Two thirds of German SMEs are affected by increased energy costs

• Representative survey conducted by KfW Research in early September
• Half of businesses believe they can manage additional burden
• Higher gas prices mainly mean increased heating costs for SMEs
• Manufacturers, which account for a small share of businesses but have considerable economic weight, are hit particularly hard

Nearly two thirds of all small and medium-sized enterprises in Germany are feeling the effects of increased energy costs. This is the finding of a special survey conducted by KfW Research on the basis of the representative KfW SME Panel in early September 2022. The share of SMEs affected by energy price hikes has risen by around 7 percentage points to 62% since May 2022.

However, a sizeable share of businesses assume they can manage the energy costs on the level of early September even in the long term. The views of businesses have thus changed since the early summer even though energy prices have continued to rise. So for around half of all SMEs (53%), energy costs remain an additional burden (May 2022: 51%), but one they believe to be able to absorb – even in the long term. Energy costs hardly play a role for around 13% of all SMEs (May 2022: 16%), for which the question of sustainability has not yet arisen. At the same time, another approx. 13% of all SMEs (May 2022: 14%) experience the high energy costs as a significant additional burden that would overwhelm their financial capabilities if prices were to permanently remain above the level of September 2022 or rise further. The fact that 21% of businesses currently cannot determine whether they can bear the increased energy costs in the long term shows that there is great uncertainty around the issues of energy costs and overall economic development.

A major reason that the majority of SMEs believe they can manage the increased energy costs is that energy costs so far have not been such an important factor for the SME sector in Germany as a whole. Before the outbreak of the war in Ukraine and the energy crisis, energy costs were less than 10% of total costs in more than three fourths of the 3.8 million SMEs, and even less than 5% in half of them. These are among the preliminary findings of the KfW SME Panel which will be published at the end of October 2022. It has found that the share of energy costs has risen since 2017. Five years ago, energy made up less than 10% of total costs for nine in ten SMEs. The share of energy costs in 2021 was thus higher than in 2017 but on a level comparable to the year 2013. Recently, energy costs have also risen in absolute terms. In 2017, half of all enterprises had annual energy costs not exceeding EUR 4,000. In 2021 it was around EUR 9,000.

The current discussion around energy costs revolves heavily around the development of gas prices. In order to better assess SMEs’ dependence on natural gas, KfW Research in its special survey in September asked where exactly small and medium-sized enterprises employed natural gas. Overall, natural gas plays an important role particularly for heating business premises and offices of SMEs. Half of them (49%) reported a heavy or very heavy dependence. Natural gas is also used relatively often as fuel to operate (commercial) vehicles, with 15% of all SMEs reporting a high level of dependence. Across the overall SME sector, natural gas has little relevance as a source of energy for generating process heat (2%), for example in technical processes such as drying, smelting or heat generation. However, the manufacturing sector plays a special role in this regard, as 13% of manufacturers depend heavily or very heavily on natural gas for generating process heat.

In the current debate on the impact of energy price increases and the sustainability of current energy prices, a sole focus on aggregate trends in SME sector as a whole is therefore too narrow. On a structural level, the overall SME landscape is defined by services businesses, which account for 2.92 million of the 3.8 million small and medium-sized enterprises that exist in Germany. While manufacturers make up only 5.8% of all enterprises by number, they do account for a significantly disproportionate share of the total SME workforce, turnover and investment, so they deserve particular attention. Naturally, this also covers the approx. 29,000 businesses with energy-intensive production, such as the paper industry and metal production and processing. These enterprises are currently under particular pressure. Accordingly, should a large number of these enterprises in particular run into financial distress, the consequences would be enormous.

“The majority of small and medium-sized enterprises are still showing resilience. Rather low energy cost shares across the sector and high adaptability are mitigating the effects of sharp energy price increases for SMEs. Many businesses have the ability to reduce their own burden by passing part of the cost increases on to their customers,” said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “But this finding should not mask the fact that the price increases in the energy markets had not yet fully reached businesses by early September 2022. The price tsunami still has to start rolling in the months ahead as long-term energy supply contracts and fixed prices begin to expire. At the same time, a notable proportion of SMEs already feel financially overwhelmed by the resulting permanent high energy costs. If their business model is no longer viable, that could also affect downstream stages of the value chain. It will be necessary to ease the burden on businesses that are particularly affected by high energy prices in order to stabilise the economy. The third relief package aims to do just that. What is also needed are greater incentives for investment in energy efficiency and the expansion of renewables. Without strengthening investment in the development of alternative energy and reducing energy consumption, we will remain highly dependent on suppliers of fossil fuels, and the goal of transitioning to a sustainable, climate-neutral economy will remain out of reach”, concluded Köhler-Geib.

The current study can be downloaded from
www.kfw.de/fokus