Why small businesses are fearing the worst after energy bills hike

Following the pandemic, visitors were just starting to return this summer to the Portsmouth Historic Dockyard, a naval museum that includes attractions such as Vice-Admiral Lord Nelson’s flagship HMS Victory, when the cultural centre received its next blow.

Chief executive Hannah Prowse was informed that the site’s energy bill would be going up next year by £484,991 – an increase of 230%.

Ms Prowse, who runs the Portsmouth Naval Base Property Trust which owns the land that the museum sits on, told Sky News that sharply rising energy costs had put the site “in a very difficult situation.”

And in a twist of bitter irony, the bills would have to be paid out of money set aside to invest in making the museum more environmentally friendly, she said.

“We’re taking it out of reserves that we would’ve put in energy sustainability work,” said Ms Prowse. If these prices continued for a prolonged period, she added, the situation would become “fairly untenable.”

“It won’t bankrupt us instantly but it puts us in a precarious situation. And for smaller cultural institutions this will be a death knell.”

The museum is one of many businesses facing what experts have described as a potentially “catastrophic” winter this year, as Russia squeezes European gas flows in response to sanctions, sending both household and business bills skyrocketing.

But Russia’s invasion of Ukraine just compounded an already bad situation for small companies in the UK.

Some businesses will see their bills increase by fivefold from October, according to research published earlier this month by consultancy Cornwall Insight.

One of the key differences between consumer energy bills and business rates is that companies aren’t subject to a price cap in the way that households are, meaning there is no limit to how high prices can rise for firms.

This is on top of surging energy costs shouldered by companies last year too, triggered by the short supply of electricity in Europe and disruption to liquified natural gas (LNG) markets.

As such, more than half of all small and medium-sized companies surveyed in the UK are concerned that brutally high energy bills could force them out of business this year, according to the SME Insights Report.

“Business energy prices have climbed considerably in the past 15 months, and they stand on the verge of another significant steep uplift when new contracts come into place for the period from 1st October 2022,” said Robert Buckley, head of relationship development at Cornwall Insight.

“Logic dictates that there can only be so long that so many businesses can pay so much more for their energy without knock-on consequences for themselves, their suppliers, and the wider economy, and if we at Cornwall Insight are correct there will be no return to 2020-21 wholesale prices before 2030,” he said.

“Despite this, in contrast to households, there has been strikingly little said about the affordability of business energy bills.”

Some are surprised about the lack of attention that small businesses and cultural institutions are receiving, given the potential impact of higher energy prices to devastate the government’s economic growth strategy.

Small and medium-sized enterprises employ approximately 60% of the entire UK workforce, and account for around half of the UK private sector’s entire revenue each year.

And yet some 390,000 small businesses went under in the first year of the pandemic alone. And some experts predict that number could be worse as a result of the energy crisis.

“Any cost of living plan worth the name needs to tackle the mounting energy bills small firms face – inaction won’t just lead to spiralling prices but to a generation of lost businesses, jobs and potential,” said Tina McKenzie, policy and advocacy chair at the Federation of Small Businesses, in a statement.

“Small businesses and the self-employed together are simply too important, and both the economy and local communities depend on their success,” she added. “They need the right public policy supporting them to survive and thrive.”

The hospitality industry, in particular, remains in a hazardous position, with rising supply chain costs, a lack of staff, and weakened finances following two difficult years during the pandemic.

Pub, restaurant, and hotel bosses wrote to the government earlier this week pleading for support, saying that without help the sector faced a wave of closures.

So far, the government has not laid out any plans to support the hospitality industry.

“On Friday, the government saw fit to declare a drought, in the face of inarguable evidence that weather conditions had caused a threat to the nation. The energy crisis is no less of a threat and deserves similar attention,” UK Hospitality, the Night Time Industries Association, the British Beer and Pub Association, the British Institute of Innkeeping, and the Music Venue Trust said in the letter.

A quarter of all hospitality firms are considering closing down within the next 12 months due to energy prices, according to a recent survey conducted by eEnergy.

To ease the strain on firms, the Federation of Small Businesses has recommended that the government offer direct financial help to small companies, while temporarily reducing taxes on energy and extending the price cap to the businesses most in need.

For Ms Prowse at the Portsmouth Historic Dockyard, like for many business owners and chief executives, the energy crisis has been a bigger hit than even COVID-19, she said.

“No one seems to be talking yet about support for heritage institutions,” she said. But the “government needs to get a better grip for hospitals, households,” and companies too, she added.

Their policies, she said, “are not fit for purpose.”