What does well-designed business energy support look like?

Energy prices are rising sharply once more. Renewed conflict in the Middle East has pushed prices of Brent crude to a five-month high and European gas prices to their highest levels since 2022. UK businesses are again facing large and sudden increases in their energy costs. This comes against a backdrop where UK businesses face some of the highest energy prices in the developed world (Jarvis, Levell and Upton, 2026).

Unsurprisingly, there has been growing pressure on the Chancellor to find ways to bring energy costs down in the upcoming Budget. In 2022, and in response to the Russia–Ukraine war, the government introduced the Energy Bill Relief Scheme (EBRS) and subsequently the Energy Bills Discount Scheme (EBDS). Together, these are estimated to have cost £7.8 billion over 18 months (Office for Budget Responsibility, 2023).

More recently, in 2025, the government announced the British Industrial Competitiveness Scheme (BICS) as part of the Industrial Strategy (Department for Business and Trade, 2025). The scheme is currently set to cut eligible manufacturers’ electricity bills by up to 25% from April 2027 by removing a variety of policy levies, at an estimated cost of up to £600 million per year (Department for Business and Trade, 2026). In April 2026, the government announced an expansion of eligibility by more than 40% (from 7,000 to over 10,000 businesses) and introduced a one-off backdated payment equal to the support firms would have received had the scheme been in place from 1 April 2026. Details of how the £600-million-per-year scheme would be funded are to be announced in the 2026 Budget. The introduction of backdated payments means that the BICS, initially a longer-term industrial strategy policy, now doubles as short-term energy support.

In May, the government announced further support to help firms deal with rising petrol and diesel costs (in the form of an extension of the 5p fuel duty cut to the end of 2026, a cut in red diesel, biodiesel and bioblend duties, and a 12-month vehicle excise duty holiday for hauliers), increased the generosity of tax deductions for miles driven in personal cars and vans (HM Revenue and Customs, 2026) and provided targeted support for the chemicals and ceramics industries.

So far, the announced measures are far less wide-ranging and costly than those introduced in the last energy shock. But business groups are calling for the government to go further. Should the government do more and, if so, how? This comment sets out five principles for well-designed business energy support schemes.

Principle 1: target specific market failures

The government should not be in the business of permanently subsidising energy prices, either for firms or for households, as doing so distorts incentives to save energy and to invest in more energy-efficient technologies. But temporary support can be desirable to smooth a transition to structurally higher energy prices, or to deal with a short-term shock.

Temporary support for households is justified as a form of social insurance because many households lack the savings buffers to deal with temporary spikes in prices, as we have discussed in other work (Levell, O’Connell and Smith, 2025). The rationale for supporting firms is different. Ultimately, the government cares about the welfare of households, and not firms per se. The impact of high energy prices on firms therefore matters because of what it means for their employees, owners and customers.

In many cases, in order to achieve distributional or social insurance goals, support is best given directly to affected households through targeted transfers. The case for providing subsidies to firms should rest on the presence of specific market failures. Clarity over these objectives is important both to help the government design well-targeted schemes and to assess their effectiveness after the fact.

There are three main rationales for temporary support for firms when energy prices spike, each implying a different policy design.

Preventing inefficient exit. Some firms may be viable at long-run energy prices but face short-run liquidity constraints that threaten their survival. Credit markets are imperfect and even firms that could in principle repay their debt from future profits may not be able to secure a loan. In such cases, the aim of support is to avoid the destruction of productive capacity that would be costly to rebuild. This argument implies temporary, targeted support focused on firms facing financial pressure they would not have faced otherwise. Loans or loan guarantees are the natural instrument to address this problem, since the underlying problem is a gap between short-run cashflow and long-run viability.

Preventing concentrated job losses. Policymakers may wish to prevent sudden, concentrated job losses in communities that depend on energy-intensive industries, particularly if they believe that short-term employment losses could become entrenched. This is related to the first rationale, because inefficient exit also destroys jobs. But it is a distinct argument in one respect: policymakers may wish to slow job losses even when exit is efficient, if there are additional frictions in the labour market, such that short-term disruptions have long-term negative consequences.

