By Chris Bowden, Managing Director of Squeaky
On 8th September 2022, Liz Truss announced the government’s support scheme for businesses. In her statement, she stated that gas and electricity costs for UK businesses, charities and public sector bodies will be capped for six months.
The Department for Business, Energy & Industrial Strategy (BEIS) then announced that the scheme (known as the Energy Bill Relief Scheme) would be calculated based on a benchmark wholesale price for electricity of £211 per MWh and £75 per MWh for gas for the six months starting on the 1st October 2022, with the scheme applying to contracts signed since December 1st 2021.
The discount a business receives will depend on whether it is on a fixed or a flexible contract.
Certainly, this support is well and truly needed. After all, it will help to cushion the biggest and most volatile cost pressure facing businesses and without it, many firms would simply collapse, and jobs would be lost. That being said, we can’t escape the reality that this support package is an extremely expensive intervention and will cost billions. In fact, consultancy Cornwall Insight, estimated that the six-month relief alone will cost up to £25bn.
At the time of writing this piece, businesses are still in the dark as to what happens when the six-month cap runs out and without a doubt many businesses will still need financial support beyond this initial period. With that in mind, it’s likely the overall bailout for the energy crisis will be by far the biggest financial support package seen in history. So much so in fact, that the government’s support could stretch well beyond the billions pledged for the Covid furlough scheme. As a result, Capital Economics has forecast that the UK’s borrowing will hit £165bn, or 6.5% of GDP, in 2022-2023, rather than the £99bn the Office of Budget Responsibility (OBR) forecast.
And let’s be real here – there has to be a ceiling to the support. It’s unlikely this size of bailout will keep coming. With this in mind, it’s important that businesses of all sizes adapt their energy buying behaviour in the long-term to not only manage their energy costs and mitigate their risk, but also maintain their commitment to the climate. Here are five ways they can do just that:
- Change behaviours to waste less energy: Billions will be spent on bailing out bills. But there is much less focus on targeting the root of the problem; businesses waste huge amounts of energy. Behavioural changes, such as turning lighting and electrical equipment off in unoccupied areas of the workplace and ensuring machinery is properly maintained, can make a huge difference. Finding and eliminating energy wastage can yield dramatic results for businesses who are looking to reduce the impact on their finances and the environment.
- Reduce energy consumption: Businesses could save a considerable amount of money by looking at their current consumption practices and making a more diligent effort to be more scrupulous. Although this could be said for all industries, it is perhaps most relevant in industrial and manufacturing firms where energy usage can often make up a significant proportion of input costs. It’s also not just about reducing consumption it’s also important to look at shifting it as some suppliers offer incentives or reductions in pricing if you shift your consumption away from peak hours like 5pm.
- Hedge wisely: Some firms have done a good job of hedging their energy. As a result, they have shielded themselves from the volatility of the energy crisis. Others have, unfortunately, decided to bury their heads in the sand hoping the price would come back down. This is no time to put risk mitigation on the back burner. Hedging is essential to ensure firms are covered when the bailout dries up.
- Double-down on securing longer term energy security: Without a doubt, this is the time to double down on energy security. One way to achieve that is with a Corporate Power Purchase Agreement (CPPA). A CPPA is a long-term contract between an energy buyer and an energy generator. In short, the two parties agree to buy and sell an amount of energy which is, or will be, generated by a renewable asset. A CPPA is usually agreed over a period of 10-15 years, although we are starting to see shorter terms. Businesses can use a CPPA to mitigate risk by protecting against price volatility and securing price certainty, they can also buy energy at below wholesale market prices and lock in a long term supply of clean energy. A CPPA will also enable them to trace their energy so they know it’s 100% clean, reduce their scope 3 emissions and accelerate their net zero journey.
- Start to innovate: When it comes to sustainability, one of the biggest tech developments is the capacity to create, capture and transmit data. Learning and acting on this data is a critical feature of the sustainability agenda. Advanced analytics supply businesses with insight into how efficient they are, ultimately helping to pinpoint opportunities to reduce environmental impact. Artificial intelligence (AI) and Robotic Process Automation (RPA) developments are also making a significant contribution here, helping optimise operation efficiency and process accuracy. But innovation is not just about data. Businesses must innovate their thinking too. They need to be open to and commit to collaborating in green finance, invest in clean technology and use their powerful voices to back social movements that call for positive change.
Let’s be frank here; there is a real risk that businesses will treat the government bailout scheme as a get out of jail free card for their lack of prudence ahead of the crisis. But if business leaders operate under the proviso that they will always be bailed out, it’s unlikely they will exercise caution on such important matters in the future. And when it comes to the climate agenda, this simply just won’t do.
Certainly, the energy crisis is entirely out of businesses’ control. But corporate leaders should use this as a wakeup call and start to put in place processes and behavioural changes to ensure long term stability, whilst all the while being more climate conscious, too.