PwC comments on the Government's energy announcement

Government support packages are a welcome relief for businesses and consumers alike, although prices will still be significantly more than both paid 12 months ago. Businesses should be looking at shorter-term measures they can take to mitigate these increases. In the medium term, reform is required to deliver a lower cost and more resilient energy market. 

Vicky Parker, Head of Power and Utilities at PwC UK, comments on the Government’s energy policy announcement.

“Today's support recognises the magnitude of the energy crisis and the risk it poses to UK businesses. Taken alongside the scheme announced earlier this month for consumers, it is a welcome package of short-term support. Clearly, there is a need for immediate action ahead of this winter on price and demand measures, but medium-term reforms are equally important to deliver a robust solution for energy security and affordability by reducing our long-term reliance on fossil fuels through the net zero transition. 

“PwC initial estimates of government support packages suggest that the total cost to the taxpayer of the schemes to be greater than the £70bn provided under the COVID furlough scheme. PwC estimates the business scheme to total £10-20bn over the six month period starting 1 October 2022*. While still a significant intervention, the lower cost of business support reflects its short duration and that only apply to a subset of firms whose contracts have expired since April this year. The final costs of both schemes will change in line with movements in wholesale commodity prices for gas and electricity.

“We estimate that up to 25% of the market could be recontracting in October in addition to those that contracted in April this year. Even at the capped levels, most businesses will still see a material increase in energy costs, depending on when their original contract was signed. For a typical business, electricity costs are much more material than gas costs, although some will be insulated from the current high prices having signed long-term power purchase agreements.

“With the scheme expected to last for six months initially, and given most recontracting businesses will see price increases despite the cap, all businesses should be looking at a range of measures to mitigate energy price inflation. These measures will be a combination of short term actions and will vary by business but should include taking practical steps to reduce energy use and become more efficient. For example, making savings in air conditioning costs, shifting demand and rethinking energy contracting strategies, including power purchase agreements."

*Costs calculated based on assuming equivalent wholesale costs in the business support scheme as in the domestic support scheme, futures prices dated 6 September, and assumptions informed by PwC analysis of recontracting patterns for business customers. We assume that up to 25% of this market will recontract from October and be covered by the support, as well as a smaller proportion of those who contracted in April 2022.

PwC’s view is that there are four critical areas that will need to be focused on during the coming weeks:

1. Use the six month window to develop a targeted package that provides more enduring support and balances affordability and the economic impact on the UK

• The scheme announced today provides important immediate help, but the high prices in the market will continue for much longer than the 6-months of this scheme.

• Government has announced the intent for a more enduring scheme. To manage affordability, they should work with the energy sector to identify the most vulnerable sectors, e.g. hospitality

• The enduring scheme will need to consider the impact on the UK economy and recovery. We estimate that the targeted price measures will reduce inflation from the previously estimated peak of around 17%, without this intervention to around 11%.

2. For energy suppliers, urgently stress test the impact of volatile market prices to check future liquidity requirements

• The announcement on 8 Sep of a joint 'Energy Markets Financing Scheme' with the Bank of England to establish a £40bn fund to provide loans to suppliers to address collateral and liquidity challenges will be welcome relief to suppliers. The Government hopes to reduce the need for further intervention. 

• The EBRS is likely to change the nature of business contracts, e.g. moving to fixed contracts of shorter duration and the impact on working capital.

3. Progress medium market reforms to accelerate a move to a lower cost, more resilient energy system

Central to delivering this will be:

• Not stalling the existing consultation underway through the Review of Electricity Markets (REMA);
• Understanding how interventions and the announced decarbonisation review will work alongside REMA; and
• Medium-term actions that bridge the gap between immediate interventions and longer-term market reforms necessary to meet 2035 electricity system decarbonisation targets.

4. Revisit planned investment on enabling infrastructure to ensure it will support future proposals for market reform, for example, grid upgrades to allow for the ~x5 growth in new renewable energy technology. Ensure that forward plans consider a “whole system energy approach”. Invest in UK supply chains to support delivery of these new large capital programmes supporting economic recovery and continued growth in green jobs.