The Rising Cost Of Energy And Its Effect On Business Press

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 1^st 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.

A snapshot of the current situation

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

Why did energy prices rise In 2022?

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.

International Factors

• Russia’s invasion of Ukraine – As previous mentioned, a significant factor in the rising costs of energy is Russia’s invasion of Ukraine, or rather the ensuing political fallout. On 24^th February 2022 Russia launched their invasion of Ukraine and this was followed by a raft of sanctions against Russia and prominent Russian figures. As global political tensions increased, Russia responded by limiting and then stopping its supply of natural gas to Europe, via the Nord Stream 1 pipeline. The recently completed £11 billion Nord Stream 2 pipeline, which would increase the amount of natural gas that Russia can import to Europe, has also yet to be turned on due to Russian hostilities.
• Post COVID demand increase – Even before the Nord Stream 1 shutdown gas prices were already high. A significant factor in this was demand increasing as countries around the world, especially Asia, left lockdown and industry ramped back up.
• Freeport LNG’s Texas plant fire – Global gas supply has been further limited due to a fire at a Texas production plant. This has further limited the supply of gas into Europe.
• Depleted gas reserves – Following a prolonged and cold winter in 2020-21 European gas reserves were depleted and could not be used to subsidise

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UK Factors

• Low renewable energy production – The UK energy market has been hit by low production of renewable energy. Low winds and nuclear power outages have been cited as contributing factors to this.
• Low UK gas reserve capacity – Whilst the entirety of Europe saw depleted gas reserves after a long and harsh winter, the UK also suffered from the fact we have an unusually low storage capacity for natural gas. Continental European countries have storage capacities of between 25% - 37% of annual demand the UK is able to store just 2% of annual demand.
• National Grid Kent site fire – A 2021 fire at a National Grid site in Kent damaged a cable used to import energy from France. This increased the need for domestic energy output and subsequently increased the demand and price for fuels.
• The poor UK energy market – The UK energy market had numerous smaller ‘providers’ supplying domestic energy at competitive prices. In reality these companies worked more like energy brokers, buying wholesale power from producers. When the wholesale price rose above what could be charged by the price cap 29 of these companies collapsed. Even before the rising cost of wholesale energy this was still a system that saw relatively high levels of failure, since 2016 there have been 65 energy suppliers go out of business.
• When a supplier goes out of business its customers are transferred to a healthy company (known as a ‘supplier of last resort’), who then need to quickly buy more wholesale energy; the cost of this travels through the supply chain until the customer eventually foots the bill. The estimated cost to UK energy bill payers for these collapses is around £2.4 billion.

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.

• An overreliance on gas – The UK relies on gas to supply around 40% of its power, as compared to an average of less than 20% in the EU bloc. This means that just producing the energy in the UK is extremely expensive and this cost is ultimately paid for by the consumer.
• Low government support – Whilst the UK government has contributed funds to business and domestic energy bills to help with the price rise it falls well short of other countries.; and of 1 April 2023 businesses support in the UK has been slashed.

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%.

How have businesses been affected so far?

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.