Boosting aid for small UK firms in reaching net zero

Tina McKenzie, Policy Chair at the Federation of Small Businesses, sheds light on the urgent need for tailored support to assist small enterprises in enhancing energy efficiency and navigating the costs involved in transitioning towards a low carbon economy. This discussion took place during the Big Zero Show 100 Days of Labour online conference.

The iconic moment arrived when the turbines ceased operation at Ratcliffe-on-Soar, the UK’s final coal-fired power station, on 30th September. This event underlines a significant stride made by the UK Government in phasing out coal power, aligning with the nation’s ambitious target of achieving net zero emissions by 2050.

Although this milestone is encouraging, more efforts are imperative in materializing the net zero goal and supporting small businesses in enhancing their energy efficiency. It is crucial to shield them from future price shocks.

Not to be underestimated, small businesses constitute a staggering 99% of the business ecosystem, emphasizing the substantial contribution they could make towards decarbonising our economy. Taking incremental steps within our community could lead to a disproportionately influential outcome.

The vital correlation between energy efficiency and cost savings cannot be understated. Urgent action is warranted to equip small firms with the means to become more energy-efficient and curtail their energy consumption. This urgency was magnified during the energy price crisis of 2022, where a significant number of small businesses encountered drastic price hikes.

The repercussions of these soaring energy prices were severe, leading to the closure of numerous small enterprises and burdening others with sustained cost escalations they could scarcely endure.

The detrimental aftermath of the energy crisis is reflected in recent business population statistics from the Department for Business and Trade. Between the beginning of 2023 and 2024, approximately 56,000 small businesses in the UK were forced to shut down. A substantial contributor to this decline was the notably higher average baseline for energy bills, pushing businesses beyond the threshold of viability.

Research from FSB’s Small Business Index reveals that utility bills have persistently been cited as the primary or secondary cause of overall annual cost escalation for over two years. Nearly half of small firms (48%) participating in the Q2 2024 survey identified utility bills as a major cost driver.

Enhancing energy efficiency within the premises of small businesses can directly reduce energy consumption and costs, thus mitigating the impact of potential price crises in the future.

Investments in energy efficiency improvements can be financially challenging, especially for small business owners and the self-employed who heavily rely on their savings during arduous times. According to FSB’s Accelerating Progress report on net zero, more than half of small firms hold back from addressing their energy usage due to insufficient savings and uncertainties surrounding the payback period.

Government support plays a pivotal role in empowering small businesses to enhance their energy efficiency standards. While numerous green policies target major polluters and domestic decarbonisation, the focus on small businesses remains inadequate.

For instance, the Business Energy Advice Service, an initiative rooted in FSB’s Help to Green proposal, was launched as a pilot project last year. It offered small firms in the West Midlands free energy audits and enabled some to access up to £100,000 of matched funding for implementing recommended measures.

A logical progression would involve expanding this scheme nationally to benefit small businesses nationwide. In contrast, the Industrial Energy Transformation Fund, while theoretically accessible to all energy-intensive businesses, remains largely inaccessible for the vast majority of SMEs.

On average, the initial cost for a small firm to revamp its manufacturing processes over the past three years hovers just above £36,000, as per FSB data. This amount falls short of the minimum £75,000 SME threshold mandated for the fund.

By broadening the scope of existing funding and lowering the grant threshold to £20,000, smaller projects could receive the crucial support they need.

Many small businesses are exploring opportunities to alter their transportation practices to reduce emissions. The impending closure of the Workplace Charging Scheme, due in April 2025, adds pressure to small firms eager to extend the deadline. However, with a mere six months remaining, no official announcements have been made thus far.

Small businesses leasing their premises, as opposed to owning them, encounter additional obstacles when striving for energy efficiency improvements. Shockingly, a fifth of small firms shared that their landlords prohibit the installation of energy-efficient measures.

It is imperative to establish a task force comprising suppliers, small business landlords, and business groups to collaboratively devise strategies for reducing energy usage in rental properties. Furthermore, providing resources and tools to facilitate SMEs in engaging with their landlords would be instrumental.

Alongside these initiatives, the Government could establish a task and finish group to review commercial tenancy laws, preventing leases from impeding low-carbon, cost-reducing enhancements.

Discrepancies in the treatment of small businesses concerning energy market engagement compared to domestic consumers call for rectification. While small businesses operate similarly to domestic consumers, they lack comparable protections. Recognizing this disparity, both the Government and Ofgem expanded the Energy Ombudsman’s eligibility criteria to encompass small businesses with up to 50 employees.

A recent open consultation on regulating third-party intermediaries in the energy market showcases a proactive approach to safeguarding SMEs from unscrupulous brokers. FSB continues to champion these policies, recognizing their potential to positively impact small businesses.

If Ofgem introduces a cooling-off period for micro-business customers, it could significantly aid the smallest ventures in securing fair deals. FSB continues to advocate for this protective measure.

Labour’s emphasis on lowering energy bills during the General Election is commendable, yet small businesses eagerly await clarity on how major policy announcements, such as the establishment of GB Energy and the multi-billion-pound carbon capture clusters in Merseyside and Teesside, will affect them.

The involvement of small firms’ requirements in the decision-making processes of the Department for Energy Security and Net Zero, led by Secretary of State Ed Miliband, is crucial for fostering a sustainable environment for small businesses.

Ensuring that small businesses possess the necessary financial resources to invest in net zero and energy efficiency measures entails tackling the pervasive issue of late payments plaguing millions of businesses. Addressing this crisis is pivotal in facilitating investment and economic growth.

FSB welcomed the unveiling of a package of proposals in mid-September aimed at combatting late payments. The obligatory reporting of payment terms by large companies, potential oversight by audit committees on payment practices, and the transition from the Prompt Payment Code to the Fair Payment Code are significant steps towards eradicating the detrimental practice of late payment.

As the Chancellor hinted at a possible overhaul of business rates during the Labour Party Conference, FSB reiterates its longstanding call for the reduction or elimination of this day-one tax for small enterprises owning their premises.

Elevating the threshold for complete Small Business Rate Relief in England from £12,000 to £25,000 would exclude a quarter of a million small businesses from the rates system, particularly benefiting deprived areas in need of economic revitalization.

Reforming business rates can unlock funds for small businesses to invest in green improvements. The exemption of ‘green’ investments from valuations for business rates underscores the importance of incentivizing sustainable practices without penalization.

Exploring additional avenues to democratize access to green investments for small businesses is crucial. Research indicates that a considerable portion of small businesses refrain from investing in energy-efficient technology due to capital constraints and limited access to affordable financing, despite the potential long-term benefits.

The forthcoming Budget presents an opportune moment for the new Government to demonstrate a tangible commitment to reducing bills and emissions for SMEs. Prioritizing sustainable growth for small firms is essential in fostering an environmentally conscious and economically thriving ecosystem.

In conclusion, the alignment of policy interventions, financial support, and regulatory frameworks tailored to the unique needs of small businesses is imperative in accelerating the transition towards a greener, more resilient economy. Collaborative efforts from government bodies, industry stakeholders, and small business advocates are paramount in ensuring the sustainability and success of small enterprises on the path to achieving net zero emissions.

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