The previous three years have seen businesses faced with an unprecedented series of challenges; from a global pandemic through to soaring inflation. However, it is the rising cost of energy that has become the biggest threat, admittedly amongst many others, to the survival of many companies.
The UK government had shielded businesses somewhat against these price increases with its Energy Bills Relief Scheme, which saw business energy bills discounted, but as of 1st April 2023 the significantly less generous Energy Bills Discount Scheme was implemented. This will see many small businesses effectively receiving no support and the rising energy costs will be much more keenly felt.
In this article we will look at why energy prices rose in 2022, what the effect of this has been and what might happen in 2023.
Business energy bills have increased by over 400% since early 2021
The government’s new Energy Bills Discount Scheme will see small businesses receiving as little as £50 relief per year
Wholesale prices of natural gas rose significantly due to numerous factors including: War in Ukraine, global demand, depleted gas reserves, a poor UK energy market, low UK government support and the UK’s overreliance on gas
Business energy costs contributed to 2022 having 22,109 insolvencies; which is the highest number since 2009
Whilst wholesale energy costs have gone down, it is unlikely that bills will drop soon
Insolvencies in 2023 are predicted to be significantly higher than in 2022, in part due to energy bill shock
It is often put forward that the sole reason for the price rise is Russia’s invasion of Ukraine and the subsequent shut down of Nord Stream 1. Whilst it is undeniable that this played an important role, there where many other issues and events that also contributed.
These factors can be divided into international and domestic.
This does not include the cost of Bulb collapsing. Bulb had 1.5 million customers and when it collapsed the government decided to place it in special administration as opposed to following the usual supplier of last resort system. Whilst initially expected by the government to cost £2-2.5 billion, experts estimate it will actually cost in excess of £6 billion, which would be enough to add £200 onto domestic energy bills.
To apply some context, France has limited energy price rises to 4%, Spain has lowered VAT on energy bills form 21% to 10% and taxes on electricity from 7% to 0.5% and the Netherlands has lowered VAT on energy from 21% to 9%.
The Federation of Small Businesses reports that the average rise in energy costs amongst its members has been 424% since early 2021. Following the various challenges and crises since the start of 2020 the huge increase in energy costs has proven to be the final straw for many businesses, even with the more generous Energy Relief Scheme.
There were 22,109 insolvencies in 2022, which is the highest number since 2009. This number was driven by Company Voluntary Liquidations (CVLs), which made up 85% of all insolvent businesses in 2022 and represents the largest amount of CVLs since records began in 1960.
Whilst there were other contributing factors to this, such as bounce back loans coming due, inflation, supply issues etc, the role energy costs has played is well stated. The Director General of the British Chamber of Commerce reported that over 33% of businesses were reporting problems paying their bills and the Chief Executive of the British Beer & Pub Association has stated that the price of energy is the biggest threat to that industry.
It is small businesses that suffered most as they are least able to absorb sudden costs and after years of razor thin margins, initially started by COVID, record numbers of directors threw in the towel as the cost of energy finally made their businesses unviable.
The wholesale cost of energy has already fallen to below pre-Ukraine invasion prices though this has not yet been passed on to customers.
This has a lot to do with how energy providers purchase energy. An energy provider pre-purchases energy from the generators based on projected demand; this means that energy used in any given day was purchased by the energy provider in advance. This leads to a lag in wholesale price changes reaching the end user. The fact that wholesale prices are down does not necessarily mean that bill payers will see reduced costs as energy providers are slow to reduce prices and given the incredible volatility of the global wholesale energy markets in recent years, they are likely not to gamble that the downwards trend will continue and decrease bills in any short order.
The Chief Executive of Centrica, the parent company of British Gas, has stated that bills are not likely to decrease in 2023 and maybe even early 2024.
To summarise, that whilst wholesale energy costs have fallen recently it is almost impossible to predict how geo-political events and global demand might influence costs in the near future.
The first blow to businesses relating to energy will be felt in their first power bill following 1st April. This will be the first bill under the government’s new Energy Bill Discount Scheme. This is far less generous than the previous iteration and will see a small discount on the wholesale price of energy should it exceed a certain threshold.
This may not provide much practical support, especially in a time where the wholesale price is below the threshold, but bills remain high. The Federation of Small Businesses estimates that the average small business will see between £50 - £200 off their bills annually against bills that have more than quadrupled.
The immediate effect of support for business effectively being removed is likely to be a large surge in insolvencies in the first half of the year at least and if prices do not fall in an immediate way then this is likely to continue for the rest of the year. Red Flag Alert is projecting that there is likely to be 28,000 insolvencies in 2023 but that this could rise to exceed 30,000.
Cornwall Insight, which works with energy companies and provides industry analysis and insights, stated that there was concern in the energy industry about bad debt after the Energy Bills Relief Scheme gave way to the Energy Bills Discount Scheme.
The Chair of the British Institute of Energy Economics Council said, ‘it is clear that without energy cost reduction, small business will not be able to survive’.
Despite the vocal criticism of the UK government’s current business energy support scheme, they seems to be gambling on a significant reduction in energy cost in the rest of 2023. Chancellor Jeremy Hunt advised that the old scheme was ‘unsustainable’ and was only meant to be a temporary measure.
The cost of the Energy Bills Discount Scheme is projected to be £5 billion, which is an 85% reduction as compared to the previous scheme. This reduction is undoubtedly a response to strain on the public coffers and may be the best the UK government is currently able to do.
Whilst many companies are expected to go insolvent, the cost of energy will also have a negative effect on those that do not as well. Margins will be much reduced and leave them operating in a state that is vulnerable to any sort of shock.
Another effect will be that solvent companies will have significantly less funds to reinvest into themselves. This should be of concern to a government that has set having the strongest growth in the G7 as one of its five aims and has a general election on the horizon. Especially considering France’s strong business support scheme and America’s low energy prices and President Biden’s aggressive subsidies designed to attract tech startups.
This puts UK business and our economy at a significant disadvantage for global competition and, given that energy bills are not projected to drop soon, it is likely the government will need to introduce additional measures of support if their lofty economic goals are to be achieved.
As government support has now been significantly scaled back it is likely that the UK will see an increase in insolvencies. Each insolvency causes a ripple effect as creditors have to absorb the loss caused by bad debt and themselves become one step closer to insolvency. In fact, a company that experiences a bad debt is three times more likely to go insolvent itself.
Companies also need to ensure that they are doing business with financially solid suppliers. Should a supplier go insolvent, then not only will a new supplier need to be found in a hurry, often leading to unfavourable payment terms, but given global supply chain issues, business critical resources may not be able to be supplied in the short term. Business that weather 2023 will need to demonstrate excellent supply chain management in addition to credit risk management.
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