Following the raising of the cap for household energy last Friday, there is a lot of worry about rising domestic energy costs for winter 2022.
Due to high energy prices, there could be an unprecedented number of otherwise healthy businesses failing.
One thing is certain. It is harder to pay bills at home if out of work and the ripple effects of high energy costs across the economy threatens more livelihoods than the pandemic and economic shutdown did. SME’s will have to start building a survival strategy the simplest one a choice between employment or paying the energy bill to survive.
Many of these companies will be forced to lay off staff to avoid failure.
That’s according to the UK's number one insolvency scorecard, Red Flag Alert.
Red Flag Alert data shows that the recent increase in energy bills could lead previously profitable companies to experience significant losses.
A £100bn Problem
According to Red Flag Alert, there are 355,000 companies with a turnover of higher than £1m designated as high energy users (BEIS DUKES)*. Of those, 75,972 are being put at risk of insolvency due to energy price hikes. Red Flag Alert estimates that the price increases could cause 26,720 of those companies to fail.
These insolvencies will begin in 2023 and are additional to the already high levels being experienced (Red Flag Alert predicted 26,000 insolvencies in 2022, and this forecast is accurately reflecting reported government figures).
While the statistics are shocking, this data only includes businesses with a turnover of over £1m. There are many more small businesses, especially in retail and hospitality, that will also face failure due to increased energy costs. Red Flag Alert predicts that mitigating this decrease in profitability will cost £100bn a year in business support.
We have worked on 3 core scenarios; GDP as -0.5, 0, 0.5, and segmented by Firm level Asset base (RFA rating) and growth propensity score (GP)
Our core Scenarios lead top 3 potential outcomes;
Stagffluent, Stagfluid and Stagflattened
- Stagffluence involves inherited and widening inequalities producing relative affluence for some, but seeming terminal stagnation for others. In general asset rich businesses have a wider range of options and can mobilise survival strategies by focussing on innovation.
- Stagfluidity is a bigger and wider category (by grouping businesses in the muddled middle together you can see trends and patterns) Many businesses in this category have incurred debts in the pandemic, from stimulus and at lower interest rates and may be less resilient in the face of rising costs.
- Stagflattened are those whose debt burden cannot be restructured or their offer reimagined. To avoid stagflattening businesses which may have been viable in better times there must be a series of mitigation measures from government depending on; size, sector and scale of challenge faced by small business.
Energy-Intensive Sectors Worst Affected
In 2020, the average energy cost for all UK businesses was 8%. This figure varies between sectors and will be higher for those with greater energy requirements.
Energy-intensive sectors with high exposure to energy costs include:
- Wholesale and retail.
- Agriculture, food and farming.
Businesses in the hospitality sector are also at risk as they face a triple threat of increasing energy bills, higher supply and staff costs, and poor consumer confidence.
These sectors are unevenly distributed around the country. This means that some regions will be impacted by soaring energy costs more than others.
Lay-offs Could Damage the Economy
Government support for households is important. However, supporting businesses in dealing with uncapped energy costs should also be a priority.
If the government doesn’t provide financial support to businesses, many could be forced to lay off staff. A rise in unemployment would put untold pressure on households and would be catastrophic for the economy.
*In 2020, the average business with a turnover over £1 million spent 8% of it on energy and achieved a profit of £90k. If the cost of energy doubles to 16%, then the same firm turning over £1 million will post an operating loss of £230k.