Small business,big impact

Enabling SME energy customers to decarbonise their demand

Executive summary

The increase in international wholesale gas prices has seen businesses face unexpectedly high energy bills throughout 2022 and 2023. As financial support for businesses provided by the UK Government’s Energy Bill Relief Scheme is withdrawn, and against the backdrop of higher than average energy bills expected for the rest of this decade, supporting small and medium-sized enterprises (SMEs) to decarbonise their premises and vehicles will be vital to protecting our economy.[1]

The energy industry is investing in products and services that support non-domestic customers to reduce their consumption and decarbonise their assets. Still, the UK Government must go further in providing the right policy framework that maximises the impact of these activities.

The current policy landscape is insufficient to support businesses investing in decarbonisation, with the Climate Change Committee’s (CCC) 2023 Progress Report highlighting an ‘increasingly concerning policy gap relating to non-residential buildings’. The lack of progress in this sector is hampering the UK’s ability to meet its net zero carbon emissions obligations. Emissions from buildings represent 17% of the UK’s total output, and with two million non-domestic buildings across the UK, this represents a significant area in which more action is required.[2]

SME firms represent 99.9% of the UK business population and therefore need targeted support.[3] This report sets out seven recommendations for measures that the UK Government could bring forward to help unlock investment by SMEs in reducing their energy demand through the decarbonisation of premises and vehicles.

The report is divided into four sections, exploring the following themes:

The energy industry is taking the lead in supporting small businesses to unlock the benefits of low-carbon premises and transport, but more support is needed from the Government to establish a policy framework that supports SMEs to invest in decarbonisation, and reduce their energy bills over the long-term.

[1] Energy prices to remain significantly above average up to 2030 and beyond (Cornwall Insight, 2022)

[2] Progress in reducing emissions (Climate Change Committee, 2023)

[3] Business population estimates for the UK and regions 2022 (Department for Energy Security and Net Zero, 2022)

Seven recommendations to make it easier for SMEs to decarbonise

Access to finance is a key barrier for businesses investing in decarbonisation

Small businesses are motivated to reduce their energy consumption, but the cost of investing in building and vehicle decarbonisation can be prohibitive.

• The Federation of Small Businesses (FSB) found that 33% of SMEs were yet to take steps to reduce their energy usage, with 24% citing an uncertain return on investment, and 22% a lack of capital.[1]

• In addition, the Energy Systems Catapult and carbonTRACK found that 71% of a sample of SMEs in the West Midlands said that while they felt it was important to help combat climate change, cost was a barrier to doing so.[2]

The current approach to funding for SMEs in England is piecemeal

Financial support and advice provided by the UK Government to businesses in England, promoted via GOV.UK and the UK Business Climate Hub, represents a piecemeal approach. For example, businesses in Greater London can access loans from £100,000 to £1 million to invest in their business, while those in the North West have access to match funding only.[3] Elsewhere, businesses located in the West of England are eligible for grants of up to £15,000 for energy efficiency measures.[4]

By contrast, in Scotland, Business Energy Scotland offers interest-free loans of up to £100,000, and cashback grants of up to £20,000, for SMEs financing the installation of energy efficient systems, equipment or building fabric. This scheme has supported a wide range of businesses, as shown by the case studies on its website, from solicitors saving an estimated £2,400 annually on their energy bills, to a golf clubhouse that benefitted from a 50% drop in energy consumption.

In Wales, the Welsh Development Bank has launched the Green Business Loan Scheme which offers eligible firms loans from £1,000 to £1.5 million, with discounted interest rates and flexible repayment dates. The scheme works to provide a package of support to businesses, including consultancy support to help businesses understand their path to decarbonisation.

It is commendable that, in its Powering Up Britain report, the UK Government committed to piloting a ‘Help to Green’ audit and £5,000 grant scheme for SMEs seeking to invest in energy efficiency, and this was something Energy UK supported. However, until the pilot scheme is scaled-up to be available nationwide, the piecemeal approach to funding and advice that is currently being taken will continue, resulting in a postcode lottery for businesses in England.

