Rising Energy Costs: What’s in Store for Start-ups and SMEs?
Start-ups and small and medium enterprises (SMEs) in the UK have lurched from one existential threat to the next so far this decade - and the latest challenge is really heating up.
The energy crisis: the underlying causes
The energy crisis is being caused by a perfect storm of forces - from last year’s long cold winter to Russian aggressions in Ukraine. Against this turbulent backdrop, the UK’s energy system has been plunged into chaos, prompting fears that energy suppliers will crumble and businesses will be saddled with unaffordable bills as another winter looms. By the end of December last year, a total of 28 energy companies had already gone bust.
Higher demand means higher prices - and two factors have perpetuated this trend in the energy market: in 2021, countries in Asia - notably China - and Europe burned through a significant amount of their gas reserves during an arduous winter; and the reopening of economies following successive lockdowns also led to higher energy usage as businesses try to make up for lost time.
Since Russia - one of the world’s largest producers of oil and gas - invaded Ukraine in February 2022, the cost of Russian gas has soared, which has in turn prompted energy bill rises. While very little UK gas is sourced from Russia, suppliers are exposed to the knock-on effect of pricing across the rest of Europe, which typically purchases around 40 per cent of natural gas from Russia. Sanctions imposed on Russia have also forced European nations to look elsewhere for their supply, which has pushed up the price of gas from other sources.
Liz Truss said in her first speech after becoming Prime Minister: “Putin’s war in Ukraine and weaponisation of gas supply in Europe is causing global prices to rise – and this has only made clearer that we must boost our long-term energy security and supply.”
The extent of the energy crisis
Small business owners across Britain are facing up to the very real threat that they will not survive the winter due to energy bills rising. So, how much will energy bills rise? According to data from the Federation of Small Businesses (FSB), firms have experienced a 424% rise in gas costs and 349% rise in electricity costs since February 2021, causing rising energy bills for the average small business to reach over £28,000 - quadruple what they were in February 2021.
Businesses that are not on fixed rates with their suppliers will experience a significant energy bill rise, which will have a negative impact on their cash flow. Meanwhile, firms that are on fixed-price supply deals are urgently looking to renegotiate electricity and gas contracts that expire in October as these favourable contracts come to an end.
The energy price squeeze is being felt across many industries:
- Agriculture: The price surge has already forced two major fertiliser plants in Teesside and Cheshire to close. The plants, which produced CO2 as a by-product, became too expensive to operate due to the spikes - deepening the fertiliser shortage across the industry. Higher energy and fertiliser prices inevitably translate into higher production costs, and ultimately higher food prices.
- Travel: According to GlobalData’s 2021 Global Consumer Survey, businesses in the travel industry - including transportation, tourist attractions and hoteliers - have been heavily impacted by rising energy and fuel costs, hampering their recovery from the pandemic.
- Textiles: UK Fashion and Textile Association (UKFT) CEO, Adam Mansell has indicated that many of the UKFT’s manufacturing members are reporting five to six-fold hikes in energy costs - an industry-wide issue that also impacts consumers’ power to spend. Responding to news of these eye-watering increases, he said: “In order to survive and grow, it is essential that the sector strengthens its sustainable competitiveness.”
- Manufacturing: The energy crisis is tightening its grip on businesses in the manufacturing sector, especially SMEs. Insolvencies across the sector have soared by 63% since last year.
- Shipping: According to a report into maritime trade disruption by the United Nations Conference on Trade and Development (UNCTAD), by the end of May 2022 the global average price for very low sulphur fuel oil had increased by 64% since the start of the year - raising shipping costs for all maritime transport sectors. The impact of these increased costs will translate into higher prices for consumers and threaten to widen the poverty gap.
All of this is playing out against the backdrop of decades-high inflation, which is exacerbating the financial strain on businesses. Amid these testing conditions wages heat up as employees seek higher pay to compensate for increasing consumer prices - or move jobs altogether. Businesses are also impacted by supply pressures as the cost of materials and products rise.
Without government intervention, the energy crisis could spell the end for many start-ups and SMEs as they are forced to choose between paying their bills or staff wages. When announcing her energy support package for domestic customers, Liz Truss said the government would also “launch a new scheme for all non-domestic customers”.
Businesses across the land breathed a collective sigh of relief when the PM stepped in with an emergency package of government support, including a cap on the price paid for energy from 1st October to help them through winter - essentially discounting wholesale energy prices for businesses, charities and public sector organisations, including schools.
Under the plan, businesses will be given a six-month cushion to protect them from soaring energy prices. Additional help will be provided to companies in vulnerable industries after that. The terms of the cap mean electricity prices for business customers will be about double what they were in October 2021, but more than half the forecast winter prices of about £540.
The support package - which applies to new contracts taken out after 1st October 2022 and to fixed contracts taken out since 1st April 2021 - restricts the price suppliers can charge businesses for units of gas and electricity. Businesses will not need to activate the cap, with the discounts automatically applied to their bills. New chancellor, Kwasi Kwarteng, said: “We have stepped in to stop businesses collapsing, protect jobs, and limit inflation.”
In his mini-budget on 23rd September, Mr Kwarteng claimed the freeze on domestic and non-domestic energy bills will reduce inflation by 5 percentage points. He also revealed that the total cost for the energy package is expected to be around £60bn for the six months from October.
Stephen Phipson, chief executive of the manufacturers’ organisation Make UK, welcomed the “timely” measures. However, he’s concerned that wholesale prices will remain high and added: “Industry will need support for a longer period to protect jobs and remain competitive, so the further announcement of a review on future support at the three-month stage is reassuring.”
But the chancellor’s mini-budget had a sting in its tail after he announced large tax cuts, to be paid for by borrowing billions of pounds. This caused the value of the pound to nosedive to a record low against the dollar - perpetuating the energy crisis in the process.
As start-ups and SMEs in the UK grapple with the impact of rising energy prices and inflation, they should not lose sight of the opportunities that will also present themselves - not least the opportunity to save money when making international payments amid currency market volatility.
Currencies are traded around the clock. Therefore, the value of the pound against other currencies is constantly changing - not just daily but by the second. This brings the need to manage their exposure to currency risk into sharp focus for senior decision-makers.
Clear Currency specialises in helping businesses that are exposed to currency market risk save money when making international payments - both large and small. Transferring money into another currency can be daunting and confusing. Aware of this, we use our knowledge and experience to cut through the jargon and provide you with a friendly and personal service.
We recognise that it’s impossible to accurately predict how exchange rates will perform; therefore, it’s prudent to plan for all eventualities. With this in mind, when you sign up for an account with us, we will assign you a dedicated currency specialist. In addition to helping you benefit from quick, easy, and secure transfers via our intuitive payments platform, they can help guide you on the tools to use to mitigate the impact of currency risk on your international payments.
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