Business, Energy and Industrial Strategy Committee
Oral evidence: The impact of the cost of living crisis on workers, consumers and business, HC 680
Tuesday 6 September 2022
Ordered by the House of Commons to be published on 6 September 2022.
Members present: Darren Jones (Chair); Tonia Antoniazzi; Alan Brown; Paul Howell; Andy McDonald; Mark Pawsey; Alexander Stafford.
Questions 36 - 68
Witnesses
II: Dhara Vyas, Director of Advocacy and Programmes, Energy UK; Dave Dalton, Chair, Energy Intensive Users Group, and Chief Executive, British Glass; Karen Betts, Chief Executive, Food and Drink Federation; Tina McKenzie, UK Policy and Advocacy Chair, Federation of Small Businesses.
Witnesses: Dhara Vyas, Dave Dalton, Karen Betts and Tina McKenzie.
Q36 Chair: We now move on to our second panel to speak with business representatives. We welcome to the Committee Dhara Vyas, director of advocacy and programmes at Energy UK. On the screen, we see Dave Dalton, who is the chair of the Energy Intensive Users Group and also the chief executive of British Glass. Also in the room we have Karen Betts, CEO of the Food and Drink Federation, and Tina McKenzie, UK policy and advocacy chair from the Federation of Small Businesses.
Dhara Vyas, I am going to come to you first. There has been some reporting this morning and a bit more detail of what we might expect from the new Administration this week on support on energy bills. It has been reported that, for households, the Government will set the price, not Ofgem, and they will pay energy companies the difference, but the cost of that will be recouped by a levy on bills over a period of time. It sounds as if the windfall tax is not being extended, and energy companies are getting a load of money paid for by bill payers. Your members are doing quite well out of that, are they not?
Dhara Vyas: I have not seen the detail of what has been announced, and it is not a formal announcement. It is my understanding that it is speculation and leaks to the media, so it is difficult to comment on those sorts of details. Generally speaking, we are facing a really critical winter, as you have heard from your first panel, and the most important thing is to make sure that there is support for people, for households and for businesses this winter.
One of the things we have called for is a deficit tariff scheme, which is in the ballpark of what you are talking about, but with some key differences in that this should not be the only thing. The detail has to be worked through to make sure that we get out of it. It is not an enduring or a long-term solution. However, prices this winter are far higher than anyone had anticipated. They are being driven by global gas prices, as you and the Committee know, and it is really important that people and businesses get the help they need this winter while the incoming Government work with industry, the regulator and consumer bodies to put in place exit plans from any deficit tariff scheme, and to consider two things.
One is how we could move to a voluntary CfD, where we take people who are on the existing renewables obligation scheme, which pays a subsidy on top of wholesale prices, into a CfD. That is a significant first step to achieving that decoupling of gas and electricity prices, but is not rushing into anything. The reality is that the electricity market reform that we need is complex, and should be long term and sustainable. It is important that we consider what a voluntary CfD would do, because it would give generators more certainty on prices and would also pay back, and I do not think that it can be done for this winter.
To your first point, we definitely need more urgent help for this winter, but we could be thinking about moving to a voluntary CfD scheme, which would start paying back from next winter and could save between £150 and £250 per household, and between £6 billion and £11 billion for business customers. In summary, yes, we need urgent help for this winter, but it must not just be a sticking plaster and nor should it be an enduring solution. We need to be working through the details.
Q37 Chair: If the help that is offered to bill payers is, essentially, a loan that is then repaid via energy bills, will your members support that?
Dhara Vyas: The vast majority of our members are in favour of anything that will help people this winter. We are also really aware that we need to target extra help and support to certain customers who need it the most. Talking about paying it back over a longer period of time, this is about the fact that there are really high global gas prices. Most energy suppliers are not making huge profits. In fact, most have not made profits since—
Q38 Chair: Energy generators are, though, are they not?
Dhara Vyas: Yes, but suppliers are not. There are certainly parts of the industry that are making money, and this is a trade-off for the Government to consider what the impact is for the long-term investment horizon. Investment in renewable energy is worth about £100 billion over this coming decade, and there is a question about how important it is that we are investing in clean, home-grown, domestic renewable generation in order to end our dependency on importing gas; investing in net zero; and, crucially, moving to a more sustainable, smart renewable grid.
Q39 Chair: I am going to come to our other guests now and ask what is happening with your member organisations and the bodies that you represent. Karen Betts from the Food and Drink Federation, we were hearing in the previous panel that it is going to be a very difficult winter ahead for people spending disposable income and, for a lot of people, even just being able to put food on the table to feed themselves.
Karen Betts: It is going to be a really difficult winter. You have seen a fairly rapid rise in the rate of food and drink inflation over the summer, which now stands at 12.7%, so our industry feels caught in the eye of a pretty powerful storm at the moment. We know that we have a huge responsibility to keep prices affordable, but all of our manufacturing companies are experiencing exponential rises in their input. Whether that is the cost of ingredients, of energy, of raw materials, of transport or of labour, all of those costs are really going up.
