Businesses have been warning of an energy Armageddon, with those looking to sign new gas and electricity contracts this autumn quoted prices as high as 10 times normal rates. Many have already closed their doors, while others warned they would not be able to continue without government help.
On Wednesday, the new business secretary, Jacob Rees-Mogg, stepped forward with his solution: the government will cap wholesale prices of gas and electricity for businesses, charities and public sector organisations. Electricity prices will be fixed at half what businesses were expecting to pay this winter, but will still be double the cost last October.
The cap will only apply to contracts entered into after 1 April 2022, and will only last until 31 March.
Four companies give their verdict.
DS Smith, a FTSE 100 packaging company
As one of the UK’s biggest industrial companies, DS Smith spends a lot of time and money hedging its energy purchases, protecting itself against big price moves. But the company, one of the biggest suppliers of cardboard boxes to Amazon and other delivery firms, uses large amounts of energy to pulp and dry recycled cardboard. Energy prices are a key risk, according to its annual report in July.
Miles Roberts, the group chief executive of DS Smith, said the UK’s manufacturing sector needs a “coherent energy strategy”, on top of the welcome support for the next few months.
“It’s positive to see the government is acting and recognising the magnitude of the energy challenge in the UK, but this is a short-term approach,” he said. “We need certainty for the longer term, because this is not likely to be a situation that will disappear after six months.”
Energy costs represent between 20% and 35% of input costs for paper producers, depending on the grade of paper, according to Berenberg, an investment bank. DS Smith is thought to be well hedged, but the company wants longer-term clarity on whether energy-intensive industries making paper, cement, steel and glass will be given support beyond six months.
“It’s a chance not just to solve the challenges of security and price, but to also address lagging economic productivity by thinking strategically about industrial energy policy,” Roberts said.
The crisis also adds to the case for a zero-carbon energy system, he said: “With security of supply and affordability paramount, never has there been a better case for renewable energies.”
The Parkers Arms, an inn in rural Lancashire
Stosie Madi, the chef patron of the award-winning Parkers Arms, near Clitheroe in rural Lancashire, said the support on offer was “not good enough”. Even a limited rise in bills would leave many hospitality businesses in danger of going under, she said, pointing to reduced consumer spending amid the cost of living crisis, and inflation on ingredients.
“If your bill was £10,000 and it could have been £60,000 but it’s now £30,000, that just doesn’t cut it,” she said.
“You’re probably earning a lot less than you were before and having to pay a lot more for produce [due to food price inflation]. It doesn’t work, mathematically. You don’t have to be an economist, it’s just common sense.”
She said the government’s planned review of which sectors should receive ongoing support must include hospitality, and it should be brought forward.
“Hospitality is a huge employer, a huge taxpayer,” she said. “It’s one of the things that make the UK economy work.”
The Parkers Arms is on a fixed-term energy contract that doesn’t run out until 2023, but Madi said the business would struggle after that unless conditions improve or further support is provided.
“If prices are still high at that point, I’d have to close my doors, unless trade goes back to normal and cost of products goes down.”
Cube Precision Engineering, a manufacturer in Rowley Regis
“Particularly in the past week I’ve been waking up at night thinking, ‘what are we going to do?’” said Neil Clifton, the managing director of Cube Precision Engineering. His first reaction to the government’s help for business energy bills was relief.
The company, in Rowley Regis, near Birmingham, makes tools for stamping metal parts used in cars made by the likes of Jaguar Land Rover and Nissan, as well as Airbus’s A220 and A320 aircraft.
Cube’s electricity bills were due to rise from £12,000 in August 2021 to £44,000 a month this winter – a serious extra cost for a company that expects to turn over £5m next year. The support will make those costs “manageable”, he said, but it still leaves a big question mark over what happens in six months’ time.
“If this six-month cap is removed at that point then we could be out of pocket,” he said. Long lead times for products mean that it could still be hit by rising prices for orders it takes in over the winter.
Companies like his will seek to sign energy contracts for the six months of the cap, but it is still unclear if these will be available from energy suppliers. Longer contracts could lock in higher rates over the summer, when demand may be lower.
“If we sign up for a year, we might not take advantage of prices dropping,” he said.
Il Portico, a pizza restaurant in London
James Chiavarini, who runs Il Portico family pizza restaurant in South Kensington, London, said his hunch was that the government support “won’t be enough”.
“Fridges, freezers, glass chillers, all that stuff runs seven days a week, 24 hours a day. All your heating and gas is on for a large amount of time but you have a short window at lunchtime and dinner to make back all of that money.
“And if a butcher with a huge warehouse in Tottenham sees their energy bill go up, and they’re not on a fixed tariff, the price of lamb could go up overnight.
He said the government should consider the importance of the hospitality sector to economic prosperity.
“The government should look at us and think restaurants, bars and pubs are providing a valuable service, stopping people from claiming benefits,” he said. “These are the ones that need the help.”
Chiavarini also pointed to a range of other pressures facing the restaurant trade.
“This is one of the four horsemen of the Apocalypse that we’re trying to battle,” he said. “It’s like a Hydra, you cut off one head and another grows back in its place.
“We had Brexit, and rising staff costs, we thought we’d dealt with that, then the pandemic, then rising food costs from the war in Ukraine, it’s one thing after another and none of the previous problems have been solved.”
