How can small businesses cope with increased energy prices?

Over the last year, the UK and much of Europe has experienced a significant energy crisis, with the price of energy for businesses and households increasing to record levels.

Where do small businesses fit in this picture? Let’s examine the state of commercial energy use in the UK and how SMEs can face up to long-term increases in utility costs, including details of the government’s new ‘Energy Bills Discount Scheme’ which begins in April 2023 to replace the existing ‘Energy Bill Relief Scheme’.

Why have energy prices risen?

Recently, energy prices have risen considerably in the UK for both businesses and households. Indeed, the wholesale price of gas increased by 404% in the last 12 months, according to figures from Ofgem, the energy industry regulator.

Wholesale gas prices have just started to tentatively come down since December 2022, but what caused the significant rise in prices seen across 2022?

• Knock-on effects of the Russian invasion of Ukraine and the ongoing war
• The indefinite shutting down of the Nord Stream 1 gas pipeline by Russia in September 2022, as a reaction to Western sanctions following the invasion
• Historically low levels of gas reserves in the UK compared to other European nations
• Low levels of renewable energy production due to outages at nuclear power stations

Unlike residential households, businesses on commercial energy tariffs have not historically been protected by any price cap. This changed in October 2022, with the introduction of the Energy Bill Relief Scheme, which is set to conclude in April 2023 and be replaced by more targeted support in the form of the Energy Bill Discount Scheme, which we explore in more detail later on.

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”.

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?

Current UK government support

The current system of government support is the Energy Bill Relief Scheme that was announced in September 2022 by the then-Chancellor of the Exchequer, Kwasi Kwarteng. The scheme will end on 31 March 2023 and is will be replaced by more targeted support.

The following businesses are eligible for the current scheme:

• Businesses on a variable or default tariff or a flexible purchase tariff
• Businesses signing new fixed contracts
• Businesses with existing fixed contracts signed on or after 1 December 2022

Fixed contracts

Under the Energy Bill Relief scheme – which runs until the end of March 2023 – wholesale energy prices for businesses (as well as other non-domestic settings) on fixed contracts are capped at:

• £211 per megawatt hour (equivalent to 21.1p/kWh) for electricity
• £75 per MWh (equivalent to 7.5p/kWh) for gas

Importantly, for those on fixed contracts, the support scheme only applies a discount to the wholesale price of gas and electricity. It does not cover additional charges such as supplier margins and distribution costs. These will continue to be added to your commercial tariff to make up the final bill that your business pays.

Variable and flexible contracts

For businesses on variable or flex contracts, the soon-to-end Relief Scheme sets discounts at up to:

• 34.5p/kWh for electricity
• 9.1p/kWh for gas

Unlike with fixed contracts, this discount applies to overall unit rates, including the wholesale cost and network, policy and supplier costs. Those on variable or flex contracts will see their bills reduced by the up to the amounts above, until their bill reaches the same as the cap for fixed contracts.

In short, the Energy Bill Support Scheme will apply to businesses on fixed and flexible contracts – both new contracts and existing ones signed after 1 December 2021.

Upcoming UK government support in 2023

In announcing the Business Energy Discount Scheme (due to come into effect in April 2023), Chancellor Jeremy Hunt underlined that the Relief Scheme it was replacing was only ever intended to be a temporary support measure.

The new Discount Scheme will run for 12 months from 1 April 2023 and will include an estimated £5.5 billion of discounts on commercial energy bills for businesses. The new scheme will only be available to businesses that pay more than £107 per MWh for gas and £302 per MWh for electricity and offers a discount of up to:

• £6.97 per megawatt hour (MWh) of gas
• £19.61 per MWh of electricity

Certain industries that use significantly higher levels of energy, such as manufacturing, will be eligible for larger discounts on their energy bills. Businesses in these sectors will be able to get a gas and electricity bill discount that will be capped by a maximum unit discount of £40 per MWh for gas and £89.10 per MWh for electricity.

The government has a list of all the industries that will be eligible for the higher levels of discount.

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 may wish to consider creating a budget before contacting your supplier so you know in advance what kind of payment plan would be affordable.

Regional schemes

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.

An example of a country-wide scheme is Zero Waste Scotland, which offers Scotish SMEs 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 combatting 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.

Saving money

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

Furthermore, from 1 April 2023 all commercial landlords will be required by law to ensure that their properties are rated as at least band 'E' on their Environmental Performance Certificate (EPC), or face a fine of up to £150,000. This means that the owners of commercial property will have to ensure that things like insulation are at least of a reasonable quality, potentially saving you money on your energy bills.

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 reduce your bill.

Read more about how to reduce your carbon footprint.

Switch supplier

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, even with the Energy Bill Discount Scheme in place, one way to draw down the cost of your energy bill may be to switch supplier, taking advantage of new customer discounts and locking in a fixed rate. Because of the lack of an outright 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.

Both Uswitch and Love Energy Savings offer a comparison service, allowing businesses to see how much they might be able to save on their commercial energy tariffs by switching supplier.