Companies are doing everything they can to cut costs—you will see advertising and marketing budgets slashed and, in some cases, product lines rationalised—but there are limits to all of that. Companies have to remain viable, so some costs are being passed on. As we go through the winter, we will see how it goes, but different businesses will be impacted in different ways, and some may not make it through.
The energy issues in particular are very hard for companies. Many of our companies were on fixed energy rates. Those that were are coming off them at the moment and, in general, what we hear from our members is that it is impossible to fix going forward at an affordable price. If you are fixing for one, two or three years out, the prices that they are being offered for energy contracts are exponentially higher than they were, so most companies are going on to a daily rate, which is making their lives pretty volatile. Managing their costs and prices, in conversations with retailers and customers, has become very difficult.
There are particular issues in our sector about SMEs. You will know that our sector has a massive range of companies within it, and a real range of sizes, but there is a real criticality within the supply chain of many of our SMEs. Many of our larger companies are worried about some of the SMEs in their supply chain. Those SMEs are worried about their own businesses, and this is about being able to pay, essentially, for these rising costs, but particularly in energy. We have some energy intensive users in our industry, such as flour millers, coffee roasters and bakeries. There are some parts of the industry that are more affected than others by very high prices.
We have parts of our industry that use carbon dioxide as an input, and you will have seen that there is real tightness in the CO2 market and a real question about the resilience of that market. We have had that question of resilience for more than a year now. While some work has been done by the Government and by companies to introduce more resilience into the system, it is still pretty precarious. That will feed into price rises and, potentially, into the operationality of some companies.
It is a worrying time for households in terms of food and drink price inflation arriving on their doorsteps at the same time as the energy price rises that you have just been discussing. It is a worrying time for businesses about being able to maintain that viability that I referred to, off the back of a series of successive crises that have eroded the resilience of businesses in our sector, and ensuring that they can make their way through the current period and find their way out the other side.
Q40 Chair: If there are small or medium-sized businesses in the supply chain that are critical, and they just cannot afford their energy bills any more and go bust, will there be food or drink items on the shelves in supermarkets that just will not be available?
Karen Betts: If that were to happen, yes. There will be consequences. There will be tightening of supply in certain products, absolutely. There are worries about, as I say, SMEs having a particularly hard time with this, and much of this may well be around cash flow, which is very hard for companies.
There are also worries in the industry about security of supply. To some of your conversation earlier, there is a sense from many of our companies that operate internationally of more planning, or at least exposure to more planning, in other European countries. Companies would feel reassured by a more detailed conversation with Government about what happens if there is disruption to energy supplies at some point during the winter.
Chair: Energy and potential food supplies by the sounds of it.
Karen Betts: Those two things are definitely linked.
Q41 Chair: Tina McKenzie from the Federation of Small Businesses, you represent lots of small businesses. We think about retail, hotels, coffee shops and restaurants. There have been quite a lot of stories in the media where they just cannot afford to pay their energy bills. What are they going to do?
Tina McKenzie: It is interesting that 99% of all enterprises in the UK are SMEs, so the probable impact on unemployment, if we do not tackle this, would be huge—not just the impact on energy and food security, but people losing their livelihoods and their businesses that we helped keep afloat through covid. We are standing by now, and a lot of them are going down. Some have already closed the doors, as I am sure you are fully aware.
Our latest survey shows that fuel and utilities are the two highest costs that small businesses are worried about. We know that the price increases we seeing are anywhere between 3% and 500% for small businesses. They are probably the most vulnerable because they do not have the consumer price cap. They do not have big business’s ability to hedge or negotiate, and all of those things, so they are really, I guess, standing alone, and that is how they feel at the moment with it.
A lot of small businesses renegotiate. October tends to be the time when a lot of contracts come to an end. A lot of people are holding back, thinking that someone somewhere in the Government may have heard the cries for help and may do something before the renegotiation of contracts, but it is pretty dire, I have to say. We hear a lot about inflation, but we have the highest producer price inflation in 40 years, as well as the highest tax environment in 50 years, as well as the fact that they have just been through covid and spent their reserves. They have nothing left in the tank and have given so much to their communities as well. They do not know what to do, because they cannot pay 400% and 500% increases in bills.
A hairdresser in Manchester sent us her bill, which is six times what it usually is. A small craft brewery in Essex went from £3,000 to £14,000. A sports bar in Tyne and Wear went from £32,000 to £135,000. It is not possible. They just cannot pay the bill, and the question is, “When do we close our doors, or are we going to get help with it?”
Q42 Chair: You would, presumably, support a price cap for business energy contracts as well.
Tina McKenzie: There needs to be a combination of measures, not just a price cap, but certainly we would support any cap on the cost to small businesses, so that they can at least get through the winter and prepare and plan into the new year, for sure.
Q43 Chair: Dave Dalton, you represent the intensive energy users, who traditionally get a bit of help anyway from the Government. The Government have consulted on extending that help. Is that making life slightly easier for your members or is it just as dire as with everyone else?
