Research by Energy Systems Catapult has found that SMEs are contending with energy bill price rises of between 167% and 500%.
The report Back from the Brink: How SMEs are taking control of their energy management and why extra support is needed found that inflation and energy costs had created real financial hardship for smaller companies.
The research, for carbonTRACK into the experiences with energy of seven West Midlands firms, also found that more than half said that energy bill increases had negatively impacted profit margins.
On a more positive note, five of the seven businesses said they had carried out assessments of their energy consumption in a bid to drive down energy use
However, the same proportion expressed concern about the Energy Bills Discount Scheme (EBDS), which the government introduced in April 2023 to support non-domestic energy users. The ESC said that businesses felt that they would not benefit due to the high thresholds proposed or that their energy bills would increase further due to the lower discounts available (in comparison to the former Energy Bill Relief Scheme).
The comments of the managing director of Smethwick-based JCM Fine Joinery were typical. He said:
It has been an utter shock – any business cost that more than doubles overnight without negotiation is always going to be difficult to swallow.
Many SMEs are putting measures in place to improve energy efficiency, ESC said. Five of the seven businesses had conducted their own studies to investigate on-site energy consumption, while three had engaged academic institutions to explore energy efficiency improvements. Solar energy is increasingly becoming an attractive option for SMEs looking to cut their bills with six of the seven firms investigating the potential for solar deployment. Some businesses were also considering energy management dashboards, voltage optimisation equipment and battery storage.
However, one of the most significant challenges identified by SMEs relates to cost; both in terms of the high upfront costs of low-carbon technologies as well as scarce access to financial resources to fund investments.
SMEs have also encountered difficulties when trying to measure their carbon footprint due to the absence of data or monitoring systems, the ESC noted. Unlike large businesses, SMEs do not legally have to disclose their annual energy usage and greenhouse gas emissions. However, they may be required to do so if they supply to large business customers. This could become a more pressing issue in future if carbon reporting requirements are mandated for SMEs, the ESC said. Having limited access to data also means that SMEs may find it difficult to track their progress towards sustainability targets
Key areas for policymakers
The report highlights three key areas of focus for policymakers:
- Gas and electricity prices have recently fallen below the baseline thresholds set by the EBDS, meaning that businesses may not benefit from the scheme at all. Despite recent decreases, wholesale energy prices are still considerably higher than they were pre-COVID. If this remains the case, businesses will continue to feel the impact of high energy bills.
- Despite conducting energy consumption studies, some businesses felt that they needed access to more detailed energy consumption data to make informed decisions relating to energy management, and hopefully allow them to reduce energy costs and cut carbon emissions.
- Although all businesses felt that it was important to do their bit to combat climate change, five of the seven identified cost as a barrier, while four felt that the UK government had not provided enough financial support to help manufacturing businesses to decarbonise.
The ESC said that all the businesses surveyed felt that it was important to do their bit to combat climate change. When asked what benefits this may have for their business, three businesses stated that it would be financially beneficial to reduce energy consumption as it would lead to lower energy bills. However, it was frequently brought into question whether businesses could take on the costs of new, low-carbon technology in addition to rising energy and raw material costs.
One of the most frequently reported challenges concerned the long payback times of energy efficient and low-carbon technologies. Although businesses recognised the environmental benefits of such technologies, they reported that payback times often stretched beyond their typical investment horizons. For example, one business had recently researched an energy dashboard that had a twelve-21 year payback – more than double what they would consider a suitable payback time of five years.
Another challenge flagged by businesses was the high-cost of converting existing assets to low-carbon alternatives with little to no incentive to do so. One business reported that it would cost them approximately £17m to convert their gas furnaces to electric alternatives. They then explained that adapting electrical furnaces to perform to the standard of their existing assets would be incredibly difficult in their industry. Another business reported that, at present, it would not be cost-effective to decarbonise their industry. They reported that it would require billions of pounds to fundamentally change operations and that not all customers would be willing to pay for a lower emission product.
In addition, four of the seven businesses identified limited government support as a challenge to combatting climate change. Some of these businesses felt that the UK government had mandated net zero without supporting the manufacturing sector in achieving this target. This barrier was discussed in two different ways. Some companies felt that the transition to net-zero had not been clearly defined by the UK government and that there were no “clear” policies to “motivate” businesses to change.
Others said that the UK government had not provided enough financial support to help decarbonise the manufacturing sector. On this topic, one business felt that grant funding for decarbonisation initiatives was often awarded to larger companies and believed that there should be more support made available to SMEs running ‘traditional businesses.’
Reace Edwards, Business Modelling Consultant at Energy Systems Catapult, said:
We are witnessing more and more SMEs looking to take back control of their bills by engaging with third parties, implementing internal energy management policies, or by deploying renewable generation technologies and energy efficiency improvements on site. The businesses we interviewed are however, looking to the government for more financial assistance to ensure they can weather the storm. Not only would this aid them in paying their bills, but it would make decarbonisation a cost-effective option for SMEs in our region. We cannot decarbonise while the cost of doing so for these businesses remains at a record high.
