The Strait of Hormuz, the narrow waterway between Iran and the Arabian Peninsula through which approximately 20% of the world's oil and a significant proportion of global LNG flows, has been a source of heightened geopolitical tension throughout 2026. Incidents in the strait, combined with broader Middle East instability, have kept global energy prices elevated well above where they were at the start of the year.
The Bank of England's Monetary Policy Committee explicitly cited Strait of Hormuz uncertainty as a factor in its decision to hold interest rates at 3.75% at its 30 July 2026 meeting, with three members voting for a rise in response to persistent inflationary pressure partly driven by energy costs. The Bank's Chief Economist warned in August that energy price volatility could persist well into 2027.
For UK small and medium-sized businesses, this matters on multiple fronts. Energy costs flow directly into operating margins. Fuel costs affect transport and logistics expenses. Energy price pass-through from suppliers increases the cost of materials and components. And elevated energy prices are one of the reasons the Bank of England is reluctant to cut interest rates, keeping borrowing costs higher than they might otherwise be.
This article explains what the current energy environment means practically for your business — not as geopolitical commentary, but as a set of financial risks that can be measured, managed, and in some cases offset through tax-efficient investment.
The Direct Impact on Business Energy Bills
UK business electricity is supplied at 20% VAT — there is no equivalent of the domestic electricity VAT cut announced from October 2026 for commercial consumers. The price of business electricity reflects the underlying wholesale electricity price, which in the UK market is closely linked to gas prices through the merit order system, and gas prices are in turn heavily influenced by global LNG prices which are sensitive to Middle East disruption.
Business energy contracts fall into three broad categories. Those on long-term fixed-price contracts entered before the current volatility began are insulated from the current price environment — their costs are predictable regardless of what happens in the Strait of Hormuz. Those on variable or spot-linked contracts are fully exposed to current market conditions. And those whose fixed contracts are due for renewal in the next six to twelve months face a decision about whether to re-fix at current elevated rates or take the risk of variable pricing.
For businesses in the last category — approaching a contract renewal in a volatile market — the decision is finely balanced. Fixing now locks in certainty but at a higher price. Waiting risks prices rising further if the Middle East situation deteriorates, or benefits from falling prices if the situation resolves. Most energy cost consultants currently advise fixing a proportion of exposure rather than taking an all-or-nothing position.
The Indirect Impacts: Fuel, Materials, and Supply Chain Costs
For many businesses, the biggest impact of higher energy prices is not the electricity bill — it is the downstream effect on other costs.
Transport and logistics costs rise directly with fuel prices. A business that relies on deliveries — whether collecting goods from suppliers or distributing products to customers — pays more per journey when diesel prices are elevated. For businesses where transport is a significant cost line, monitoring fuel cost movements and reviewing delivery route efficiency is a straightforward response.
Manufacturing and food production businesses face energy-intensive processes where cost increases are directly margin-destructive. For these businesses, the economics of investing in energy efficiency improvements — insulation, heat recovery, LED lighting, motor efficiency upgrades — become compelling when energy prices are high, because the payback period shortens as the savings per unit of energy consumed are larger.
Professional services businesses with significant office footprints face rising utility costs that, while smaller in absolute terms, erode margins that may already be under pressure from wage increases. The option to reduce office energy consumption — through smart heating controls, occupancy-based lighting, and equipment standby management — generates immediate savings with minimal capital outlay.
The Tax Incentives for Energy Investment That Are Worth Using Now
One of the most effective responses to elevated energy costs is to invest in energy efficiency, and the UK tax system currently provides generous incentives for qualifying expenditure.
The Annual Investment Allowance provides 100% first-year tax relief on qualifying plant and machinery, including energy-efficient heating and cooling systems, LED lighting upgrades, insulation improvements, battery storage systems, and solar panels used in business premises. A business investing £30,000 in a qualifying heating system upgrade deducts the full £30,000 from taxable profit in the year of purchase — saving £7,500 in Corporation Tax at the 25% rate. The after-tax cost of the investment is £22,500, and the ongoing energy saving reduces operating costs every year thereafter.
