The energy crisis squeezing business and consumer finances today is not without precedent. As Russia continues to use its gas supplies as a weapon in its war with Ukraine and, in turn, the West, commentators have compared today’s situation with the energy crisis of the 1970s.
Back then, a political conflict deliberately disrupted supply chains and caused surging energy prices. The recession that stemmed from this disruption differed from its predecessors by simultaneously causing high inflation and high unemployment – a phenomenon known as stagflation.
The Bank of England has made it clear it will do everything it can to stop inflation and stagflation from taking hold in the UK economy. But unfortunately for businesses, the solutions to stemming the rise of inflation threaten to tip the UK into a recession.
After the biggest interest rate rise in 27 years, the Bank of England warned last month that the UK will fall into a recession later this year. This downturn is forecast to last until the end of 2023, with economic growth expected to grind to a halt next year.
Increasing business interest in renewables
But if there is a silver lining to the current energy crisis, it’s the increasing demand from businesses for clean and renewable energy supplies.
The combination of high costs associated with non-renewables and longstanding concerns about the environmental impact of fossil fuels has reframed renewables as a more economical and reliable source of energy than dirtier alternatives. The first half of 2022 saw a record investment globally in renewable energy, which reached $226bn (£191bn). Solar and wind were the most popular choices, according to BloombergNEF.
Unless businesses realise the cost of fossil fuels unsubsidised then the switch to renewable green energy is not going to happen quickly enough
Christophe Williams is the co-founder and CEO of Naked Energy. He does not believe the energy crisis will be an immediate catalyst for widespread renewable adoption, pointing to our recent history with fossil fuels as proof that our energy habits are hard to shake.
“Covid showed us that after lockdown and when economies wanted to reboot, the first thing they did was burn fossil fuels. It’s low risk. Investors love it because it’s a very steady return. It’s a safe investment.”
The value of onsite green energy
Williams notes that the ongoing energy crisis creates an opportunity for companies to protect themselves from future price shocks. He says firms that switch long-term to clean energy now will be better placed to weather future economic uncertainty and primed for the next big energy challenge facing businesses: net zero.
One option that some businesses are pursuing is generating their own green energy onsite. Research by NatWest Group found that 7% of SMEs have already started to invest in onsite green energy generation, with most of this investment going to battery storage and installing solar panels. This figure is predicted to double next year, meaning that by 2023 around one in six SMEs (17%) will generate and store their own green energy onsite.
The push toward onsite green energy generation from SMEs is timely, given the disruption in the energy market. British Gas is reportedly planning to stop selling energy to its biggest business customers, while in March ScottishPower announced plans to stop supplying its British industrial and commercial customers.
Williams says the decisions taken by British Gas and ScottishPower are typical of an energy market that lacks both “independence” and “forward thinking”.
He says: “Businesses need to become more energy independent. Gaining this independence is a great way to keep energy costs low. Making your building more energy-efficient is the first step, so insulate it and get your onsite renewables to cover your heat and power needs. Energy efficiency is incredibly effective at bringing down demand because the cheapest energy you’ll ever use is the energy you don’t use.”
Nigel Pocklington, CEO at Good Energy, agrees with this view, adding that despite the requirement for a significant initial outlay, switching to onsite green energy generation is a win-win for businesses by reducing energy costs and signalling a commitment to the climate to customers.
“Businesses were already shifting towards renewables because that’s increasingly what their customers expect. The UK market is such that the cost benefits of renewables are difficult for businesses to access unless they invest in generating their own clean power, because energy prices continue to be set by gas. But what is positive is that this has not diminished interest from businesses in switching to renewables.”
The cost of switching to renewables
But for many businesses, finding the investment to make onsite green energy generation viable is not possible in the current economic climate.
The cost-of-living crisis and the drop in household disposable income are impacting businesses at a time when they are also grappling with supply chain issues and high inflation. Corporate insolvencies in England and Wales rose by more than 80% in Q2 compared to a year earlier, while the number of firms opting for liquidation hit the highest level for at least six decades.
Businesses were already shifting towards renewables because that’s increasingly what their customers expect
High energy costs appear to be driving this trend, with 77% of business leaders saying energy prices are the biggest challenge facing their company, according to research by Npower Business Solutions.
“There is rightly a national conversation happening about the economic and wellbeing hardship on people right now, with less about the pressure on businesses,” says Pocklington.
“There will be more insolvency, uncertainty and increased prices across the economy unless there is significant government intervention to tackle rising energy costs for both people and businesses.”
Government supporting the transition to renewables
The government’s role in alleviating the energy crisis and incentivising widespread renewable adoption among businesses has been under the spotlight again after the passing of the Inflation Reduction Bill in August. The long-awaited legislation is a significant victory for the renewables sector, with $369bn going toward encouraging the production of renewable electricity plants.
Williams believes action on a similar scale is needed in the UK to ensure that the businesses that have switched to renewables during the energy crisis do not return to fossil fuels once the prices have normalised. “It’s frustrating when you consider that roughly $11m per minute is going toward subsidising fossil fuels. The switch to renewable green energy won’t happen quickly enough unless businesses realise the cost of fossil fuels unsubsidised and we divert the money used to subsidise fossil fuels to create cleaner grids, cleaner infrastructure and facilitate the energy transition.”
But according to Rhianna Wilsher, director and clean energy lawyer at Freeths, the UK government’s focus on tackling the cost-of-living crisis for consumers may limit the support offered to businesses. “The pinch that the government finds itself in is that introducing financial incentives or tax cuts to support development or rollout of renewable technologies has previously been funded by an increase in green levies on consumers’ energy bills.
“The need to reduce energy bills to ease the cost of living is seen by many as a priority over the imposition of green levies and is currently being used as a political football. This may hold back the government’s investment in renewables, over the need to ease the cost of living.”
The energy crisis squeezing business and consumer finances today is not without precedent. As Russia continues to use its gas supplies as a weapon in its war with Ukraine and, in turn, the West, commentators have compared today’s situation with the energy crisis of the 1970s.
Back then, a political conflict deliberately disrupted supply chains and caused surging energy prices. The recession that stemmed from this disruption differed from its predecessors by simultaneously causing high inflation and high unemployment – a phenomenon known as stagflation.
The Bank of England has made it clear it will do everything it can to stop inflation and stagflation from taking hold in the UK economy. But unfortunately for businesses, the solutions to stemming the rise of inflation threaten to tip the UK into a recession.
