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Energy Price Crisis - Assessing the Impact on Businesses

Geoff Riley

29th August 2022

Businesses are not currently part of the UK retail energy price cap, and the surge in energy bills is having a huge impact on many sectors.

It represents a major cost shock to the majority of businesses with small and medium-sized enterprises likely to be hardest hit. Take a look at this tweet from the front line of a bakery on the verge of collapse.

One of the real issues with the energy crisis is its effect upon businesses, particularly small and medium-sized businesses. The problem is that whereas households are getting some assistance, as yet nothing has been proposed for businesses, and many of them are faced with increases in energy costs of up to 80%.

According to Cornwall Insight reported in this article in the Financial Times, "businesses looking for a new energy contract this autumn will have to pay more than four times the price they paid for their electricity in 2020."

The Federation of Small Businesses (FSB) is lobbying for the industry regulator OFGEM to bring in an energy price cap for small businesses with 10 employees or fewer, similar to the one for households.

Their analysis finds that average small business' energy bills are now £21k for electric and £7k for gas - more than four times what they were in February 2021.

From brewers to hotels, from fish and chip shops to farmers, and from restaurants to construction companies - the cost squeeze is and will be severe.

More here in this article from City Monitor

Businesses are being hit by a triple whammy:

  1. Operating costs are rising - not just from the direct effect of a steep jump in energy bills but also from energy costs hitting many suppliers who then in turn raise their own prices
  2. Falling demand in many markets as consumers suffer deep cuts in real incomes and have to rein back their spending on goods and services
  3. Higher interest rates as the central bank (the Bank of England) raises monetary policy interest rates in a bid to control inflationary pressures

There are growing fears that commercial banks and other lenders may reduce the supply of credit for small businesses whose cash-flows are under great strain.

The energy price crisis appears to be delaying the opening of one of the UK's most important new factories - the GigaFactory being constructed by Britishvolt in the North East of England.

According to the Financial Times, "Britishvolt, the start-up at the heart of UK’s electric-car industry plans, will not deliver batteries from a £3.8 bn gigafactory for another 3 years because of soaring energy costs; originally targeted production to start at the facility in Blyth, north-east England by late 2023."

Read more here

As always, there are winners and losers from the climb in electricity and gas bills.

Demand for solar panel installations is rising quickly as this article makes clear.

Demand for thermal blinds and LED light bulbs is also increasing rapidly as households (if they can afford to do so) look for quick-fix solutions to reduce energy use before autumn and winter arrives.

Energy generators have clearly gained - Oil companies for example have enjoyed extraordinary profits this year as prices have spiralled leading to widespread calls for an extension of the windfall tax on their profits and increasing pressure for nationalisation.

In theory, energy storage businesses should gain as will renewable generators whose prices are now much lower in relative terms.

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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