This blog was written by Dr Courtney Depala, Research & Development Director at Mercia Power Response. Mercia is a member of Energy UK.
At the start of 2022, Small-to-Medium sized Enterprises (SMEs)1 represented 50% of all business turnover in the UK and 99% of the 5.5 million business in the UK. SMEs are a crucial part of the UK economy – which could be important to the future development of the UK Energy market.
As one would expect, SMEs are found in a wide range of industries – from construction to retail to professional services. The SMEs categories according to Government data are broad, so some assumptions need to be made in order to quantify the SMEs that contribute to the UK energy sector.
The industrial category perhaps most associated with the UK energy industry would be mining, quarrying and utilities, which represents about 32,000 businesses (only about 0.6% of SMEs) – however, there are many other categories that could potentially be key to the energy industry as well – such as construction (914,000 – 17%) or professional, scientific and technical activities (762,000 – 14%). Therefore, a conservative estimate could be that around 50,000 to 100,000 individual businesses contribute in some way to energy in the UK, equivalent to approximately 1-2% of all UK SMEs.
So why does the number of SMEs that contribute to the UK energy industry matter?
Broadly speaking, SMEs are recognised to add value across many Government Departments – most of whom have some level of an SME Action Plan (see SME Business Hub: https://www.gov.uk/guidance/small-and-medium-business-hub), and it is assumed that SMEs provide prominent levels of value to the country overall. But what does that value look like?
There are two key areas where SMEs are shown to demonstrate unique value that will be key to enabling the energy transition:
- Competition and innovation: in general, SMEs are closer to the end consumer and work more at the “coal face” of the industry – meaning that they have a unique view of understanding experience and applying this knowledge quickly to update products and services. Additionally, there is an added pressure for SMEs to ensure cash flow, which means that they drop dead end ideas quickly and work faster with ideas that are economically viable.
- Skills and workforce: Over 60% of all UK workers are employed by an SME. As the Climate Change Committee (CCC) highlighted in May (https://www.theccc.org.uk/publication/a-net-zero-workforce/), the needed Net Zero workforce could create up to 725,000 jobs just by 2030, which will include a substantial proportion of the SME workforce. This workforce, at an SME level, could help support with the unique solutions that will be required, as well as a different understanding of customers at a more local level.
These advantages present an immense potential for SMEs to contribute to the energy transition, shifting the UK away from fossil fuels to net zero forms of energy production. In recent weeks there have been promising discussions in this space; Ofgem have indicated their desire to actively involve more innovators, start-ups, and SMEs in their current and upcoming innovation funding, supported by the Energy Innovation Centre (EIC); and both Utility Week Live in Birmingham and Innovation Zero in London have highlighted the significance for SMEs in the industry. As a result of this, there are many businesses engaging in the energy transition, and working towards the energy transition across many sectors of transport, industry, and buildings, displayed in panel discussions, talks and informational stands.
However, despite the valuable contribution that SMEs can bring to the energy transition, many businesses are currently faced with increasingly complex regulatory and political environments, such as changes to the connections process, the Review of the Electricity Market Arrangements (REMA) and the Retail Market Review. While larger businesses in the industry can afford to have whole teams devoted to navigating the current changes, the resource simply is not feasible for most SMEs. The seemingly constant flow of consultations and changes present significant hurdles. This drives uncertainty, which is subsequently making knowing where to invest and then securing that investment increasingly challenging.
As the UK energy market moves towards achieving Net Zero, it is critically important now that the approach considers the SME perspective in the wider strategic planning that is being done for the energy transition. This could mean aspects like simplifying the strategy around consultations and proposed industry changes and more inclusion of SMEs in ways to feedback and have a voice with the larger players and government. An inclusive, whole system approach can also contribute to broad simplification of how the energy system is transitioned, making it more accessible not just for SMEs, but for consumers, regulators, and politicians to reach the best possible outcome to deliver Net Zero by 2050.