Dave Dalton: It is just as dire as with everyone else. The representation here is across a broad spectrum, from a lot of SMEs, as other people have quoted, to very big corporates. A lot of the commodities that are produced within these sectors are exactly that: commodities, with very little margin, and fuel price has always been a significant part of that.
In terms of affordability, I would empathise with everything that has already been shared, but we are seeing members roll off contracts now. Some of them have contracts into the future. They are very fortunate. Others are rolling off those contracts and seeing price rises. I had one quoted this morning of £40 million last year for fuel, and this year over £200 million, but speculating nearer £300 million. With those sorts of price increases, starting with something with an embedded fuel cost of maybe 20% or 25% of your sales price, it is untenable, but it is a lottery, unfortunately.
At the moment, we really need to understand two things very strongly: first, the security of supply, because some of our members have continuous process. I specifically represent the glass industry outside wearing the energy intensive users hat and, within my own industry, we have uninterruptible process, so we are critically dependent on a permanent gas supply. Education is needed in that area to understand that, if we reduce to, say, less than 70% of a critical fuel load, our furnaces fail and they close down, and there is no way back. These are investments of £30 million, £40 million or £50 million or more that would just crumble. Because a lot of these are, essentially, administrated from outside the UK, business decisions to reinvest in the UK are really critical.
We find ourselves in a two-stage dichotomy—first, affordability, as others have said. As we roll off contract, we cannot really afford to speculate at what is now typically seven times the price. In glass, our entire fuel bill for 2020 was around £212 million. It is projected this year to be around £1.3 billion or more. Our entire industry value is less than £1.5 billion, including around 30% pass-through costs that we have already managed to achieve. This is echoed. I am speaking with more knowledge of glass than I am for steel, cement or other industries.
We have talked about some of the specifics. The difficulty is the vast spectrum of need. As has already been said, a lot of SMEs need immediate-term support in their cash flow. A lot of the bigger corporates see that as a loan that they do not need. They need a policy environment in which they can plan. Investment decisions based on those plans are critically hung at the moment. We really cannot afford to speculate.
It really does feel like we are walking into a casino and the time that we walk in determines whether we come out or not, because, fundamentally, one by one, we are reaching the end of these hedges and we are just open to a marketplace where it is impossible to speculate. If we tie into a contract now, for instance, and find that the situation eases and it is a long-term contract, it is unaffordable and we cannot bury those costs. We are really in a very difficult situation.
Q44 Chair: Presumably, if, for example, the European Union takes a decision to support businesses with their energy costs, it will make many of your members uncompetitive in terms of export opportunities, because your costs will be so much higher.
Dave Dalton: It is already happening. We are closely connected and a lot of our companies have European bases, so we get first-hand experience of that. If you look at what has happened in Germany, France or Italy, even, we do not see the same level of urgency impacting the need in the UK. This winter is going to be critical for us. We need to make decisions, but we need some support.
Our big dichotomy here is that, historically, energy-intensive industries have been the pariahs. We have been the carbon emitters, but over the past 20 years we have worked together, and more so over the last three or four years, in a collaborative sense, to put road maps towards complete decarbonisation together. All of those things are having to go on hold because we do not have the investment capacity to keep those processes in flow. We are looking to decarbonise, but how can we do that if we cannot fuel switch, experiment or invest? At the moment, the speculation is so high that it is all about survival.
Q45 Paul Howell: A little bit of what I was going to raise has been covered, because I wanted to start with the relative level of price increases. Tina and Dave, you have given us a sense of yours. I want to come back to Karen and ask whether you can give me a sense of the scale of what is going on there.
In my past life, I spent a bit of time in the cement industry, so I know the significance there, and I have spent a lot of time in a medium-sized manufacturing company, so I am used to dealing with the need for forward contracts and all of this sort of thing, and the wall that comes when you step from one to another. I do have a context as to where you are at, but could you just talk a little bit, Karen, about what you are seeing in terms of the input challenges that you are getting?
Karen Betts: You will have seen that, as I said, food and drink price inflation rose to 12.7% in July. It was 9.8% in June, so it is rising quickly.
Q46 Paul Howell: Just to be specific, that is the inflation you are seeing in food and drink, but I am on about your input costs that are driven by energy—your input inflation, if you like.
Karen Betts: A significant proportion of our input costs are driven by energy, but, for instance, to the last conversation, if we buy glass, the price of the glass will have gone up. To us, it is the price of glass that has gone up, but it is the price of energy into the production of that glass that is driving the price. Energy probably is a baseline for the rising costs altogether, but you will have seen significant rises in the price of ingredients and global commodities. That is significant for our industry as well.
At the moment, domestic ingredient inflation is running at about 15%, and imported ingredient inflation is running at about 22%. That is driven by a variety of factors, but it includes the global price of wheat and dairy, and things like the drought that we have experienced in the UK and in other European countries having pushed up the need for and the cost of animal feed.
