Britain’s energy plan: the power and the gory

You know those compelling TV adverts that say something like “If you bought fridge insurance between 2004 and 2008, you might be eligible for blah blah blah”?

A suitable 2023 version in the UK might say “If your business bought a fixed electricity contract between June and December 2022, you screwed up”. And then the television would turn off because you can’t afford the power.

Per the FT on Monday:

The British government is slashing the support it gives companies with their energy bills, but extending it for another year from April at a cost of £5.5bn, ministers announced on Monday . ..

At present the taxpayer is subsidising energy bills for the six-month period to April at a cost of £18bn by capping the price of electricity and gas at £211 per megawatt hour and £75 per MWh respectively until the end of March.

From April, the government will replace the caps with discounts of £19.61 per MWh for electricity when wholesale prices are above £302 per MWh, and £6.97 per MWh for gas when prices are above £107/MWh.

For acronym enthusiasts, this is the baton pass from the Energy Bill Relief Scheme (EBRS) to the Energy Bills Discount Scheme (EBDS). And if you’re really feeling the January brain fuzz, here’s a quick n’ reductive chronology of how we got here:

— Post-pandemic demand rise, energy price goes UP
— Russia invades Ukraine, prices go UP A LOT
— As businesses and households plead for help, Conservative party naval-gazes for months
— Liz Truss drops a crazy energy plan; soon after, UK drops Truss
— New regime trims plans

Importantly, however, energy prices were actually rapidly dropping during the UK’s autumn political omnishambles — and are now below pre-Ukraine war levels (here’s some more from mid-November on what that meant for Germany in particular).

For example, via ICE, here’s UK NBP natgas futures for Q2 of this year:

If the trend continues, this will come as a relief — including for the Bank of England, given how energy prices are indisputably the big kahuna of the whole rampant inflation thing.

But, as the FT notes:

UK wholesale gas prices have already fallen below that trigger point, with contracts for delivery in late spring currently at about £63 per MWh, although some businesses are likely to have signed fixed cost contracts when prices were higher.

“There will be people who are getting a discount at the moment who won’t be getting one from April, and others will see a massive reduction in support,” said Martin Young, analyst at Investec.

Young has expanded on that analysis in a note today, with unlovely conclusions for companies that locked in fixed energy contracts in the latter half of last year, for whom “it will hurt”, he warns.

How badly? An accompanying chart gives an idea (reminder that EBRS = current scheme, EBDS = scheme from April):

So, yes, pain. By these figures, companies will be going from relief worth hundreds of pounds per hour to relief that’s worth almost nothing.

Consultancy Cornwall Insights has a similarly grim outlook:

The fact that costs have for a short recent period trended back to levels at the time of the invasion is welcome but does not represent a return to energy bills that businesses experienced in the years prior to the recent crisis. The EBRS was pitched broadly at those summer 2021 prices and shielded businesses considerably from the most extreme prices of 2022. The EBDS as proposed will necessitate a further fuller, and potentially, painful adjustment back to market prices.

The Government will be offering further relief (“electricity — £89 per MWh with a price threshold of £185 per MWh, gas — £40 per MWh with a price threshold of £99 per MWh”) for businesses that are “particularly vulnerable to high energy prices” — mainly manufacturers, although libraries and museums get in on this.

But for a swath of companies that locked in fixed-price deals over recent months, April must now look frightening, to say the least. FTAV expects this policy rollercoaster may have a few more turns left.