It’s been widely reported that the rising cost of energy will see bills soar this year and next, but it’s not just consumers that will be hit in the pocket – UK SMEs need to be braced for a serious increase in their monthly utility costs. Many businesses are already seeing it.
There isn’t one specific reason why costs are going up so fast, but it’s been reported that the price of wholesale gas has gone up by 250% since January 2020. A combination of factors including gas shortages across Europe, lower renewable energy generation and higher demand from Asia are all contributing to the problem.
Ofgem, the UK energy regulator, recently increased the domestic energy price cap to help suppliers recover money lost over the last 12 months. The price cap exists to control the cost of gas and electricity in the UK and limits the unit rate and standing charge that suppliers can bill for their default tariffs and it gets reviewed twice a year.
However, there is no such price cap for UK businesses. It leaves large and small companies very vulnerable to price increases and so far, the government has not agreed any measures to help, although it is expected that something will be announced this week.
Meanwhile, Industries have been left exposed to what Ofgem has called ‘unprecedented price rises of recent weeks’.
A BBC report summed up the current situation:
“Domestic customers have seen a rise in direct debit demands and bills from suppliers. They are, however, protected from the extreme cost of gas on the wholesale markets by the price cap. Businesses are not. Many are seeing instant and large increases in their energy bills.”
Heading into the busy winter period, the rising cost of energy presents a huge problem for businesses at a crucial time, with margins set to be squeezed and a huge amount of strain put on company cash flow in every sector. That’s on top of other factors, such as the rising cost of inflation, which could reach as much as 4 per cent by the end of the year according to the Bank of England, driven primarily by the cost of energy and goods.
Businesses left disappointed by lack of government action on energy costs
On Friday 8 October, leaders from a range of UK businesses met with the government and the Business Secretary, Kwasi Kwarteng calling for urgent action against the soaring cost of gas.
It was reported that talks between industry and government broke down during the meeting despite companied such as UK Steel – which represents the British steel industry – pushing for a solution. Other leaders from some of the UK’s most energy intensive industries also confirmed that the government failed to offer any reassurances about their concerns.
UK Steel warned that the additional costs could start to strangle manufacturing unless the government acted. Gareth State – UK Steel’s Director General, described how rising gas prices were are a major problem for UK manufacturers and “could lead to slowdowns in production and ultimately job losses.”
Smaller businesses are also at risk from the escalating crisis. Although some may have fixed prices on their tariffs right now, many are worried about rising prices when they come to an end – especially with no price cap in place to limit the size of the increases.
It’s not just gas prices that are causing the problem either, as electricity prices for SMEs also reached record highs in the second quarter of 2021.
Analysis by Cornwall Insight suggested that power prices reached the highest level since the research company’s records began in the second quarter of 2012.
At the time, Molly Lloyd, Analyst at Cornwall Insight, said: “The rise in SME prices correlates with a significant upward trend in wholesale prices, which saw wholesale energy costs rising to some of the highest since the Beast from the East in 2018.”
Here are just a few examples of the problem and how it effects different sectors in the UK:
- Construction companies in the UK are another of the most energy intensive with machinery, materials, and transportation just a few examples of where energy use is essential
- Care homes rely heavily on things such as heating, oxygen tanks and air flow mattresses, which cannot simply be switched off
- Restaurants and hospitality businesses need to heat rooms and power kitchens, refrigeration, and other equipment to make money
- Retailers need lighting for physical stores, heating to keep them warm and energy to run security and POS till systems
- E-commerce businesses – if you run your small business completely from home, you might not even have switched to a business energy deal, in which case your rates will increase in line with the price cap if you’re on a standard variable rate tariff. Or your supplier will increase the price of its fixed-rate deals, meaning you might feel the pinch next time you switch energy suppliers.
The list goes on and it’s clear that the long-term impact of energy price rises has the potential to rip through the whole economy.
Will heavy industries get support from the government for energy costs?
On Monday 11 October, Kwasi Kwarteng put forward a bid to the Treasury for financial aid specifically to help large firms in energy-intensive industries like chemicals, steel and ceramics. More news is expected on that soon.
However, there is concern that SMEs may be left behind. A survey from the British Chamber of Commerce found that more than two thirds of firms have not yet reported any increase in investment or cashflow since Covid restrictions eased in the summer, with smaller firms disproportionately impacted.
Mike Cherry from the Federation of Small Businesses (FSB) was quoted in the Independent as saying that “SMEs were now in a “very dangerous space” thanks to a swathe of rising costs”.
Calls for an energy price cap for UK small businesses is growing, but it remains to be seen if how far the government will stretch any potential support.
How can you protect your business from the rising cost of energy?
With the government yet to take action, and the details of and support package still unconfirmed, it’s clear that lots of businesses will need to prepare themselves for an inevitable squeeze on cash flow.
Several UK energy firms have already gone out of business because of the increasing cost of wholesale gas, and there are concerns that many others could follow suit this winter, which will only make the problem worse.
When asked if the government could help those energy companies, Mr Kwarteng has already stressed that the Government “will not be bailing out companies” and said: “there are no rewards for failing”.
Making sure you have a good understanding of your utility costs and when your current business energy tariff comes to an end is a good place to start when it comes to preparation. Consider making a cashflow forecast to help with this so you have a good understanding of income and expenditure in the months ahead. Our guide to SME cashflow management has some good tips to help you.
Protecting your cash flow with an injection of finance is another option to consider – especially with the winter months upon us. Capify has provided alternative finance to UK companies since 2008 and a business loan is one of the options that could help to protect your SME against significant pricehttps://www.capify.co.uk/small-business-loans/ increases you may already be seeing, or that will be inevitable in the weeks ahead.
You can check your eligibility here and to qualify for a Capify Business Loan you will need to meet the following criteria:
- Run a UK-based business as a limited company
- Process more than £10,000 a month through your business bank account
- Have at least 12 months of trading records