Andy Street is Mayor of the West Midlands, and is a former Managing Director of John Lewis.
Last autumn, businesses faced a catastrophic rise in energy costs. A number of factors combined to create a historic spike in prices, impacting businesses of all kinds, from major manufacturers to community coffee shops.
The Government acted swiftly, subsidising businesses to the tune of £6 billion, helping with their energy bills throughout the winter.
It was the right thing to do. We Conservatives are the ‘party of business’ and, coming after the unprecedented support through the pandemic, this robust response illustrated our ongoing commitment to commerce.
However, right now many businesses are still struggling with the cost of gas and electricity – even though wholesale energy prices are clearly falling. Why? Because when energy costs peaked last year, concerned businesses signed fixed contracts to secure their short-term survival, chaining them to deals that means they cannot benefit from the downward trend we are now seeing in prices.
These punitive agreements are still being paid, are strangling their recovery, and for some are also threatening their future.
Here in the West Midlands, I have seen the effects of these deals first-hand, just as our economy recovers after COVID-19. Before the pandemic, this was the fastest growing place outside of London, but our economic mix, with its large manufacturing and hospitality sectors, meant we took the hardest hit of any region.
We are working hard to drive the recovery here, and it is working – by attracting investment, creating jobs, improving skills and strengthening transport. Moreover our “trailblazer devolution deal” will put much of our destiny in our own hands, and we are determined to seize the opportunity. However, business growth is being threatened by energy costs.
And we are not talking about a few isolated cases. In the West Midlands, it’s estimated that over 10 per cent of firms are paying more than a fifth of their turnover for energy. A third of firms here are paying five times the pre-Ukraine war market price for energy. According to the Black Country Chamber of Commerce, 14 per cent of firms there are trapped in energy contracts that put the viability of their business at risk.
Nationally, the Federation of Small Businesses has warned that with more than one in ten small firms in fixed contracts negotiated during the market peak in 2022 – when some were being quoted up to £1 per kWh for electricity – 93,000 small firms face closure or cutbacks due to energy costs.
The economic mix in the West Midlands – those manufacturers and hospitality sectors mentioned earlier – mean we have lots of energy-intensive industry here. That’s why we have launched the Industrial Energy Taskforce, bringing business and energy firms together to identify short-term measures to mitigate the immediate impacts of industrial energy costs.
One of the many West Midlands firms struggling with sky-high energy costs is Alpha-Rowen Ltd, a heat and metal treatment business in Tipton which has been hugely impacted over the last two years.
Alongside other energy price rises, its gas prices have risen from 2p/kWh in summer 2021 to around 12p/kWh in April, putting the business under serious financial stress, leaving it needing to restructure in a bid to ensure its long-term future.
All facets of our large hospitality sector, from big conference venues to individual restaurants, have seen their cost structures fundamentally changed by the situation.
Quite simply, this is not a sustainable situation for businesses. So, a dramatic response is needed. The first call should be the energy retailers or their producers who must renegotiate these deals. For example, some firms will be willing to extend contracts for a cheaper rate, the so-called ‘blend and extend’ approach.
The second call should be to the Regulator, Ofgem, for whom this situation provides a true test. As regulators, it is their job to identify where the market is failing. Clearly, right now it is failing, and I want to see them step up to their role and prove their effectiveness.
If the energy suppliers won’t do the right thing, and the Regulator fails to act, then the Government must intervene again – it is that important. I understand that last year’s subsidies could not go on forever, but the £5.5 billion that has been allocated to current support can be used much more effectively, by being targeted to those firms most in need.
Indeed, if responsibility for the Energy Bills Discount Scheme were to be devolved to us in the West Midlands as a Hardship fund, we would be confident that local decision-making would ensure funds would be delivered to those businesses hardest hit.
Finally, I know we have already spent a lot of money in supporting these companies through such unprecedented times. But all that support will be wasted if we now fail to step in at the eleventh hour and see them through to the end.
Last week’s front pages reporting falling domestic energy prices are welcome, but they are of little comfort to business owners trapped in deals signed six months ago. As someone who spent decades in business, I understand their frustration and hear the concerns of the trade groups calling for action.
That action must come from the regulator, and from energy producers and suppliers who accept their moral responsibility to support economic recovery, not stifle it. As the party of business, we Conservatives must press those energy retailers to do the right thing, but if that approach fails, we must be willing to step in again to help firms keep the lights on.