The UK Government should work collaboratively with lenders to unlock finance for SMEs

While grants for small businesses are very welcome, private investment will be needed to effectively decarbonise non-domestic buildings and help SMEs afford their energy bills. To this end, in its 2021 Future of Energy report, Energy UK recommended that the UK Government work with the lending industry to unlock additional green finance products for businesses seeking to invest in decarbonising their premises, equipment and operations.

The British Business Bank (BBB) is well placed to facilitate lending to SMEs through its existing products and programmes, predominantly investment with and alongside private finance providers like banks and other SME financiers. Though not specifically designed to support energy demand reduction, the BBB’s programmes can be used to support investment in energy reduction measures. For instance, the Government-backed Recovery Loan Scheme supports access to finance for UK businesses as they look to invest and grow, providing up to £2 million in lending protected with a 70% loan guarantee.

Additionally, the ENABLE products are wholesale solutions that can be used to increase lending, and in one application this programme was used to support asset-based finance, helping a taxi company invest in electric vehicles (EVs).[5]

In line with the BBB’s objective to help smaller businesses transition to net zero carbon emissions, it would be beneficial for the BBB to develop specific products or mechanisms that support commercial lenders to provide funding for SMEs for this purpose.

Having responded quickly to the COVID-19 pandemic by working with the UK Government to establish the Bounce Back Loan Scheme, the BBB is well placed to design a successor scheme that helps firms respond to the pressing issue of high energy prices by decarbonising their premises and vehicles.

Working with the UK Government, the BBB should define specific green taxonomies and methods of demonstrating the results of their investment, to establish the framework needed to create this new product. It is difficult for lenders to be confident in providing green finance, due to challenges around repossessing energy infrastructure, such as heat pumps, or the lifecycles of technologies relative to the loan’s repayment period. However, there may be other solutions, such as securing additional revenues from green assets, that can help mitigate these challenges. Additional revenue streams, such as flexibility, may become all the more attractive to businesses and investors as these markets develop within the UK power system.

Alternative funding mechanisms should be explored

Leasing is a commonly used funding mechanism for SMEs to invest in new assets, such as EVs. This approach should be explored fully by lenders and industry as a mechanism by which to improve the affordability of other low-carbon technologies.

With the majority of businesses renting their premises, solutions that are designed for the domestic market such as Property Linked Finance, as developed by the Green Finance Institute, could also represent a solution. Property Linked Finance helps overcome the ‘payback period barrier’ whereby, in the non-domestic sector, a business planning to move premises will not be deterred from investing in energy saving measures in the shorter-term.

The success of funding mechanisms for SMEs renting their premises depends on productive and constructive relationships between tenants and landlords.

Information provision is crucial

While access to finance is a clear barrier to SMEs investing in energy efficiency, support in the form of information and tailored guidance is also crucial to support businesses taking action. Nesta worked with the Development Bank of Wales to test options for financing green home upgrades among owner-occupier households. They concluded that, for this customer group, ‘providing support is equally, if not more, important than the details of the finance product itself’, and that for any government looking at this policy area, ‘neither a green finance product, nor an ecosystem of advice and support is likely to be sufficient on its own’.[6] While this report was focused on the owner-occupier sector, it demonstrates the importance of providing information alongside financial products.

With research by the British Chambers of Commerce finding that 79% of SMEs are taking steps to increase their energy efficiency, by investing in LED lighting (69% of businesses), greener vehicles (34%), and solar panels (30%), it is clear that there is significant demand for low-carbon technologies among SMEs.[7] However, the same survey found that SMEs face information asymmetry as a key challenge to reaching Net Zero alongside financial barriers, with just 8% of SMEs fully understanding what the UK Government’s 2050 Net Zero target means for them.