Preserving strategic resilience. If a critical supplier exits, then downstream firms may also fail. This argument has particular bite in areas of national security, such as arms production, and upstream industries, such as steel, where exits could leave the UK dependent on suppliers in non-aligned countries. If strategic resilience is the reason for intervention, governments may be willing to sacrifice some economic efficiency to avoid catastrophic outcomes in the worst cases. This rationale can be an argument for permanent support if the strategic vulnerability is itself permanent, rather than a consequence of the temporary price shock.

All three rationales point towards support that is temporary and targeted. What differs across the three is which firms should be targeted and what form the support should take.

Principle 2: do not distort incentives at the margin

Both the EBRS and the EBDS operated as per-unit subsidies on energy consumption. They reduced the wholesale price firms faced for each unit of gas or electricity consumed. This tends to be an expensive way to deliver support, because it blunts the price signal that encourages firms to reduce energy use, at a time when the quantity of available energy has decreased.

Germany’s energy price support scheme (the so-called Strompreisbremse), introduced in late 2022 as part of a €200 billion package, offered a better design. For large industrial consumers, the electricity price was capped at 13 cents per kWh plus network charges, taxes, duties and levies (based on a translated version of Federal Ministry for Economic Affairs and Energy, 2024), but only for 70% of historical consumption. Any additional electricity use was then purchased at the (higher) market price. This helped firms with higher energy costs, while preserving their incentive to reduce energy consumption.

Lump-sum transfers (or subsidies that apply only to a fixed quantity of historical consumption) are better at preserving the price signal than energy price caps. Studying the UK’s 2022 household energy support package, Levell, O’Connell and Smith (2025) estimate that the efficiency costs of the Energy Price Guarantee amounted to 12% of total relief spending. The same logic extends to firms: the more support delivered through the price, the greater the potential waste. Moreover, when viewed on a global scale, large-scale energy subsidies are a beggar-thy-neighbour policy. If many countries adopt them, they can push global prices higher and raise the overall cost of fiscal support (Auclert et al., 2023).

More fundamentally, energy price shocks shift resources across firms and industries. Some of this shift is efficient: resources move from less productive to more productive uses, and firms that cannot adapt exit the market. Dampening the price signal through price caps prevents this adjustment, with long-run productivity costs. A well-designed temporary scheme should support firms through any transition to higher prices without trying to prevent it.

Support also changes how firms prepare for the next shock. If firms expect government to step in whenever energy prices spike, they have less reason to invest in energy efficiency, and a government that has supported firms once will struggle to commit not to do so again. A scheme’s full cost therefore includes these weaker incentives. The best protection is to make support visibly temporary and exceptional.

One disadvantage of lump-sum transfers is that they can be difficult to target to those most exposed to the price increase, whereas price subsidies automatically reach those with high energy consumption. Therefore, support packages may involve a combination of the two. The mix should be weighted towards transfers where firms can adapt to higher prices by investing in new technologies, and where government can identify and target exposed firms more easily.

One important consideration for the UK context is that businesses’ incentives to use energy are, in some ways, already distorted at the margin. Some business energy use is already subject to higher implicit carbon taxes than household energy use (Gadenne and Upton, 2025). This creates unequal carbon prices across the economy, raising the costs of meeting the government’s decarbonisation objectives. Various other levies and charges also push up marginal electricity costs in order to recover the fixed costs of the electricity system, artificially discouraging electricity use. While the government has acted to temporarily remove some of these charges from households’ per-unit electricity costs, it has yet to do the same for most businesses. A permanent rationalisation of energy taxation, creating more uniform incentives to reduce carbon dioxide across activities, and making sure electricity consumption reflects the social costs of production, could lower unit costs for businesses at the same time as reducing distortions. This would ideally be part of a longer-term plan for energy taxation across the economy (Jarvis, Levell and Upton, 2026).

Principle 3: target support carefully

In addition to choosing a clear rationale for support, and designing a policy that as far as possible preserves price incentives, policymakers face another challenge: how to reach the firms necessary to achieve the objective (ensuring the effectiveness of the policy) without subsidising other firms (keeping down fiscal costs).