There is a variety of global factors that are, in some way, driven by energy, which are all are all finding their way into the rising costs of food and drink.
Q47 Paul Howell: Yes, it is not just the obvious ones; it comes through the supply chain in many ways. I get that. As MPs, when we are talking to our constituents, we see everything from the small steel company doing fabrication work that has troubles, through to somebody who is running a climbing wall and the electric costs that go with it. They can just about send them out of business and close them down. Tina, is there anything you want to add, in terms of the scale of what you are seeing or the ability to get new contracts, from the range of business that you come across?
Tina McKenzie: We are seeing a real shock across the business community as these bills come in. We have heard a lot over the summer about consumer bills and people starting to realise even the cost of fuel for their vehicles and things like that. We have heard that from some of the people who are out on the road, and some of the small businesses that are members that have vehicles. There is absolute shock that these bills are landing for electricity and gas and someone, somewhere, expects a small business that maybe turns over less than £40,000 or £50,000 a year to pay a bill that might be £10,000 or £15,000, which is more than the gross profit, never mind the profit.
They are all in the same boat: 89% of our members have cited it as the biggest issue. People are in so much shock. We talk about the issues with the labour market and about some of the fixes that we can do on that over the next six, 12 or 18 months, or over a number of years. We talk about interest rate increases, which have an impact on small businesses, but, again, you are going through a period of having to adjust to it.
These bills are landing, and there is absolutely no answer. They do not have the cash to pay the bill. Most small businesses in this country do not have offshore accounts. They are paying their tax. They are good people. They are giving back to their communities. Therefore, they do not have anywhere else to go. They look at it and think, “Where am I meant to get the cash to pay that bill?” That is why there is just a collective shock and why it is such a crisis, because they do not know what to do.
Because they know it is tough to get lending at the moment, the only thing that they can think is, “Is that it? Is it time to close the door?” Effectively, you are talking about over 16 million people employed. You are talking about over 50% of the GDP of the United Kingdom. You are talking about the high streets being decimated. You are talking about the economy. Without making it sound worse than it is, this is absolutely the most serious thing that we have seen. We have been through covid and through all the recessions. Quite frankly, the utility companies know that companies cannot pay these bills. They know that, so the question really is, “Where do they think they are getting it from?”
Q48 Paul Howell: I will develop the question further in a second, but I have one more specific on that. We hear about the difficulty of getting a new account and the demand for a prepayment: “If you want to come to us, we need 10 grand off you before we are even going to entertain you.” Do you get much feedback in that space?
Tina McKenzie: A lot of our members have said that the companies that they were with have gone under. You will find that it was the smaller utility companies that had the smaller businesses in contract, and so they were left high and dry when these companies went under. That was the first impact.
Secondly, a bit like some of the small businesses that are being refused these days to have bank accounts, they are also being refused certain utility contracts. We are hearing that, but more so the impact of the smaller ones that closed and have left some of those small businesses out searching for new contracts. What they got back was four or five times what they normally pay.
Karen Betts: There are a couple of things that I also should have mentioned. The first is labour. As your previous panel noted, we are in the peculiar situation of having a very tight labour market in the current economic climate. The cost of labour in our industry is going up, and that is feeding into food and drink price inflation.
The other thing that I would mention is exchange rates. The UK imports about 60% of the food consumed in the UK. We produce about 40% domestically. Quite a lot of often not finished products but ingredients are being imported from overseas, where there is a real hidden impact from exchange rates. Those goods are costing significantly more to buy than they were a year ago.
Q49 Paul Howell: The next questions are obvious. How many suppliers are not taking on new business customers and how many are demanding up-front payments?
Dhara Vyas: I feel like there are a number of questions coming from the previous points. There is a real agreement that urgency is key here. As has been noted, a number of non-domestic customers are facing increasing bills, and as we get closer to the colder weather—and also this is the time of year when lots of contracts come up for renegotiation—that is absolutely right.
One thing that is clear to us is that our members are speaking to their non-domestic customers pretty much every day and doing their best to support them, but the current situation does feel like it is out of control of the industry, and Government need to intervene.
Q50 Paul Howell: Could you elaborate on why we are seeing demand for deposits up front and things like this?
Dhara Vyas: Yes, sorry, I was coming on to that. It is important to note that, when you are offering a contract to a non-domestic customer, a supplier will hedge a certain price over a number of years, for obvious reasons, to spread the costs and any spikes in winter over the years. That gives them the ability to offer lower prices to customers and means that cash flow remains constant for energy suppliers. Non-domestic customers are not a homogenous group. They vary greatly, as has been set out, from a few tens of thousands of pounds to millions and millions, and it is very difficult right now to hedge that far in advance, in order to offer those long-term contracts. Not many business customers want those, based on today’s prices, so prices are incredibly high.