Information provision is a key tenet of addressing financial barriers to investing in decarbonising premises and vehicles in order to save money in the long-term.

• Recommendation 1: The British Business Bank should work with UK Government to establish an affordable loan scheme for SMEs investing in low-carbon technologies and measures to reduce their energy consumption. The provision of finance should be made available alongside access to impartial information.

Fiscal policy should be aligned with building and vehicle decarbonisation targets

Research by the BBB found that SMEs considered tax incentives to be the most helpful enabler for them to take action to decarbonise.[8] This was followed by access to information and external finance, including grants and loans. The UK Government should bring forward a fiscal policy regime that aligns to targets for non-domestic building and vehicle decarbonisation.

At the 2023 Spring Budget, the UK Government brought forward a series of capital allowances that support businesses investing in assets, plant and machinery, which can include energy efficiency measures (see Box 1).

Until March 2023, the Annual Investment Allowance (AIA) and First-year allowance (FYA) sat alongside the super-deduction capital allowance, a measure introduced to counter low business investment as a result of the COVID-19 pandemic, by encouraging businesses to bring forward investment that would have otherwise been planned for a later date. The super-deduction allowed companies to claim 130% capital allowances on qualifying plant and machinery investments. Data from the ONS suggests that the super-deduction increased business investment by 5% at its peak while full expensing, by contrast, is estimated to raise business investment by 3%.[9]

The British Retail Consortium (BRC) is advocating for the UK Government to make full expensing permanent to provide greater certainty to its members seeking to plan over the long-term, thereby unlocking retail investment in measures that improve building efficiency and accelerate the industry’s transition to Net Zero.[10]

In the final report of the Net Zero Review, there are a number of recommendations for fiscal policy that would help to unlock business investment in low-carbon technologies. This includes establishing a successor to the super-deduction, offering extended support from 2023 to 2028, and reviewing the approach to Business Rates to incentivise businesses to invest in decarbonisation.

The review also recommended that the VAT rate on electricity at public and private charging infrastructure be balanced to ensure that those without access to off-street parking are better able to afford the transition to EVs. Currently, pricing at public chargepoints, including at workplaces, reflects a 20% VAT rate on electricity compared to the 5% rate for private home chargers. Greater fiscal incentives will help to accelerate the rate of chargepoint deployment in workplaces, with the UK Government’s Workplace Charging Scheme closing for applications from 31 March 2024.

Energy UK submitted a response to the UK Government’s consultation in early 2023 on updating the Energy Saving Materials list. In its response, Energy UK supported modernising the list to bring batteries, smart thermal stores and home EV chargers in scope. Removing VAT on these technologies would reduce costs for SMEs, build the supply chain, and support the development of a smart, and flexible energy system. Extending this relief until 2030 would align the fiscal regime with the UK Government’s targets for a 15% reduction in emissions from buildings and industry.

• Recommendation 2: The UK Government should review its capital allowances, business rates and VAT regime to ensure that its fiscal policy aligns with its 2030 targets for minimum energy efficiency standards in the non-domestic sector and phase-out of ICE vehicles in line with trajectory in the Zero Emission Vehicle mandate.  

[1] FSB spearheads business groups’ call to help small firms invest in energy efficiency in Spring Budget (FSB, 2023)

[2] SME energy bills soar by up to 500% (Energy Systems Catapult and carbonTRACK, 2023)

[3] Greater London Investment Fund (The FSE Group)

[4] Green Business Grants (West of England Growth Hub)

[5] Capital Cars (British Business Bank)

[6] All the things I could do (Nesta, 2023)

[7] Action on net zero held back by lack of understanding (British Chambers of Commerce, 2023)

[8] Small businesses and the transition to net zero (British Business Bank, 2021)

[9] Business investment in the UK (ONS, 2023)

[10] Submission from the BRC to HM Treasury Autumn Statement 2023 (British Retail Consortium, 2023)

Better monitoring, better managing

Smart meters help businesses, and the energy transition

Smart meters not only enable businesses to better monitor their energy usage, but they are also critical infrastructure for the transition to a Net Zero power system. Real time information on usage is already delivering grid benefits and will be key to the flexible, more efficient grid of the future.

