New Business Energy Price Cap
The government have announced a new business energy price cap to tackle the ever-increasing gas and electricity prices and provide some much-needed relief for businesses. In this blog we are going to breakdown this new energy price cap and explain how your business can benefit.
When does it start?
The scheme will take effect on October 1st, 2022. The discounts will last six months, ending on March 31st, 2023.
Am I eligible?
All businesses big or small will be eligible for the discount. That includes voluntary sector organisations, such as charities, and public sector organisations, such as schools, hospitals, and care homes. Furthermore, you are also eligible if you have an existing fixed price contracts that were agreed on or after December 1st 2021, on deemed/out of contract or variable tariffs, on flexible purchase, or similar contracts.
This means if the predicted wholesale price at the point of signing your contract for each month is higher than this the government supported price then the difference will be automatically deducted from your bill.
This is not an out right cap because it does not include the third party costs associated with electricity and gas prices that derive from things such as distribution costs and supplier profit.
(The scheme however does not cover those who intend to sell power back to the grid such as power stations).
How much will I save?
To calculate your discount, the estimated wholesale portion of the unit price you would be paying this winter will be compared to a baseline ‘government supported price’ which is lower than currently expected wholesale prices this winter. The government support price has been set at 21.1p per kilowatt hour (kWh) for electricity, and 7.5p per kWh for gas. Wholesale energy costs currently expected to sit around 60.0p per kWh for electricity and 18.0p per kWh for gas. This results in the supported price reducing bills by up to 38.9p per kWh for electricity and 10.5p per kWh for gas.
Variable contracts and out of contract rates will receive maximum discount of 9.1 p/kWh for gas and 34.5 p/kWh for the out of contract contracts.
For example if you signed a contract in August when the predicted price for electric was 87p/kWh then the discount you would receive in January would be 66p but if you signed in May when the predicted price was 22p/kWh then you would receive a 1p discount. Remember, if you are on a variable rate or out of contract then the maximum discount you will receive is 9.1p/kWh for gas and 34.5p/kWh for electric. That means that for the same example of 87p per kWh you would only receive a 34.5p per kWh discount resulting in a price of 52.5p per kWh.
How does it work?
A discount will be calculated by the government and automatically applied to customers’ bills during the 6 months, starting from 1st October 2022.
The discount applied will be in pence per kilowatt hour (p/kWh). The p/kWh government support for comparable contracts will be the same across suppliers, but the absolute level of individual bills will continue to vary across different contracts and tariffs.
For fixed contracts, the discount will reflect the difference between the government supported price and the relevant wholesale price for the day the contract was agreed. The government will publish the wholesale prices they will use for calculating this for each day from April 1st 2022.
For variable tarrifs, deemed and all other contracts, the discount will reflect the difference between the government supported price and relevant wholesale price, but be subject to a ‘maximum discount’ that will be determined at the beginning of the scheme.
Businesses on variable/flexible contracts will need to choose if they move to fixed contracts. This is likely to suit you if you don’t want to be exposed to price variation. To learn more about fixed rate contracts and how our experts can help please get in touch.
The p/kWh government support for comparable contracts will be the same across suppliers, but the absolute level of individual bills will continue to vary.
(please note that customers will not see the discount until their November bill(s))
What this will look like in practice?
A medium sized manufacturing business (Example provided by Gov website):
A medium sized manufacturing business uses 200 MWh of electricity and 1,600 MWh of gas each month. They entered into a fixed contract in August 2022, giving them a current monthly energy bill of around £560,000. At the time they signed their contact, wholesale prices for the next 6 months were expected to be higher than the government supported price of £211/MWh for electricity, and £75/MWh for gas, meaning they can receive support under this scheme.
The difference between expected wholesale prices when they signed their contract and the government supported price is worth £360/MWh for electricity and £90/MWh for gas, meaning they receive a discount of £215,000 per month, reducing their original bill by more than 35%.
Key points to take away:
To learn more about the price cap for businesses give us a call on 0115 648 5655 and our experts can help.
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