The day after being handed the keys to Number 10, our new prime minister, Liz Truss, disappointed both the general public and businesses with the announcement of her plans to help with the energy-costs crisis.
Unfortunately, her speech in the Commons setting out her package of support was drowned out, literally hours later, with the sad announcement that our wonderful Queen had passed away. Nevertheless, it is still important to examine the new measures designed to help both households and businesses cope with the spiralling cost of energy.
Energy Price Cap: Measures for households
Domestic energy bills are subject to the energy price cap, which limits the price of each unit of energy sold, with the energy regulator Ofgem now setting the price cap every three months. Currently, a typical household is paying £164 per month (£1971 per year) for their energy based on the Ofgem cap.
Unfortunately, for the general public, in a little over two weeks’ time on 1st October, the next energy cap is due to come into force. If the PM does nothing the forecast increase, will see a typical household facing an eyewatering bill of £3,549 per year for energy.
The government’s planned support will override the Ofgem cap on the unit price of energy so a typical household will pay a maximum of £2,500 per year from 1st October. This maximum amount payable is to be guaranteed for the next two years and has been agreed with the energy retailers. This package of support also temporarily removes the green levies from domestic fuel bills but not the 5% VAT charge.
Additionally, the £400 energy grant previously announced by Rishi Sunak, will go ahead as planned from October. This grant is given in six instalments as a discount to energy bills and is administered by the energy suppliers. This will also apply, via a special fund, to domestic heating oil users.
Energy Price Cap: Measures for businesses
Commercial energy supply contracts are not subject to the Ofgem-set price cap per unit. However, most businesses sign contracts that fix the price of their energy typically for a period of 12 months. These contracts tend to be for one fuel only, electricity or gas, and may apply only to a particular premises.
When a commercial fixed-term energy contract comes to an end, the business has to negotiate a new contract. If this is not possible the business is automatically rolled on to an out-of-contract rate, which will be on a variable tariff and therefore both expensive and unpredictable. A business that cannot fix its energy price will not be able to budget, and may run out of cash very quickly, leading to business failure.
There was some good news from the PM, with the promise that businesses will also benefit from an energy price cap, regrettably though, this “energy price guarantee” for businesses will only apply for six months, not two years. She also hinted at further focused support to certain sectors such as hospitality, with the vague promises that these businesses may get extended support but without any details.
Energy Price Cap: Who pays the cost?
The energy support package will cost in the region of £150bn, including £90bn for the domestic element. The new Chancellor, Kwasi Kwarteng will set out how these costs will be covered in a mini-Budget statement later this month, but after the Queen’s funeral.
The support package is not only the Government’s attempt to stem the ever-rising energy prices, but also to reduce the knock-on effect on inflation, currently standing at 10.1% and set to rise further. The new measures could well knock off up to 5 percentage points from inflation and reduce the predicted government debt costs by up to £25bn per year.
Energy Price Cap: Other plans announced
Also in the PM’s speech was a plan to reform the energy market, with a new Energy Supply Taskforce being created to negotiate with suppliers to agree long-term contracts, to help reduce the price they charge.
Finally, Liz Truss confirmed that the government will be launching a new round of gas and oil licences to exploit the known new fields in the North Sea and off the Scottish islands. She also confirmed that the current ban on fracking, a technique for recovering gas and oil from shale rock, will be removed forthwith.
Well at least there was some good news, especially for the man and woman in the street. Unfortunately, the help for businesses was either vague or short-term, which does not help with even medium-term planning.
But at least she’s ditched the NIMBY inspired moratorium on fracking and oil extraction, which will actually reduce our carbon footprint because it will dramatically reduce the need for imports brought in over long distances, which is very inefficient on carbon costs.