How to beat the energy crisis

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The energy crisis is hitting businesses hard,  but thousands of pounds can be saved by negotiating fixed or pass-through terms and taking advantage of energy policy incentives.

As the energy crisis continues to bite, what could and should accountancy firms and their SME clients do to weather the storm?

Despite significant reliance in the UK on fossil fuels for electricity and heavy industry, the UK also has some of the lowest amounts of gas storage capabilities in Europe, making our domestic market uniquely exposed to the current supply crunch. Energy market volatility has caused SME’s gas bills to rise between 250% and 400% in the last year.

Red flag alert

Having emerged from the pandemic, many companies were hoping for an economic boom but instead many are now bracing themselves for recession as the combination of supply chain issues and the war in Ukraine have served to drive up raw material and energy costs, reducing both business and consumer confidence.

According to the latest Begbies Traynor “Red Flag Alert” report, the number of companies rated as being in “critical financial distress” continued to rise, jumping by more than a third in Q2 2022 compared with the same period last year to 1,957, and edging up 3% compared to Q1 2022.

“I am particularly concerned for those small businesses who operate in energy-intensive sectors, such as manufacturing, as some could simply become unviable. Without the benefit of an energy price cap, business energy tariffs have at least trebled, and for many it will be much worse,” says Julie Palmer, a Partner at Begbies Traynor.

SMEs must act

Despite the negative outlook, there are steps all businesses can take to manage energy risk and protect their budgets. Accountants’ close business relationships with clients mean they are uniquely positioned to guide them through the current crisis.

“One of the first things we would look at would be the client’s turnover and whether their prices could be raised to offset the increased energy costs or other costs that might be impacting on their business,” advises Patrick Tigwell, a Partner at accountancy firm Thomas Westcott.

Other overheads should also be reviewed to see whether savings could be made to compensate for the increase in energy costs.

Rick Smith, Managing Director at insolvency and business rescue specialist Forbes Burton, agrees that planning is critical. “Accountancy firms and their clients need to be forecasting where these rises are going to be and look to see if any savings can be made elsewhere.”

Negotiating the best contract

Having the most cost-effective energy supply contract is the foundation for energy cost control: “If your contract is coming to an end, it’s time to take action so you don’t roll over onto an expensive standard variable rate tariff,” advises Michael Dugdale, Managing Director, Trident Utilities.

Balancing short-term needs with long-term benefits is key, Dugdale adds, and thinking about your likely consumption profile over a three-year period will dictate whether you are better off on a fixed or flexible contract.

“Many SMEs are likely to have opted for fixed contracts for budget certainty but with the help of the right partner, and innovative purchasing framework solutions, flexible contracts and the benefits of increased purchasing power aren’t just for bigger businesses,” Dugdale says.

Contract conditions

An area that is often overlooked is non-commodity costs – all charges aside from the wholesale energy costs, Dugdale says. “There is the potential to make thousands of pounds of savings every year through negotiating fixed or pass-through terms and taking advantage of energy policy incentives and subsidies available to your business.”

Businesses should also turn their attention to cutting consumption. An energy audit will help clients to identify where energy is being wasted and where savings could be made. Meanwhile, encouraging employees to adopt best practice for energy conservation is an easy win.

Despite the current energy challenges, it’s important businesses don’t lose sight of the net zero goal for 2050, Dugdale warns. “While this may seem like a long way off, decarbonisation makes commercial sense now and is one way businesses can help manage overall energy costs.”

Organisations should look at whether they could increase energy resilience with energy-saving measures and on-site generation including solar PV, air source heat pumps, LED lighting and combined heat & power or systems that switch off automatically when not needed.

Capital allowances

Funding may be available to put towards renewable energy and it may pay off to hire a consultant to help with a plan to save energy, Smith says. “It would be pertinent to advise on the capital allowances available to the client on energy conservation materials,” Tigwell says. Bear in mind too that it is important to bring in a revised estimate for energy costs in the management accounts.

While businesses may be able to absorb some of the cost themselves, they may also look to pass the increases on to their clients, in which case effective communication is key, Smith warns, “At this point clients and customers are probably expecting to see some price rises, now may the best time to do it.”

Accountants should also be mindful that they are managing any potential impact on their own firm, Tigwell warns: “Accountants always complain that they are the last to get paid! So, it’s about identifying clients that are most at risk from their exposure to energy costs and make sure that your billing and payments are up to date wherever possible.

“You might want to consider bringing in a payment on account system or setting up a monthly standing order to spread the costs for the client. It’s also a good idea to contact your SME clients more often, to see how they are coping with increased energy costs in the current climate. You may also consider whether it’s appropriate to raise your fees to offset the firm’s increased costs,” Tigwell adds.

Don’t delay

What is increasingly clear is that inaction isn’t an option, bearing in mind that the energy crisis is happening against a backdrop of widespread cost increases, including pressure to increase salaries to fund, higher fuel prices and burgeoning raw material costs

“With a warning of a recession on the cards for later this year, the tipping point for SMEs can come incredibly quickly, so this cannot be ignored otherwise profitable firms are at risk of failing due to a cash crunch,” Tigwell says.

Although day-ahead prices for gas and electricity have seen some short-lived drops, rolling average prices support suggestions of an expensive winter ahead for business energy users and energy market signals suggest that wholesale price volatility could be around for a further 12 months at least. “But through being proactive, businesses can manage their risk and make a positive difference to their energy costs, Dugdale says. “The time to take action is now.”

Further information

Rachel Willcox is a former Accountancy Age journalist, now freelancer covering business and finance.

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