What do interest rate hikes mean for small energy suppliers?
Corin Allen, financial content strategist writing on behalf of Utilitywise, considers how the Bank of England’s interest rate hike and the looming energy price cap will affect smaller energy suppliers.
The Bank of England’s recent decision to up interest rates to 0.5 per cent was the first hike in the UK since before the financial crisis of 2008. Despite being a relatively small hike, it has generated headlines across the country, and raises questions about how the energy industry may be affected in the near future.
A price cap on energy, which would limit the amount charged by energy companies for standard variable tariffs, has also been promised by the government which may well affect smaller energy suppliers as well as the big six.
Here are some of the ways the change in interest rates and a looming price cap may affect the UK’s smaller energy suppliers.
More expensive to borrow
One of the main effects of rising interest rates is that borrowing money from institutions like banks becomes more expensive. The big six have significant turnovers and no need for loans, this therefore may not be cause for concern; however, for smaller energy suppliers the interest rate hike may be unwelcome news as smaller suppliers are often dependant on loans to invest in new company assets and expansion.
Having to put aside more capital towards paying off debt means their growth ability could be hampered as they will have less money for investment. Furthermore, the quality of their service may be adversely affected as a result, potentially leading to a loss of custom in a worst-case scenario.
The raised interest rate could force cost effective smaller energy suppliers to raise their prices in order to cope with a heightened borrowing expense. As cheaper prices are often the main selling points, this could certainly harm profits if potential customers are dissuaded as a result.
If smaller energy suppliers were to take a cut in profits in order to maintain their competitive prices, further limitations would be put on opportunities for growth and expansion.
Energy price cap
The energy price cap has drawn expansive media attention. The “big six” are known to increase their rates regularly, and their standard variable tariffs may well be overpriced for many of their domestic customers. For smaller energy suppliers, this tariff may prove to be a threat to smaller suppliers.
The cap has identified that consumers are potentially being overcharged for their energy supply and a sense of anger may come as a result. This could work in the favour of smaller suppliers who have, on the most part, cheaper tariffs to offer.
The cap has also brought about questions of whether or not business rates will be inflated to compensate for capped domestic rates. Brendan Flattery, the chief executive of the UK’s leading business utilities consultancy Utilitywise, recently expressed concern that “electricity costs for SMEs have already increased by 43 per cent since 2010, and… such caps might introduce even more crippling costs for companies”.
Switching energy suppliers
The big six have been seen to be overcharging millions of people for a sustained period of time, and the fact that an energy price cap is necessary to stop this, has drawn a lot of negative attention to these suppliers.
Whilst they may soon be prevented from overcharging their customers, their reputation has been tarnished to some extent by the negative media attention. This reputational damage may spark an increased switching appetite amongst customers who no longer want to be associated with negative brands and instead find themselves considering a switch to a smaller, lesser known supplier.
The future for smaller energy suppliers
It seems the energy industry is changing. Although the BoE’s interest rate hike may make it more expensive for small energy suppliers to borrow, it could well be offset by an increased customer interest in switching supplier as a result of the bad press received by the big six overcharging.
If they manage to maintain attractive prices and ultimately prove to be an effective alternative to larger energy suppliers, then it would make sense for consumers to explore them as an option. Add the rise of renewable energy suppliers in to the mix and it seems as though the energy industry status quo could be changing.
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