Eye-watering energy price cap may save businesses… but comes at a serious cost | Ed Conway | Business News

A month ago, a company called CF Fertilizers announced that it was suspending ammonia production at its plant in Billingham.

Ammonia, the basis for most modern fertilizers (and for explosives) is in some respects the most important man-made substance in the world.

Without it, about half of humanity would starve to death. Billingham is the UK’s last remaining fertilizer producer: so this is important.

The good news is that you can transport ammonia relatively easily. So CF – an American company – will stop producing ammonia here and bring it in from the US instead.

Why, you may be wondering, am I mentioning all of this on a day when the government has agreed to spend billions of pounds to support businesses? Because CF’s situation is at the heart of this.

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Ammonia is created using natural gas. The reason CF is halting production in the UK is that European gas prices are too high, and with US gas prices much lower, the total amount simply stops growing.

Chemical companies have a phrase for this kind of decision… “make or buy”.

At a certain cost, the economics of making something in a certain place no longer make sense; you have to buy that product from abroad instead.

In the case of CF, the pendulum switched from “buy” to “buy” earlier this summer. And that is the dangerous threshold that the Department of Business Energy and Industrial Strategy has taken into account when setting energy price ceilings for businesses.

When wholesale gas prices rise above around 220p per tank, businesses will be protected from the increase. The taxpayer will pay the difference between that and the wholesale price; Something similar happens with electricity.

The consequences of this are quite large. It represents one of the biggest economic interventions in modern times (though to be fair, with similar plans for households last week and plans further a few years ago, the This almost unprecedented engraving seems to appear more and more often).

As a result, certain businesses may have had to close, forcing us to buy products from abroad, possibly keeping things going for a little longer.

For smaller, less energy intensive businesses – pubs, hair salons and retail – the program will be helpful. That’s the difference between the towering bills and the world’s last bills.

None of this will prevent the economy from facing a severe downturn in the coming months. But it could help – and bring the UK closer to other European and Nordic countries, almost all of which are helping their energy-intensive companies keep operating or go into business. hibernate until energy costs drop.

But at what cost? The short answer is we don’t know. No one has a clue. When things settle down, the business plan only lasts for six months – unlike a two-year household energy guarantee.

According to Cornwall Insight, at current energy levels, the business plan could cost a whopping £25 billion. And if you assume it’s been extended for two years, that would work out to be £100 billion.

Add to that household energy security, with energy prices common a few weeks ago already worth £70 billion a year and the whole thing could add up to almost a quarter of a trillion pounds. This is an amazing amount.

But here’s the thing: we simply don’t know how much it will cost because that almost entirely depends on what happens to wholesale gas prices.

As it happens, that price has dropped a bit in recent weeks amid promising news about the amount of gas continental Europe has stockpiled and hopes that the war might just go on. in a short time.

If it continues to decline, these programs will likely be significantly cheaper; if it goes up they can be very expensive. We do not know. This is one of those situations that goes beyond financial arithmetic.

All of which helps explain why investors are quite worried about the UK’s public finances right now. The recent rally doesn’t fully explain the pound’s weakness.

The dollar is very strong right now, for one thing. However, it is definitely part of the story. You can say this because, firstly, the pound is also weak against other currencies and second, because other metrics show growing interest.

For example, consider credit default swaps as a form of insurance against an issuer defaulting on their debt. The CDS spread on UK debt is growing – from the lowest in the G7 to the highest.

Market participants deciding whether or not to invest in the country seem to be a little nervous. And one can understand their point of view.

The Truss government began the tenancy by signing two sizable blank checks. We were jumping into a pool, but no one knew how dangerous the water could become in the end.