Despite a recent cold snap and some stormy weather, business owners and directors can be thankful that, so far, we’re enjoying a relatively mild winter and they will not have had increased heating and energy bills to contend with.
Gas and electricity prices are now a higher proportion of a business’ outgoing than they have been in many years, if not ever.
So what has happened to business energy costs recently and what is the best estimate about where they could go in 2024?
The first statement to make is that energy prices stabilised in 2023 compared to high volatility in 2022. This doesn’t mean they have reduced.
They are still double the level they were in 2021 so a 100% increase while the inflation rate was 11% shows the scale of the prices rise.
Households saw an energy price cap come into effect in 2019 but there has never been an energy price cap for businesses and still isn’t. The Energy Bill Relief Scheme was launched for six months in 2022 and was replaced by the Energy Bills Discount Scheme (EBDS) in 2023 to help mitigate their effects.
Unfortunately, EBDS expires on March 31st 2024 with no replacement lined up although as energy prices have yet to cross the required threshold to trigger the discount since December 2022, the scheme has effectively not operated.
Why are energy prices so volatile?
Basic issues of supply and demand have been a factor in the recent volatility of the past two years. Prices increase when energy is in short supply and will go down when supply levels are greater.
But extraneous global events, coupled with supply and demand fluctuations have pushed up prices beyond levels seen in recent times. These include:
- Supply shortages – a prolonged cold winter in Europe between 2020 and 2021 helped drain natural gas storage capabilities across the continent
- Higher demand – Increased demand for liquefied natural gas (LNG) from Asia has seen lower LNG shipments to Europe
- Nord Stream 1 closure – the pipeline transported gas from Russia to Germany and then on to other destinations but was closed after Russia invaded Ukraine.
- Infrastructure – The closure of Nord Stream 1 and the postponement of Nord Stream 2 which would have had a 55 billion cubic metre capacity that bypassed Ukraine, coupled with a fire at Freeport LNG terminal in Texas has severely impacted the amount of LNG being exported to Europe.
There are also some UK-specific factors that have impacted businesses in our country too. These are:
- Nuclear energy gap – The UK does not have as much nuclear energy capability as our neighbours and combined with relatively low winds in the past couple of years means that a higher proportion of the UK’s electricity is generated using gas during its production. An unfortunate side effect of this arrangement means that the price of renewable energy in the UK is tied to the price of gas so if gas prices rise, so do renewable energy prices, despite being more environmentally friendly.
- Infrastructure damage – a fire at a National Grid site in Kent knocked out a power cable between England and France that is used to import electricity from the continent. This was not repaired until late 2023 but the lagging effects still increased prices
- Low reserves – The UK has some of the lowest gas reserves in Europe with no method of stockpiling gas to use when required.
- Insufficient government support – France capped all electricity price increases to 4% during the price surge; although welcome the two discount schemes provided for UK businesses did not provide savings anywhere near a measure like this would have achieved.
- Inefficient energy market – Since 2021, 28 UK energy suppliers have entered insolvency. Many had a business model that just couldn’t cope with the unprecedented increase in wholesale prices but the way the UK energy market functions means that when this happens, consumers help absorb the cost through higher bills. When Bulb ceased trading, the government placed it into special administration instead of going through the “supplier of last resort” process. Initially estimated to cost £2.2 billion over two years to process the Office for Budget Responsibility (OBR) found that an additional £4.6 billion had been spent on the special administration for a total of £6.5 billion – effectively £200 a year extra onto the annual bill for every UK energy consumer.
Where are current business energy prices?
Individual prices vary for businesses depending on their location and size but the average prices are as follows:
Average business gas prices per kWh – January 2024
|Unit Price (kWh)
|Daily Standing Charge
|Cost per year
Average business electricity prices per kWh – January 2024
|Unit Price (kWh)
|Daily Standing Charge
|Cost per year
What will happen to energy prices in 2024?
Although it’s difficult to predict exactly what will happen in a market as currently turbulent as energy, the chief executive of Centrica, the parent company of British Gas, said: “there was no reason to expect gas prices would come down any time soon” and they suggested that “high gas prices will be here for the next 18 months to two years at least.”
The government is under pressure to help business consumers either by way of a VAT cut or lowering other charges not directly linked to the wholesale price of energy.
Several trade bodies including the Chamber of Commerce and the Federation of Independent Retailers (NFRN) have also urged cuts to VAT on energy, a commercial energy price gap or an emergency energy grant for SMEs to help offset the historically high costs.
With a budget due in March in an election year, it would be foolish to suggest there won’t be any help but now prices appear to be reducing for domestic users (albeit with a price cap) it wouldn’t be surprising to see no active decisions taken either.
Energy analysts Cornwall Insight are more optimistic about price reductions in the medium term. They said: “concerns that events in the Red Sea would lead to a spike in energy bills have so far proved premature.
“Increased energy stocks and a positive supply outlook are keeping the wholesale market stable. If this continues, we could see energy costs hitting their lowest since the Russian invasion of Ukraine.”
They also stressed that a full return to pre-crisis energy bills wasn’t on the horizon as the consequences of diverting away from sourcing energy from Russia and other geopolitical tensions continued to weigh heavily on the market.
The shocks to the energy market over the past few years perfectly illustrate how precarious running a business can be and how little you can rely on outside circumstances.
This is why having your own plans in place is paramount and why using available time to build these is the best use this early in the year.
We offer a free initial consultation to any business owner or director who wants to take advantage and help protect their company from existing problems and any unknown ones that could be lying in wait throughout the rest of 2024.