While 52% of meters in non-domestic premises are already smart, there is clearly still significant progress to be made in ensuring that all meters installed in non-domestic buildings can measure energy usage on a more granular basis (via smart or advanced meters).[1]

Requiring smart or advanced meters in commercial premises would not only help to accelerate uptake but also act as a test-bed to understand how stronger levers of smart could work across a broader range of customer types.

Time-of-use tariffs offer businesses a route to cheaper off-peak energy, but a smart or advanced meter is usually required to achieve the full benefit of these products. Research by the BCC found that, of the SMEs they surveyed which were investing in energy efficiency measures, only a quarter (28%) were using renewable energy providers or tariffs to make progress towards net zero carbon emissions.[2] Widespread meter upgrades would enable this proportion to grow.

Energy suppliers must do their bit in encouraging the uptake of smart meters, but requirements in Building Regulations and other mechanisms would drive uptake by businesses, and signal the importance and benefits of the smart system upgrade. Other mechanisms could include making access to finance conditional upon having a smart or AMR meter installed.

• Recommendation 3: The UK Government should require new non-domestic buildings to have a smart meter by updating the Building Regulations to require that new buildings are designed to be ‘smart ready’.

Smart meters support better monitoring and reporting by businesses

Non-domestic energy customers can derive significant benefits from smart meters, given the requirements across the non-domestic sector around energy usage reporting. For example, the Energy Savings Opportunity Scheme (ESOS), which applies to large businesses, covers the monitoring of energy usage. The ESOS has demonstrated significant value to the UK, with estimates that the ESOS has so far led to £1.6 billion of net benefits, with the majority of these resulting from reduced energy costs.[3]

Provisions for the continuation of, and improvements to, the ESOS has been included in the Energy Bill through amendments tabled by the UK Government following its 2021 consultation on strengthening the scheme. These amendments will enable the Secretary of State to take powers to require ESOS participants to publish an action plan, and mandate that action is taken. Furthermore, while the ESOS is currently only a requirement for large businesses, the amendments make provision for the scheme to be extended to SMEs through secondary legislation.

With the improved ESOS framework in place, further consultation with industry and the business community should be brought forward to look at expanding the scheme to medium-sized companies, and strengthening the scope and requirements of the scheme.

• Recommendation 4: The UK Government should consult on mandating action by Energy Savings Opportunity Scheme (ESOS) participants on audit recommendations, and should consult on proportionally extending the scheme to include medium-sized companies.

[1] Smart meter statistics in Great Britain report (Department for Energy Security and Net Zero, 2023)

[2] Action on net zero held back by lack of understanding (British Chambers of Commerce, 2023)

[3] Energy Bill, Volume 826: Debated on Monday 19 December 2022 (Hansard, 2022)

Businesses need clarity on the future of regulations for non-domestic buildings

There is a lack of clarity on what the future might look like in terms of regulations for minimum energy efficiency standards and low-carbon heating in the non-domestic sector. The CCC’s 2023 Progress Report highlights that ‘the information gap creates barriers, making it hard for businesses to take key decisions, such as how and when to retrofit buildings’. The UK Government should address this information gap urgently to provide businesses and commercial landlords with confidence, enabling them to plan for the long-term. 

The CCC highlights that around half of non-domestic energy customers operate from rented premises, but in the absence of regulations, there is a lack of incentive for commercial landlords to invest in upgrading the energy efficiency of buildings, and decarbonising heating systems.[1] Regulations would drive investment for the benefit of the business renting its premises, reducing overheads and unlocking new capital to be reinvested in supporting growth.

