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3. Energy Price Guarantee (EPG) and Energy Bill Relief Scheme (EBRS)
Publication date: 30 Mar 2023
uk In depth INT2023-03
Background
The Energy Prices Act 2022 provides that the Secretary of State may reduce the amounts that would otherwise be charged to customers for electricity and gas.
The Energy Price Guarantee (EPG) provides relief for domestic customers and was implemented through EPG scheme documents, made binding on the relevant parties by scheme agreements in late 2022. It was announced in March 2023 that the EPG would be extended for a further three months until the end of June 2023.
The Energy Bill Relief Scheme (EBRS) provides relief for non-domestic customers and was enacted through The Energy Bill Relief Scheme Regulations 2022 (SI 2022/1100) (the ‘regulations’) in late 2022. After March 2023, the EBRS is replaced by the Energy Bills Discount Scheme (EBDS). This has similar requirements to the EBRS, with an additional level of support available for high energy users (Energy and Trade Intensive Industries).
The EPG and EBRS are different schemes, however, the accounting considerations are similar, so they are considered together in the analysis below. Any differences between the schemes are noted, where applicable.
Under the schemes, the prices an energy supplier is entitled to charge to a customer is restricted to certain prices agreed by the government. At the time of creating the arrangements, these were below wholesale energy prices. The government prices were set until December 2022 and in late 2022 the new government prices were set for the period from January 2023 to March 2023. At a high level, the schemes identify a base support amount or discount on wholesale prices and require the supplier to reduce the supply price by that amount. The methodology between EPG and EBRS varies slightly depending on whether a customer is on a fixed price or variable arrangement (including any hedging implications for non-domestic customers). However, the overall outcome is that the amount charged to customers per unit of energy will be capped at the relevant government supported price. Customers will be billed the net amount, that is after recognition of the discount.
The discount provided to customers is calculated each month and, following notification to the government administrator/Secretary of State, the discount is settled retrospectively into a bank account nominated by the supplier.
Accounting implications
FAQ 3.1 – Are amounts received by energy suppliers under the EPG or EBRS a government grant?
Under the EPG and EBRS schemes, the energy supplier is restricted from charging the wholesale price (similar to other price regulation regimes) to the customer and will charge the government supported price. The government then provides funding to the supplier that reimburses it for compliance with the price reduction and other requirements of the regulations. The reimbursement will ensure that the supplier does not make a loss where it has to buy energy at wholesale prices to supply to the customers. However, the reimbursement is against the difference between wholesale prices at a point in time and the government supported price. The supplier may not actually be paying those wholesale prices and, as such, this is not directly a reimbursement of costs incurred.
PwC understands that EPG and EBRS payments received by energy suppliers are being treated as government grants by HMRC (these are exempt from VAT) rather than as consideration for the supply of domestic energy. See VAT on fuel and power notice 701/19. This supports the view that the amount receivable is a grant to the supplier, rather than amounts received to settle customers' balances by the government on their behalf.
PwC’s view is that the supplier recognises revenue in accordance with IFRS 15 for the amounts they are allowed to charge under the scheme rules or regulations. That is, the supplier’s revenue from contracts with customers is the amount after subtraction of the ‘discount’ required by the schemes from the transaction price.
The discount received/receivable can be seen as a government grant since it reimburses the supplier for the discount/reduction against the wholesale price that the supplier is not permitted to charge customers. Our view is that this is a government grant receivable by the supplier and not by the customer since the customer benefits from a lower price (like other regulated utility prices) and the supplier receives cash to cover the shortfall from the discount it is required to provide to customers as a condition of the scheme.
In summary, our view is that the amount receivable from the government may be recognised as a credit to the income statement. It is accounted for as grant income received from the government [IAS 20] rather than under IFRS 15 as consideration from the contract with the customer.
FAQ 3.2 – How should grant income in relation to EPG or EBRS be presented in the energy supplier’s income statement?
The grant appears to be an income grant rather than compensation for higher supplier costs, therefore, the amounts receivable will be recognised as ‘other income’ and not offset within cost line items in the income statement.
Alternatively, in our view, the supplier may present a combined ‘revenue’ figure with a split between revenue from contract with customers [IFRS 15] and other revenue/grant income (on the face of the income statement or in the notes to the financial statements). This is on the basis that the reimbursement of the discount still meets the wider definition of revenue in IFRS 15, being “income arising in the course of an entity’s ordinary activities”. Our IFRS Manual of Accounting FAQ 17.2.3 How should an entity account for a relief programme to support entities with lost income? provides further detail on this.
The reimbursement of the discount also meets the definition of revenue in FRS 102, “the gross inflow of economic benefits in the period arising in the course of the ordinary activities of an entity”. However, it might not meet the Companies Act definition of turnover for suppliers that use Companies Act formats for their accounts.
Entities will need to ensure that there is transparent disclosure of their involvement in the schemes, the accounting policies applied and the impact on the financial statements, including any disclosures required by the accounting standards for government grants.
FAQ 3.3 – How should amounts received by energy suppliers under the EBSS be presented in the cash flow statement?
It would be appropriate for cash receipts under the EPG or EBRS to be classified as cash flows from operating activities in the cash flow statement. Under the indirect method, this is likely to flow through from profit or loss and working capital movements rather than requiring addition through a separate line.
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