Guest Blog: Filippo Gaddo – small firms suffer most from seesaw energy prices

Energy prices are always a touchy issue – but nowhere more so than in small firms. Predictably changes in residential prices always carry big headlines and sometimes the impact of […]

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By Vicky Ellis

Energy prices are always a touchy issue – but nowhere more so than in small firms.

Predictably changes in residential prices always carry big headlines and sometimes the impact of high prices on large businesses’ competitiveness grabs the limelight.

Rarely is attention paid to how small businesses cope with rising prices – but small businesses may well be the ones who have suffered most from seesaw prices over the past decade.

Number crunching on gas and electricity

Stats from DECC show UK businesses of all sizes pay the lowest gas prices in the EU 15 right now. So far, so good. But electricity is a different story: small and medium-sized industrial users currently pay electricity prices around the median for the region while larger energy users’ electricity prices are above the median.

As for medium energy users, between July to December 2012 their average UK industrial electricity prices (including taxes) were the fourth highest in the EU15 and were 11% above the estimated EU15 median.

That’s not the best – but not the pits either. While it might be comforting to know your competitors in Europe are paying more for energy, there are two things we can’t forget: a) prices have shot up over the past six years and b) prices are expected to rise in future.

That’s a real problem for small businesses. While attention is hogged by large business complaining about the cost of EU ETS or the carbon price floor, smaller companies face a similar if not more compelling pressure. Small businesses generally tend to pay higher prices for energy.

Small firms’ energy prices are getting worse

Since prices started to rise in 2004, things have gone from bad to worse. Small energy users now pay about 30% to 40% more per unit of electricity and gas than large firms – and the smallest get the really raw deal.

Since the peak of early 2009 prices have fallen for all firms – but for the very smallest (i.e. less than 20MWh of electricity consumption or less than 278MWh of gas consumption) prices have stayed at the high level of 3.7p per kWh for gas and 12.4p per kWh for electricity.

That compares with large consumers who pay 2p per kWh for gas and 7.7p per kWh for electricity (based on figures for the 3rd quarter of 2012).

Context is everything

The price rises came over a period of two recessions and a sluggish economic recovery – between 2009 and 2012 turnover in small businesses (less than 50 employees) has declined by around 7%. Persistent high energy prices are taking their toll on small businesses’ margins. While energy prices are not a major cost for most businesses (on average 3% of revenues), for some they are a significant factor. There’s evidence that for smaller businesses energy costs make up a higher portion of costs.

Green Deal to the rescue?

That’s why te launch of the Green Deal for businesses – the ‘Non Domestic Green Deal’ – could not come at a better time. A policy that helps small businesses to cut (or manage) their energy costs would be more than welcome. If properly deployed, it could also be a boost for the economy – small and medium businesses make up about half of UK GDP.

So far though there’s been very little progress. The domestic Green Deal is off the ground and getting traction. The non-domestic ‘poor cousin’ is still making much less headway. It should become a priority for government – to ensure that for once good energy policy is also good economic policy.

 

Filippo Gaddo is an independent economic consultant who previously worked at Ernst & Young and the Department of Trade and Industry before it was replaced by BIS.