Help with energy prices
We now know that the government will introduce the Energy Bill Relief Scheme for businesses, charities and public sector organisations from 1 October, which creates a cap on the price of gas and electricity. However, we need to remember that this is only a cap on the wholesale price and does not put a break on distribution costs and standing charges. Given the scheme is only for six months, will it have much of a positive impact, or is it simply pushing the energy can down the road?
It's important to set out the context of the present energy and cost of living crisis. Energy prices were increasing as economies started to recover from the Covid-19 pandemic, and surging demand could not be matched by supply. This led to very volatile energy and fuel markets, which we continue to see today.
The very fact that this volatility has continued is due to Russia’s invasion of Ukraine in February 2022, as well as Russia’s decision to turn off the Nordstream 1 gas pipeline to the EU. These peaks in prices have understandably created uncertainty for rural businesses. In addition, the sabotaging of the Nordstream 2 supply is putting more pressure on gas prices.
As energy prices increased, so has inflation. In August 2021, inflation was at 3.2%. Fast forward to 12 months later, it had risen to 9.9%, with no prospect of it falling in the next six months. The Bank of England has forecast inflation to end the year at 13%. In fact, It is these inflationary pressures that resulted in the Bank of England increasing interest rates to 2.25% last week to try and control inflation. However, this also makes borrowing more expensive and restricts investment, very much contrary to the government’s ambitions to promote growth.
When we bring inflation, interest rates and rising energy prices together, it was inevitable that the government needed to act to protect businesses. This meant the introduction of the Energy Bill Relief Scheme, among other measures. This caps the energy price at 21.1p/kWh for electricity and 7.5p/kWh for gas. Although there will be a review of the scheme in three months, there are no guarantees that it will be extended beyond March 2023.
Let’s bring all of this up to date, given how fast things are developing. The aftermath of the chancellor’s statement on 23 September has seen the money markets act in a way clearly not envisaged or foreseen by the government. The rise in bond interest rates has meant that government would have to pay an additional £15bn per month in interest rates on its borrowing requirement, which simply is unsustainable. As a result, this has led to a run on the pound, with the value of sterling falling to near parity with the US dollar at $1.03. As a result, the Bank of England has taken the unprecedented step of trying to stabilise the markets by saying that it will use £65bn to buy up government bonds and provide a base for the financial markets.
The CLA’s cost of living hub contains the latest information, analysis, briefings and resources for members to help them manage costs for their businesses. It will be regularly updated as more information and government announcements come out.