The difference in the risk profile is the best way of describing it, in that the energy companies have to consider and assess the risk of their potential business customer and what it means to them in terms of potential for future debt. One of our energy supplier members has recently told us that the level of debt among its non-domestic customer base has pretty much doubled in the last year, so that is the sort of thing that they are seeing. They are very mindful of that, which is why it is so difficult to offer contracts right now, because businesses have different risk profiles.
Q51 Paul Howell: Is there a sense that they are being overly cautious in that space, given the amount of deposits that are being demanded?
Dhara Vyas: They are basing it on their assessment of the risk and their ability to ensure that they can get the money back that they are paying for the commodity. The commodity is incredibly expensive because of global gas prices, and it is the point about the long-term hedge. That gives them the ability to give businesses the stability that they need. It is a far from perfect situation and that is why Government do need to intervene.
There are a few things Government should be considering, including cutting VAT on non-domestic bills from 20% to at least 5%, which would mirror that in the domestic market. We have mentioned covid and the impact on businesses and the economy, and we should be thinking about funding some of the wholesale cost shock for energy and for business customers through things like energy grants for businesses.
It struck me that this was not brought up in the earlier session, but there has been very little discussion about energy efficiency, and I was glad to hear Dave talk about the journey on decarbonisation. We need to be thinking about how we can help businesses to reduce their energy consumption as well, where those savings could be made in the long term. I know that that will not solve prices for this winter, but it is something that we should be thinking about.
Paul Howell: It is another tool in the box. I will leave it at that. I could talk for a while.
Q52 Andy McDonald: On that theme, can we have a little discussion about the role of Ofgem in all of this? The question that arises is how well Ofgem is protecting non-domestic customers and what actions you are looking to Ofgem to take in order to protect commercial customers. Does it have the powers to do it? What is the view?
Dhara Vyas: When it comes to Ofgem’s role right now in the crisis for both domestic and non-domestic customers, this is about price; it is about that global price. Therefore, most of the solutions and interventions to support customers—both households and businesses—need to be driven by Government. I genuinely do think that this is about price, and that is what the issue is here right now.
One thing that we have not touched on, and I know you probably do not want to go into detail on, is the role of the TPIs. Government have committed to regulating that sector. We talked about how many small businesses were on contracts with some of those smaller energy suppliers that went out of business. There is a big role for TPI regulation in this space, particularly for SMEs.
Chair: This is third-party intermediaries.
Dhara Vyas: This is the brokers. I am sorry; I should have spelled it out.
Q53 Andy McDonald: I get that. We have looked at third-party brokers in the past, but it is right that you raise it. I wonder if Dave wants to come in on the role of Ofgem or its lack of activity.
Dave Dalton: I do not think that it is a secret that, as the Energy Intensive Users Group, we have never really been a great fan of the powers that Ofgem manages to wield to assist us in industry. As a regulator, it does not appear to have been able to influence policy from a Government perspective to accommodate our needs. A lot of this has been around domestic rather than industrial use, so the jury has been out for us.
We have had a much stronger dialogue because of the degree of concern that exists at the moment, but it is not just Ofgem. We have tried a more tripartite dialogue with National Grid as well, which is providing potential solutions to this. As has already been said, we need Government intervention, we need a better understanding, we need creation of that policy environment, and we need easement of certain situations in the immediate term.
EIUG has always campaigned to get fair and equitable supply to the UK so that we can compete. That will not change. The real issue is the immediacy and the here and now. What gets us over this winter? What sort of interventions can we do?
Just going back to the previous comments, there are fewer suppliers in the industrial supply market currently. A lot of them have closed down, as has already been said; there is no profit to be had at that level. That is making that element of purchasing more and more speculative. It means that we are having to go to potentially new suppliers with no experience. Of course, they are asking for guarantees and payments up front. With the sorts of volumes that we consume, that becomes a real issue to us.
Going back to the tripartite element of it, there is a demand side response element here that comes out of the National Grid position. What we are concerned about is an understanding of our industries. We really do feel that, with a much more constructive dialogue, rather than having to be reactive—and, quite frankly, that is where most of our members sit at the moment in terms of reacting to process that they do not understand—we could be more proactive and work on the ability that, given enough notice, there are elements of the energy-intensive sector that could reduce their load. Mine is not one of them. In glass, we have to produce 24/7, once we have turned the furnace on, but we could switch fuels.
In switching fuels, we need the ability for regulators, for instance, to accommodate, at least pro tem, the stretching of our contracts in terms of emissions limits and things like that, in order to get by. Survival comes first in this equation. The dialogue across Ofgem, National Grid and industry, supported by Government, needs to be much more constructive.
I do believe that, in this arena, by playing that one through, industries like mine could switch to alternative fuel sources. Maybe heavy fuel oil is the last fraction that no one particularly wants. We could survive on that, but we would need some easement of our emissions capabilities to get through it. Some other energy-intensive sectors could turn down their production, or even turn it off for a while, if it was incentivised. Demand-side response is not about whether, as we have it currently, given six hours’ notice we could cope. It is something that says, “Plan for the winter. What could you do? When can you switch on of an evening rather than during the day? What other fuels could you use? What easements could Government put in place to see us through that?”
