Energy bills: Tens of thousands of firms ‘face collapse’ without helpon September 7, 2022 at 10:32 am

Tens of thousands of businesses are at risk of going under without government support because of soaring energy bills, according to insolvency experts.

Red Flag Alert, which monitors the financial health of firms, told the BBC previously profitable companies are experiencing significant losses.

Among those that survive, many will be forced to make workers redundant, the consultancy said.

Firms are waiting to hear if they will get help with their energy bills.

On Thursday the government, led by new prime minister, Liz Truss, is expected to announce significant financial support for households facing an 80% rise in the energy price cap in October.

Businesses are not covered by the cap, however, and Red Flag is warning that more than 75,000 larger firms that are high energy users are at risk of insolvency or are likely to lay off staff without government support.

The government’s plan is expected to include some relief for businesses – but details are not yet known.

According to Red Flag, many firms will face a choice between paying wages or paying energy bills.

“Businesses can’t absorb these costs and they’re going to be forced very quickly into a decision about headcount or being able to pay energy bills,” said chief economist Nicola Headlam. “That’s going to be the reality and it’s coming down the track very quickly.”

According to Red Flag Alert, there are 355,000 companies with a turnover higher than £1m that are designated as high energy users – industries such as steel, glass, concrete, and paper production. Of those, the company estimates 75,972 are at risk of insolvency, and they estimate 26,720 of them could fail because of energy costs. That’s in addition to the 26,000 insolvencies they’d already predicted this year.

“That is a colossal number of people whose businesses will fail, without a large scale support package from the government”, said Ms Headlam. “That’s more than during the pandemic, and more than in any other recession,” she said.

“A business turning over a million pounds two years ago would have spent around 8% of that on energy costs and made profits of around £90,000”, she said. “If the cost of energy doubles to 16%, that instantly wipes out profitability, and they’re straight into a scenario where it threatens the viability of the business within a year.”

Beyond the large, energy intensive companies, smaller companies with turnover under £1m, were also at risk of failure, Red Flag Alert said. It highlighted the hospitality sector where firms face a triple threat of increasing energy bills, higher supply and staffing costs, and a fall-off in consumer spending, squeezed by inflation.

That is certainly the case for James Greenhalgh, who runs Flamingos Coffee House in Leeds, and a bar in the city too. The combined energy bill for both is due to leap from £1,500 to around £10,000 from the beginning of October.

“That’s more expensive that our wage bill. That’s just catastrophic,” said Mr Greenhalgh.

“It’s an extinction event for many businesses like mine,” said Mr Greenhalgh.

“I’ve been speaking to so many similar businesses in Leeds and everyone’s in the same situation – considering whether to try and battle through, mothball sites over the winter and hope things improve, or whether it’s game over.”

“The only thing I can do is wait to see what help the government will give. I can’t innovate out of it. I can’t put prices up because our customers don’t have the money.”

Without rapid government help, Mr Greenhalgh said he would have to close one of his sites, and make staff redundant.

“If the government had stepped in two months ago, it would have made a much bigger difference. The delays this summer have slammed customer confidence”, he added.

Red Flag Alert calculates businesses overall will need £100bn a year in support to tackle the rise in energy bills.

While hospitality is not included in that figure, speaking to BBC R4’s Today programme, restaurateur Martin Williams warned that thousands of smaller firms in the industry were also at risk.

The boss of the Gaucho steakhouse chain urged the government to consider energy bills help, as well as VAT cuts and business rates reform.

“There needs to be some confidence and that can only come from government support by the prime minister and the chancellor,” he said.

However the government is already under pressure over how it will finance a promised package of support for households, while sticking to promises to cut taxes.

Ms Truss is understood to be planning to borrow up to £100bn to to limit the expected sharp rise in energy bills for households and firms.

Right now, the annual energy bill for a typical household is £1,971. From 1 October, however, that’s due to rise 80% – to £3,549. It is understood that the plans will see a typical household energy bill rise to £2,500 instead – about £1,000 less than expected, but still about £500 more than at present.

As well as households, businesses are also expected to receive some help. Many firms are currently facing even sharper rises than households and many fixed-rate deals for business expire this October, exposing thousands of firms to full costs that could rise by four or five times or more.

In her victory speech, Ms Truss pledged to “deliver on the energy crisis”.

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