Business fires up the back-up generator as costs rise

McGills was advised that it would be cheaper to charge its electric buses using diesel generators

• Soaring energy costs are hitting businesses as hard as they're looming for households, making even diesel generators a more attractive option than buying power from the grid.

• Other costs are crowding in; raw materials, packaging, recruitment and retention, insurance, shipping, haulage, and payroll tax is soon to rise for both employers and employees.

• More than three-quarters of businesses are putting up prices more than they normally would, or they expect to. And they face the added threat of consumer spending being pulled back as household budgets are soaked up by rising heating and fuel bills.

Imagine you've just bought 68 new buses, powered by electric battery. Helped by a wadge of public cash, you wire up your bus depots with chargers.

Then the price of electricity goes through the roof, and it turns out that the best business option is to fire them up with power from a diesel-fuelled generator.

It's not quite the clean, green future of public transport that we were sold last year at COP26, as big government grants went into renewing bus fleets with batteries.

But that's how energy prices are up-ending parts of the economy.

The scenario of battery buses powered, albeit indirectly, by dirty diesel has been briefly explored by the chief executive of McGill's Buses.

Ralph Roberts tweeted that the procurement team at the Inverclyde-based bus operator had run the numbers on the £624,000 increase in its energy bill.

"They are advising that we charge our zero emission buses by diesel generators," he wrote.

Three emojis followed, the latter showing an exploding head.

He subsequently clarified this was "to draw attention to the impact that the electricity price rises are about to have".

"We are NOT suggesting that we actually would use diesel to charge electric buses, except in emergencies," he added.

'Over the precipice'

For other businesses, the cost of power is already biting. While most businesses lock in prices for at least a year at a time, and often in September, the owner of one food processing firm has told me that he is trialling use of his emergency back-up generator, to see if that will come in cheaper than using the grid supply.

He explains that he had budgeted for a 62% increase, as indicated by his supplier. But last week, it said the 62% renewal deal was off the table, and it would instead be an increase of 125%, with the contract lasting six months.

And if he didn't like that, moving onto the variable rate would start at more than 300% above his previous contract.

"That's extortion," he said. "Except even the Sopranos wouldn't do that. They knew it was in their interests to keep businesses open."

He has kept his sense of humour, but only just, saying many such companies are "looking over the precipice".

He prefers to keep his company's brand out of the media on this subject, for fear of spooking suppliers, customers and trade credit.

But unlike McGill's, he is serious about shifting to a diesel-powered generator, even if it goes against the drive to cut emissions.

He is also looking at the possibility of moving to night shifts, if his power bill for night-time work can be cheaper than daytime.

Against the grain

The pressure on business from soaring bills for oil, gas and electricity is closely aligned with rising prices for households.

Companies are seeing sharp increases in raw materials, when they can get them. A survey out this week from the Fraser of Allander economics institute showed two thirds of manufacturers are struggling to get the materials they require.

Partly, that is down to increased transport costs. A shipping container from China to Europe went up in price last year by an average of around seven-fold. That disruption is far from over, and prices remain elevated.

Haulage within Britain and from the EU was also sharply up, due to the shortage of drivers.

Labour costs are up. According to a regular Royal Bank of Scotland survey of recruitment consultants, starting pay for new recruits hit record levels in November, and last month's just below that.

An Easter Ross farmer I interviewed last week, Ewan Macdonald, said farm labour wages are up by about 50% - partly due to Brexit, and the difficulty of recruiting workers when they can't be brought from European Union countries.

He pointed to a sharp increase in the cost of agricultural machinery, and in red diesel to run it, while fertiliser costs are closely aligned with the cost of gas required to make it. He is looking at fertiliser up at least 50%, and says these costs will have to be passed on.

Farm prices are not set by farmers, but by markets. If the price doesn't cover costs, Macdonald says there will be less grain sown or less fertiliser used. Either way, that curtails supply later this year, putting further upward pressure on prices.

Insurance costs have gone up for hospitality businesses because of the increased risk of Covid restrictions

James Withers, chief executive of trade body Food and Drink Scotland, adds insurance costs to the bill, pushed up by the increased risks businesses face with Covid, as insurers try to cover themselves against the consequences of renewed restrictions to trade.

And an index of packaging costs, across all sectors, is running at more than 30% up on last year, having peaked above 60% during last year.

In sectors which have benefited from temporary tax cuts, those are being unwound, including VAT on hospitality returning to 20%, from 12.5% since October, and 5% before then. Business rates reductions for the most Covid-hit sectors are removed later in the year.

Upstream oil

The regular Allander monitor, covering more than 400 Scottish firm and working with legal firm Addleshaw Goddard, found 80% of companies were expecting to raise prices more than usual, and 20% will cut back production because of rising costs.

In December and January, 80% were struggling to recruit staff, while quarter were finding it difficult to retain workers. Nearly half expected weak or very weak growth this year - although at the time of the survey, the Omicron variant of Covid-19 may have cast a longer shadow than it does now.

That was reinforced on Thursday, when a survey of 1,000 British Chambers of Commerce members showed 73% of firms were already putting up prices, in response to pressures that have been building for some months.

Fuel was a big issue for more than 60% of them, and wages for a similar share, while 90% of manufacturers said raw material costs were rising. One in twenty were thinking they may stop trading.

National Insurance hike

Looming in little more than six weeks is a hike in National Insurance Contributions (NICs). That can seem stealthy, in that not that many people understand it. But it's hitting employment twice.

NICs from employees - at 12% for most earnings, falling to 2% above £50,000 - are going up by 1.25%. Also in April, employer NICs are rising from 13.8% to 15.05% of pay.

And there is a circular effect to this. If someone on £30,000 is taking a £250 cut in take-home pay because of NICs, plus a £700 increase in fuel bills, plus food prices rising, they are going to have less to spend on the discretionary items - from upmarket food to gym membership to holidays and a new car - that many further companies, and their employees, depend on selling.

So while much attention is focussed on the upstream oil and gas producers and the vast profits announced in recent days, many other businesses are in similar positions to households in the inflation pressures they face.

Circular effect

NICs from employees - at 12% for most earnings, falling to 2% above £50,000 - are going up by 1.25%. Also in April, employer NICs are rising from 13.8% to 15.05% of pay.

And there is a circular effect to this.

If someone on £30,000 is taking a £250 cut in take-home pay because of NICs, plus a £700 increase in fuel bills, plus food prices rising, they are going to have less to spend on the discretionary items - from upmarket food to gym membership to holidays and a new car - that many further companies, and their employees, depend on selling.

So while much attention is focussed on the upstream oil and gas producers and the vast profits announced in recent days, many other businesses are in similar positions to households in the inflation pressures they face.