If you then decide a short term contract is the right choice for your business. When would be a good time to agree a contract for 1 April?
You could wait and see if energy prices fall back in the next few months. Or commit now in case there are more issues affecting energy supplies and prices increase again.
Some people think prices ‘have to fall’ as they are so high.
This is what happened in June and July. Businesses waited for energy prices to fall, thinking they can’t go any higher. But then Russia turned off the gas on Nordstream1 pipeline and look what happened to prices. Those that fixed prices are glad they did, others wished they had. But who can tell what is around the corner?
In recent days we have read about potential escalation in the war, with Russia attempting to annex parts of Ukraine. And there were the explosions rendering the main pipelines from Russia unable to transport gas, even if Russia wanted to.
The volume of gas in storage is a major influence on wholesale prices
We may start 2023 with energy prices several times higher than 2022. Don’t forget, in 2022 gas was still flowing from Russia and this helped Europe to build up enough gas in storage to alleviate some pressure ahead of this winter.
Whether Europe looks likely to hit gas storage targets ahead of winter, is a major influence on the price of gas. So I am a little pessimistic about 2023 for this reason. Europe will need to largely rely on LNG shipments and pipeline gas from Norway.
We hope this provides a little clarification in very uncertain times.
If you would like to discuss your options, please call us on 020 3372 6517.