Business Energy Bills Climb 25% Since February

Business energy costs have risen 25% since February, as the conflict in the Middle East continues to push wholesale prices higher.

A typical average 12-month electricity contract for small industrial and commercial (I&C) businesses¹, such as a larger retail and leisure site or small manufacturer site – would now cost an average £638,500, a rise of 25%, since February according to Cornwall Insight’s Business Energy Cost Forecast. The same story is playing out in gas, with costs for that same small I&C site also up by around 25% to £1.15mn. Many businesses have contracts renewing in October, and our forecasts suggest they’ll be locking in at a worse rate than they’d hoped.

The conflict in the Middle East has seen wholesale prices rise to their highest level in almost four years, with a lasting ceasefire still not in sight. It has also made it harder for European gas storage operators to refill stocks ahead of winter, which is likely to keep prices elevated as the weather turns colder. Heatwaves in Europe have put more pressure on demand over the summer months, as energy is used for air conditioning and cooling. We have also seen an impact from the extended Norwegian offshore production outages and strong liquified natural gas cargo demand from Asia.

On top of wholesale prices, businesses are facing increases in other areas of the bill, including the costs to balance the electricity system and network costs. Government support for businesses is highly targeted at present, a small number of energy-intensive industries qualify and businesses in the Industrial Strategy’s eight growth sectors will see support from 2027². However, nearly 90% of business energy consumption is from businesses that have seen no support at all on their policy costs.

How exposed a business is to these price increases really comes down to how it buys its energy. Many larger companies lock in prices months or even years ahead through hedging, which means a short-term spike in wholesale costs doesn’t automatically result in higher bills. However, the longer that elevated prices endure, the wider and deeper the impact on businesses becomes.

There is no silver bullet for this issue. However, there are steps that businesses are taking to help mitigate the challenges of high and variable prices. That includes through hedging, fixing prices in advance, or investing in on-site generation and flexibility to reduce costs and their reliance on the grid.

Jacob Briggs, Energy Users Lead, Cornwall Insight:

“Gas prices have been climbing over the past six months, largely driven by the ongoing conflict between the US and Iran, and those costs are landing on business energy bills. With no end to the conflict in sight, and this summer’s heatwave also pushing up demand, businesses renewing contracts this year are facing a tougher market than they might have expected. Add to this the fact gas storage levels are running lower than usual for this point in the year and the next twelve months could stay volatile, however the conflict in the Middle East plays out.

“On top of rising wholesale prices, businesses are also seeing increases in other parts of the bill to pay for network upgrades and balancing costs. While these are necessary to support the energy transition, unlike households, the cost support that’s available is highly targeted, so a lot of businesses will struggle with the rises.

“High bills will continue to weigh on investment decisions, after all it’s hard to commit to expanding your business when you’ve no idea what your energy bill will look like next year. Businesses who keep an eye on where prices are heading are in a much stronger position to plan around it, whether that’s locking in contracts early or looking at on-site generation to take back some control over costs.”

Reference:

1. An archetypal Small Industrial or Commercial business site in Cornwall Insight’s Business Energy Cost Forecast uses 2,334MWh of electricity and 15,275MWh of gas
2. Through the British Industry Supercharger (BIS) ~500 energy-intensive businesses get relief on policy costs such as Renewables Obligation (RO), Feed-in-Tariff (FiT), Contract for Difference and the Capacity Market (CM), plus network cost rebates of up to 90%. That support is now widening, with the British Industrial Competitiveness Scheme (BICS) supporting around 10,000 eligible businesses via exemption from RO, FiT and CM costs. Support will take effect from April 2027 and include backdated support for the current year.