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11 January 2023

Why Jeremy Hunt is gambling with thousands of small businesses

The government’s Energy Bill Discount Scheme could force thousands of small firms out of business.

By Will Dunn

More than 16 million people in the UK (61 per cent of the workforce) are employed by small businesses, and most of the money in the UK (51 per cent) is made by them. The biggest trade body for these companies, the Federation of Small Businesses (FSB*) says the government has decided to “all but eliminate help” for these companies from April, when – as the government announced on Monday (9 January) – the Energy Bill Relief Scheme is replaced by the similar-sounding but much less generous Energy Bill Discount Scheme.

The new plan for business energy support feeds fears that small businesses expressed in November, when an FSB survey reported that almost one in four small- and medium-sized enterprises (24 per cent) would be forced to “close, downsize or radically restructure” if energy support was withdrawn. If this risk materialises, it could lead to a sudden jump in unemployment, which is already expected to rise: the Bank of England has predicted an unemployment rate of 6.4 per cent by the end of 2025.

The pessimism was still greater within some sectors: 42 per cent of hospitality and 34 per cent of retail businesses surveyed said they would downsize or close if support was withdrawn. Meanwhile 44 per cent of all the businesses surveyed reported that their energy costs had doubled, tripled or more than tripled in the past year, and the most popular response to this was to raise prices.

When the energy price cap was introduced by the government in October, it was forecast to cut five percentage points off inflation; removing it could create a direct upward effect on inflation, making price rises more persistent. Either that, or companies will make less money. As Huw Pill, the Bank of England’s chief economist, explained in a speech in New York yesterday, “in the end, someone in the UK will have to bear the cost of a higher aggregate UK energy bill”.

The new discount scheme is less generous and leaves companies more exposed to changes in energy prices. The original relief scheme was a price cap, similar to that given to domestic energy users, which meant the government paid the difference between the wholesale price of energy and the deals businesses secured from suppliers. The discount scheme is, as the name suggests, a discount that only kicks in when energy prices are very high. This means there is no longer a maximum on businesses’ energy costs, only a limited pot (£5.5bn over 12 months) to help them out. A higher discount is available for energy-intensive enterprises such as mining, manufacturing and, for some reason, museums. The energy costs of businesses whose primary operations are extracting coal and crude oil for energy production will also be subsidised at the top rate, which seems a bit rich.

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For every other business, the new scheme amounts to what Martin McTague, chairman of the FSB, characterised as “two pence off a kWh of electricity and half a pence off gas”, which he called “totally insignificant for small businesses, despite costing billions to the taxpayer”.

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“With a wholesale unit price cap, you can at least plan ahead,” said Andrew McRae, policy chairman of FSB Scotland, yesterday. “But with a mere discount on wholesale prices, many businesses will fear the next spike in energy costs. This will make it harder for firms to bid for fixed-price contracts, or to decide when, or if, they’ll open in the first half of the year.”

The response from Jeremy Hunt, the Chancellor, is that the price cap was “unsustainably expensive”, while James Cartlidge, a Treasury minister, said it was “not for the government to habitually pay the bills of businesses… It cannot be that the taxpayer props up failing or unproductive firms”. This will be news to the oil and gas companies who received an £18.3bn tax break for tidying up after themselves in the North Sea, or the second-home owners who got hundreds of millions of pounds in extra energy rebates. It’ll also be news to the people whose bills were very much paid by the former chancellor, Rishi Sunak, through his Covid business loan schemes; these organisations included criminal gangs and, indirectly, the terrorists Isis.

One bit of good news is that wholesale gas prices have fallen steeply; in December European gas futures dipped lower than they were before Russia invaded Ukraine in February 2022. Furious social media users (is there any other kind?) will tell you this means Big Energy is keeping your bills high while gas is cheap, but it’s not that simple. Firstly, gas is still several times more expensive than it was at the beginning of 2021, and secondly, energy companies are required to secure energy supply months or years in advance, so your supplier may well have bought the gas they’re selling you now at peak prices.

But if prices continue to fall and remain low (if it’s a mild winter) there’s a chance that less support will be needed; the energy analyst Cornwall Insight currently predicts that the government may not need to subsidise domestic energy bills in the second half of this year.

That is Hunt’s gamble: if the weather and geopolitics are in our favour, bills will gradually fall (but not to pre-pandemic levels) for households and businesses and the Treasury will gain some headroom. But if these unstable forces throw up a surprise, he’ll have to bring back greater support, or watch British businesses go under.

*Not to be confused with the Federal’naya Sluzhba Bezopasnosti, the Russian security service, which unhelpfully shares the same acronym.

[See also: The long and futile history of British anti-strike law]