At the time of writing this report, a response has not yet been published to the 2021 consultation on the implementation and enforcement of a minimum energy efficiency standard of EPC B target by 2030 in privately-rented non-domestic properties, which was initially proposed in the Energy White Paper. The industry is still waiting for a response to the 2022 consultation on phasing out the installation of fossil fuel heating systems in businesses off the gas grid. These responses should be published as soon as possible to provide clarity to businesses renting their premises, and commercial landlords.

In September 2023, the Prime Minister set out a new approach to regulations for the domestic sector.[2]  Clarity is needed over the pathway for the non-domestic sector is now needed to help build confidence and support investment. With the changes in regulations now representing a longer time frame for the transition to low-carbon heating in the domestic sector, more progress needs to be made in the non-domestic sector in order to achieve the UK Government’s target of a 15% reduction in energy consumption from buildings and industry by 2030.

Finally, the response has not yet been published for the 2021 ‘Future of transport regulatory review’ consultation. This included a proposal to mandate parking areas with a certain number of bays to have a minimum requirement on the number of chargepoints available. This requirement will benefit businesses with employee car parks and clarity should be provided as soon as possible on the outcome of this consultation.

• Recommendation 5: The UK Government should provide a roadmap for the non-domestic sector by publishing its response to recent consultations on minimum-energy efficiency standards in the non-domestic sector and the phase-out of fossil heating in business premises off the gas grid. It should also provide clarity on proposed minimum requirements for chargepoints in parking areas as soon as possible.

[1] 2023 Progress Report to Parliament (Climate Change Committee, 2023)

[2] What the PM’s new approach to net zero means for you, Prime Minister’s Office (10 Downing Street, 2023)

Enabling the non-domestic sector to lead the way

Removing barriers in planning policy to decarbonising buildings

The planning regime is a key enabler to removing barriers to SMEs investing in decarbonisation, and maximising the impact of their investments. Planning policy should be aligned to national targets for decarbonising buildings, and deploying low-carbon technologies.

With around 140,000 businesses occupying listed properties, these businesses will face additional barriers that should be addressed.[1] The Royal Borough of Kensington and Chelsea was the first Council in the country to introduce a new planning order that gives consent for solar panels on most Grade II and Grade II-listed buildings, without the need for individual consent. There should be a presumption in favour of energy-saving low-carbon technologies such as these in all Councils so as to avoid a postcode lottery for SMEs, and the National Planning Policy Framework (NPPF) should be amended to this end.

Indeed, in its proposed draft changes to the NPPF, the UK Government included stronger wording around supporting energy efficiency improvements, such as solar panels, particularly for large non-domestic buildings, and in cases of conservation areas and listed buildings, which Energy UK supports.[2]

While this was a welcome step, there is scope for the wording to be strengthened further by also considering energy efficiency in new buildings, and aligning the NPPF with the uplift to the Building Regulations of non-domestic buildings under the Future Buildings Standard. This will help remove barriers to solar PV being installed on new non-domestic buildings, delivering benefits for the occupying business while helping to strengthen the UK’s energy infrastructure and security.

While provision within the NPPF for these measures is essential, for existing and new buildings, what is also needed is clear guidance for businesses making applications to individual local authorities, regarding permitted development rights in the local area, and the process for making an application.

Energy UK highlighted the need for updates to the approach to permitted development rights for air source heat pumps in its 2023 ‘Energising the Heat Pump Market’ report.[3] Reviewing requirements such as the need to install air source heat pump units at least one meter from the property boundary would also remove barriers to businesses installing low-carbon heating, for example those that occupy terraced premises on the high street.

• Recommendation 6: The UK Government should strengthen the wording in the proposed new Section 161 of the revised draft National Planning Policy Framework to include references to new buildings, and in particular the need to make provision for the inclusion of solar panels on non-domestic buildings.

Accelerating the connections process

Businesses often face significant waiting times and costs for connecting low-carbon technologies to the low-voltage network, and this is hampering growth for small businesses and creating barriers to SMEs investing in energy-saving assets.

