What can business leaders do to mitigate energy price hikes?

How is your organisation being impacted by the current energy crisis? Why is the energy crisis so significant? What can business owners do to reduce its financial impact? 

These were questions both posed and answered in a recent Vistage webinar, hosted by Claire Burden, National Lead Partner of Advisory Consulting at Evelyn Partners. You can watch the one-hour webinar in full here – or read on for an overview of the current issues, the help that’s available to business leaders, and suggestions that could help you through these challenging times.  

What has caused the current energy crisis? 

Many people, says Claire, had a strong sense of positivity after the UK came out of Covid lockdowns. However, since then there has been a great deal of uncertainty. 

Inflation, a possible recession, the energy crisis, supply chain issues, the Ukraine war – many of the former issues have been caused by the latter, but there are many factors that are causing organisations of all types and sizes to struggle with energy costs. 

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With a backdrop of unprecedented inflation, rising fuel costs and labour shortages causing supply chain issues, the last thing business owners need is energy price hikes. 

There are four key factors, says Claire, that have led to the current energy situation. 

1. The invasion of Ukraine. While the UK doesn’t rely on Russian gas, the invasion has resulted in global gas prices. The UK uses a great deal of gas – far more than its European counterparts – as we burn large amounts of gas to create electricity. 
2. The post-Covid return to work. The return of workers to their workplaces has led to the energy industry needing to do more work around balancing. The UK’s balancing system involves redistributing energy to cities or out to suburbs, depending on where it is needed. This comes with a cost – and much of this cost, says Claire, has been passed on to businesses.
3. Increased taxes and levies. Over the years, taxes and levies on energy – including green energy – have risen. These costs have been passed on to the end user and added to energy bills. 
4. Leisure activities and change in usage. This includes the fact that energy usage always increases as winter approaches.

What is the current state of play, and what support is available? 

When the Government opened up the energy market a number of years ago, the aim was to make it fairer and more competitive. As competition increases, prices decreased, which was great news for customers. 

However, with low limits to entry, many of the challenger brands that emerged did not have the background or financial backing to hedge themselves correctly. Any big changes in the market meant that they went bust. 

For both domestic and commercial customers, the cost of failed energy firms is charged back through the energy market, translating to higher bills. The total cost of supplier failures currently stands at almost £3bn – and continues to rise. 

The Government has offered support to both domestic and business energy customers in the following ways. 

Domestic market

Historically, the domestic energy price cap was looked at every six months. Now, it’s every three months. With predictions that the price cap could rise to £3.5K, £5K or potentially even £6.5K per year for the average household, the Government stepped in.

Energy prices for domestic customers are now capped at £2.5K – on average. Consumers are protected for a period of two years, adding some stability, even though prices continue to rise.

Business market

The business market, however, does not have this level of protection. The Government introduced the Energy Bill Relief Scheme for non-domestic customers to help them to get through this winter. 

Electricity prices previously stood at around £100 per megawatt hour (MWh). The current expectation is that the price will reach £600 per MWh this winter. The Government is limiting the price for non-domestic customers to £211 per MWh. 

Wholesale gas costs previously stood at around £20 per MWh. The market cost this winter is set to rise to £180 per MWh, with the Government reducing this to a set cost of £75 per MWh. 

This will be applied automatically to all eligible business contracts. Those who fixed their energy bills a year or two ago below the expected gap will already be paying less, so will not receive this Government help. 

Without this intervention, research experts Cornwall Insight predicted that businesses could have seen energy bills rise fivefold this winter. While this support should prevent a number of energy-intensive businesses from becoming insolvent this winter, there are debates about how the support will be funded – and what will happen next. This scheme is set to finish in March – although the Government has stated that some support will still be available after this, the details of which will be communicated in December. 

Energy prices are still double – or more – what businesses were paying historically, with many attendees on the Vistage webinar still unsure as to how they would manage to pay their bills. With this in mind, what can business leaders do to survive this winter?

What can we do as business leaders?

The future remains uncertain. While the Government will be reviewing the Energy Bill Relief Scheme in December, there will be no guarantee that support will continue. 

There is also discussion of a potential windfall tax to be levied on energy suppliers, which could fund longer and wider support for organisations of all types. However, as yet there is nothing concrete in place. 

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The current levels of Government support are welcomed, but they do not fix the problem – particular if high energy prices are set to be an issue long-term. So, what can businesses do to shore themselves up going forward? .

Outside of how business owners purchase energy and the Government support available, Claire’s webinar described four key ways in which organisations can mitigate energy price increases: 

1. Renewable energy

While this is one potential solution, many businesses may be willing to invest the capital necessary for a fuel change when under such financial pressure. One webinar attendee stated that their business was in the process of costing up rooftop solar panels. However, those who lease their business premises would also have the issue of a tripartite agreement with their landlord to deal with. 

If an organisation generates excess renewable energy, this can be sold back to the grid to reduce energy bills further. 

2. Linking up with local renewable energy suppliers

Organisations can take advantage of local renewable energy suppliers who link up with local users. Claire offers the example of businesses on industrial estates using fields of nearby solar panels under a power purchase agreement, giving those businesses certainty of price and supply. 

Other renewable energy suppliers are working with businesses to utilise tech to conserve energy usage. In her webinar, Claire cites one business using a “virtual power plant”: tech that switches off power in certain areas when not being used. 

3. Energy-efficient equipment

Switching to energy-efficient equipment may not make large cost savings, but they all add up. In addition, as Claire highlights: “our energy supply is a finite resource – the less we can use, the better off we’ll be”. 

Encouraging your work place to adopt energy-saving best practices should be the norm. Turn switching equipment off when not needed into a habit. Ask workers to sit in fewer offices or smaller rooms so that less space needs to be heated. “It can feel like nagging, but it’s critical”, adds Claire. 

4. Look at your entire cost base

Now is as good a time as any to not only assess your business’ energy usage, but also to look across your entire cost base to see where savings can be made. Look at your working capital to see where you can release cash. Engage in some scenario planning around your cash reserves – perhaps starting with looking at what would happen in March when the Government support ends. 

Review any financing arrangements you have in place. Essentially, make things as lean as they can be across the whole business. Don’t focus entirely on reducing energy usage – there may be plenty more that can be done elsewhere. 

As Claire states, we should “work on the basis that energy costs will go up before they go down”. What can you do now to mitigate future price increases?

Watch the webinar in full here.

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