The government's six-month cap on energy costs for businesses announced this week offers some relief to under-pressure firms. But Professor Richard Scase warns the impact of price rises will still be felt particularly hard in Kent...
The uncertainties and the hike in international energy prices are probably the biggest threat that businesses in Kent have ever had to face.
They are far greater than those created by the pandemic. In that, there was a level of certainty that the present energy crisis does not offer. Lockdowns forced businesses to close and the government was able to underwrite their viability through furlough and other reasonably across-the-board subsidies.
With the present energy crisis this is not possible. There is such a wide diversity of business types, of sizes, and across such diverse economic sectors, that so many different solutions and policies have to be formulated. This is why the government has been compelled to defer the details of its business relief scheme until November, although relief will be backdated to October 1.
The Energy Bill Relief Scheme will apply to all businesses and be reviewed in three months’ time. Then, the most vulnerable businesses will be identified for further support after the end of the six-month scheme in March 2023. These will include the most vulnerable businesses such as pubs, shops and other locally trading outfits. The Relief Scheme will reduce by half what businesses would be expected to pay with future prevailing tariffs. It will offer a lifeline to many firms that are high energy users. But to offer such a ‘blanket’ scheme to a large, diverse small business sector will mean that many businesses that are low energy consumers and are very profitable will benefit at the expense of taxpayers' money.
But there is also a problem with the timeframe of the support scheme. Six months is hardly long enough for most businesses. It is too short a period for planning and decision-making. What will happen to energy costs and what will be government support schemes after that? What business owner will decide to invest in new technologies, search out new market opportunities and recruit staff?
The outcome is that small business growth will come to a halt, reducing job opportunities and almost definitely leading any would-be entrepreneur to put any business ideas on hold. The impact will be felt particularly in Kent with an economy predominantly of small and medium-sized enterprises (SMEs). More so, because of its focus upon the hospitality, social care and horticultural sectors. All these are high energy users with levels of consumption that cannot easily be reduced without destroying the viability of the business.
Unlike larger firms, small businesses cannot "pass on" any increase in their cost structures by putting up their prices to customers. At the best of times, they operate with borderline profit margins and even the slightest cost increases can push them under. The marketplace in which they operate is ruthless and unforgiving.
More so in those sectors where small firms are an integral part of business supply chains when contracts have been negotiated for 12-month or even longer periods. Large companies are hardly likely to renegotiate contracts to help or benefit small contract supplies when their own profit margins are under attack. Sympathy, yes. Understanding their position, yes. But renegotiation of contracts, sorry but no.
One of the major tasks the government is facing in implementing its Energy Relief Scheme is to tackle the fact that most businesses negotiate their energy contracts with suppliers on a one- or two-year basis. But the proposed scheme is only for six months. Each contract will have to be reviewed. Where are the government resources to do this?
The government has clearly taken the decision the future of energy prices is unpredictable (rightly so) and, very probably, short-term. The majority of energy experts, however, seem to be of the opinion this is a long-term issue and needs to be treated as such, by both government and business.
The view of these experts is this will be the case until the UK frees itself from the vagrancies of the world energy pricing market and gains national self-sufficiency. But that will take a long time. How many years does it take to plan and build nuclear power stations? Will the green agenda prevent fracking and even the re-opening of coalfields? What happens when the wind stops blowing the blades of the sea wind farms off Herne Bay and Margate?
The taken-for -granted utility called "energy" has suddenly become an issue of major business strategic importance. The problem for businesses today, unlike most planning and decision-making, is that it is riddled with uncertainties and out of our control.
Could this have been predicted? Some experts have seen the writing on the wall for years. But that is no relief today for small business owners whose livelihoods were already under threat, having only just survived the challenges of the Covid pandemic.
Richard Scase is emeritus professor at the University of Kent and visiting professor at Canterbury Christ Church University. He lectures around the world on social, economic and business trends.