23 August 2022
First it was Brexit. Then Covid-19 appeared followed by the unexpectedly strong bounce-back causing supply chain pressures and price inflation. Next it was the global disruptions following Russia’s invasion of Ukraine, and now it’s spiralling energy costs. Businesses face one challenge after another.
On Friday Ofgem, the energy regulator, is expected to announce that the household energy price cap (the maximum annual amount a household can be charged) will rise from £1,971 to £3,500 in October; some analysts suggest it could reach £5,400 next April, which is simply astonishing.
Furthermore, there is no such cap on costs for businesses. Firms are already experiencing eye-watering electricity cost increases.
The Sunday Times at the weekend reported on the plight of a couple running a farm shop who had been quoted an annual electricity price of £76,000 compared with £20,000 previously. Faced with costs of that magnitude, they have decided to close the business.
While households pay five per cent VAT on their energy bills, small businesses are charged 20 per cent. So companies face even greater cost pressures which, in theory, must be reflected in higher prices to customers.
One well-known hire industry supplier told me last week that the bill for their factory’s electricity recently went up by 500 per cent from one month to the next. And the MD of a smaller company said their monthly bill suddenly increased from £800 to £2,100, at a time when they have also given each staff member an extra £1,000 payment to help with the rising cost of living. That all adds up to even higher overheads and tighter margins.
The government’s focus seems to be more geared towards encouraging home owners and businesses to cut their costs by using less energy. There’s talk of electric vehicle owners being paid this winter for power they feed back to the grid from their car batteries – although that won’t help the estimated 32.5 per cent of households without off-street parking or a garage for recharging. Other incentives might include using domestic washing machines off-peak through the night.
When it comes to business, chancellor Nadim Zahawi is understood to be considering support options such as Covid-style relief grants, VAT reductions and rates holidays.
However, nothing is concrete at the moment and such measures would be very costly. There are no quick fixes and energy costs are yet another factor that businesses face and which call for sound management.
● Perhaps a more positive side-effect of rising electricity costs is that they are encouraging firms to explore ways of harnessing energy themselves.
As reported previously, Obart Pumps has solar panels on the roof of its office building in Maidstone. The company, which has adopted a number of green initiatives, now generates more power than it consumes for regular operations and can sell some back to the grid. However, the panels were installed in 2012 and the payback period was over several years, so it is not a quick-fix solution.