Chancellor set to double support for UK sectors hit by energy crisis

UK ministers are poised to double the government assistance provided to energy-intensive industries whose bills are soaring with an estimated £800mn three-year package to be announced on Friday.

Kwasi Kwarteng, business secretary, has been under pressure from big business to provide relief for the spiralling cost of gas that is driving up global energy prices. Kwarteng first indicated in October that he was pushing the Treasury for a solution.

At the time, some major manufacturers warned they could have to suspend production because of fast-rising energy bills, even before Russia’s invasion of Ukraine in February sent the price of gas even higher.

Under the agreement expected on Friday, the government will extend an existing programme called the “energy intensive industries compensation scheme”, which expired at the end of March for a further three years.

The scheme provides relief to strategic industries for the costs of being in the UK emissions trading scheme and carbon price support mechanism in their electricity bills. Under the ETS scheme, carbon-intensive companies are allowed to buy allowances that permit them to emit a tonne of carbon.

However, Kwarteng will make clear that the compensation scheme support package will more than double its previous level of about £130mn a year up to £280mn a year.

That estimate reflects that the UK ETS system has become more expensive because of the rising price of gas. Through the support package, companies receive compensation for 75 per cent of their costs under the ETS scheme.

On Friday, Kwarteng will say that the government has recognised the relatively higher price of electricity for British manufacturers compared with some continental rivals.

The minister is also expected to clarify which industries will be eligible for the support, including chemicals, ceramics, steel, cement and paper. The Treasury will continue to provide the support to companies on a quarterly basis.

Ministers are also considering forms of assistance, including increasing an existing “renewable obligation exemption” to 100 per cent from 85 per cent.

UK Steel, the trade group for the steel sector, said the extra help was a “major step forward” for the sector and would provide some relief in the face of “extremely challenging circumstances” for the industry.

The Chemical Industries Association, a trade body, had recently warned that without urgent intervention high energy costs could force factories to reduce operations and foreign-owned companies relocate overseas.

On Monday, the CIA said the extension by three years was “good news” but warned: “This compensation will only help a handful of sites and only targets a small portion of the policy cost present on their fuel bill.”

The recent rise in energy prices has created huge challenges for the government, which seeks to protect households from sudden price changes through an “energy cap” that changes every six months.

In April, that cap leapt by 54 per cent to nearly £2,000 and is set to rise again in October. Rishi Sunak, the chancellor, is under pressure to increase an existing package of support for British households, announced in February, ahead of a further price rise in the autumn.