What is the commercial energy price cap? Is it enough to keep struggling companies afloat?

After months of uncertainty, British businesses have finally received the lifeline of an energy price cap ahead of a difficult winter.

Companies have been hit hard by volatility in energy prices because their use is not included in regulator Ofgem’s price cap, which only covers households.

Leading figures in the hotel industry had warned of massive job losses in the absence of any help, with the sector still reeling from the impact of the coronavirus.

After mounting pressure and the introduction of a national power cap, ministers have now announced that commercial power prices will be capped until March 2023.

Lifeline: The government has introduced a cap on the price of energy for businesses until next March, but there are concerns that the package will not go far enough for the most vulnerable businesses.

Lifeline: The government has introduced a cap on the price of energy for businesses until next March, but there are concerns that the package will not go far enough for the most vulnerable businesses.

The government says it will halve UK business bills over the next six months, but industry figures warn more support will be needed after the winter.

This is Money takes a detailed look at the energy bill support being offered to businesses, how the scheme works and what could happen when it ends in March.

What is the energy support package like?

Last week, the Department for Business, Energy and Industrial Strategy said wholesale energy costs will be capped at £211 per megawatt hour (MWh) for electricity and £75 per MWh for gas.

These rates will be the base costs with other add-ons, such as permanent charges, that will be added by the energy providers.

Energy consultancy Cornwall Insight said the cost reduction represents a 45 percent discount from closing wholesale prices at the end of last week, taking the market back to where it was in the spring.

The support will no doubt be a welcome relief to the thousands of businesses preparing for a catastrophic winter.

It comes after the government outlined its support for households earlier this month and has been widely welcomed by trade bodies and businesses alike.

Matthew Fell, chief policy director at the Confederation of British Industry, said: ‘We welcome swift and decisive action from the government to provide struggling businesses with a substantial short-term solution to a long-term problem.

“The package will alleviate concerns about otherwise viable businesses closing down and smaller businesses will especially benefit from the discounted rate.”

The price cap is expected to see many businesses face closure, particularly in the hospitality industry, or have to lay off staff to continue operating through the winter.

Could the support be better targeted?

The limit applies to fixed rates agreed from April 2022, as well as flexible and variable rates, and companies do not need to apply as the discounted wholesale price will be automatically reflected on their invoices.

However, there are concerns that businesses will continue to suffer this winter, even with this general price cap.

Those coming to the end of longer-term fixed contracts, for example, still face huge increases in their bills due to huge price increases since signing their contract, even with the new support in place.

There is also concern that support may not come soon enough. The savings will first be seen on October bills, which are typically received in November.

ARE PERMANENT CHARGES LIMITED?

A standing charge is added to most gas and electric bills to cover the cost of supplying energy to your property.

It is a fixed daily amount that you have to pay, regardless of the energy you have consumed.

The average unit price for domestic customers will be limited to 34.0p/kWh for electricity, with a daily fixed rate of 46.36p, and 10.3p/kWH for gas, with a daily fixed rate of 28.49p, VAT included, from 1 October.

Standing charges have become increasingly controversial, as even if you are aware of your energy usage, you will still have to pay a bill.

However, there is no mention of a cap on increases in permanent posts in the government’s support package for business.

Shirley Leader, Clothing Boutique Manager, Velvet & Rose said: ‘Help with energy bills is very welcome… We would also appreciate capped charges for standing charges as well as unit charges because after six months we still we will be in a vulnerable position if this is not addressed.”

“The exact level of support will vary greatly from business to business depending on the details of their contract, so inevitably some will fare better than others,” said Shevaun Haviland, director general of the British Chambers of Commerce.

“Now we need to take action so that these savings are passed on to businesses as soon as possible – every day some businesses will get closer to the limit and won’t be able to take much longer.”

For many small businesses, support will be seen as too little too late, particularly those still struggling post-pandemic.

Government High Streets Task Force expert and ShopAppy founder Dr Jackie Mulligan said: “This announcement has come too late for many small businesses, and the length of time they must wait for payments to be retroactive will exacerbate cash flow issues. of cash and critics they face.

“While it’s nice that some support is finally being announced, small businesses, particularly those that line our main streets, need help right now. There is no time for delays.

Businesses that have paid higher bills since April will struggle, says the Federation of Small Businesses. This is because government support is only activated for October usage, which is billed in November.

The FSB is asking energy providers to allow those customers to switch to new fixed contracts free of charge.

Support has also been criticized for not being better targeted.

Darren Jones, chairman of the Business Department’s Trade, Energy and Industrial Strategy Committee, said: ‘Limiting the price for all businesses is a waste of taxpayer money, which should go to those who need it most. Why should British taxpayers collectively go further into debt to deliver public funds to Amazon?

What happens after six months?

The scheme will help avert a winter crisis, but with support dwindling in March, some companies are already worried about how they will deal with it.

The government has hinted that more help will be offered to vulnerable businesses that need support beyond March, but the lack of certainty has created a precarious position for companies.

There have been little to no details on eligibility for further support, although Liz Truss said the government was seeking additional help for the hotel industry.

“What I can say is that for businesses that are vulnerable, that don’t have the means to invest in their own energy supply, we will provide long-term support… And that includes businesses like pubs,” he said in a speech.

Hospitality businesses have just recovered from the impact of the pandemic and are now facing another difficult winter

Hospitality businesses have just recovered from the impact of the pandemic and are now facing another difficult winter

Hospitality businesses have just recovered from the impact of the pandemic and are now facing another difficult winter

Kate Nicholls, chief executive of UKHospitality, warned that the government must avoid a cliff when support ends next March.

“This intervention is unprecedented and it is very welcome that the government has listened to hotel companies facing an uncertain winter,” he said.

“The Government has recognized the vulnerability of hospitality as a sector, and we will continue to work with the Government to ensure there is no cliff when these measures are lifted.”

Haviland added: ‘For those who will benefit, six months’ support is not enough for most companies to plan for the future. We understand that there are a variety of unknowns for the government as it looks into the future, but without that certainty, very few companies will make plans to invest or grow.”

The six-month support risks crippling businesses that need to make decisions based on what their long-term costs will be.

Companies may well be forced to cut production and lay off staff with no concrete plan in place beyond March.

Jonathan Dudley, head of the manufacturing business at accounting firm Crowe, added: “Support for just six months will not prevent key strategic decisions from being made. It is an adhesive dressing on a bleeding wound.

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