Business will need energy support this winter

A couple of months ago, my child’s nursery emailed to say they would be raising their prices again in the middle of their year. The fees set back in April looked laughably historic against soaring costs. The main culprit was energy: the bill for one building was set to more than quintuple.

It being a nursery, I’d probably donate a kidney to burn for fuel provided the lights stay on, the doors open and the children happy. Customers of other businesses may be less tolerant of price rises, not least because as food, energy and childcare become more expensive, households cut back on pretty much everything else.

It has been obvious for some time, to everyone except the odd candidate to become prime minister, that it will be necessary to increase support to households this winter drastically, with a focus on the poorest and most vulnerable to soaring energy bills. The energy price cap is expected to increase to £3,600 this week, an 80 per cent rise, before jumping again in January and in April.

The same sense of crisis is building in the business market, where the traditional renewal date of October 1 for fixed-price contracts is looming. Cornwall Insight points out that businesses renegotiating a two-year price contract could face a fivefold rise in costs. Those renewing annually could see bills double, having already doubled compared with the previous year. There are concerns that suppliers are becoming more reluctant to take on new customers.

For the small and medium-sized companies that account for three-fifths of UK employment, this will be the price shock that industrial users — which are more likely to be exposed to wholesale prices — have been dealing with for more than a year. Business customers, even micro businesses with fewer than 10 employees, aren’t protected by the price cap — even though the ability of small businesses to hedge or absorb huge increases is more similar to a household than a pillar of industry.

This requires a reprisal of pandemic-era thinking: does the UK want otherwise-viable businesses or jobs to disappear in an energy crisis prompted by Russia’s invasion of Ukraine?

About one in seven small businesses expects to have to cut back their operations, or close up shop, according to the second quarter outlook from the Federation of Small Businesses. That is two-thirds higher than the proportion giving such a gloomy assessment in the first three months of the year. Other business groups report less confidence that soaring costs can be passed on to customers or absorbed. Investment plans are being shelved.

The government has already proposed further cutting the bills of about 300 large businesses in energy-intensive industries, with more generous levy exemptions. The pandemic provides templates for wider action. Cutting rates of VAT on businesses’ energy bills might provide some respite, particularly for smaller businesses. The business rates system provides a quick way of alleviating near-term cash flow pressures, either by extending the discount available to hospitality and retail to other sectors, or by waiving rates for a period.

One lesson from the early days of Covid is that there is a trade off between speed and accuracy. With no new prime minister, and no decisions, before September, the likelihood is that support may again have to be broad-based to be quickly deployed. Targeted help, such as a discretionary fund trained on those hardest hit, may be needed but would take longer.

Another Covid takeaway is that it helps to tackle, and not exacerbate, the underlying problem. Business support should include sticks and carrots to save energy, not just assistance to pay for it. The government’s bizarre reluctance to talk about energy efficiency owes more to ideology than energy security: Ireland also isn’t reliant on Russian gas and has had a “reduce your use” push since April. Cornwall Insight argues that devising a scheme to incentivise reducing peak energy demand could be worthwhile, given the likely persistence of high wholesale prices and the demands of the energy transition.

Household support will be at the top of the new prime minister’s inbox in September. Business should not be far behind.

helen.thomas@ft.com
@helentbiz