Britain pledged on Wednesday to cap wholesale electricity and gas costs for businesses this winter, in a bid to help relieve the pressure of soaring energy costs to ensure companies do not go bust, yet adding to the government’s fast-rising spending.
Authorities said the government will pick up nearly half of all business energy bills for six months starting Oct. 1 to ensure companies “are able to get through this winter.”
Wholesale prices for electricity will be capped at about 211 pounds ($239) per megawatt-hour (MWh) and for gas at 75 pounds per MWh, compared to forecast market rates of 600 pounds and 180 pounds respectively.
“We’re going to review it after six months. We’ll make sure that the most vulnerable businesses like pubs, like shops, continue to be supported after that,” said Prime Minister Liz Truss, who was in New York to attend the U.N. General Assembly.
Treasury chief Kwasi Kwarteng said the government was stepping in to “stop businesses collapsing, protect jobs and limit inflation.”
The news followed similar measures announced earlier this month to cap domestic energy prices to help millions of people heat their homes amid a cost-of-living crisis.
Wholesale gas and electricity prices in Europe surged after Russia invaded Ukraine and have remained volatile since.
Spiraling gas and electricity bills, together with steeply rising food costs, have driven inflation in the U.K. to its highest level in decades. The Bank of England (BoE) expects the economy to go into a recession next year.
The consumer price index hit 10.1% in July, though it decreased slightly to 9.9% in August. Britons were accustomed for years to an average inflation rate of around 2%.
Groups representing businesses from pubs to steelmakers welcomed the intervention, saying the government had thrown a lifeline to companies battling to survive.
“This intervention is unprecedented, and it is extremely welcome that government has listened to hospitality businesses facing an uncertain winter,” Kate Nicholls, chief executive of trade body U.K. Hospitality, said.
Tens of billions of pounds
Truss announced a two-year “energy price guarantee” for consumers on Sept. 8 that caps average household bills for heating and electricity at 2,500 pounds a year. The household average was expected to rise to 3,500 pounds a year beginning in October, an 80% jump from the current average annual bill of 1,971 pounds.
The government did not publish any estimate of the cost, but reports have put the price of six months of support at up to 42 billion pounds, on top of more than 100 billion pounds for a previously announced scheme to help households.
The final unit prices will be confirmed on Sept. 30.
“The difficulty with giving cost figure is that this will depend on where the price of energy goes over the winter, and that’s very difficult to forecast so I can’t give you an absolute cost,” Business Minister Jacob Rees-Mogg said.
“It will be in the tens of billions of pounds unquestionably.”
A spokesperson for Prime Minister Liz Truss said Kwarteng’s fiscal event would outline estimates of the cost of the support packages for businesses and households.
After weeks of political stasis as governing Conservatives chose a new leader and the country mourned the death of Queen Elizabeth, this week the government is making several announcements aimed at averting an impending economic crisis.
On Friday, Kwarteng is expected to set out some detail on how he will pay for the energy scheme while at the same time delivering on promises to cut taxes, although the total cost of the energy scheme will depend on market prices over the coming months.
Investors say Friday’s statement will be a critical test of confidence in British public finances as borrowing costs rise at the same time as a commitment to higher spending and banking on accelerated economic growth to pay for it.
Kwarteng said on Wednesday he had pledged to get debt down in the medium term, but it was “absolutely right” to help families and businesses in the face of a major economic shock.
The business energy scheme will initially apply from Oct. 1 to Mar. 31, 2023, for all non-domestic energy users, including charities and the public sector such as schools and hospitals as well as businesses.
The scheme initially gives urgent support to all such institutions that may need it, but is expected to be narrowed down in March with support targeted to the ones that most need it.
The government also announced support for households in Northern Ireland on the same level as the equivalent scheme in the rest of the United Kingdom, taking effect from November but backdated to the start of October.