Over one million small businesses in the UK may be paying inflated energy bills due to being locked into long-term contracts that were fixed at historically high prices last year, according to trade groups representing various industries. The situation has been described as “perilous,” with thousands of insolvencies and job losses possible unless the government forces energy suppliers to renegotiate unaffordable contracts.

Surveys by the British Chamber of Commerce and the Federation of Small Businesses suggest that approximately 25% of the country’s 5.5 million small businesses may have been coerced or misled into renewing their energy supply contracts at the market’s peak.

Last year, many small businesses in the UK were unable to secure energy deals as suppliers either refused to supply them or demanded large financial deposits. Although market prices have since fallen and government financial support for businesses has been cut, many companies are still locked into long-term contracts that will require them to pay inflated prices based on last year’s peak rates for several months or even years.

The Confederation of British Metalformers has written a letter to the business secretary, warning that small manufacturers face a “perilous situation” that could cause further harm to the British manufacturing sector while energy suppliers and brokers profit at the country’s expense.

This news comes on the heels of the energy regulator, Ofgem, expressing concern about the behaviour of some energy brokers and suppliers with regard to business energy customers. Ofgem noted that some companies are facing energy bills that are higher than market conditions warrant and are being forced to pay high deposits and standing charges. The CBM described the current scenario as the “biggest mis-selling scandal since PPI.”

Small manufacturers in the West Midlands have already gone out of business since the government ended its support scheme for them at the end of March after just six months, according to the Confederation of British Metalformers. Small manufacturers, who use a lot of energy, are some of the hardest hit by the high prices, and the loss of these companies could have ripple effects throughout the UK’s supply chains.

The British Chamber of Commerce has estimated that over a quarter of small businesses signed new energy contracts when prices were at their peak at the end of last summer, and 60% of them said they would struggle to pay after March 2023. Many were encouraged by the government to sign fixed price deals rather than tracker arrangements, which means they are locked into high prices. A separate survey by the Federation of Small Businesses found that 24% of small businesses were on fixed deals, and 320,000 may have trouble paying their bills.

The FSB’s policy chair suggested that businesses should be allowed to blend and extend their existing energy rates with rates that reflect the lower market prices. The Association of Convenience Stores called for the government to help businesses out of their huge fixed contracts and onto something that better reflects the current wholesale market, while a government spokesperson said businesses had been offered £5.6bn of support over the winter and that the new level of government support reflects the welcome fall in prices.

Steve Hardeman, managing director of Clevedon Fasteners

Many small manufacturers in the West Midlands have gone out of business since the government ended its original support scheme at the end of March, after only six months. Small manufacturers, which use a lot of energy, have been hit especially hard. The collapse of these firms, which supply larger manufacturers with components, could have serious implications for the UK’s supply chains. The British Chambers of Commerce (BCC) estimated that over a quarter of the UK’s small businesses signed new energy contracts when prices were at their highest at the end of last summer. Around 60% of these businesses said they would face payment difficulties after March 2023.

Many were advised by the government to sign up for fixed-price deals instead of tracker arrangements, meaning they were locked in at high prices. According to a separate survey by the Federation of Small Businesses (FSB), 24% of small businesses were on fixed deals, and 320,000 of them may struggle to pay their bills. Tina McKenzie, the FSB’s policy chair, said firms should be given “a fighting chance” by being allowed to “blend and extend” their existing energy rates with rates that reflect lower market prices. Chris Noice, a spokesperson for the Association of Convenience Stores, said: “Thousands of our members are dealing with the short-term pain of fixed contracts that were signed in the second half of 2022, at the height of wholesale prices”.

The government should help businesses get off these contracts as soon as possible and on to something that reflects the current wholesale market, he added. Government officials said that businesses had been offered £5.6bn of support over the winter, enabling some to pay only about half of the predicted wholesale energy costs. The spokesperson said global energy prices had dropped considerably and were now at their lowest level since before Russia’s invasion of Ukraine. The new level of government support reflected this decline in prices, but it would continue to support businesses, as it had done during the winter.

Many small business owners signed up for long-term fixed-rate energy supply contracts last summer when energy markets reached their peak. This included Steve Hardeman, the managing director of the rivet maker Clevedon Fasteners, who was told by an energy broker to fix his rates for three years. He said there were very few contracts available at the time, so he considered himself lucky to get the deal that he did.

However, his company is now locked into paying a rate of 46p per kilowatt-hour for its energy, compared to the current market rate of around 28p/kWh. The burden of overpriced long-term deals, combined with the end of the government’s previous support scheme, could cause smaller manufacturers to go bust, with serious consequences for jobs and the UK supply chain.

Philip Ford, the managing director of six nurseries in East Sussex, said his company was facing a “massive” increase in energy costs following the end of the government’s energy bill relief scheme in March. The new campaign to help small companies reduce their energy use and the new discount scheme offered little help to small businesses, many of which were forced to sign up for long-term energy supply deals at peak prices last summer.

Ford said the decision to sign up for long-term fixed-rate energy supply deals felt “sensible” at the time because he didn’t know where energy costs were going to go. The quarterly electricity costs at one nursery soared fourfold to about £6,000. In total, the Hopscotch group’s energy costs climbed from £30,000 a year in 2020 to £60,000 last year.

Steve Hardeman, Managing Director of Clevedon Fasteners, is among thousands of managers who are locked into long-term fixed energy supply contracts at rates far higher than current market prices. Last summer, at the peak of the market, brokers urged these managers to sign up to these contracts. “There were very few contracts available at the time so we considered ourselves lucky to get the deal that we did,” Hardeman said. However, his company is now locked into paying 46p per kilowatt hour for its energy, compared to a prevailing market rate closer to 28p/KWh. This could lead to small manufacturers going bust and put the UK supply chain at risk.

Similarly, Philip Ford, Managing Director of Hopscotch Children’s Nurseries, is facing a “massive” increase in energy costs after the end of the government’s energy bill relief scheme in March. This has resulted in a new discount scheme that offers little help to small businesses, many of which were forced to sign up to long-term energy supply deals when energy markets reached their peak last summer. “We don’t have the option to say that we’re going to turn the heating down,” said Ford, whose quarterly electricity costs at one nursery spiralled fourfold to about £6,000.

Ben Simons, owner of four convenience stores in Gloucestershire, signed a long-term energy supply contract with his supplier at the peak of the market, believing that the government’s support scheme would protect him from the worst of the cost crisis. However, his energy bills have climbed from 14p per kilowatt hour at the end of summer to 75p/KWh in October, almost three times the current market rate. He had little choice but to sign up for the fixed rate deal, which was five times higher than his previous rate, as the variable energy tariff would have been eight times higher. He now urges ministers to compel suppliers to reopen long-term energy supply contracts at current market prices.