Don’t Abandon Small Businesses in the Energy Crisis

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As energy prices surge, UK politicians seem to be relying on Latin American literature for guidance. Like a novel by Nobel Prize winner Gabriel Garcia Marquez, officials have lost the ability to differentiate between substance and magical realism. But companies can’t afford to live in a fantasy land.

Departing Prime Minister Boris Johnson is clearly a fan of the literary genre. In a valedictory address on Thursday, he blamed everyone but himself for the current situation: “It’s a chronic case of politicians not being able to see beyond the political cycle,” he said, blaming previous UK Labour leaders Tony Blair and Gordon Brown, out of power for more than a decade, for the problems. “Thanks a bunch Tony and thanks a bunch Gordon.”

But the Conservative Party has held power since 2010, giving it, in Johnson-speak, more than enough political cycles to change course. Yet British families face an 80% increase in their power and gas bills as the energy price cap increases from October. Businesses, meanwhile, are already struggling to afford much higher utility bills — paying the price of the government’s magic realism.

Over the last couple of months, the public debate about how to deal with soaring electricity and gas prices has largely focused on helping households. Neither Liz Truss, the current frontrunner to win the contest for No. 10, nor her rival Rishi Sunak have offered concrete solutions, while the risks to small businesses have barely merited a mention.

Families do face a tough winter, and the poorest will struggle to heat their homes. Even relatively well-off families will have to divert much, if not all, of their discretionary spending into paying for keeping their lights on and their houses warm. Against that backdrop, the plight of typically wealthier business owners may seem inconsequential. But with thousands of jobs at stake, their needs are also worthy of consideration.

Truss was asked earlier this week about how she planned to support business owners. Her response also crossed the line between fact and fiction: “You’ll have heard me talking about supply of energy and that’s why I think dealing with supply is the answer to this problem.” In the long term, she’s right; but there’s zero prospect of the UK coming up with additional supply to address the power shortages it faces in the coming winter, and her pledge not to resort to rationing energy may come back to haunt her.

Unlike UK retail customers, small- and medium-sized enterprises are not protected by the energy price cap, leaving them fully exposed to the recent brutal surge in wholesale electricity prices. For some companies, costs could surge as much as fourfold when their utility contracts are renewed, something that typically happens between now and the end of the year. In one example that became a cause célèbre among small business owners on social media this week, the son of the owner of a little café in Leicester showed her annual electricity bill is set to jump to more than £55,000 ($64,000) at the end of the month, up from about £10,000 previously.

It’s not just UK businesses that need government intervention. The rest of Europe is also doing too little to help family-owned businesses and smaller companies. Earlier this week, the German government said it’s worried that the country’s fabled Mittelstand sector is shutting down production under the weight of rising energy costs.

Small businesses facing hefty energy price increases have limited options: accept lower profits, try to pass as much as possible of the increase onto customers or, ultimately, cut jobs or close the doors. With consumer prices already soaring around the world, central bankers are worried that wages will climb as workers take advantage of tight labor markets to demand pay rises. But so-called second-round increases also include businesses boosting prices for goods and services to offset the impact of higher energy prices. Policymakers may face an even more sustained inflationary outlook than they are currently anticipating.

So what’s the solution? One short-term option is to extend the price cap to the smallest enterprises, treating cafes, landlord-owned pubs, corner shops, bakeries and other family-owned establishments as if they were, in effect, households. In practice, many of them are; pub owners, for example, often live above their bars. Eliminating the distinction between those households that run businesses from their premises and those that don’t makes sense.

The regulatory regime needs to improve, too. Some companies hedged against the crisis, securing multiyear contracts early last year before prices exploded. But when their suppliers collapsed, they lost that protection, which seems unfair. The government also should intervene to stop utilities from refusing to sell energy to small businesses unless they pay huge deposits to cover the risk of going bankrupt.

Above all, politicians across Europe need to discuss not just how to help families, but the thousands of small and medium-sized companies that provide the jobs those families rely on. Otherwise this winter’s energy drama risks developing into a full-blown economic crisis.