The pandemic-era Bounce Back Loan Scheme is a cautionary example of how targeting can go wrong. The government prioritised speed over verification, relying on self-certification by applicants. According to the National Audit Office (2021), the then-Department for Business, Energy and Industrial Strategy subsequently estimated that 37% of loans by value (around £17 billion) would not be repaid, with fraud losses likely well above normal public-sector levels. This example suggests that when eligibility is easy to claim and hard to verify, the fiscal cost balloons and support may not reach those who need it most.

Better approaches to targeting temporary support would use administrative and financial data that are hard for firms to manipulate. Past data from administrative sources such as smart meter data, HM Revenue and Customs (HMRC) records and payment flow data give a clearer picture of which firms likely face financial distress, and would help prevent firms manipulating metrics to increase the support they receive.

Principle 4: account for differences in firm responses

One of the clearest findings from the 2022 energy crisis is that firms do not respond to energy shocks in a uniform way. In recent research, we use linked real-time survey and administrative data on UK firms and find large differences within and across industries (Fetzer et al., 2026a). Large firms were more likely to increase capital investment, presumably to move towards less energy-intensive production processes. Small firms, by contrast, built up cash buffers and were slightly more likely to exit.

These differences have direct implications for scheme design, connecting back to the choice of rationale and targeting decisions. If the objective is to prevent inefficient exit of financially constrained firms, then support should be directed at small firms facing temporary liquidity pressure. These firms may benefit most from temporary cashflow support in the form of grants or loans. If the objective is instead to bring forward long-run structural adjustments that lower firms’ energy use, then the relevant question is how to lower the cost of energy-saving capital for firms with the largest potential to do so. Policies with a longer-term focus on increasing industrial energy efficiency, such as the now-closed Industrial Energy Transformation Fund or recently announced decarbonisation support for the ceramics industry, can thus play an additional role in reducing firms’ costs during the ongoing crisis. The risk, as with any investment incentive, is that firms that were already planning to invest may pocket the subsidy without changing behaviour. Conditionality and time limits reduce this problem, though they do not eliminate it.

Principle 5: monitor and evaluate policies in real time

A recurring weakness of UK business support schemes is the absence of built-in evaluation. The EBRS and EBDS were introduced at speed and with no mechanism to monitor how firms were using the support, or whether it was reaching those who needed it most.

This is a missed opportunity. The UK already has the data infrastructure for this: high-frequency administrative and survey data, such as the Office for National Statistics (ONS) Business Insights and Conditions Survey and the Bank of England’s Decision Maker Panel. Our recent research demonstrates how these can be linked to track firm responses in near real time (Fetzer et al., 2026b).

Any new UK scheme should be designed with evaluation in mind from the outset, allowing us to learn lessons for future crises. This means being clear about the counterfactual: what would have happened to supported firms in the absence of the scheme, and how do we estimate that? The counterfactual is hard to construct after the fact if eligibility is near-universal. Building in variation, whether through phased rollout, pilots or carefully designed eligibility criteria, makes credible evaluation possible. Ideally, it also means committing to sharing anonymised, firm-level data on programme take-up with the research community. The ONS Secure Research Service and HMRC Datalab provide the infrastructure for this. Rapid, structured data sharing would allow independent researchers to evaluate a scheme’s effectiveness while the policy is still in operation, enabling mid-course corrections where needed.

Conclusion

The government faces mounting pressure to introduce business energy support as the effects of the latest Middle East oil shocks continue to feed through to UK energy costs. The fiscal space is much tighter than in 2022. Repeating the scale of the previous support packages may well be infeasible as well as undesirable. Thus, good design becomes essential. This comment has set out five business support design principles: target specific market failures, because different market failures imply different policies; avoid distorting incentives at the margin by using lump-sum subsidies or loans rather than per-unit price support and by fixing existing distortions in the energy tax system where possible; target support using past administrative data that firms cannot easily manipulate; account for differences in how firms respond to energy shocks; and build evaluation into any scheme from day one.