Energy companies attempting to tap a £40bn government scheme to protect them from volatile prices will be blocked from paying bonuses to executives and dividends to shareholders.
The energy markets financing scheme, devised by the Treasury and the Bank of England, is intended to offer a safety net to help energy firms facing short-term financing problems.
The government is concerned that unpredictable conditions in the wholesale gas market, exacerbated by the war in Ukraine, could leave energy suppliers exposed.
Energy companies typically sell power in advance to secure a fixed price but must maintain a “minimum margin” deposit in case of default before they supply the power. This cost has risen sharply as gas prices have escalated rapidly this year, leaving companies struggling to find funds to cover this.
Liz Truss announced the support scheme last month, alongside support for households and businesses to bring down bills this winter. Applications to the scheme, which will be handled by commercial banks, opened on Monday.
The Bank laid out the conditions for applications to the scheme, and said “energy firms will not be allowed to issue dividends, share buybacks, return of equity, discretionary bonus payouts, or make changes to senior management pay packages”.
The Bank also stressed that credit must be used in relation to hedging of price fluctuations in the UK gas and electricity market for the “reduction of risk or costs”.
It only wants to give the support to companies in sound financial health. Energy suppliers’ balance sheets have been in the spotlight since the industry crisis began to escalate last year. More than 30 companies collapsed as the increase in wholesale costs exposed their fragile finances, raising household bills.
It is understood officials are keen to avoid a repeat of the business support offered to companies during the coronavirus pandemic, when some companies benefited from schemes such as furlough and business rates relief while raking in big profits and issuing dividends.
The Bank and the Treasury also blocked large businesses drawing on the coronavirus large business interruption loan scheme from paying bonuses and dividends.
The energy scheme is open to retail suppliers with more than 750,000 domestic meters as well as commercial suppliers of gas and electricity.
The details of the scheme stipulate that applicants must disclose whether they have a net zero transition plan and send it to the Treasury within six months if they do.
Firms will pay different fees to participate in the scheme, depending on their credit rating.
The Bank of England said: “This financing will help avoid the risk that the current extraordinary circumstances result in firms being unable to meet margin calls. By doing so, the scheme will support wider confidence in the market and also increase liquidity as energy firms will be able to continue to engage in hedging activity.”
Last month it was reported that Britain’s largest energy supplier, Centrica, the owner of British Gas, was in talks with banks to secure billions of pounds in extra credit to meet rising collateral demands. Centrica reinstated its dividend earlier this year, giving investors £59m, although its chief executive, Chris O’Shea, waived his bonus.
Fran Boait, an executive director of the research and campaign group Positive Money, said: “It’s good to see that the Bank of England and Treasury have learned the lessons of previous corporate bailout schemes and are finally getting serious about imposing conditions on companies accessing public funds.”
Separately on Monday, the oil firm BP announced it has agreed to buy the US biogas producer Archaea Energy for $3.3bn (£2.9bn) in cash, plus $800m of debt.
The Texas company operates 50 renewable natural gas and landfill gas-to-energy facilities across the US. Biogas is a renewable fuel produced by the breakdown of organic matter such as animal waste and scraps of food.
The BP chief executive, Bernard Looney, said the acquisition would “support our net zero ambition”. He has set a company target of hitting net zero by 2050 or sooner.
BP has notched up huge profits this year as the war in Ukraine has pushed up wholesale oil and gas prices.