Our intention there would be to work through that to help make sure that domestic users are not left short of gas or electricity supply during this winter, but we need a much firmer and more proactive dialogue if that is going to be a reality.
Q54 Alan Brown: Dhara, if we just turn briefly to domestic customers, when your members are asking for Government support for customers, they are also, effectively, asking for support for themselves, because it protects them in terms of bad debt. If the Government announce greater measures this week, would your members support the call from Citizens Advice for a ban on moving domestic customers on to prepayment meters this winter? We know that prepayment meters have higher standing charges. A small amount of debt means that someone is cut off, effectively, until they can top up their meter. Surely, as a quid pro quo, your members could support that.
Dhara Vyas: That is not a specific thing that we have talked in detail with members about. I would say, and I know Citizens Advice would agree, that, certainly before this gas crisis, prepayment meter users, more often than not—again, I am not talking about people who are being moved on now but about legacy—tend to like it as a budgeting tool. There is a balancing act here in terms of how we support these people.
Our members are incredibly concerned about prepayment meter customers. We have a vulnerability commitment, which covers around 70% to 80% of the market. One of the things that we do as part of that is to track people who are self-disconnecting and to proactively reach out and offer that help and support.
There are things being done to help support and cushion the blow for people on a prepayment meter. I understand the ask and I understand why it is being asked. There is a real balancing act here. What we do know is that we are seeing levels of bad debt increase already. We are also seeing huge demand for customer service from all types of customers, regardless of payment type, with some members saying that they are seeing at least over a 50% increase in calls during summer, when you really would not expect that sort of thing.
The point about people who are struggling now is absolutely right, and it will get worse this winter. The question around prepayment meters is one that we need to look at in some more detail.
Q55 Alan Brown: Is that something you can come back to the Committee on?
Dhara Vyas: We will talk about it with members and come back to you.
Q56 Alan Brown: In terms of security of supply overall as we come into winter, how secure is predicted energy supply? Is rationing a possibility?
Dhara Vyas: The best thing for me to point to is the National Grid winter outlook, where its verdict is based on normal circumstances this winter. However, it would be really remiss of me to not also point out that we are going through some extraordinary times right now, and Government should be planning for every scenario, including the worst-case scenario.
Even if we are confident that we are okay for supply, it could well come at a very high cost, and so some of the points that Dave made about the potential for turning down energy-intensive users or using energy differently are incredibly pertinent. Again, coming back to the demand reduction and energy-efficiency points, we really ought to be having some serious, significant conversations about demand reduction, both at grid scale and in individual households.
To your point about security of supply, the main thing is to be really honest about the fact that customer support and security of supply are two sides of the same coin, and that we need to be thinking about demand‑side reduction and energy efficiency as well as support for people this winter.
Q57 Alan Brown: What is a realistic worst-case scenario?
Dhara Vyas: I do not have a crystal ball, but it does depend on what happens with Russia and the different ways that we import gas in this country. Some 80% of households are reliant on gas for heating, and we burn 40% of gas to create electricity, so we ought to be thinking about the worst-case scenario, although it is important not to scaremonger. It is really important also to reassure people that the grid’s winter outlook verdict is based on “normal circumstances”—I think that is the language it uses.
Q58 Alan Brown: Looking at energy security, we know that, in the short term, it does not matter if you have nuclear. Nuclear cannot provide short-term security. Hinkley Point C is going to be at least four years late before unit 1 comes on. Sizewell, if it gets the go-ahead, will be 10 to 15 years at best. This morning, in his valedictory speech, the outgoing Prime Minister still spoke about building a new nuclear reactor every year. That is just a fallacy, because we cannot build a nuclear reactor every year. Would that be right?
Dhara Vyas: I do not think that anyone in the industry has said that you could build a new nuclear reactor every year, but it is important that we invest in a strong generation mix. Government should not take any steps that would curtail investment. Energy and electricity generation has a really long-term investment horizon, and we need to be thinking about that really quite significantly. Any steps taken to support and alleviate the pain for this winter should not take the eye off the ball for the long term.
Q59 Alan Brown: Karen, depending on how things go, will your members have to think about self-rationing as well as we go into winter? Is that a serious issue?
Karen Betts: As I said earlier, the energy crisis is impacting different businesses in different ways. It depends how big you are and how you can negotiate your power vis-à-vis negotiating with your supplier. It depends how much energy you use to make certain products.
Some companies—as I said earlier, particularly SMEs under pressure—may get into a situation of self-rationing. That is why the conversation that has been had just now about efficiencies and continuing to invest in a secure energy mix is really important. Most of our companies will have been looking to efficiencies for some time now as they have seen gas prices going up. Everybody will be trying to limit the energy that they are using in some way, but there is more that Government can do to help businesses do that and to make sure that companies can continue to invest in the green transition.
