What SMEs Can Learn from the Domestic Energy Price Cap

Recent changes in the domestic energy market highlight strategies that small businesses can adopt to weather the storm of rising costs. Although Ofgem’s announcement of an increase in the domestic energy price cap may not directly affect businesses, the trends it represents are a warning for commercial energy users.

Here’s how lessons from the domestic market can help business owners manage their energy expenses and maintain financial stability.

How the Price Cap Affects Businesses

The energy price cap limits the cost per unit of gas and electricity for households on standard variable tariffs. From January 2025, the cap will rise slightly, meaning a typical household paying by direct debit will face an annual bill of £1,738—more than 50% higher than pre-pandemic levels.

While this cap does not apply to businesses, it reflects a broader trend of high, unpredictable energy prices. For small business owners, the takeaway is to prepare for continued price volatility in the commercial market and take proactive steps to manage energy costs.

Liam McKee, Head of Digital and Growth at BusinessComparison, said: “With SMEs preparing for the hike in employer National Insurance contributions set to come into force in April 2025, the last thing they needed was another financial hit. However, before those increases take effect, which will raise contributions by 1.2 percentage points to 15%, businesses must contend with yet another rise in energy costs.

“Wholesale price increases are the main factor in rising bills for businesses, so we fully expect costs to go up across the board. This will only squeeze margins ever tighter and hit industries like hospitality - who can ill afford it - harder than most. This situation could create a perfect storm of financial pressures for UK businesses, especially SMEs, which are already grappling with pandemic recovery challenges, supply chain issues and inflationary pressures. Rising energy costs increase operational expenses and impact consumer spending power, creating a double-edged sword for businesses.

“We urge businesses to take proactive steps to mitigate these rising costs, whether by reviewing energy contracts, exploring fixed-rate options, or implementing energy-saving measures. For instance, we know 70% of firms experience difficulty comparing energy tariffs, while 43% have never switched suppliers – so this is a good place to start. Now more than ever, strategic financial planning and cost management are crucial to weathering this storm.”

Lessons for Small Businesses

1. Shop Around for Cheaper Tariffs

Domestic customers are encouraged to explore fixed-rate tariffs, which can offer better deals than those tied to the price cap. Similarly, companies should regularly review their energy contracts and compare offers from different suppliers.

Fixed-rate contracts provide predictability but come with risks if prices drop, so assess market trends carefully and consider seeking expert advice.

2. Adopt Energy-Efficient Practices

High energy costs have driven households to reduce their consumption - a strategy businesses can also benefit from. Conduct an energy audit of your premises to identify inefficiencies.

Simple changes like upgrading to LED lighting, optimising heating systems and improving insulation can significantly reduce costs.

3. Leverage Tech for Energy Management

Smart meters have become a valuable tool for domestic customers to monitor and manage usage in real time. SMEs can invest in similar technology, integrating it with energy management software to track consumption, identify peak usage times and make changes to save money.

4. Keep Payment Structures Flexible

Many households save money by paying via direct debit rather than quarterly billing. Negotiating flexible payment terms with energy suppliers can ease cash flow challenges for businesses.

Discuss options for payment plans if your company is struggling to keep up with rising costs.

5. Prepare for Seasonal Variations

Just as households typically brace for higher bills during a cold winter, businesses should anticipate and plan for seasonal spikes in energy use. Investing in energy-efficient heating systems and ensuring your premises are well-insulated can help mitigate these costs.

Planning for the Long Term

Energy analysts predict that high prices are here to stay. For businesses, this highlights the importance of long-term solutions. Installing solar panels or exploring other renewable energy options can reduce reliance on volatile markets and offer significant savings over time.

Beyond cost savings, energy sustainability aligns with growing consumer and investor expectations for environmentally responsible business practices.

Unpredictable prices and the need for careful management are challenges households and small businesses face. By learning from the strategies recommended to consumers - shopping around, managing consumption and planning carefully - SMEs can give themselves the best chance of surviving the current energy landscape.

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