People around the world are feeling the sting of the global energy crisis. As energy costs continue to rise, SMEs are hit the hardest, with nearly half of those surveyed by YouGov.uk stating they won't be able to sustain these prices for more than 12 months. The price caps on energy usage don't protect SMEs from these rising energy costs, making their futures uncertain. And with upwards of 20% of monthly business spending going towards energy, these expenses are a huge barrier to enterprise growth.
Many SMEs went out of business during the pandemic, and those that managed to survive are now hit with another challenge. Inflation is at an all-time high, and with no end in sight, SMEs can't afford to wait it out and will need to adapt and make some changes if they want to succeed in this market. It's not all doom and gloom, though, as there are solutions available, but first, it's essential to understand how rising energy costs are impacting SMEs so we can take steps to mitigate them.
Why are energy prices rising?
(credit: https://tradingeconomics.com/commodity/uk-natural-gas )
The main reason that energy prices are rising is supply and demand. There is increased demand for energy, limited supply and a lack of energy storage space. But why has the supply all of a sudden become so low?
Many factors have led to a supply of energy that is too low to meet the demand. First of all, during the pandemic, the energy demand dropped substantially since many businesses were temporarily closed or their operations were limited. This sent many energy suppliers out of business, with 28 collapsing in the UK alone since the beginning of 2021. The demand is back up, but without enough supply, we're faced with a shortage.
On top of that, Russia has closed the Nord Stream pipeline, which was a primary channel of natural gas into Europe, causing a considerable supply shortage. And the Nord Stream 2 pipeline has been postponed. As a result, The United States started rerouting many of its gas shipments that would normally go to Asia and sending them to Europe instead, leaving Asia starving for energy. On top of that, countries like the UK have lower gas reserves and low renewable energy generation because of the lack of wind, which puts more pressure on the need for natural gas for energy production.
All of these factors combined result in rising energy costs. And with the CEO of Centrica (owner of British Gas) warning that high gas prices will likely last two more years, SMEs need to take matters into their own hands to reduce their energy costs if they want to survive.
How rising energy costs are affecting SMEs
SMEs face unique challenges because of rising energy costs when compared to households or large, established organizations and companies. Here are some of the specific ways that rising energy costs are affecting SMEs.
1.Stunted growth potential
When such a high percentage of business expenses are allocated to energy costs, there's less budget to allocate towards growth. SMEs need to alter their budgets if they intend to survive, which means pulling spending from things like marketing, product development and lead generation. Energy is an essential expense that can't be cut, and that means SMEs are just working to stay afloat rather than working on scaling up. Until an energy reduction solution is found or prices drop, SMEs are faced with stunted business growth potential.
2.Passing energy costs onto customers
75% of SMEs say that rising energy costs mean increasing the cost of their products and services to make up the difference. It's understandable that if business expenses rise, SMEs somehow need to cover those costs. But contrary to larger companies with an established and loyal customer base, SMEs can risk scaring away potential customers with price hikes. Where a temporary price increase at Starbucks likely won't deter customers forever, SMEs may find themselves losing business.
3.Staff reductions
Because of rising energy costs, many SMEs are forced to implement salary cuts or reduce the number of staff they operate with to save money. Operating with a skeleton crew puts strain on the employees, which lowers job satisfaction, productivity and staff retention. Employees are experiencing lower job security, and there are fewer opportunities for employment in general. When SMEs only employ enough staff to keep the business operational, it also means less business development and innovation opportunities since there isn't enough personnel to allocate to anything but the bare minimum.
4.Implementation of energy reduction measures
With no end to the global energy crisis in sight, SMEs have no choice but to implement energy reduction measures as soon as possible. The more businesses can do to reduce the amount of electricity, gas and water consumed by various operational processes, the more they will save on energy bills. And while this seems like an obvious first step, it can be more complicated than it sounds. Without the funds to invest in more efficient equipment or green energy initiatives, SMEs need to find more cost-effective ways to manage their business's energy usage.
One of the best ways for SMEs to reduce their energy usage is by implementing a sustainability management system, including a full audit of their current usage to identify opportunities to lower it. This includes everything from switching to LED lighting, switching off equipment and appliances when not in use and educating employees on how to be more energy-aware.
5.Closure of businesses
Unfortunately, SMEs are struggling to survive due to rising energy costs, which has resulted in many going out of business. No one could anticipate that the energy crisis and the corresponding high energy costs would last this long. Many SMEs tried to weather the storm, trying to stay afloat until prices dropped again and they could recover. But the awaited price drop hasn't come resulting in SMEs depleting their savings and having to close up shop. For those that remain, some changes will need to be made if they want to maintain a profit margin.
What are governments doing to support SMEs?
If you are an SME, you should be aware of the many government programs that can help you reduce your energy costs. While no SME should rely entirely on government aid, every little bit of support helps. Some of the government incentives available include:
Tax breaks for SMEs
Grants from local councils and governments
Subsidies for switching to renewable energy products, green technology and implementing carbon reduction initiatives
In the United Kingdom and Northern Ireland, the government is offering an Energy Bill Relief Scheme, applying discounts to energy usage between October 2022 to March 2023 for SMEs, charities, and public sector organizations. To be eligible, businesses must be on fixed-price energy contracts that were agreed to after December 2021 or be signing new fixed-price contracts, or be part of a flexible purchase contract. This scheme discounts electricity and gas unit prices based on a baseline government-supported price. But it is set to change once it expires in March. The current scheme is said to be unsustainably expensive for the government, and the level of support is set to be cut by more than half. Find out more about the Energy Bill Relief Scheme here.
While we encourage all SMEs to take advantage of any support their local government offers, the United Kingdom government scheme serves as an example that businesses cannot rely entirely on long-term relief. Instead, SMEs must work to mitigate the impacts of rising energy costs themselves.
How can SMEs mitigate the impacts of rising energy costs?
As the price of energy rises, SMEs are losing money. But there are steps you can take to mitigate those costs to minimize the impact that rising energy costs have on your business. Reducing energy consumption should be the first place you start since it won't eat into your business budget, which is already stretched thin. Instead, it just requires you to implement changes in how your business operates. A sustainability management system with a strategic energy management plan can ensure that you're tapping into every opportunity to reduce consumption and lower your monthly energy bill.
But SMEs also need to look at investing in energy solutions that will make a long-term difference because there is no way of knowing when energy costs will come down. Things like installing smart meters, upgrading inefficient machinery, draught-proofing your facility and switching to green energy solutions will all help ensure the long-term stability of your business, regardless of the state of the energy market.
If your SME needs extra support to identify the most effective ways to reduce energy consumption and cut energy costs, Green Interval can help. Through the Green Interval Capability Framework, we help SMEs to adopt sustainable business practices that not only allow them to operate effectively and sustainably but also accelerate growth. Get in touch to find out how Green Interval can help you.