The UK Energy Crisis and its Impact on Businesses

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10 February 2022

As inflation remains at a record high and the price of fuel continues to dramatically increase – what does this mean for UK businesses?

 

“The government is right to help households with rising costs. It should be helping the smallest firms too, which face many of the same challenges as consumers in the energy market, but without the same protections. The household rebate should be matched by an equivalent business rates rebate, to help the smallest firms which have been weathering these price increases for months already, and which desperately need a measure of protection from the energy crisis storm."

–Mike Cherry

National Chair, Federation of Small Businesses

 

 

Why are Energy Prices Rising?

 

The UK is one of the most “gas-dependent” countries in Europe and has therefore been hugely affected by the rising cost of gas. Upwards of four-fifths of the UK’s housing stock is fuelled by gas, and almost half of our electricity.

The wholesale price of gas has risen for several reasons: the cold winter of 2020/21 depleted stored supplies and demand from Asia also put pressure on liquefied natural gas supplies.

Low wind speeds in 2021 also affected the generation of wind energy. SSE reported that its renewable assets produced 32 per cent less power than expected due to the low winds.

Meanwhile, gas suppliers have been restricted by energy price caps from passing the rising cost of gas into their consumers. Over the last year, 29 energy companies have exited the market or been put in special administration affecting around 4.3 million domestic customers.

 

What Will the April 2022 Price Cap be?

 

Under the renewed price cap, energy companies will be allowed to pass on these higher costs from April 2022: those on default tariffs paying by direct debit will see an increase of £693 from £1,277 to £1,971 per year. Prepayment customers will see an increase of £708 from £1,309 to £2,017. 

Speaking in early February 2022, Jonathan Brearley, Chief Executive of Ofgem, said:

“We know this rise will be extremely worrying for many people, especially those who are struggling to make ends meet, and Ofgem will ensure energy companies support their customers in any way they can.

“The energy market has faced a huge challenge due to the unprecedented increase in global gas prices, a once in a 30-year event, and Ofgem’s role as energy regulator is to ensure that, under the price cap, energy companies can only charge a fair price based on the true cost of supplying electricity and gas. 

“Ofgem is working to stabilise the market and over the longer term to diversify our sources of energy which will help protect customers from similar price shocks in the future.”

 

 

How Will The Price Cap Affect UK Businesses?

 

It is inevitable that businesses will too be impacted by these additional pressures, in rising running costs, increases from suppliers and squeezed profit margins.

Many believe that the effect on enterprise further compounds the argument to increase investment in cleaner forms of energy.

The CBI says that steps to protect cashflow for smaller firms and heavy industry must occur, whilst Mike Foster, CEO of the Energy and Utilities Alliance feels that the energy crisis should boost a move to hydrogen:

“We now need a firm commitment from the government to wean us off natural gas and onto hydrogen, which we can produce ourselves, and convert our world-class gas network to run on hydrogen. That way, Putin will not hold us hostage, with his fingers turning the gas taps off, jacking up prices and forcing UK households to choose between heating and eating.”

 

What Help is Available for Businesses?

 

The government launched new support measures to mitigate the impacts of rising energy bills for households, including council tax rebates, but what about business support?

The Bank of England Monetary Policy Committee voted on 2 February 2022 to increase the Bank of England base rate to 0.50 per cent from 0.25 per cent, in an attempt to help curb rising inflation. However, the Federation of Small Businesses (FSB) says that this will only serve to “heap pressure on many indebted businesses.”

The FSB National Chair Mike Cherry also called out the exclusion of business support in the Chancellor’s support statement:

“The government is right to help households with rising costs. It should be helping the smallest firms too, which face many of the same challenges as consumers in the energy market, but without the same protections. The household rebate should be matched by an equivalent business rates rebate, to help the smallest firms which have been weathering these price increases for months already, and which desperately need a measure of protection from the energy crisis storm.

“Planned support via the council tax system will leave struggling community cafes, convenience stores and restaurants wondering, where is the support via the business rates system? Equally, where is the help to spread bills for the small businesses that create jobs and ensure growth in local economies? These are the very businesses which will be key to the success of the levelling-up agenda, yet the day after it was launched they’ve been left out in the cold.

“The back-to-back rate increases will mean more pain for all those with personal and professional debt that carries a floating rate. Where emergency loans are concerned, repayments on bounce-back loans are fixed, but anyone with a coronavirus interruption loan could be significantly impacted by this move.”

Picture: a graphic showing various icons including a lightbulb, scroll of paper, smart meter and a cityscape. Image Credit: Shutterstock

Article written by Ella Tansley | Published 10 February 2022

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