Energy Lifeline For Business But Challenge Remains Amid Zero-Carbon Concerns

Q2 2022 hedge fund letters, conferences and more

Business Feel The Impact Of High Energy Bills

There will be a big sigh of relief among company bosses that finally a balm will be available to limit the impact of scorching energy bills on their businesses.

The support will be ‘equivalent’ to the household energy freeze but there will be disappointment that it’s only temporary help, with a review after six months. Given that the energy crisis could last three years or longer, many firms are crying out for longer term stability.

Even so, every little bit of help will count and it can’t come a moment too soon given how desperate so many firms are in the face of crippling energy costs.’

In the latest ONS snapshot of businesses concerns input price inflation and energy prices remain the top two worries for October.

More than a fifth of companies are at the mercy of the market, and on variable rates for electricity, while another 10% said their fixed or hedged deals would expire by the end of the year.

So almost a third of firms are highly exposed to the huge price surges we are seeing in the price of electricity.

Almost one in 7 firms are also coping with variable rates for gas prices too, and with costs shooting up to fresh record levels, the situation is likely to have led to quite a few sleepless nights.

It’s little wonder that there have been warnings of mass business collapse from the hospitality sector given the whirlwind of price increases.

Given the bleak picture it’s still going to be tough going for businesses to ride out the economic storm ahead even with these latest measures to help.

Energy worries and high business costs may be at the top of the pile of financial pain but companies are also still grappling with plenty of other problems.

Supply chain snarl ups haven’t eased with more than a fifth (21%) of companies reporting disruption and more than a third (36%) facing ongoing problems with staff shortages.

These are also fuelling the price spiral with higher wages being offered to lure staff, and rising input costs being passed onto customers.

Weakness In Sterling

There is a worry that the Bank of England will still find it hard to dampen down on inflation even with this shock and awe blitz on bills by the government. As interest rates look set to move ever higher, and consumers are still forced to tighten belts further, a recession is on its way.

The pound has lifted above $1.15 as Liz Truss made her announcements but it’s still languishing around lows not seen since near the start of the pandemic. The worry is that continued weakness in sterling will fan the flames of inflation even more, as it makes imports more expensive.

Worries about the risks to future UK financial stability by increasing the debt burden even more is also weighing on markets, particularly as around a quarter of UK borrowing is inflation linked.

Given the volatile nature of the energy markets, freezing bills will require an elastic budget and there is a risk that overseas investors who the UK relies on for borrowing, will baulk at financing a ballooning debt.

The might of the dollar is also a major factor in sterling’s weakness as investors seek safety in the greenback amid the turbulence elsewhere and while storm clouds continue to gather over the global economy, the dollar’s strength looks set to continue.

Her determination not to impose a further windfall tax on the oil and gas sector and her vision for the UK to become a net energy exporter is adding to the strength of companies in the sector which have already been boosted by super-high gas prices and elevated crude costs.

Shares in BP plc (LON:BP) and Shell PLC (LON:SHEL) surged as the Prime Minister gave her speech. However, given that the UK is in such a crucial stage of its net zero transition, the support given to a significant scale up of oil and gas exploration, and the scrapping of the fracking moratorium is worrying.

Although it is encouraging that Truss has reaffirmed her support for the UK's 2050 net zero goal, and set out the ambition to speed up the deployment of clean technologies, it is of utmost importance the new Prime Minister stays committed to a clear and achievable carbon transition path.

This is particularly important given that the UK government’s net zero strategy was previously ruled unlawful as it didn’t explain how targets would be met as it breached obligations under the Climate Change Act 2008. Increasing the energy efficiency of homes, in particular, is a key long-term solution to the rising energy rises.

Article by Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown