Even before Russia’s invasion of Ukraine sent oil prices leaping to more than $100 a barrel, energy costs have been on the rise. Last year, when energy prices were up 29% from 2020, according to an S&P Global report, they represented “the top driver of inflation.” Now, climbing gas, heating and other costs are putting businesses in a quandary as entrepreneurs must decide how much they can pass on to customers, and how much they’ll have to absorb to stay competitive. Fortunately, they can turn to some advisers for help.
“There is no quick fix to reducing energy costs,” acknowledged Corey Derr, an assurance senior manager based in CohnReznick’s Parsippany office. New Jersey in particular tends to have higher-than average energy bills “because of strong demand generated by a densely populated business and residential market,” he added. “Additionally, there are many older homes and commercial buildings that are inefficient consumers of energy, especially when compared to states and cities with a lot of new construction.”
Some companies are making minor energy saving changes, like using energy efficient lightbulbs or installing motion sensitive lights. “But a more costly, though superior, long-term solution would be to switch over to solar energy or another form of renewable energy,” he advised. “Significant upfront costs would be involved, but there are excellent federal income tax incentives for solar and other clean energy technologies.”
One is an investment tax credit “for business[es] who owned solar systems placed in service before 2024,” Derr noted. “It’s currently worth 26% of the eligible capital cost, plus either bonus- or five-year accelerated tax depreciation. While these federal tax credit rates are set to decrease in 2024, state and local governments, as well as local utilities may offer additional tax and cash incentives to further reduce the cost.”
High energy costs slam minority entrepreneurs
High energy costs hit Black-owned businesses particularly hard, according to John Harmon, president and CEO of the African American Chamber of Commerce of New Jersey. “Of the more-than 80,000 Black-owned businesses in New Jersey, 93% are sole proprietorships, and have less capital available to head off unforeseen expenses,” he explained. “And the average Black individual’s net worth in the state is about $5,900, compared to $315,000 for whites — home ownership is part of the reason for the disparity — so Black business owners are often not in a good position to withstand incremental increases in expenses. With so many Black businesses in danger, it’s in the interests of the state government to ensure that every part of every sector of the New Jersey economy can improve their situation — otherwise they may be at risk of underperforming.”
So, should companies just eat the higher energy costs? “Some businesses may choose to pass their higher energy costs on to customers through their own increased pricing or by establishing an additional energy charge, like a COVID-19 surcharge,” he said. “Many factors will weigh in on the amount a company would willingly pass on to customers since current economic conditions are already weighing on many businesses through higher material and supply chain costs. Price increases will depend on the competitive environment and how much added cost customers are willing to bear on top of already increasing costs.”
CohnReznick professionals are also providing guidance to businesses who want to find out about other energy-related initiatives and tax credits. The firm currently fields a national renewable energy team and a dedicated project-finance team, and is rolling out a new service for …….