Flexible monthly business insurance
Let’s face it, we are currently in the grip of an energy crisis, with headlines reminding us daily about the financial squeeze of soaring energy bills and bleak predictions abounding about the future cost of gas and electrical supplies.
Where do small businesses fit in this unhappy picture? Let’s examine what the state of commercial energy use is in the UK, what the future may hold and how SMEs can face up to rising utility costs.
Why are energy prices rising?
Both businesses and individuals across the UK will have noticed that energy prices have been rising, with a major spike in household energy bills expected in April 2022. The energy industry regulator in the UK, Ofgem, is raising the price cap on household energy bills by 54% in April 2022, with another significant rise expected in October unless global wholesale prices fall. With wholesale gas prices having risen by 250% in the 12 months between January 2021 and January 2022, a further rise is expected.
Unlike residential households, businesses on commercial energy tariffs are not protected by any price cap and tariff prices have been rising in reaction to the spike in wholesale energy prices around the world.
So what’s causing this significant rise in wholesale prices?
- Squeeze on global supply caused by an unusually cold European winter in 2020/21
- Further demand on global supply due to hot summer in Asia (particularly China) in 2021 and the demand for air conditioning
- Limits on Russian exports of gas as part of geopolitical maneuvering over European tensions
What are the consequences of higher bills for small businesses?
Research by Tyl by Natwest suggests that nearly two thirds of businesses in the UK spend between 5% and 20% of their total outlay on energy. This represents a significant proportion of their total running costs, meaning that large price rises will have a dramatic knock-on effect on businesses’ ability to operate at a profit. Indeed, the same survey found that “70% of SME owners believe that the cost of their energy bill impacts the growth of their business”.
Energy bill rises for small vs large businesses
Small enterprises (those with fewer than 50 employees) represent the vast majority (roughly 99%) of all businesses in the UK and are considered the backbone of all UK industry. While commercial energy tariffs will rise for all businesses, small and large, the impact will be felt most keenly by small businesses with tighter margins and lower cash flow.
Can price increases be passed onto consumers?
With tight margins and restricted cash flow, small businesses are less well placed than their large corporate cousins to swallow increases in business running costs, such as a rise in energy bills. A retail giant like Tesco will have the flexibility to swallow smaller profit margins (or even losses) in the short-to-medium term while local independent retailers do not enjoy such luxury in their finances.
Small businesses are more likely to be forced to pass on their running cost increases to consumers through price hikes, just in order to survive. This in turn puts them at a competitive disadvantage against larger companies, further disincentivising customers from choosing small businesses.
What support is available?
In February 2022, the Chancellor of the Exchequer, Rishi Sunak, announced a £350 rebate on household energy bills to help counter the 54% increase in the energy price cap.
However, this will not apply to businesses on commercial tariffs. The only businesses that might benefit from the announced rebate are sole traders and self-employed people working from home. If a freelancer, for instance, lives and works at home with a non-commercial energy tariff, then the rebate would be applied, and price caps will limit the amount that energy companies can charge per unit of energy used.
For businesses on a commercial tariff, cost savings will have to come from elsewhere. Let’s examine what support is (or is not) available to SMEs up and down the country.
From energy suppliers
Ofgem, the energy industry regulator in the UK, recommends that small businesses who are struggling to pay their energy bills contact their suppliers directly to discuss and potentially arrange a payment plan that would spread out your energy bill payments over a longer period, or in smaller installments. You should create a budget before contacting your supplier so you know in advance what kind of payment plan would be affordable.
UK Government support
Ever since the Chancellor’s announcement about a rebate for households to reduce the energy bill rise in April 2022, there has been pressure on the government from the business community to extend the financial support to small firms. The National Chair of the Small Business Federation, Mike Cherry, explained that small businesses “face many of the same challenges as consumers in the energy market, but without the same protections”.
However, at the time of publication, there have been no announcements from the government about any package of financial support for businesses to tackle rising energy bills.
The impact of price rises will not be seen equally in each country and region in the UK. For instance, currently SMEs in the Yorkshire and Humber region spend more on energy bills each year than any other region, at more than £5,000 per year on average.
The UK government has a handy search function to find all of the grants and loan schemes available for businesses looking to reduce their energy bills, around the UK. This list will evolve over time as different local authorities secure funding and distribute it. While you may not see your local area represented on the list, it’s worth checking regularly as funding opportunities emerge throughout the year.
An example of a smaller-scale localised business support scheme to increase energy efficiency is to be found in East Sussex, where local SMEs can apply for up to £1,000 to kick start energy efficiency projects that could reduce their overall energy bills in the future.
As far as schemes that are eligible across an entire country, Zero Waste Scotland offer SMEs in Scotland access to a government-backed loan scheme of up to £100,000 to install energy efficient lighting, heating and insulation.
Energy efficiency improvements
It may seem like a simple solution to combat rising energy prices, but as your business’ bill will likely be calculated based on a price per unit of energy used, by using less energy, you’ll pay less each year.
Reducing energy consumption is already a major talking point in the fields of sustainability and environmentalism, with increased energy efficiency associated with reducing organisations’ carbon footprints. As well as being better for the environment, becoming more energy efficient will be better for your business’ bottom line.
Improving energy efficiency will always save your business money in the long run, with research by The Carbon Trust suggesting that a “20% cut in energy costs represents the same bottom line benefit as a 5% increase in sales in many businesses”.
There are many ways to make your business more energy efficient, including some simple, easy to implement steps:
- Change your lightbulbs from older filament bulbs to modern, efficient LEDs or halogen bulbs
- Turn down the thermostat. Overheating an office space by just 1°C can increase your business’ energy bill by 8%
- Turn off computers overnight. Even on standby, a computer left on overnight can cost your business an additional £35 per desk, per year, according to EDF energy
Reducing carbon emissions
As mentioned above, increased energy efficiency amongst businesses can help contribute to lower carbon emissions which are crucial in combating climate change. The UK government offers certain incentives to businesses to reduce their carbon footprint and invest in ‘green’ technology. For instance, most businesses will be able to claim additional capital allowances when buying energy efficient, or low or zero-carbon technology, reducing your overall business tax bill and saving you money, all the while helping to improve energy efficiency and reducer your bill.
Ever since British Gas and the National Grid were privatised more than 30 years ago, private gas and electricity suppliers in the UK have operated in competition with one another, in a bid to harness market forces to improve efficiency and reduce cost to the consumer.
Whether or not this strategy has worked is a different debate altogether, but what a privatised energy sector does bring with it is an element of consumer choice, for both private individuals and businesses.
As prices of commercial energy tariffs rise, one way to draw down the cost of your energy bill may be to switch supplier, taking advantage of new customer discounts. Because of the lack of a price cap in the commercial sector, a switch of supplier can have a serious impact on how much you pay for your gas and electricity.
This content has been created for general information purposes and should not be taken as formal advice. Read our full disclaimer.
We've made buying insurance simple. Get started.
- 23 September 20225 minute read
Your weekly business news roundup that allows you to speed through the top news stories affecting the UK’s small businesses, all in under 5 minutes.
- 21 September 20224 minute read
You don’t have to be an accountant to understand your financial performance. Use our calculator to assess your business with five important accounting formulas.