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

Published 30/01/2023   |   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:

  • 50% business rate relief for the retail, leisure and hospitality sectors in 2022-23 up to a maximum of £110,000 relief across all business premises. This will rise to 75% relief in 2023-24, again with a cap of £110,000 relief across all premises.
  • The business rates multiplier which all businesses pay has also been frozen for 2023-24. Business rates bills are calculated by multiplying the rateable value of premises by the multiplier, which is the pence in the pound businesses are required to pay in business rates, before subtracting any reliefs the business receives. This normally increases by the level of inflation each financial year, but won’t in 2023-24;
  • Business Wales resource efficiency advisers support businesses to reduce their energy, water and waste use. Businesses can contact them on 03000 6 03000 or via their online contact form; and
  • The Development Bank of Wales is currently developing a scheme to support businesses to fund decarbonisation, and its wider funds can be used to support decarbonisation.

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 will support look like beyond March 2023?

The UK Government recently announced details of the Energy Bills Discount Scheme, which will replace the Energy Bill Relief Scheme, and will operate from 1 April 2023 to 31 March 2024. This will support businesses, voluntary sector organisations and public sector organisations that are:

  • On existing fixed price contracts that were agreed on or after 1 December 2021.
  • Signing new fixed price contracts.
  • On deemed/out of contract or standard variable tariffs.
  • On flexible purchase or similar contracts.

Eligible non-domestic consumers will now receive a per-unit discount to their energy bills, subject to a maximum discount. The discount is calculated as the difference between the wholesale price associated with an energy contract and the price threshold. The discount is phased in when the contract’s wholesale price exceeds the floor price, until the total discount per MWh reaches the maximum discount for that fuel.

For most non-domestic energy users in Great Britain and Northern Ireland these maximum discounts have been set at:

  • electricity - £19.61 per megawatt hour (MWh) with a price threshold of £302 per MWh.
  • gas - £6.97 per MWh with a price threshold of £107 per MWh

There will be enhanced support for energy intensive industries. This will provide the following discounts (for 70% of energy volumes) and price thresholds for eligible businesses:

  • electricity - £89 per MWh with a price threshold of £185 per MWh
  • gas - £40 per MWh with a price threshold of £99 per MWh

Businesses in these industries will be required to apply for enhanced support, and further details on how to do this will be published by the UK Government.

The scheme provides considerably less support than the arrangements currently in place, and there has been a mixed reaction to this. The CBI said that it was “unrealistic to think the scheme could stay affordable in its current form”, and that the new scheme will still provide respite for many businesses, particularly in energy intensive sectors. However, the FSB described the scheme as “a huge disappointment for small businesses”, and said that the support provided will be insignificant for many firms.

With the UK predicted to be in recession throughout 2023, there are likely to be challenging times ahead for businesses. It remains to be seen how effective the support available beyond March will be in helping them to weather the storm.

Article by Gareth Thomas, Senedd Research, Welsh Parliament