The rising cost of doing business: What are the issues and what support is available?

Published 12/10/2022   |   Reading Time minutes

With company insolvencies at their highest since 2009, concerns have been mounting over the rising cost of doing business over recent months. Firms are reporting escalating energy costs, labour shortages, and ongoing supply chain issues.

Our article explains what’s going on, sets out what support is available, and explores what additional support might be needed.

How are businesses impacted by cost of living pressures?

As with households, businesses have experienced escalating energy costs over recent months.  Prior to the Energy Bill Relief Scheme being announced by the UK Government (more on this later in the article), there wasn’t a cap on non-domestic energy prices in the same way there has been for households since 2019. Business organisations told the Senedd’s Economy, Trade and Rural Affairs (ETRA) Committee that some small businesses had seen annual increases of 250% in average gas bills over the past year, and that there were particular concerns around energy-intensive industries.

As well as rising energy prices, many employers have faced labour shortages, including hospitality, retail and tourism businesses and the social care sector. Workers told the ETRA Committee about low pay in these sectors, a lack of job security and feeling they don’t have a say on workplace issues. Employers highlighted that they face a “dire recruitment problem” and they are increasing pay and changing working conditions in response to this.

Ongoing supply chain issues have also created challenges for businesses, with rising fuel costs driving increases in delivery costs and reducing the availability of deliveries. Rural businesses have been particularly affected by these issues.

Sectors hit hardest by the pandemic such as tourism, hospitality and some retail businesses are being particularly affected by rising costs of doing business, as they are less able to absorb additional costs and debt, and rely on non-essential spending. Some manufacturers were described by the Confederation of British Industry Wales as being “priced out of markets that they’ve been in for decades” due to rising costs and supply chain issues.

What do we know about the Energy Bill Relief Scheme?

The UK Government’s Energy Bill Relief Scheme will support non-domestic energy customers like businesses, charities and public sector organisations for six months, providing similar support to the energy price cap for households.  It will support organisations that are:

  • on existing fixed price contracts that were agreed on or after 1 April 2022;
  • signing new fixed price contracts;
  • out of contract;
  • on a deemed contract or variable tariff; or
  • on flexible purchase or similar contracts

Organisations that are on a fixed price contract signed before 1 April 2022 will not be eligible for support, as the UK Government says they “will not have been exposed to the recent rises in wholesale prices”. Both the Federation of Small Businesses (FSB) and Make UK are concerned this might negatively impact businesses who signed fixed price contracts after prices started to rise, but before April 2022.

The scheme will set a ‘government supported price’ of £211 per megawatt hour for electricity and £75 per megawatt hour for gas, which the UK Government says is “less than half the wholesale prices anticipated this winter”. The level of support for each organisation will vary depending on the type and date of their energy contract. The UK Government has provided some illustrative examples of how this will affect organisations’ energy bills over the next six months.  The support will automatically be provided to eligible organisations by energy suppliers applying reductions to their energy bills.

The UK Government has said it will review the scheme within three months of its introduction to inform decisions on future support, which will be targeted at the most vulnerable non-domestic customers.

What other support is available to businesses?

If businesses are experiencing difficulties paying their energy bills, Ofgem advises them to contact their supplier as soon as possible. Businesses can agree payment plans, and can ask for a review of payments and debt repayments; payment breaks or reductions; more time to pay; or access to hardship funds.

The Welsh Government provides the following support to help businesses with rising costs, and to improve their energy efficiency:

The UK Government also offers additional support to assist businesses with energy costs, and to become more energy efficient:

  • support for energy-intensive industries with their electricity costs, through a range of schemes that provide compensation or exemption from the indirect costs of some UK Government policies;
  • a one-stop shop webpage where businesses can find out about funding to help them become greener; and
  • a Boiler Upgrade Scheme for small businesses and homes, which provides discounts on installing biomass boilers, air source heat pumps and ground source heat pumps.

What additional support might businesses need?

Whilst many businesses and representative organisations welcomed the Energy Bill Relief Scheme, some also expressed concern that isn’t yet clear what will happen after March 2023. The FSB said “help must not result in a cliff-edge afterwards”, while Make UK highlighted that industry will need support for a longer period to protect jobs and remain competitive. UK Hospitality called for more comprehensive support, such as reducing VAT for the sector.

Responding to the UK Government’s announcement on the Energy Bill Relief Scheme, FSB Wales would like the Welsh Government to reintroduce 100% business rate relief for the retail, leisure and hospitality sectors.

Business organisations have suggested that current pressures businesses face in accessing finance could be addressed by the Development Bank of Wales developing low-interest loans.

The Minister for Economy has said the Welsh Government is also looking at ways to help businesses improve their energy efficiency and reduce energy usage. Businesses told the ETRA Committee that grants to support businesses to do this “would be snapped up immediately”.

What’s next?

While major cost pressures for many businesses will have been addressed in the short term, there is still uncertainty around what will happen beyond next March. Key questions for the UK and Welsh governments include whether all businesses will still need support, how to target support at those who need it most, and how to balance short-term support against longer-term energy efficiency measures.

Article by Gareth Thomas, Senedd Research, Welsh Parliament