No escape from the energy shock for UK business. A long-term strategy is still essential | Nils Pratley
The cost of energy for British business was a crisis even before the Iran war sent prices higher: the UK already had the highest electricity prices for industry among G7 countries.Now comes the next whack.How big will it be?Projections from the energy consultancy Cornwall Insight are steep for electricity and gas.For the former, it thinks increases of 10-30% are on the cards; for the latter 25-80%.The ranges are wide because, unlike with households, there are no price caps for businesses.
Contracts are a negotiation, more or less, between supplier and customer.So the size of the business, its sector, its financial strength and its level of consumption are relevant considerations.By way of illustration, Cornwall offers a larger retail and leisure site or a small manufacturer.The average 12-month electricity contract could rise to £578,000, up £95,000 from early last month; for gas, the bill could increase by £376,000 to just over £1m.The timing of the spikes in the market prices of oil and gas is also awful.
About a third of businesses renew their energy contracts at the start of April to coincide with the start of the tax year and – again, unlike with households – the effect of higher wholesale prices is felt instantly.Nor does it help that market prices yo-yo wildly even over the course of a day.Here’s a flavour of today’s business energy market from Adam Berman, the director of policy and advocacy at EnergyUK, which represents electricity generators and retailers: “Liquidity in the market is already affected.The ability of suppliers to offer long contracts is drying up and prices are changing by the hour.There are cases of an offer being made in the morning and being withdrawn by lunchtime.
“There is nervousness on both sides,Some business customers are signing shorter three-month deals where they might normally opt for a year,”Could the government do anything? Probably not in the short term,Without actually saying so out loud, the chancellor, Rachel Reeves, has ruled out an across-the-board package of support for consumers; the effort is aimed instead at finding a “targeted” scheme for poorer households should it be needed,So business, inevitably, will be on its own.
That is today’s fiscal reality.The only possible exception – but probably a long shot – is that the work-in-progress scheme to give bill savings of “up to” 25% to 7,000 manufacturing firms from April next year could be brought forward, or be backdated to this year when it eventually arrives.But such tweaks feel unlikely because the so-called “British industrial competitiveness scheme” appears to be bogged down in defining the right sort of manufacturer (it’s all to do with SIC, or standard Industrial classification, codes) and departmental back-and-forth over funding.At least the separate and established “supercharger” scheme will carry bigger discounts from next month – but that covers only 500 heavy energy users.One can understand why this week’s purchasing managers’ index painted a bleak picture of growth slowing “to a crawl” across manufacturing and services amid the sharpest one-month acceleration in cost inflation since the aftermath of Black Wednesday in 1992.
Higher energy costs are felt almost instantly.For the longer term, however, this episode is yet another reminder for government that the top priority for its industrial strategy must be the cost of energy.The CBI and EnergyUK have turned out to be unlucky in pitching their call to arms a week before the Middle East conflict started, but their report last month offered strong arguments for why a reset – as opposed to sticking-plaster schemes funded by other bill payers – is needed to cut energy costs for business.The central thesis that “high energy costs are holding back the UK economy” is almost unarguable.It’s a debate that, inevitably, will be delayed by the current crisis.
But it’s not going away,Other countries do energy policy more strategically,
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