For instance, the BEIS consultation at the moment about the climate change agreements would exclude 85% of our sector from the current climate change agreement that they benefit from. That seems a bit of a perverse outcome at the moment when we need to be finding incentives, particularly for a sector as diverse as ours that involves as many smaller and low-margin businesses as it does, to make sure that people can continue to manage their own energy as well as possible.
On that, I would say that, at the moment, our industry is struggling to absorb the level of new Government regulation that is coming at us on things like plastics and packaging, where we know that we have to get to good outcomes and to get there quickly, but we need a review of what the priorities are here, a bit more support for those investments that need to be made in the green transition, and perhaps a bit more listening to industry on how progress on things like plastics and packaging can be made in a more efficient and streamlined way than is currently envisaged by Government.
Q60 Alan Brown: David, in terms of supply disruption, you have already said that, for furnaces, disruption in supply or not enough energy would be catastrophic. Dhara spoke about reducing the demand side on energy-intensive industries. Are there enough discussions with your sector in terms of what security of supply would look like and what protections need to be in place?
Dave Dalton: Is there ever enough discussion? It is live, to be fair. We are permanently in touch with the relevant civil servants. The evidence and the models have been put together. It is really the judgment call on what action comes from that. There is a massive exposure and vulnerability. There is absolutely no doubt that we are in such uncertain times that, unless we have something that we can hang our hat on and know definitively how things are going to play out, we are speculating.
At the moment, I have companies looking to vary their fuel mix. In doing so, they are then flying in the face of hedge contracts they already have that will be coming to an end, or placing new hedge contracts. It is all speculation that we cannot afford to take on board, and the exposure is absolutely immense.
Our vulnerability at the moment, as others have said, is such a varied lot. We represent a lot of SMEs, particularly in the ceramics sector. There are probably over 90 members in the ceramic federation, 95% of which get no relief. They are SMEs and are in a really exposed position. If you go to some of the more consolidated, larger sectors like steel and chemicals, some of that relief is already taking place, and it is a slightly better situation in one aspect of where they currently stand.
In the round, the mix exposes all of us, big or small, massively energy-intensive or electro-intensive. The rules having changed, as I said earlier, we are looking to extend that dialogue progressively. It is not the immediate-term stuff here. This is getting the whole longer-term policy landscape correct—the carbon floor price and the embedded elements that we are still paying but are now moribund. We need to get all of that sorted out. We are on a journey to net zero and we need supporting on that journey, but we cannot afford to let members fall away, because we are setting the trend for the rest of the world, collaborating on these issues towards road-mapped journeys to net zero, with industries and sectors fully signed up to it.
We have subscribers from elsewhere on the planet looking at the UK and at the trend that we are setting. At the moment, we are putting all of that on hold and seeing companies just about to fall away. We saw the debacle with CF Fertilisers earlier in the year, with the lack of CO2 in the marketplace impacting on food and beverage. A plant has already closed down. The current position is that there is going to be a suspension in production, which is going to rapidly and massively impact on food production. If we look at things like paper manufacture, which is responsible for most things that are shipped around—carton, board—the last company producing paper for bank notes in the UK, in Hampshire, closed down with the loss of 300 jobs a fortnight ago.
These things are happening already. We are just in such an exposed position. The dialogue is there. The outcomes from the dialogue are wanting. We need action, not just dialogue, and that is where we stand at the moment.
Q61 Alan Brown: Over what timescale is action needed to get that certainty?
Dave Dalton: Yesterday.
Q62 Mark Pawsey: I just have a quick question for Karen, in addition to saying to Karen that you have some very big boots to fill, which I am sure you have heard many times already. You spoke about food price inflation of 12.7% in July. How long is it going to last and what are your projections for the next 12 months?
Karen Betts: I am not a forecaster but, with everything that our companies are saying, food inflation is unlikely to peak until well into next year, and it may run into—
Q63 Mark Pawsey: The energy hit hits only once, does it not? The depreciation that we have seen over the last few months hits only once, so can we look forward to something more stable in the new year?
Karen Betts: Inflation is going to start to slow down, because our figures are going to be off a higher base come the autumn/winter, but we are still going to have food and drink price inflation for some time. There is some drop-off in global commodity prices that has come through the UN FAO figures recently, but our producers will say that it takes between four and six months for them to start experiencing, for instance, a slightly lower wheat price. It then takes between seven and 12 months for the prices that manufacturers are paying to be reflected in the prices that customers see on supermarket shelves, so there is quite an in-built time lag into food and drink price inflation anyway, and you have the volatility of energy added into that, so it is going to take some time for this to work through the system.
Q64 Mark Pawsey: Tina, I do not know if you heard the previous evidence session, but Joanne Cairns of USDAW, in arguing the case for wage increases to get somewhere close to the rate of inflation, told us that there were rising profits in a number of companies. She did say, to be fair, “a number of companies”, but how big would you put that number?
