Keith Anderson, the chief executive of ScottishPower, has proposed that “all energy companies, including oil and gas producers, should pay into a multibillion pound fund to subsidise energy and gas bills from April”.
This has been motivated by the reversal of Liz Truss’ energy plan by Jeremy Hunt. Instead of the projected end date being in 2024, it will now end this April 2023.
Whilst this is an idea in its early stages, Anderson foresees that this can be funded by energy companies, and potentially partly funded by “public money”, suggesting that the government could also play a financial role.
Anderson explains that utility companies need to sit down with the government and talk though this solution, and how everyone can contribute.
What is the energy plan? The energy plan puts a cap on the “price per unit of electricity and gas that suppliers can charge”. This has been introduced because of sky rocketing prices of energy, intending to support the cost-of-living crisis. The average household would pay £2,500 a year for their energy bills.
With the new Chancellor of the Exchequer introduced into government, Hunt has scrapped this, with the ending date being marked for next April.
Price Caps When a price cap is put on any company, it creates a limit on how much a utility provider can charge, intending to protect consumers without damage to the businesses profits.
Such regulation tends to support companies to re-evaluate their business operations to reduce their costs to maintain profitability. However, it may have the effect of companies reducing their capital expenditure, meaning they will be less likely to invest profits in the company or even limit their services to control costs.
This should not be confused with revenue caps, which limits the total revenue a company can earn when they operate with few competitors.
Funds In the simplest terms, “A fund is a pool of money that is allocated for a specific purpose.”
Usually, certain amounts of money are deposited into a fund in a specified amount of time per year, by companies (and governments) which is then used for specific things.
In this case, it seems that Anderson seems to be proposing that several utility companies (which could include EDF, Octopus Energy, etc) would collaborate with the government to create a fund, which would be used to subsidise energy bills for consumers.
It is likely that different companies will have different agreements, and no one will pay the same amount. One way of calculating how much each company will pay could be by percentage of profits. The governments contributions will also look quite different, such as using their revenue from tax.
There are different kinds of funds, some which are more relevant to individuals for their own personal ventures, such as pension funds or even emergency funds. What we have been focusing on refer to investment funds, some of which are outlined below.
Some types of funds include:
Mutual funds: in which money is gathered from several investors, contributing to a diversified portfolio of assets.
Hedge funds: in which high net worth individuals and institutions assets are invested for a higher return.
Special revenue funds: created by governments, is used to pool together money to pay for specific public expenses.
Index funds: in which specific indexes performance is tracked to indicate the measure of change.
How are law firms involved? Law firms will be integral to regulating how something like this could take place.
Some practice areas that will be relevant include:
Competition – helping to navigate the changes in policies, and supporting clients stay on top of industry specific changes.
Corporate – to support client's commercial decisions by prioritising the biggest issues and highlighting any red flags, as well as ensuring that this is the right decision for the client.
Finance – to give advice on contributing to the fund, and how this will be structured and financed. Restructuring – in the case that this will be relevant, or as a ‘just in case’ option that the price cap or any other reason would cause a need for a company restructure.
Tax – to be mindful of any tax changes and considerations that this would require.
SOURCES
‘ScottishPower calls for private sector-backed fund to subside energy bills’, FT. https://www.ft.com/content/a3387bdc-5231-44e3-b756-e26c3edeefcf Price-Cap Regulation, Investopedia.
https://www.investopedia.com/terms/p/price-cap-regulation.asp Fund: Definition, How It Works, Types and Ways to Invest, Investopedia. https://www.investopedia.com/terms/f/fund.asp
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