Energy Cap Rise Squeezes SMEs on Two Fronts

What the new cap means in practice

The new cap applies from 1 July to 30 September and covers dual-fuel households across England, Scotland and Wales, according to Ofgem's latest quarterly announcement. It represents a £221 annual increase on the previous cap of £1,641, which itself had fallen 7 per cent in April after the government shifted 75 per cent of the renewables obligation cost from household bills to general taxation and scrapped the energy company obligation scheme.

The cap sets the maximum price per unit of gas and electricity, not a fixed bill; households pay only for what they consume. That distinction matters less in practice than it does in theory. Typical consumption patterns mean most households will face materially higher bills, and the timing, arriving just as the summer quarter begins, gives consumers a few months of lower usage before the real pain arrives in the heating season.

The figure came in above Cornwall Insight's final pre-announcement projection of £1,850, as reported by City AM. The consultancy's forecasts shifted repeatedly during the Iran conflict, climbing as high as £1,973 on 20 March before retreating to £1,929 following a fragile ceasefire, according to the same report.

For businesses, the cap itself does not apply directly. Commercial energy contracts are negotiated separately. But wholesale gas and oil prices drive both markets, and the same supply disruption that pushed the household cap higher is feeding through into business tariffs on renewal. Operators whose fixed-rate contracts expire in the coming months face repricing against a volatile wholesale backdrop.

Why October could be worse for businesses

The July cap covers the warmest quarter. October's review will set the rate for the period when UK gas demand peaks. Cornwall Insight's current projections suggest the October cap will hold near the July level even if the Middle East conflict ends soon, according to City AM's reporting. Physical damage to infrastructure from airstrikes and the lingering disruption to oil and gas supply chains are expected to keep wholesale prices elevated.

The Strait of Hormuz, which carries roughly a fifth of global oil supply, was closed during the conflict, according to industry estimates. Its reopening, even under a durable ceasefire, does not immediately restore normal flows. Damaged oil fields and port facilities in the region require months of repair, and insurers have repriced shipping risk across the Gulf.

The UK's exposure is amplified by its continued dependence on gas-fired electricity generation. While renewables capacity has grown, gas remains the marginal price-setting fuel in the wholesale market. That structural vulnerability means global gas price spikes translate quickly into higher UK electricity costs.

Ned Hammond, Energy UK's deputy director of policy, warned that the July rise "will already be a concern for millions of customers but such worries will be magnified if bills remain at this level, or higher, over the winter months," as quoted by City AM.

"It's another unwelcome reminder… of how our country's high dependence on gas leaves us exposed to price spikes we can do nothing about resulting from conflicts thousands of miles away."

For SME operators, the October outlook creates a planning problem. Businesses renewing energy contracts in the autumn will be negotiating against a wholesale curve that prices in continued disruption. Those on variable or short-term deals face the sharpest exposure. Meanwhile, consumer-facing businesses must factor in the spending impact: households paying more for heating have less to spend elsewhere, compressing demand across retail, hospitality, and leisure.

Government intervention: what's on the table

The April cap reduction was engineered partly through fiscal intervention. Moving the renewables obligation cost to general taxation and scrapping the energy company obligation scheme cut bills before the conflict's full impact reached consumers. That willingness to act set expectations for further support.

So far, those expectations have not been met with specifics. Chancellor Rachel Reeves told MPs last week that the government "stand ready to act if market conditions worsen significantly later this year," adding that she had been "leading cross-Government contingency work on design of potential future targeted and temporary support for businesses," as reported by City AM.

The language is notable for what it omits. There is no threshold defined for "worsen significantly." There is no timeline for the contingency work. The phrase "targeted and temporary" echoes the framing used during the 2022-23 energy crisis, when the Energy Bill Relief Scheme provided a six-month discount on business energy costs before being replaced by a far less generous successor.

Reeves also announced a change to how energy companies are taxed on their "foreign branches," ensuring the Treasury can collect receipts from UK trading activity profits, according to City AM. The measure may raise revenue, but it does not address the cost side for businesses or households.

Claire Maio, global lead partner at KPMG UK, questioned what targeted support would look like in October, pointing to "suppliers still tackling mounting energy debt" and the need for "longer-term measures" for energy efficiency, as quoted by City AM.

The gap between the government's stated readiness and its actual commitments leaves SME operators in limbo. Finance directors cannot model scenarios against a policy framework that does not yet exist.

What operators should do now

The absence of concrete government support means businesses must manage their own exposure. Several practical steps are available, none of them novel, but all more urgent given the outlook.

Review contract timing

Operators whose energy contracts expire in Q3 or Q4 2025 should assess whether locking in a fixed rate now, at elevated but known prices, is preferable to rolling onto variable tariffs that track a volatile wholesale market. The decision depends on the business's risk tolerance and cash flow position. Brokers and consultants can model scenarios, but the underlying uncertainty is genuine; no one knows when, or whether, Gulf supply chains will normalise.

Stress-test budgets for sustained high costs

Cornwall Insight's projections, as reported by City AM, suggest bills will remain near July levels through the autumn. Operators should model at least two quarters of elevated energy costs and assess the impact on margins. Businesses with thin margins in hospitality, food manufacturing, or cold-chain logistics are most exposed.

Accelerate efficiency measures

Capital expenditure on insulation, LED lighting, smart metering, and heat recovery systems has a shorter payback period when energy prices are high. Government-backed schemes such as the Industrial Energy Transformation Fund remain open for eligible manufacturers, though application windows are competitive.

Monitor policy signals

Reeves's commitment to "contingency work" suggests a support package may materialise if October's cap rises further. Operators should track Treasury and DESNZ announcements and engage with trade bodies that have input into policy design. Energy UK and the Federation of Small Businesses have both called for more targeted business support.

Reassess pricing and demand assumptions

Consumer-facing businesses should factor household energy costs into demand forecasts. A sustained squeeze on disposable income, particularly among lower-income households, will affect discretionary spending. Operators in retail and hospitality may need to revisit pricing strategies, promotional calendars, and staffing plans for the winter period.

None of these steps eliminate the risk. The conflict-driven supply shock is external, and UK businesses are price-takers in global energy markets. But the combination of proactive cost management and scenario planning gives operators more control than waiting for a government intervention that may arrive late, arrive small, or not arrive at all.