Support for energy bills

The government announced on 21 September discounts for businesses with fixed contracts with energy suppliers. The discount reflects the difference between the government-supported price and the relevant wholesale price for the day the contract was agreed.

The government said it would publish a retrospective table of ‘official’ daily wholesale energy prices from 1 April to the current date, ending (unless the scheme is extended) on 31 March 2023.

If a supply contract was agreed on or after 1 April, the government will consider that the wholesale price element of that supply contract was the ‘relevant wholesale price’ on that date. If that ‘relevant wholesale price’ exceeded £211/MWh for electricity or £75/MWh for gas, your client will be entitled to receive a subsidy for any consumption under that contract between 1 October and 31 March 2023.

The subsidy amount will be the ‘relevant wholesale price’ minus the ‘support price’ (£211/£75) divided by 1,000 and multiplied by the client’s consumption in kWh.

Who is eligible?

The government has said that ‘non-domestic customers on existing fixed-price contracts will be eligible for support, as long as the contract was agreed on or after 1 April 2022’. This implies that eligibility is determined by the date the contract was agreed (ie signed) and not by the contract start date (CSD). If so, a forward start contract agreed on or after 1 April and having a CSD between 1 October and 31 March 2023 should receive support.

Default, deemed and variable tariffs

Businesses on default, deemed or variable tariffs will receive a per-unit discount on energy costs, up to a maximum of the difference between the supported price and the average expected wholesale price over the period of the scheme.

The maximum discount is £345/MWh for electricity and £91/MWh for gas. This means that businesses on these types of tariffs will receive support equal to the ‘average wholesale price’ minus the ‘support price’ divided by 1,000 and multiplied by their consumption in kWh. This set discount will be applied to variable prices. So, if variable prices increase in line with increasing wholesale, the discounted level will remain as is.

Businesses on default, deemed or variable tariffs will receive a per-unit discount on energy costs, up to a maximum of the difference between the supported price and the average expected wholesale price over the period of the scheme.

Insights

Many clients have been sitting on deemed rates awaiting news of the support package or have delayed putting a renewal in place. They will undoubtedly ask for guidance on the relative merits of remaining on deemed rates or entering into a fixed contract.

Because the government’s support is at the wholesale level rather than the tariff level, it comprises a tariff discount rather than a universal maximum tariff. Tariffs still matter. If a customer is on an egregious default, deemed or variable tariff, receiving a government discount will soften the blow, but from a very high starting point.

Because it is not possible to migrate to an alternative supplier while remaining on default rates, it is likely to be advantageous to accept a fixed tariff. If clients expect tariffs to fall, they can mitigate the constraints of a fixed contract by accepting the shortest term possible.

Tactics

It might be tempting to monitor prevailing wholesale prices and agree a contract on a day in which the government’s official ‘relevant wholesale price’ is high, thereby guaranteeing the largest possible subsidy. However, because the contract tariff will reflect any wholesale price changes and because the contract term will extend beyond the end of the support period, this tactic is unlikely to be advantageous.

In addition, clients will need advice as to the ‘true’ cost of a contract offer. This will involve calculating what consumption will fall within the support period, the value of any support thereon, and therefore what the ‘true’ tariff over the entire contract term is likely to be.