Small firms brace for crippling rise in energy costs as relief scheme ends

Small businesses with flat rate energy deals will face a sudden, crippling increase in their bills when the government’s current Energy Bill Relief Scheme expires in April. Many could go bankrupt.

Thousands of companies signed up for fixed rates last year, when energy costs rose to record highs. They hoped to shield themselves from the uncertainty of future price increases.

The exemption scheme, introduced last October, helped cut costs by effectively limiting the price of gas and electricity. For example, a company that committed to 75 pence per kilowatt-hour (kWh) paid 21.1 pence per kWh thanks to the cap.

But last week the government announced that from April the ceiling will be replaced by a new scheme, the energy bill discount scheme, which amounts to a much less generous discount on the energy bill.

As a result, a company set at 75 pence per kWh will pay 73 pence per kWh from April – a discount of just 2 pence per kWh.

Unlike households, companies that take out a fixed-rate contract are stuck and unable to look for a better deal if wholesale prices fall. More and more small business owners are considering closing their shop altogether.

The Butchers Arms pub in Sonning Common, Berkshire, is closing next month due to rising costs. Energy bills have already risen from £20,000 to £60,000 a year and could rise even higher when the price cap is replaced by the new discount scheme in April.

Gavin Mansfield, a business development manager for Brakspear brewery and pub company, of which The Butchers Arms is a tenant, says he’s never seen things so bad in his 33 years in the industry.

“Some pubs are seeing bills go up three or four times,” he says. ‘Most of them have a permanent contract and cannot switch suppliers, so they are stuck. I don’t know why the government hasn’t set a proper cap or allowed commercial properties to switch if they can get a better deal.’

Pubs, due to their tight margins and high energy costs, are likely to be particularly hard hit by lower energy bills.

Under the current scheme, a pub could receive up to £3,100 a month in aid, depending on energy consumption. The Treasury estimates they will only get £190 a month under the new scheme.

Mick and Claire Sugg run The Hare & Hounds, a neighboring pub to The Butchers Arms. They manage to keep the pub open by closing early when there are only a few customers and by not turning on kitchen appliances such as deep fryers unless pre-booked for food.

But they, too, will face an even bigger battle from April. “If I took out an energy contract today, there would be no way out, even if prices fall,” says Mick. ‘Pubs are closing all around us because of the situation – I’ve never seen anything like this before.’

Small businesses with variable rates are better placed as wholesale prices have fallen significantly in recent weeks. They pay about 17.25 pence per kWh for electricity and 5.71 pence per kWh for gas.

However, if wholesale prices rise again, these companies will be very vulnerable. The new rebate is about 2 pence per kWh on electricity and 0.7 pence per kWh on gas, and would not take effect until wholesale prices start to escalate.

Threat: Abdul Majid faces utility bills of £6,000 a month

The discount remains static no matter how high wholesale prices rise, so small businesses will once again be directly exposed to the volatile energy market due to Putin’s war with Ukraine.

The government has earmarked £5.5bn for the Energy Bills Discount Scheme, which will run for 12 months, to replace the current Energy Bill Relief Scheme, which has cost around £18bn.

Paul Wilson, policy director for the Federation of Small Businesses, says moving from a price cap to a discount will cripple small businesses.

“We will certainly see more businesses closing, and if energy prices rise again to the high levels we have seen before, the number of closures will be much higher,” he says.

‘We are moving from a scheme that gives a fair amount of certainty about the price that companies have to pay for electricity and gas, to a scheme where you may get a very limited discount, and only in circumstances where the price you pay exceeds a certain threshold.’

Abdul Majid, from Bellshill near Glasgow, has run his successful post office and convenience store Baba’s Kitchen for 14 years and was awarded the MBE for his services to charity and the community.

He worries about what will happen if his energy bill is exposed to the wholesale markets. His bills have already risen from £2,000 a month to £3,500 and he’s been told they will rise further to £6,000 in April.

“The scary thing is that my business is being threatened by something beyond my control,” he says.

“I feel like I’m being held to ransom by the energy companies and while I should get some benefit from the discount scheme, I’m still looking forward to a big raise, which will affect the company, my household finances and potentially the community.” .’