Many businesses are rightly worried about the soaring cost of energy and the likely delay before they will be able to access the rescue package being put together by the government. Unfortunately, there are good reasons why they will have to be patient.
The new ‘Energy Price Guarantee’ will cap the unit price of energy for households for two years, starting on 1October, with the government compensating suppliers for any additional costs. This part of the package is relatively straightforward, mainly because it simply extends the existing Ofgem cap on domestic bills.
We also already known that similar support will be offered to businesses and other non-domestic users of energy, such as schools, initially for a period of six months. But it is unclear how this will be delivered and this support may not begin until November. Some businesses will therefore still face huge increases in their energy bills in the coming weeks.
There is no simple way around this. For a start, the case for universal support for businesses is weaker than for households. As it is, the Energy Price Guarantee is another massive state intervention in the markets which will subsidise the energy bills of every household regardless of need, and could be eye-wateringly expensive. Indeed, any half-decent economist could have come up with a better targeted, more efficient and cheaper ‘Plan A’.
Nonetheless, the chosen ‘Plan B’ is at least simple and easy to understand. It should therefore be far more effective than a patchwork of smaller measures in lifting the huge cloud of uncertainty hanging over households. It will also not have to be continually revised and extended (as the furlough scheme was) if energy prices remain high.
Market signals will also still have some role to play. The Energy Price Guarantee will cap the unit cost of energy, not total bills, and at what will remain a historically high level. Households will therefore still have a strong incentive to save energy.
This can therefore be seen as a pragmatic response which reflects the scale of the economic and social crisis in the pipeline. In principle, it should have been possible to design something better. In practice, it would be difficult to target support at those that need it most, without many falling through the cracks.
However, this argument is somewhat weaker in the case of businesses, where the ‘moral hazard’ risks are greater. Larger firms in particular could reasonably be expected to negotiate longer-term contracts and insure against higher energy bills, or to be able to borrow from private sources, including commercial banks, to spread the cost.
It is not unreasonable either to expect some companies to pass on higher energy costs to their customers in the form of higher prices. Again, this is the market at work. Very few households will have any of these options.
Put differently, think of any well-known FTSE 100 company, perhaps in retail, or banking. Would you truly feel comfortable using taxpayers’ money to reduce their energy bills, especially if this meant there was less room to protect families directly?
What’s more, there are plenty of businesses, including some smaller ones, which have been able to manage their exposure to higher energy prices relatively well. They could reasonably feel aggrieved if their competitors are now bailed out. At the very least, they should be allowed to exit deals which were agreed at a higher price.
These problems are not easy to solve. Even more than households, it makes sense to target support for businesses in ways that minimise the distortions to markets and which only help those that really need it.
I suspect we will end up with a messier solution. It does seem right that any freeze on energy prices for businesses should be for a shorter period than for households. The six-month horizon does increase the risk of another ‘cliff-edge’ in the spring. However, most businesses should be better able to plan for this, and to mitigate the risks, than households in the same position.
The six-month horizon should also be long enough to tide businesses over what is likely to be the most difficult period. Many market commentators now expect wholesale gas prices to plummet after the European winter, if not before. Prices have already fallen sharply in the last two weeks.
Realistically, the government would have to extend the help to at least some businesses if energy prices do remain high. But this option is being built into the current plan too. After the initial six-month period for the broader package, the government will provide ongoing ‘focused support’ for ‘vulnerable industries’.
This will be informed by a review which is due to take place in three months’ time. Again, this will not be straightforward. The government can support low-income households relatively simply via the existing system of means-tested benefits, but there is nothing quite the same for businesses.
Options here might include further relief on business rates for particular sectors or types of businesses, another round of targeted cuts in VAT, or a repeat of some of the grants and cheap loan facilities offered during the pandemic.
In short, the government has a difficult balancing act in providing more support to the most vulnerable companies, without writing a blank cheque for ‘corporate welfare’. It is surely worth waiting just a little longer to get the details right.
In the meantime, suppliers are unlikely to pull the plug or send in the bailiffs, as long as they know government support is coming and that this will be backdated. But more clarity – and soon – would obviously be welcome.
This piece was first published in the Daily Telegraph on 15th September 2022