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Bank of England to lend UK energy companies as much as £40bn

The Bank of England will lend UK energy companies as much as £40bn to deal with soaring market prices amid fears of another wave of energy company collapses.

Prime minister Liz Truss, on her third day in office, said she wanted to make sure energy companies have the cash they need to buy energy if prices jump. Reports this week said British Gas owner Centrica was in talks with banks to secure extra cash as Vladimir Putin continues to choke off Europe’s supply of gas.

The bailout fund for energy companies was announced alongside a suspension of the energy price cap, which Truss replaced with an “energy price guarantee” to freeze household energy bills for two years. The government will also offer “equivalent support” for six months for businesses – most of whom have not received any financial aid to address the energy crisis prompted by Russia’s invasion of Ukraine.

Companies who use the Bank of England’s energy markets financing scheme will have to sign up to a “wider set of conditions”, the Treasury said. During the coronavirus pandemic support schemes some companies were banned from paying dividends after receiving loans.

Amid warnings energy markets were facing a “Lehman” moment, when a liquidity crunch precipitated the global banking crisis, the government said the scheme would provide “last resort” financing. The money will essentially guarantee that energy suppliers can pay for any power they commit to buying in the wholesale markets, as well as letting them insure themselves to protect against price rises.

Surging prices have prompted ballooning calls for collateral for energy trades, forcing even the largest suppliers to turn to their banks to increase their overdrafts. The governments of Sweden and Finland stepped in with similar measures at the weekend, with the Finnish economy minister saying: “This has had the ingredients for a kind of a Lehman Brothers of energy industry.”

Since the start of the energy crisis more than 30 suppliers have collapsed. That has left energy customers concentrated with bigger firms, whose collapse would probably cost the taxpayer billions of pounds. Some analysts believe that the largest collapse so far, of Bulb, could cost more than £4bn.

Officials are scrambling to draw up details of the scheme, but the government on Thursday said it may only be able to reveal a start date by the end of October. It is understood that further details of the scheme will be published next week.

Tim Speed, an energy specialist at law firm, Shakespeare Martineau said: “A £40bn liquidity fund provides some comfort for energy suppliers, but the support needs to start with immediate effect to stabilise the market. Further supplier casualties will end up costing consumers more.”

In an indication of the hurried design of Truss’s plan, the government said it would also not be able to provide details until next week of how financial support will be delivered to households or businesses. Nevertheless, business leaders welcomed the scale of the ambition displayed in a package estimated to cost as much as £100bn for the first year alone.

Rain Newtown-Smith, chief economist at the CBI, the UK’s largest business lobby group, welcomed “bold and decisive action” that will “limit some of the damaging hardship faced by families this winter and for the wider economy”. “Big spending now needs big plans to recapture sustainable economic growth,” she added.

As well as support measures over the next few months, Truss also promised to rewrite the rules governing how customers buy electricity and gas – throwing the future of regulator Ofgem into doubt. Those policies included:

A review of the UK’s energy regulation that promises to deliver “fundamental reforms to the structure and regulation”
An energy supply taskforce, led by Madelaine McTernan, who currently heads the government’s vaccines taskforce, that will seek to agree long-term contracts for energy supply at steady prices

A review of the UK’s 2050 net zero target to ensure it is “not placing undue burdens on businesses or consumers”
McTernan, a banker who held senior roles at Credit Suisse and Lehman Brothers before entering government in 2017, will also look to strike better deals with solar, wind and nuclear power generators, who have seen their incomes rise because the price of electricity is pegged to the price of gas. Truss announced the government would be adopting an industry proposal to replace current contracts for renewable energy with a contracts for difference regime, which caps returns and should deliver a lower fixed price, over a longer term.

Economists said the package was likely to soften the impact of the long recession forecast for the UK as the energy crisis caused inflation to soar. The plan is expected to match – and in many cases exceed – the actions of other countries facing similar predicaments. It was reported on Thursday that Germany plans to give discounts to households and businesses on a certain amount of power in its €65bn plan.

Martin McTague, national chair of the Federation of Small Businesses, said the promise of bills support for the first time during the crisis was “a huge relief for millions of small businesses”. However, he said Truss offered “not enough information, yet, for them to plan”.

McTague also cautioned against a “cliff-edge after six months” if, as planned, the government withdraws support for companies. The government should have a “broad, realistic and fair” definition of which sectors are “vulnerable”, he said.

The business support is expected to focus on subsidies for wholesale gas prices. The government has promised to keep prices lower for all businesses for six months, and will consider how to cut back support to certain sectors in a review in three months’ time.

Households will see costs frozen at an average of £2,500 a year, a measure that is expected to support consumer spending. The government said it would also help reduce inflation, curbing the headline rate – which reached 10.1% in July – by four or five percentage points.

Chris O’Shea, chief executive of Centrica, the largest UK domestic energy supplier, said it was a “bold customer support package” that “will bring immediate relief to hard pressed households”.

Paul Dales of Capital Economics, a consultancy, said the package would “reduce inflation and limit the size of the recession”, but that it would also lead to higher interest rates and higher government debt.

Energy companies called for the government to reduce the use of fossil fuels.

Michael Lewis, chief executive of supplier E.ON UK, said the UK needed to make more “cheap, clean electricity” and “reduce our fossil fuel use”. However, he said he was “disappointed not to see a greater commitment to energy efficiency as a long-term solution to the current crisis, and as the foundation stone of that cleaner, greener future.”

Keith Anderson, chief executive of ScottishPower, called for “a three-pronged attack to tackle the issue at source by weaning the country off fossil fuels, doubling down on cheap, clean renewables and, importantly, decoupling electricity prices from gas.”

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