High cost of energy: anti-competitive and could drive investment overseas say manufacturers

Darrell Matthews

A projected 50% hike in electricity prices by 2020 would damage British manufacturing - hitting investment, margins and competitiveness says EEF, the manufacturers’ organisation. The stark warning follows new research showing that escalating energy costs would see a quarter of manufacturers (25%) considering investment in facilities outside the UK:

· 73% of manufacturers say the projected rise in electricity costs would have a noticeable impact on profit margins – over half (53%) say it would hit their competitiveness

· Energy already accounts for 6% or more of turnover for 27% of firms – affordability is a key concern for 83% of companies

· Balancing act: while a third (32%) say the UK’s lead in setting ambitious climate targets drives innovation, 41% say it risks undermining competitiveness

· EEF is calling on the next Government to ensure that energy policy supports ambitions for a better-balanced economy.

Britain’s ambitions for a better-balanced economy could be seriously undermined by escalating energy costs, warns a new report out today from EEF, the manufacturers’ organisation. It projects a 50% hike in electricity costs by 2020[1] and says that this would hit investment, margins and competitiveness, potentially applying a brake to economic growth. In fact, such is the impact that just 4% of manufacturers would be left unscathed.

Almost three quarters of manufacturers (73%) say electricity hikes of this magnitude would have a noticeable impact on their profit margins, while over half (53%) say it would hit their competitiveness. Over a third (34%) would be forced to cut spend in other areas of their business. More worryingly, it could lead a quarter of manufacturers (25%) to consider investing in facilities overseas.

The findings suggest that the increases would be adding to the pressure that manufacturers are already under – over a quarter (27%) are already spending more than 6% of turnover on energy. For 83% of companies affordability is already a key concern[4]. This rises to 87% amongst mid-sized firms.

There are also concerns over the adequacy of Government energy efficiency schemes – less than one in five firms (19%) say the key UK schemes provide the right incentive to improve energy efficiency. Almost four in ten (38%) believe the schemes are overly complex.

As a result, businesses are split over the UK taking a leading role in developing ambitious climate targets. While a third (32%) say it drives innovation, 41% say it risks undermining competitiveness. And, although almost a quarter (23%) say it creates new markets, this is out-weighed by the 46% who want to see the UK remain in line with global competitors. This suggests that, going forward, a more balanced approach is required from policy makers.

Darrell Matthews, North West Region Director at EEF, says: “This is a wake-up call that the tension between the pursuit of low carbon policies and Britain’s ambitions for a better-balanced economy must be resolved. Failure to do so could hit investment, margins and competitiveness, putting the brakes on growth and leaving our economy stuck in the slow lane.

“It’s time for a fresh approach. Low carbon is rapidly becoming synonymous with anti-competitive, which is why we are urging all parties vying for government to commit to review and reform current policies and mechanisms. Above all, we are seeking a firm commitment to implement the Energy Intensive Industries package announced in the 2014 Budget as soon as possible. High energy costs are crippling for manufacturers of all sizes, but rapid implementation of this scheme would at least reduce the burden on those who are most exposed.”

As part of its Agenda for Government to 2020, EEF is calling for:

· Commitment from all parties for the implementation of the Energy Intensive Industries (EII) compensation package as announced at the 2014 Budget. This should include introduction of the compensation for the costs of renewables as soon as possible and a long-term view of continued protection measures beyond 2019/20.

· A fresh approach to industrial energy efficiency and decarbonisation. This must include; review and reform of the current mechanisms to ensure they are capable of delivering on-going improvements across the sectors they effect, a greater focus on low carbon innovation for the manufacturing sector (such as CCS) and the establishment of an EII decarbonisation strategy drawing on the 2050 low carbon roadmaps.

· Review and reform of the costs of decarbonising the power grid to energy consumers. The current hybrid approach of a carbon price and CfDs to fund low carbon electricity generation is needlessly expensive and inefficient; a first major step to resolution would be to scrap the carbon floor price as soon as fiscally possible. Longer-term thinking must focus on ensuring that emissions-related taxes and policies demonstrably and effectively deliver emissions reductions and are not aimed primarily at raising revenue.