Energy companies trying to take advantage of a £40bn government scheme to protect them from volatile prices will be barred from paying bonuses to executives and dividends to shareholders.
The Energy Markets Funding Scheme, devised by the Treasury and the Bank of England, aims to provide a safety net to help energy companies facing short-term funding 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 usually sell energy in advance to ensure a fixed price, but must hold a “minimum margin” deposit in case of default before supplying the energy. That cost has risen sharply as gas prices have risen rapidly this year, leaving companies struggling to find the funds to cover it.
Liz Truss announced the support plan last month, along with support for households and businesses to reduce bills this winter. On Monday, applications for the plan, which will be handled by commercial banks, were opened.
The Bank set out conditions for applications to the scheme, saying “energy companies will not be allowed to issue dividends, buy back shares, return capital, pay discretionary bonuses or make changes to senior management pay packages” .
The Bank has also stressed that the credit should be used in relation to hedging price fluctuations in the UK gas and electricity market for “risk or cost reduction”.
It only wants to support companies in good financial health. Energy providers’ balance sheets have been in the spotlight since the sector’s crisis began to escalate last year. More than 30 businesses collapsed as rising wholesale costs exposed their fragile finances, pushing up household bills.
Officials are understood to be keen to avoid a repeat of the business support offered to companies during the coronavirus pandemic, when some companies benefited from schemes such as time off and business tax relief while making big profits and issue dividends.
The Bank and Treasury also blocked large companies relying on the coronavirus business interruption loan scheme from paying bonuses and dividends.
The energy plan is open to retail suppliers with more than 750,000 household meters, as well as commercial gas and electricity suppliers.
Details of the plan stipulate that applicants must disclose whether they have a net zero transition plan and submit it to the Treasury within six months if they do.
Companies will pay different fees to participate in the program, depending on their credit rating.
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The Bank of England said: “This funding will help to avert the risk that the current extraordinary circumstances will leave firms unable to meet margin calls. In doing so, the scheme will support wider confidence in the market and will also increase liquidity as energy companies will be able to continue hedging activities.”
Last month it was reported that the UK’s biggest energy supplier, Centrica, the owner of British Gas, was in talks with banks to secure billions of pounds in additional credit to meet growing collateral demands. Centrica reinstated its dividend earlier this year, giving investors £59m, although its chief executive Chris O’Shea waived his bonus.
Fran Boait, chief executive of research and campaign group Positive Money, said: “It’s good to see that the Bank of England and the Treasury have learned the lessons of previous corporate bailouts and are finally getting serious to impose conditions on companies that access public funds.”
Separately on Monday, oil major BP announced it had agreed to buy US biogas producer Archaea Energy for $3.3bn (£2.9bn) in cash, plus $800m of debt.
The Texas company operates 50 renewable natural gas facilities and gas-to-energy landfills in the US. Biogas is a renewable fuel produced by the decomposition of organic matter such as animal waste and food scraps.
BP chief executive Bernard Looney said the acquisition would support our net zero ambition. The company’s goal has been set to reach zero by 2050 or earlier.
BP has made big profits this year as the war in Ukraine has pushed up wholesale oil and gas prices.