A new paper from Cornwall Insight on mitigating the impacts of energy price hikes for businesses, has laid out the geographical disparities in the effects of the business energy crisis. Many of the industries set to be hit hardest, including manufacturing and heavy industry (Figure 1), play disproportionately important roles in areas included in the government’s Levelling Up agenda, such as the North East, Yorkshire and Humber and the West Midlands (Figure 2). Absent of intervention to reduce cost increases, these areas could have a higher chance of business failure and more accompanying job losses, meaning attempts to decrease inequality between regions in the UK could be negatively impacted.
Whilst no business will be immune to price increases, impacts will be felt to differing extents; key factors influencing this variation will include the sector, size, and geographic location of a company, as well as their credit rating. Industries such as manufacturing and heavy industry are set to feel the impact the hardest, given the proportion energy makes of their total cost, and the difficulties passing costs on to consumers given their position in supply chains. Sectors where balance sheets and working capital have already been hit hard by the demand shock of COVID-19 pandemic are now grappling with the supply shock in energy before they have had the chance to consolidate during the brief period of recovery between these crises. Hospitality is especially vulnerable due to the high proportion of small and medium sized businesses that comprise this sector.
Given the challenging energy environment many businesses are attempting to hedge for future changes in energy prices, through sourcing flexible and long-term contracts from business energy suppliers. However, energy suppliers are worried about credit risk of their customers as the economy stutters, and have responded by putting more robust contract requirements in place, or by being much more selective in making new contract offers1. With extra requirements and fewer contract options being offered, there is a higher chance of businesses already considered as ‘at risk’ by suppliers ending up without a contract and much higher bills2.
Figure 1: Energy intensity disparity between sectors in GB (2020)
Source: Data – Office for National Statistics, Graph – Cornwall Insight
Figure 2: Sector distribution across regions in GB (2021)
Source: Data – Office for National Statistics, Graph – Cornwall Insight
Note: ONS statistics show Scotland and Wales as individual regions
The paper outlines a number of ways businesses may be able to mitigate the impacts of the energy price hikes both now and in the future. Shorter term solutions including saving energy on lighting, heating and air-conditioning, are already being implemented widely across Europe and could help business to wave the coming winter, with other demand side management such as the adoption of smart technologies to identify the cheapest times to consume energy, having a longer-term impact.
Options for looking at decreasing the costs from a supply side include behind-the-meter energy generation3, where businesses use energy created onsite or nearby, along with increasing storage. A greater uptake of corporate power purchase agreements (CPPAs), where businesses agree to purchase energy long-term from a generator, could also have an impact as they are usually below current wholesale market prices. Many smaller businesses currently have the opportunity to team up to buy CPPAs, but it’s a nascent market4.
In truth, taking forward strategies that reduce energy costs requires capital and investment, at a time when both are being squeezed for business, and thus there are no straightforward answers, particularly for those at the middle to smaller end of their sectors. And, it is also the case for businesses where energy costs make up a significant proportion of their cost base, that whilst reducing energy demand will reduce costs, if there are knock on impacts on the ability to deliver core outputs that underpin revenue, then the medium term the impact on margins and cashflow does not go away.
Against this backdrop, it is not surprising that there are calls for government intervention to save businesses from the impact of global energy costs. Such costs are well outside their control, and far removed from the extremities of even the most prudent budgeting exercises that would have been undertaken prior to this crisis commencing.
Naomi Potter, Lead Research Analyst at Cornwall Insight said:
“Much attention has been placed on the increase in domestic consumer energy bills, with dramatic increases in the price cap. With no such price cap for the business market, companies across the country are going to see as much as fivefold increases5 as the renewal period for business contracts approaches in early October 2022.
“Increasing energy volatility has made suppliers wary of providing new contracts to certain businesses. In some cases, smaller businesses with limited backing may find they are rejected by their incumbent supplier or unable to sign on with any supplier at all, leaving them out of contract and facing significantly increased bills. When coupled with the damage caused by the COVID-19 pandemic, these factors may push many businesses over the edge.
“The pain will not be felt uniformly across the country, with industries typically seen in areas included in the government’s Levelling Up agenda being hit the hardest. If businesses such as manufacturing and hospitality see more closures, unemployment in already struggling regions is likely to rise, with the sad conclusion being an increase in inequality.
“The closure of businesses does not have to be inevitable, and there are a number of steps that can be taken in both the short and long-term to lower energy bills, whether this be by developing energy generation, taking up a corporate power purchase agreements or cutting back on usage.
“However, given the rise in energy costs is outside the parameters of normal markets and certainly outside the control of businesses, placing all the burden of reducing bills at the feet of businesses, is neither palatable nor likely sustainable, as the calls for intervention from business groups aptly demonstrates.”
References
- The checks include enhanced credit checking of potential customers, parent company guarantees, greater scrutiny of cash flows and high security deposits.
- Once a business’ fixed contract period ends, and if it has not yet sourced an alternative contract, it is placed on out of contract terms. These are typically higher prices than fixed contracts.
- On-site energy generation could wield significant savings for companies – Cornwall Insight
- Smaller businesses could cut bills and their carbon footprint by teaming up to purchase their energy – Cornwall Insight
- The energy crisis affects businesses as well as households – Cornwall Insight
–Ends
Notes to Editors
For more information, please contact: Verity Sinclair at v.sinclair@cornwall-insight.com
To link to our website, please use: https://www.cornwall-insight.com/
About Cornwall Insight Group
Cornwall Insight is the pre-eminent provider of research, analysis, consulting and training to businesses and stakeholders engaged in the Australian, Great British, and Irish energy markets. To support our customers, we leverage a powerful combination of analytical capability, a detailed appreciation of regulation codes and policy frameworks, and a practical understanding of how markets function.
