It isn’t just consumers and heavy industry fretting about the impact of the energy crisis on already strained finances. Small businesses are starting to feel the pinch, too.
Cube Precision Engineering, a Midlands-based manufacturer that makes parts for the aerospace industry and carmakers including Aston Martin, is a case in point.
Neil Clifton, Cube’s managing director, warned the business will have put prices up next year to counteract an anticipated £46,000 increase in its energy bills, which stood at £146,000 last year, a leap of some 30 per cent.
“It’s a significant rise,” he said. It is an added pressure to an already tight operating environment for Cube. “Prices will have to go up, which is something we’re constantly battling with. We typically compete with the Chinese and the Indians for projects that run in the UK, so our margins have been under pressure for years.”
Wholesale gas prices have risen from 60p per therm at the start of the year to trade as high as 400p per therm on Wednesday last week. The surging wholesale price has led to the collapse of several energy suppliers and calls for state intervention to prevent further fallout from the crisis.
Analysts at Cornwall Insight, a market research company, warned that rising gas prices and the potential collapse of more energy suppliers could result in a 30 per cent increase in prices and push the state domestic price cap from the current £1,277 to around £1,660 in spring 2022.
Business users have no price cap protection and supply to SMEs is less regulated than the consumer market, leaving them even more exposed to bill inflation as wholesale prices soar. When a business comes off a fixed price tariff, they can find themselves switched to the highest possible tariff.
Representatives of energy-intensive industries such as steel, cement and chemicals warned last week that the price rises could be catastrophic before meeting Kwasi Kwarteng, the business secretary, on Friday to express their concerns.
The British Ceramic Confederation said: “As prices continue to escalate and the period of high pricing extends, a greater number of our members are likely to be forced to stop production due to uneconomically high energy costs.”
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Michael Rossman, co-founder of MachFast, which helps businesses start up and operates EnergyBillKill, an energy comparison site, said some small companies will be hit by price increases sooner than they expect: “A lot of businesses, particularly small and micro businesses, who were on fixed [price] contracts are getting notices from some of the energy companies that unfortunately they will have to raise prices, despite the fixed nature of the contract.”
“I expect a significant number of SMEs will be impacted by this because obviously they are expecting to be in a fixed-term contract and in the normal environment, breakage of the contract would not occur. There will be a significant impact on the cost for SMEs, even those who are on fixed contracts, and clearly the cost for those on variable contracts is going to be quite significant as well.”
Alexandra Auger, 29, the founder of Juice Executive, a Kent-based juice company, is grateful that she is well insulated from the crisis, despite recently moving into a brand new 15,000 sq ft factory. When quoted £30,000 for gas installation, she decided against it. She anticipated that “the future is electric,” she said. “We put in energy-saving technologies like heat recovery and heat pumps as well as ensuring the actual building had energy efficient insulation. This means we have been protected from gas prices rising and our [electric] usage is as minimal as possible.”
Auger added that Juice Executive’s finance manager “had the clever foresight to lock in our energy price for electricity for three years from July”, but even then the company had faced a 15 per cent increase in energy bills from 2020.
She said that just this week she had been working on a plan to purchase solar panels for the factory roof. “We are confident this is a good long-term vision for us and delivers returns, whilst mitigating the risk of inevitable rising energy costs.” She estimated that it will cost the company £50,000 for installation. “For an SME that’s not necessarily the best use of £50,000 because it takes so long to get payback. But when you see those energy prices going up, combined with the fact you already spend £20,000 a year on electricity, the balance quite quickly tips in the favour of solar technology.”
Rossman said a silver lining of the current crisis is that more companies will be persuaded of the merits of renewable energy. “If you’re a small business or manufacturer, now is a great time to think about green alternatives; does it make sense to install solar panels or does it make sense to get electric commercial delivery vehicles, for example.”
Another impact of the price rise is that it has forced businesses to closely monitor overheads, he said. “People will now pay attention to energy prices and energy costs because it’s top of mind. This is an opportunity to simply remember that energy prices are volatile.” While he didn’t recommend that businesses switch immediately, “now is a good time to put it in your calendar to do later, while you monitor the energy prices”.
Clifton said Cube, which employs 36 people and operates a 40,000 sq ft factory near Birmingham, is constantly reviewing its overheads “to see where we can get better deals and better opportunities to buy” because of the pressure to remain competitive with overseas rivals.
Even if it is forced to raise prices to offset rising energy prices, current global supply chain issues might work in Cube’s favour with far eastern rivals also forced to inflate prices to absorb additional shipping costs. “Their prices are going up as well and they can’t deliver to the same lead times as us, so there is a bit of reshoring going on,” Clifton, 43, said.
Both Clifton and Auger use an intermediary to broker the best deals with energy suppliers. “It seems to be the most efficient and cost-effective way of doing it,” Clifton said. “You have to try and have a decent level of knowledge in everything that touches the business, but the reality is there are specialists for everything, so we tend to trust those who are doing it day in, day out.”