The Enhanced Capital Allowance at 100% first-year relief is available for specific energy-saving technologies included on HMRC's Energy Technology List. This list, maintained by the Department for Energy Security and Net Zero, covers highly efficient products across boilers, chillers, refrigeration equipment, variable speed drives, and other categories. Investment in listed products qualifies for the enhanced rate regardless of whether the business has used its full Annual Investment Allowance on other expenditure.
Electric vehicle charging infrastructure at business premises qualifies for a 100% first-year allowance. For businesses whose staff or vehicles are exposed to fuel cost volatility, accelerating the transition to electric vehicles and installing on-site charging reduces fuel cost exposure while generating an immediate tax benefit on the capital investment.
Fixed Contracts, Price Caps, and the Practical Options
Beyond investment, the most direct tool for managing energy cost risk is the structure of your energy contract.
A fixed-price energy contract agreed now locks your unit rate for the duration of the contract — typically twelve to thirty-six months — regardless of what happens to wholesale prices in the interim. The current market incorporates some geopolitical risk premium into forward prices, which means fixing now is not cheap. But it buys certainty, which has genuine value for cash flow forecasting and margin planning.
A flexible or basket purchasing contract allows you to lock in portions of your energy requirement at intervals over the contract period, rather than all at once. This approach can reduce the risk of fixing at the worst possible time, but requires more active management and is typically only available to medium and larger commercial consumers with dedicated energy brokers.
Pass-through or unit-rate-linked contracts expose you fully to market movements — beneficial if prices fall, painful if they rise. In the current volatile environment, these contracts are least suitable for businesses with tight margins and limited ability to pass cost increases on to customers.
Business energy brokers typically provide no-cost comparison services and can model the economics of different contract structures against your specific consumption profile. Given the current environment, a broker review of your energy contract position is worthwhile regardless of when your current deal expires.
The Connection to Interest Rates and Your Borrowing Costs
It is worth connecting the energy picture to the wider economic context, because the two are linked in a way that affects business finance planning.
The Bank of England is holding rates at 3.75% — and three MPC members are pushing for a rise to 4% — partly because Middle East energy price volatility is keeping inflation above the 2% target. Every month that energy prices remain elevated, the case for a rate cut weakens and the risk of a rate rise strengthens. For businesses with variable-rate borrowing, energy price volatility in the Strait of Hormuz therefore translates, indirectly, into higher financing costs.
This creates a compounding effect for energy-intensive businesses: higher energy bills, higher materials costs, and higher borrowing costs all arising from the same geopolitical cause. Managing energy costs through fixed contracts and efficiency investment is therefore not just a direct cost reduction — it is an indirect hedge against the interest rate environment that the energy situation is helping to sustain.
What CoreAcc Accountants Recommends
The Strait of Hormuz situation is a reminder that external risks — geopolitical events far from Hertfordshire and North London — have real and direct effects on the cost base of every business in the UK. The response is not to worry about the geopolitics but to manage the financial exposure they create.
Review your energy contract position and assess whether fixing your rate now makes sense for your business. Evaluate capital investment in energy efficiency using the AIA and Enhanced Capital Allowances, and model the after-tax payback period at current energy prices. Where vehicle or transport fuel costs are material, model the economics of EV transition against the available capital allowances. And build the energy cost outlook into your 2026/27 cash flow forecast, using realistic assumptions that reflect the current elevated price environment rather than pre-conflict norms.
CoreAcc Accountants can help you model the tax treatment of energy efficiency investment, incorporate energy cost assumptions into your cash flow planning, and review your overall cost position in the context of the current economic environment.
Want to review your energy cost exposure and the tax reliefs available for energy investment? Contact CoreAcc Accountants today.
CoreAcc Accountants is an ACCA-accredited firm of Chartered Certified Accountants. This article was published in August 2026 and reflects economic and market conditions in force at that time. It does not constitute financial or professional advice. Always seek specific advice for your individual circumstances.
