How can small businesses cope with increased energy prices?

Flexible monthly business insurance
29 November 2022
7 minute read

The UK and much of Europe is 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 potential for further future rises in the price of energy for businesses.

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 rising utility costs, including a new government support scheme to limit the rise in energy bills.

Why have energy prices risen?

Energy prices have been rising considerably in the UK for both businesses and households, with the prepayment price cap for households roughly doubling from October 2021 to October 2022. This is a reflection of the soaring wholesale cost of energy, with wholesale gas prices having risen over 275% between January and August 2022.

So what caused this significant rise in wholesale prices in the first place?

  • The knock-on effect of a squeeze on global supply caused by an unusually cold European winter in 2020/21
  • Higher than usual demand for liquified natural gas in Asia and a the latent effect of a particularly hot summer in China in 2021 pushing up demand for air conditioning
  • The indefinite shutting down of the Nord Stream 1 gas pipeline by Russia in September 2022, as a reaction to Western sanctions following the Russian invasion of Ukraine

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 we will explore in more detail below.

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?

UK government support

On 21 September 2022, the then-Chancellor of the Exchequer, Kwasi Kwarteng, announced a a significant government intervention to help businesses afford the rapidly rising cost of commercial energy tariffs.

The Energy Bill Relief Scheme is scheduled to last for six months from 1st October 2022 until March 2023, at which point either the scheme will end altogether or more targeted support will be announced.

The following businesses were set to be eligible for the discount:

  • 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 (originally 1 April 2022)

Fixed contracts

Wholesale energy prices for businesses (as well as other non-domestic settings) on fixed contracts have been 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, and not to additional charges such as supplier margins and distribution costs which 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 discounted is set 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.

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.

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.

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 out of which your business runs 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 reducer 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 Relief Scheme, 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.

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.

This content has been created for general information purposes and should not be taken as formal advice. Read our full disclaimer.

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