As set out in Energy UK’s ‘Energising the heat pump market’ report, the process by which installers receive consent from the Distribution Network Operator (DNO) to install low-carbon technologies should be streamlined. While connection delays are already impacting SMEs, as the volume of installations of heat pumps, EV chargepoints and other low-carbon technologies increases in line with associated targets, this could exacerbate the issue of connections. As such, action should be taken now to avoid bottlenecks in future.

Where upgrades to low-voltage networks are needed, DNOs need long-term clarity to be able to plan for investments, and regulatory certainty to enable investment ahead of need where appropriate. The level of visibility needed about the current and future location and volume of low-carbon technologies is not available in sufficient detail to be able to plan for future capacity and balancing requirements.

The UK Government and Ofgem are developing a Connections Action Plan, which will look at connections to the transmission network and wider challenges with the approach to strategic network planning. Energy UK supports delivery of much-needed reforms to resolve the backlog and ensure the future approach to connections and network reinforcement fits the scale of the challenge and pace of change. Challenges with connections to the transmission network should be considered alongside the low-voltage network in order to ensure a holistic approach, given how these are increasingly interdependent challenges. If more low-carbon technologies are connected at distribution level, and come online into a system that doesn’t have capacity to manage them, then this risks leading to higher balancing costs and more restrictions for all customers. Likewise, if a mass of low-carbon generation connects without the uptake of smart, flexible, demand-side devices and energy storage technologies, it will cost more to balance the system and curtail excess generation.

Boosting the energy efficiency of buildings is essential to reducing demand on the network, and reducing the investments required in grid upgrades, in turn reducing system costs. As such, the decarbonisation of UK homes and businesses must be considered as part of the wider challenge of transitioning to a Net Zero power system.

Local Area Energy Planning

Local authorities are at the heart of place-based approaches to decarbonisation, including the decarbonisation of buildings of all tenures, and the provision of chargepoint infrastructure.

Local area energy plans (LAEPs) are locally-led strategies that, according to the Energy Systems Catapult, are the most effective route for a community to meets its Net Zero targets, and which should be developed in collaboration with stakeholders like the local community including its small businesses, investors and the System Operator.[4] While 80% of local authorities have declared a climate emergency, few have produced LAEPs.

When it comes to supporting businesses with decarbonisation, as we have set out in the earlier sections of this report, local authorities can coordinate funding pots, help manage compliance of minimum energy efficiency standards, and provide the right planning framework to facilitate retrofit and EV charging. Local authorities are also an essential advocate for the installation of smart meters. LAEPs can help provide a consistent structure and framework for this work, and help ensure that building and transport decarbonisation is being considered from a whole energy system perspective.

The CCC’s 2023 Progress Report sets out the need for a clear process and governance framework for local authorities to coordinate energy planning. Citizens Advice has also produced a framework for how local authorities can engage their community in developing a local plan.[5]

The Local Government Association (LGA) is calling on the UK Government to empower local climate action that can hit targets, mobilise support and save hundreds of billions.[6] The LGA is seeking five actions to support this process, including the bringing forward of multi-year place-based funding allocations, reviewed and adapted across the several spending review periods up to 2050.

The UK Government should build on these proposals from industry and civil society, and bring forward a framework that supports local authorities to develop and deliver LAEPs.

• Recommendation 7: The UK Government should provide local authorities with a framework, and the support they need, to develop and implement Local Area Energy Plans.

[1] New Report: Rise in number of businesses occupying listed buildings (Historic England, 2018)

[2] Energy UK response to reforms to national planning policy (Energy UK, 2023)

[3] Energising the heat pump market (Energy UK, 2023)

[4] Local Area Energy Planning (Energy Systems Catapult)

[5] Close to home (Citizens Advice, 2023)

[6] Mission to reality (Local Government Association)