Tina McKenzie: That is a really good question. It depends on where they are putting their profits to really know what their numbers are, if we are talking about some of the big companies in this country. Wages in the private sector have gone up. Average wages, at most companies that we are dealing with, are above the minimum wage, but we are finding that there is a bit of a pushback on that now, because people want to work with people who they enjoy working with, to work close to home and to work in certain environments, so it is not just all about the wage and whether they can get a pound or two more an hour somewhere else.
This crisis puts everybody on edge in terms of getting and pushing for more money, but ultimately, especially with your smaller businesses, employees know that, a lot of the time, that owner is going home on a Friday night and the only person not paid is her or him, which they have some sympathy for. Equally, they also know—and there is a real understanding across the country today, I would say—that unemployment could flip very quickly, so we are seeing less movement.
Q65 Mark Pawsey: In terms of profitability, we have heard about the cost inputs that businesses are facing. Are they able to pass those prices on or are profits getting squeezed to the extent that some businesses are now not profitable?
Tina McKenzie: If you add up all the extra costs in terms of the supply chain costs, never mind the cost of delays, as well as the tax costs and the increase in national insurance, and all the other costs that we are seeing with utility bills, fuel and so on, there is no way that you could walk into a coffee shop and charge somebody £20 for a cup of coffee in this country, so margins are being squeezed.
Q66 Mark Pawsey: How many businesses have a rainy day fund? Does that not exist because of the covid pandemic that they have gone through over the past few years? I met a small business in my constituency recently that is facing a massive increase in energy costs, but it has been trading for 20 or 30 years and will see this period through. How many businesses are not going to be able to manage to do that?
Tina McKenzie: We do not know for sure, and you will not know until after it has happened. The fact of the matter is that we did not think that we would lose nearly 10% of businesses in the UK—400,000—in 2020. We found out 12 to 14 months later, when the statistics came through. Anecdotally—you will get the letters in your in-tray, I am sure, and we are seeing it on social media—150,000 members are telling us that they are closing the doors, downsizing, letting people go or doing other things to manage. There are no huge profits out there to carry them through. They just do not have that availability or that access to cash.
Q67 Mark Pawsey: We heard some specific asks from Dave earlier. Can I put this to each of the three people in the room? If the new Prime Minister were sitting in this chair here and you had three asks of her that she could do immediately, what would they be?
Tina McKenzie: No. 1, take 200,000 small businesses—the smallest businesses in this country—out of a tax that is really unfair, which is their rates. They are the smallest businesses. If you bring the threshold to £25,000 it takes 200,000 small businesses out.
No. 2, put an energy cap on right away—immediately. Let them get through the winter and let us look at it again next year. Do it at least until the end of March, like Germany has done. Do not do it for a quarter.
Finally, cutting duty on fuel would really help a lot of businesses.
Karen Betts: First of all, a credible package of support for households will help the whole economy and will help our businesses. Secondly, we need a serious conversation with the Government about what support is appropriate to the food and drink manufacturing sector in order to get through this crisis and to make sure that we do not have a food security issue.
Mark Pawsey: What snappy, quick things are you going to say to her? It is an elevator pitch.
Karen Betts: No. 3 is that Government need to look very carefully at the current cost of regulation. Government think they have no power to influence prices—
Mark Pawsey: So get rid of some red tape.
Karen Betts: Yes, absolutely, there is much more red tape than we need. Government need to get better at listening to the business community when we say that regulation can be achieved in better and more efficient ways.
Q68 Mark Pawsey: The Government listen to the FSB pretty well, and the CBI and others lobby effectively, including the Food and Drink Federation. Dhara, what three asks do you have of the new Prime Minister sitting in this chair here?
Dhara Vyas: I have gone through the ones on non-domestic, but I will echo them. They are cutting VAT and funding some of the wholesale cost shock through reducing things like business rates or emergency energy grants, and extending loans. We should be looking at long-term investment in energy efficiency. For households, it is really important that we now crack on to do something in the short term for this winter as well as thinking about the long term and next winter. This is not a problem that is going to go away in six months.
Mark Pawsey: Thank you, Chair.
Chair: Does Dave get a go?
Mark Pawsey: Dave gave us loads, but, Dave, do you want to just reiterate those?
Dave Dalton: No. 1, follow the lead of other EU countries in providing emergency financial help to energy intensives. No. 2, work with Ofgem and National Grid to develop an industrial demand-side response product that works. No. 3 is for the Environment Agency to be a little bit more tolerant, put some temporary easement in place and allow us to maybe temporarily switch fuels in order to get us over this particular hump.
Chair: Thank you, everybody. It is reported by Bloomberg that there has been another leak from the Government about support coming for business this week, with a price cap on commercial energy bills, no doubt because of the pressure bearing down on Government from the Committee hearing this morning, so we will look forward to seeing that detail on Thursday. It is clear that businesses need help, as well as consumers, and that the scale of the energy crisis is driving lots of other economic pressures. The new Prime Minister—she might now be the new Prime Minister—will, hopefully, bear that in mind with the announcements that we expect later this week.
Thank you to all four of you for your contributions. That brings today’s session to an end.