As contract renewal time approaches, there have been warnings that UK businesses face a “cliff edge” with their energy costs. Roughly 70% of businesses renew their fixed-term energy contracts in October, but this time the terms on offer from suppliers will be very different. Since there is no price cap on energy bills for businesses, businesses coming to the end of a two-year fixed price contract might be facing a five-fold increase in energy costs. (Those on annual contracts may well be paying double what they paid last year.)
The new Prime Minister has announced a £150bn package of support to help the UK with rising energy prices, but it is not yet clear how much of this money businesses will get – some sources are reporting £40bn - or how the help will work in practice. We do know that support for businesses will be much shorter-lived than help with domestic bills; while household bills will be capped until 2024, the “equivalent support” offered to businesses and public sector organisations is planned to last just six months.
The new normal
If businesses can get through the winter with government support, can they expect lower prices in the spring? It seems unlikely. Analysts Cornwall Insight recently said: “Prices are already rocketing past what we previously would have regarded as record highs in 2021, and, while today’s peaks will pass…there is little expectation for them to sustain a return to the levels previously thought of as normal.” Their forecast shows that even by 2030, prices will not have returned to pre-2021 levels unless something significant changes such as geopolitical issues or monetary policy. They suggest that businesses need to come to terms with high prices as the “new normal”.
Energy-intensive businesses have been feeling the impact of rising prices for some time, and many have already taken steps to reduce their exposure. This often means moving away from traditional supplier contracts and instead signing a corporate power purchase agreement (CPPA). This means committing to buy energy directly from a renewable energy generator at an agreed price.
There are many advantages to signing a CPPA. One is the longer duration, in contrast with the market for regular supplier contracts where the terms are getting shorter. Some of the regular contracts currently on offer are for as little as three months. But a CPPA is typically set for 10 to 15 years, offering welcome longer-term certainty.
Price is another advantage. The price per unit for power sourced through a CPPA is agreed either for a specified period or for the duration of the whole contract. This could be a flat rate, or linked to the Consumer Price Index with an agreed ceiling. CPPA pricing is dynamic and affected by a host of factors, from construction and shipping costs to wholesale energy prices. (At the start of this year, the average fixed 10-year CPPA price was around £65/MWh and it is now closer to £90/MWh.) But it is almost always lower than market price. (Our guide to CPPAs explains a lot more about the different contract types.)
Weathering the storm
Pricing isn’t the only issue facing UK businesses. Security of supply is another headache. Because the UK is one of the heaviest gas consumers in Europe, uncertainty over gas imports is a concern. The National Grid is preparing for the possibility of ongoing power shortages, and over the summer it was reported that planned shutdowns could be on the cards. For energy-intensive businesses, this means reduced productivity and potential damage to equipment.
Liz Truss ruled out energy rationing in her final hustings before becoming leader, but this could cause even bigger problems. If energy supply drops beyond the point of meeting demand, there could be shutdowns anyway – just unplanned ones. While a schedule of planned downtime could work with businesses and their needs, perhaps building in certain exemptions, unexpected blackouts would cause chaos.
Businesses need to respond proactively to all this uncertainty by coming up with their own energy security strategy. ENTRNCE has created a guide specifically for energy-intensive businesses about how to protect yourself from rising costs and gain energy security while also making progress towards net zero goals. It would be disastrous to wait for government to act or for external forces to bring energy prices down. It’s time to take control and make a plan.