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15 September 2022

Vague policy is leaving businesses in the dark on their energy bills

The government is causing companies to waste money while they wait to find out how much help they will receive.

By Will Dunn

Tourists have flocked to the coast at Southend-on-Sea since the great pier was built there in 1830; a sturdy mile of Victorian cast iron, it remains the oldest and longest pleasure pier in the world. Other parts of the Southend seafront may not be so durable. At Adventure Island, the UK’s largest free-to-enter amusement park, which employs 1,200 people at peak season, the rides could stop when its energy bill rises from around £370,000 to £2.5m next year. The nearby Sealife Adventure, when it renews its energy contract in January, faces a rise from around £250,000 to £750,000; without help, the business will be shut, its animals euthanised or given away. The Three Shells, a beachfront café that has been open for more than 30 years, will close for the winter next month as its energy bill increases by almost four times.

Like almost every other businessperson in the UK, Philip Miller, the owner of these three businesses, doesn’t know how much the government plans to help him with the spiralling cost of energy, when that help will arrive, or how long it will last.

When Liz Truss announced a plan to freeze consumer energy bills for two years last week she included a promise of “an equivalent guarantee” for six months for Britain’s businesses, which at present have no cap on their bills. The government is clearly aware that if it does not intervene it will face a tidal wave of closures and insolvencies, but the promise is vague and poorly understood, and this is creating a dangerous situation.

In the absence of detail many businesses have taken “an equivalent guarantee” to mean that bills will only rise by 30 per cent (as they will for households), and that the government will pay the rest (as it will for households). This is not the case; the cost of doing so would far exceed even the huge borrowing to which the government has already committed, because it would leave it exposed to uncapped losses in a market that no longer had an incentive to keep prices down. One energy broker told me that if a price cap was implemented for businesses, he was aware of a single employer that would need £110m in support; the UK has 5.6 million businesses in all. A simple price cap would also incentivise businesses to use as much energy as possible for the six months it was subsidised, which would almost certainly lead to shortages.

Nevertheless, some businesses are choosing to wait to renew their energy supply contracts, leaving themselves exposed to higher prices later on. Others aren’t renewing at all, taking on even more expensive out-of-contract rates (around £1.50 per kilowatt hour, more than five times the current consumer price cap) as they wait for the details of the policy. They’re wasting their money, and they’re doing so because the government hasn’t told them what it’s going to do.

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So what is the government going to do? Forcing energy businesses to agree a discount on the wholesale price of energy is much more likely than a price cap. This would mean the government would provide support for any business paying above a certain price level for their energy, but the support would be limited – so whether a company was paying 70p per kilowatt hour or £1.50, it would still get (for example) 20p of assistance. Anyone with a good deal, below a certain price per unit, would get no support – so a business already paying 20p per kilowatt hour wouldn’t get free power. Companies would be exposed to the market, but cushioned from its worst excesses.

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Part of the problem, however, is that the market itself is dangerously under-regulated. Every business I’ve spoken to has a different story of their prices being inflated, not just by wholesale prices but by companies in the energy supply chain making the most of a frenetic market.

On a Thursday afternoon recently Richard Costin, CEO of the office furniture manufacturer Bisley, had arranged to finalise his company’s energy contract with a provider. When the signed contract was delivered, however, the provider – having seen the rate of increase in wholesale prices – refused to accept it. By the Monday morning, when the contract was accepted, it was £200,000 more expensive.

Every business I’ve spoken to has said that tighter regulation of the energy market would be at least as welcome as a time-limited subsidy, which one owner described to me darkly as “a stay of execution”. Under-regulation is (along with our excessive dependence on gas) at the heart of the UK’s energy crisis. When the retail markets for gas and electricity were created in the 1990s the energy giants split their companies into producers (such as Centrica) and suppliers (such as British Gas). Ofgem regulated the suppliers while the producers were free to profit from the global market – and when a global energy crisis arrived Britain was exposed to that market.

The other problem for businesses is that the market is not only unregulated but malfunctioning: while the out-of-contract price for electricity can now reach £1.50 per kilowatt hour, some suppliers have 20-year contracts to buy electricity from solar farms at as little as 7p per kilowatt hour. These immense and unjustifiable margins are caused by the fact that power is still pegged to the price of gas.

In her speech to the Commons the Prime Minister did promise a review of energy market regulation, but again there is no clarity on how long this will take or what its outcome will be. The only thing we know for certain is that there is a huge amount of energy price volatility that businesses will be forced to cope with before it is completed.

Truss also promised a second review of a subject that is already settled: how achieving net-zero greenhouse gas emissions could benefit businesses and economic growth. Axiom Manufacturing, an electronics maker, recently spent £600,000 on 2,250 solar panels at its site in Newbridge, south Wales. This investment, planned long before the war in Ukraine caused gas prices to rise, will shield Axiom from an electricity bill that was due to increase from around £300,000 to £1.4m. “The return on it is a little quicker than anyone thought,” said Chris Nye, the company’s managing director. The British public might spend less equipping every factory in the country with solar panels than it would subsidising them to buy electricity produced from gas.

But even a well prepared business such as Axiom will be led to limit its investment if its supply chain and its customers are affected; energy costs are fundamental to the performance of our economy, which is exactly why Vladimir Putin, the Russian president, is using them as an economic weapon against us. Every day that the government keeps businesses in the dark makes this weapon more effective.

[See also: Could an extra bank holiday push the UK into recession?]