Wednesday, May 22, 2024
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Energy in the news

In the most tumultuous period of economic and political uncertainty seen in decades, the massive increase in the cost of energy has hardly been out of the news. But while the political maelstrom has been grabbing the headlines, individuals and businesses are still struggling with the rising costs of energy that have followed on from a post-Covid world and the Russian invasion of Ukraine.

Despite countless calls for help, the Johnson administration was unable to do anything, leaving the task to the new prime minister. Liz Truss swiftly announced measures to help households and businesses on 8 September, but then went on to resign as prime minister on the 20 October.

Households have been subject to an energy price cap for some time, limiting the price of each unit of energy they consume. Ofgem, the government’s energy regulator, sets the price cap. Previously this was done every six months; it’s now set once a quarter. Until 1 October, the average household was paying £1971 per year for their energy based on this cap. However, Ofgem’s most recent cap would have seen the average household paying a bill of £3549 for energy – a near doubling of the cost. This is a huge burden for those consuming more power than the average household.

The government’s announcement effectively overrides Ofgem’s price cap. It will mean that the typical household will pay £2500 per year from October – remembering that those consuming more than average will pay more. This new energy price guarantee as announced by Truss was to be in place for households for the next two years. However, following the disastrous 23 September mini-budget, the new chancellor Jeremy Hunt reduced that to six months, with a review of the level of help from April 2023.

For those not subject to price-capped sources, such as heating oil users, they will be given a grant of £100.

Notably, the £400 energy grant announced by the previous chancellor, Rishi Sunak, has not been cancelled and began, as planned, from October and is being paid in instalments over a six-month period. It will come not as a cash sum but instead as a discount on energy bills and will be applied automatically by energy suppliers. The VAT of 5% on domestic energy bills was not changed.

The situation for businesses is different, as their energy supply contracts are not subject to Ofgem’s price cap. That said, businesses tend to sign contracts – for one fuel only – that fix the price of their energy for a period of time.

However, this becomes problematic when a commercial contract ends, as the business then has to negotiate a new deal or be automatically rolled on to an out-of-contract rate which will be expensive and, more than likely, variable.

The government’s announcement that businesses will also be able to benefit from the same cap per unit of energy as will apply to households was welcomed, but businesses were warned they needed to become more energy efficient. After the six month period, there may be defined support for some business sectors, such as hospitality, but no detail was offered.

The support package announced won’t be cheap and is estimated to cost £48bn just for the business element, with the domestic quota expected to be even higher. As for covering this cost, notable by their absence were further windfall taxes. An energy profits levy announced in May will stay in place until December 2025, but there are to be no new taxes on oil companies.

In a bid to bring more oil and gas to the market, the ban on fracking – a process to extract oil and gas from rock – has been removed, while new oil and gas exploration licences are to be made available.

So – some help, but still plenty of pain for energy users. Only time, new sources of energy and new technologies will ease the hardship that many are suffering.


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