27th October 2026
Institute for Fiscal Studies warns against repeating costly energy subsidies as businesses face another price shock.
British businesses are facing renewed pressure from rising energy prices, but the Government must think carefully before introducing another large support package. That is the central message from the Institute for Fiscal Studies (IFS), which has set out five principles for designing effective business energy assistance.
In an analysis published on 26 October, economists Peter Levell and Jakob Schneebacher argue that support may be justified, but it should be temporary, carefully targeted and designed to avoid wasting taxpayers' money or discouraging businesses from reducing their energy consumption.
The debate comes at a difficult time for the Chancellor, with renewed conflict in the Middle East pushing up oil and gas prices. UK businesses are already contending with relatively high energy costs compared with many other developed economies.
The Government therefore faces a familiar dilemma. Doing too little could threaten businesses and jobs, while doing too much could add substantially to public spending and leave the country paying for subsidies that are neither necessary nor sustainable.
Lessons from the previous energy crisis
Following Russia's invasion of Ukraine in 2022, the Government introduced the Energy Bill Relief Scheme and its successor, the Energy Bills Discount Scheme, to help businesses manage soaring energy costs.
Together, these schemes are estimated to have cost £7.8 billion over 18 months.
More recently, the Government has announced the British Industrial Competitiveness Scheme, intended to reduce electricity bills for eligible manufacturers by up to 25% from April 2027. Its estimated annual cost is up to £600 million.
Eligibility was expanded in April 2026, from around 7,000 businesses to more than 10,000, with a one-off backdated payment also introduced.
Other measures have included assistance for certain energy-intensive industries and support aimed at businesses affected by higher fuel costs.
However, the IFS argues that the existence of high energy bills does not automatically justify subsidising every business. The crucial question is what government assistance is intended to achieve and whether there is a more effective way of providing it.
1. Identify the businesses that genuinely need help
The IFS identifies three main reasons why temporary support may be justified.
First, a business may be fundamentally viable but face a short-term cashflow crisis because energy costs have risen sharply. Without help, it might close unnecessarily, destroying productive capacity that could be expensive to rebuild.
Second, a sudden closure could devastate employment in a community that depends heavily on an energy-intensive industry. Once jobs disappear, the consequences can extend well beyond the original business.
Third, certain industries may be strategically important to the UK. Losing a critical supplier could leave other businesses dependent on imports, potentially creating problems for national security or the resilience of essential supply chains.
These are different problems and require different solutions.
A temporary loan or loan guarantee might help a business that needs cash now but is expected to recover. A grant could be appropriate in other circumstances, while strategic industries may require a longer-term policy.
The IFS's argument is that assistance should address a clearly identified problem rather than simply reduce everyone's energy bill.
2. Avoid subsidies that discourage energy saving
One of the most important warnings concerns how support is delivered.
Subsidising every unit of electricity or gas used reduces the financial incentive for businesses to conserve energy, improve insulation, upgrade equipment or invest in more efficient production methods.
The IFS points to Germany's response to the 2022 energy crisis as an example of a different approach. For large industrial electricity users, support applied to 70% of historical consumption, while additional consumption was charged at the higher market price.
This helped businesses manage exceptional costs without removing the incentive to save energy.
The IFS suggests that fixed payments or support linked to historic consumption can often achieve a similar objective. Such arrangements can be combined with targeted assistance where necessary.
There is also a longer-term issue. If businesses expect the Government to subsidise energy whenever prices rise, they may have less incentive to prepare for future shocks.
The IFS also argues that the UK should review the taxes and levies applied to business energy. Changes could reduce unnecessary distortions while maintaining appropriate incentives to cut carbon emissions.
3. Target assistance carefully
Poorly designed schemes can send money to businesses that do not need it while missing those facing genuine financial difficulties.
The IFS uses the pandemic-era Bounce Back Loan Scheme as a warning. According to estimates cited in its analysis, around 37% of loans by value, equivalent to approximately £17 billion, were expected not to be repaid. Fraud losses were also expected to be unusually high.
Energy support must therefore be designed with proper checks.
The Government could use existing information, including HMRC records, smart-meter data and business payment information, to help identify firms experiencing financial pressure.
This would not remove every difficulty, but it could make assistance more accurate and reduce opportunities for abuse.
4. Recognise that small businesses face different challenges
Businesses do not all respond to higher energy prices in the same way.
The IFS cites research suggesting that larger firms were more likely to increase capital investment following the 2022 crisis, potentially allowing them to reduce their energy use. Smaller firms were more likely to build cash reserves and were slightly more likely to leave the market.
This matters because a large manufacturer may have the resources to invest in new machinery, while a small shop, hotel, restaurant or workshop may struggle to pay its immediate bills.
Support for smaller firms might therefore focus on short-term cashflow, while longer-term investment schemes could help businesses with opportunities to improve energy efficiency.
The challenge is to ensure that subsidies encourage additional investment rather than simply paying for improvements businesses would have made anyway.
5. Measure whether support actually works
Finally, the IFS argues that new schemes should be evaluated from the beginning.
Previous support packages were introduced quickly, with insufficient arrangements for monitoring how the money was used or whether it reached the businesses most in need.
The Government already has access to business surveys and administrative information that could help assess the effects of assistance while a scheme is operating.
That would allow ministers to make adjustments rather than waiting until the money has been spent.
What does this mean for the Budget?
The IFS is not arguing that businesses should simply be left to cope with every energy shock. Its message is that public money should be used to solve specific problems, not to hold energy prices artificially low for everyone.
That distinction will matter as the Chancellor prepares the Budget. Public finances are under pressure, and repeating the scale of the 2022 support package may be neither affordable nor desirable.
For Scotland and areas such as Caithness, the issue has particular importance. Small businesses in tourism, hospitality, retail and services may have limited room to absorb higher bills, while energy-intensive industries can be important employers and suppliers.
A national scheme must therefore recognise different circumstances without becoming so complicated that smaller firms struggle to access assistance.
Ultimately, the Government has to balance three objectives: protecting viable businesses and jobs, maintaining incentives to reduce energy consumption, and keeping the cost to taxpayers under control.
The IFS's five principles offer a framework for making those choices. The test of any new scheme will be whether it provides meaningful help to businesses that genuinely need it, without creating an open-ended promise that taxpayers will always pick up the bill when energy prices rise.
Source: Institute for Fiscal Studies, What does well-designed business energy support look like?, Peter Levell and Jakob Schneebacher, published 26 October 2026.
Read the full report at
https://ifs.org.uk/articles/what-does-well-designed-business-energy-support-look