The impact of rising energy costs on SMEs

Inflation in the UK soared to a 40-year high of 10.1% in July, as energy costs continued to rise and impact businesses. The Bank of England expects inflation to reach 13.3% in October, as the country’s economic situation continues to deteriorate. This rising inflation negatively impacts businesses and consumers alike as the cost of living increases and purchasing power decreases. This is particularly acute for SMEs with large energy bills, such as manufacturers or those with extensive transport needs. This article explores how rising energy costs have affected SMEs in the UK.

How have rising energy costs affected SMEs?

1. Increased operating costs

Energy is a key input for many businesses, and as the cost of energy goes up, so too do the costs of production. Companies must either absorb the increased costs or pass them on to consumers in the form of higher prices, which can lead to inflation. This can put significant pressure on businesses, particularly those already operating on tight margins.

2. Reduced profit margins

As energy costs continue to rise, profit margins are being squeezed for many businesses. While some companies can pass on these higher costs to their customers as aforesaid, others are not so lucky. In many industries, margins are already razor thin, so even a slight increase in energy costs can eat into profits. This can force businesses to make tough choices, such as reducing staff or cutting back on other expenses.

3. Reduced competitiveness

Energy prices are one of the main drivers of industry competitiveness. When energy prices are high, industries that are energy intensive become less competitive relative to other industries. In order to stay ahead of the competition, these companies need to continuously find ways to reduce their energy consumption and costs.

4. Reduced investment

Businesses may be less willing to invest in new plants and machinery or research and development if they face higher energy costs. This can lead to a lack of innovation and a decline in productivity, which can further damage the competitiveness of businesses.

5. Job losses

There are over 5.6 million small and medium-sized businesses in the UK, which account for 99% of all businesses in the country. These businesses employ over 16 million people, which is 60% of the private sector workforce. As the energy cost rises, businesses may be forced to cut costs by reducing staff levels to stay afloat. This could lead to less job security and fewer opportunities for advancement within companies. In addition, it could also lead to salary cuts and a decrease in benefits.

6. Business closures

In some cases, the increased costs associated with rising energy prices can simply be too much for businesses to bear. The number of small businesses in the UK that fear their running costs could force them to close has increased to 54 per cent, according to a report by SME Insights and insurer Simply Business. This is a worrying trend, as it could lead to a decrease in the number of small businesses in the UK, which would have a knock-on effect on the economy. And businesses are not protected by energy watchdog Ofgem’s price cap and cannot claim back the VAT on their energy bills, as consumers are.

Factors contributing to the rising cost of energy

There are several factors that have contributed to the rise in the cost of energy. These include:

The political instability in key producing countries: Russia and Ukraine are two of the world’s key energy-producing countries, and their ongoing political conflicts has led to increased costs for energy globally.

The increased demand for energy globally: As economies have expanded and populations have grown, energy resources have been put under greater pressure. This has led to higher prices.

The high cost of producing energy: This includes the cost of extracting and refining fossil fuels and developing and deploying renewable energy technologies.

Government policies and regulations: This can impact energy prices, both directly and indirectly. For example, a government policy that subsidizes the production of renewable energy may lead to lower energy prices in the long run, while taxes on carbon emissions can make fossil fuels more expensive.

In response to these challenges, SMEs are implementing various strategies to reduce their exposure to rising energy costs. These include:

• Applying grants and schemes available for businesses looking to reduce their energy bills
• Negotiating better deals with existing suppliers
• Improving energy efficiency and investing in renewable sources of energy

Conclusion

The cost to SMEs associated with energy increases remains an area of concern, especially when rising prices are due to global fluctuation and economic demand. However, there are many benefits to be gained by implementing energy efficiency measures in your business to protect your bottom line.

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