Businesses will receive reduced support for their energy bills from the end of March as the Treasury attempts to cut the cost of compensating for soaring gas and electricity prices, the UK government has confirmed.

James Cartlidge, the exchequer secretary to the Treasury, said on Monday that the government would provide £5.5bn of “transitional support” for businesses over 12 months from 1 April 2023.

Cartlidge said the government’s funding of the Covid vaccine rollout, furlough and support for Ukraine had been “right but all have come at a cost”, adding: “It is not for the government to habitually pay the bills of businesses.”

Under the plan, non-domestic energy customers – including businesses, schools and charities – will automatically receive a discount of £6.97 a megawatt hour for gas and £19.61 a MWh for electricity. Cartlidge said this was the equivalent to a £2,300 saving for a pub, or £400 for a typical small retail store.

Businesses with energy costs below £107 a MWh for gas and £302 a MWh for electricity will not receive support. Representatives of small businesses labelled the move a “huge disappointment” as their support will be drastically reduced.

The new scheme will run until March 2024 to avoid a “cliff-edge” end to support this spring, which businesses had raised concerns about.

The existing scheme, which began in October, capped the unit cost of gas and electricity for all businesses until the end of March. Under the programme, the Treasury funded a discount on non-domestic customers’ bills, covering the difference between wholesale prices and a “government-supported price” of £211 a MWh for electricity and £75 a MWh for gas.

The Treasury has now replaced that scheme with an initiative that offers a discount on wholesale prices rather than a fixed price.

The move mirrors a similar reduction to the energy price guarantee for domestic energy consumers announced by the chancellor, Jeremy Hunt, in November. The EPG originally limited the typical annual household bill to £2,500 but that will be adjusted from April to a limit of £3,000 for a further year.

Major manufacturers with high energy bills, such as steel, glass and ceramic producers, will receive a greater discount, equivalent to £7,000 of support over 12 months.

They are less able to pass on increased costs to their customers because of international competition, the government said, so will receive a discount between the wholesale price of energy and a specific price threshold – £99 a MWh for gas and £185 a MWh for electricity.

Those businesses will receive a discount on 70% of their energy volumes and will be subject to a maximum discount of £40 a MWh for gas and £89.1 a MWh for electricity.

The cost of the business support to the Treasury has been estimated at about £18bn for the six months until the end of March. However, the burden to the public purse will reduce as the scheme becomes less generous and if a recent fall in wholesale gas prices is sustained.

Hunt had been expected to announce the revamp to the scheme in December but the delay has left businesses hanging on to calculate their energy budgets for 2023.

Hunt said on Monday that he had raised concerns with Ofgem, the energy regulator for Great Britain, that discounts were not being passed on by suppliers to customers.

Martin McTague, the national chair of the Federation of Small Businesses, labelled the move a “huge disappointment”. He said: “For those struggling, the discount through the new version of the scheme is not material. Many small firms will not be able to survive on the pennies provided through the new version of the scheme.”

Gareth Stace, the director general of UK Steel, said the scheme offered “some important certainty and stability for steel producers’ production costs during this extremely difficult economic climate”.

He added: “However, there will be concerns that the newly announced support falls short of that of competitor countries, including Germany.”

Tom Thackray, the Confederation of British Industry’s director for decarbonisation policy, said: “It’s unrealistic to think the scheme could stay affordable in its current form but some firms will undoubtedly still find the going hard.”

Separately on Monday, the government laid out proposals to incentivise investment into low-carbon technologies and avoid electricity blackouts.

The revamp of the capacity market – which is designed to ensure there is a reliable electricity supply regardless of the weather – will make it easier to prevent blackouts if intermittent sources of renewable energy are not available.