Mar 31, 2023
Energy Cliff-Edge Threatens Thousands of British Businesses
(Bloomberg) -- The machines at Steve Hardeman’s factory in the West Midlands are quiet on Fridays, when the plant is closed. Five months ago, Hardeman took the decision to open his doors for just four days a week to save on energy bills.
Even with the savings, Hardeman’s monthly bill has soared from £5,000 ($6,165) to £16,000. Although part is paid by the UK government’s Energy Bill Relief Scheme, that help runs out on 1 April. The 67-year-old’s company, Clevedon Fasteners — which supplies small parts to industries including the automotive sector — expects to be on the hook for the whole amount.
It’s a story playing out across the whole of Britain. The problem for Hardeman and thousands of other businesses is that they locked into long-term contracts, often for two or three years, when energy prices soared in the autumn.
“My argument is that these were onerous contracts,” said Hardeman. “We’re stuck.”
Industry groups have warned that the collapse in energy support will lead to business failures across the country. Total company insolvencies in England and Wales in the second quarter of 2022 reached their highest level since 2009, when more than 22% of businesses said energy prices were their biggest concern, according to the Office for National Statistics.
“Businesses without strong balance sheets will find it difficult to continue to weather the storm,” said Ian Barker, managing partner of consultancy BFY Group.
The concerns are sharpest for businesses whose contracts were up for renewal in October or November last year, when suppliers had to lock in wholesale prices at about three times their current level. Businesses now face soaring bills just as the cost of gas and electricity drops.
Stuart Race runs a wool shop in Long Melford, Suffolk. When his energy contract came up for renewal in November, Race, 47, agreed a two-year deal, at almost three times his previous rate. Failing to sign a long contract would have meant paying even more, he said.
While government support has been keeping Race’s bills lower over the past few months, that support has now gone. “A lot of elderly people come in every day for a knit and a natter,” he said. Race fears his bills will now treble, costing hundreds of pounds each month. “I’ve got to keep it warm for customers because if they stop coming, that’s another income lost as well.”
Martin McTague, national chairman of the Federation of Small Businesses, said the lack of further help in the government’s recent annual budget meant that many firms would be facing “serious losses” from April 1. He said some would be better off liquidating their business at a time when it still had value.
The FSB estimates more than 300,000 business will be affected. “It’s a complete lottery,” said McTague. “If some businesses had signed a lot earlier or a lot later, under the current more benign conditions, they would have been OK. But those businesses that are stuck in the middle are very significantly hampered.”
McTague wants energy suppliers to offer to extend contracts on lower rates — but isn’t holding out much hope. “That requires goodwill on the side of the energy companies, and I don’t think they have a great track record of that,” he said.
Over a Barrel
Heidi Lane, the owner of the Crown and Anchor pub in Eastbourne, on the south coast, agreed a 15-month contract in the autumn. Lane, 57, claims she was told by her supplier that she will be unable to renegotiate until she is in debt on her account. With her bills rising from £20,000 to £150,000 a year, the end of the government support means she will be unable to pay.
Emma McClarkin, chief executive of the Beer and Pub Association, said in some cases energy firms were still refusing to offer contracts for hospitality businesses — instead forcing them to pay according to the daily rate. “You are really forcing people into the situation where they’re dealing with suppliers that in some ways have them over a barrel.”
McClarkin said a jump in energy bills could be “existential.” She added: “Having survived the whole pandemic, having battled through inflation, this could be the one factor that really sinks them.”
The business supply market has come under scrutiny since regulator Ofgem fined United Gas & Power Ltd. more than £2 million in March for deliberately overcharging customers.
A series of complaints has led to an Ofgem investigation into whether some suppliers have withheld discounts owed to them through the government’s support program. Others have also complained about surging “deemed” rates, which apply when companies are between contracts.
Jonathan Brearley, the chief executive of Ofgem, said at the Aurora Energy Research Spring Forum on Wednesday that the regulator was encouraging suppliers to amend contracts that have been agreed.
“There have to be sensible, pragmatic ways which can be managed with them and we are encouraging all suppliers to make sure that they’re doing everything they can to adjust the contracts they have in place,” he said.
For suppliers, the mounting number of customers with energy debt comes with its own risk. If customers go under and can’t pay their bills, suppliers may be forced to sell back energy they’ve already bought into a cheaper market at a loss, hitting them with an unwelcome bill of their own.
Suppliers argue that they buy energy for fixed-term contracts at the market rate when a deal is agreed, and that the arrangement offers customers a stable rate at a time of global volatility.
For businesses, the prospect of going bust looks more likely than ever. The Confederation of British Metalforming said that hundreds of smaller manufacturers could be forced to close now that the support has run out — with many of its members’ energy bills rising to almost 20% of sales.
Stephen Morley, president of the CBM, said in a statement that the government should introduce regulation allowing firms to renegotiate their contracts. “We are convinced the worst of the energy crisis hasn’t even begun,” he said.
©2023 Bloomberg L.P.