British industry faces an energy cost crisis – and it is set to grow according to
Behind the political battles over household bills lurks a far greater energy cost crisis. It risks damaging British industry and undermining attempts to boost productivity after Brexit.
Households are paying more for clean power than they should, but official data shows UK bills are still below average compared to the EU.
The picture is more worrying for industrial and commercial customers. In this league table UK businesses pay well above the average. The cost burden they bear is second only to Denmark.
The issue is under discussion at the Treasury. Officials are clear that for the UK to attract inward investment the country needs to be competitive on energy costs, even while taking action to reduce carbon emissions.
“This is why the Government has commissioned an independent review into the cost of energy led by Prof Dieter Helm … to deliver the Government’s carbon targets and ensure security of supply at minimum cost to both industry and domestic consumers,” the Department of Business, Energy and Industrial Strategy said earlier this year.
The Helm review concluded that bungled policymaking and Governmental tinkering has meant the UK is paying “significantly” more than it should.
Andrew Buckley, a director at the Major Energy Users Council (MEUC), agrees. “The report refers to decarbonisation and social policies making up 20pc of bills,” he says.
“For our members we calculate that these costs will reach over 40pc by 2020 and this is the main reason why our industrial power bills are the amongst the most expensive in Europe.”
The Government has already been forced to provide an 85pc rebate on green energy taxes for UK steel makers. The £5m a month refund is meant to help avoid another crisis for the embattled industry. Energy costs remain a threat to other high-energy industries, however. Water companies are some of the highest energy users in the country, alongside factories and the data centres run by some of the biggest tech and telecoms giants
“Some energy intensive businesses receive some relief from these charges but the great majority of commercial and industrial companies amongst MEUC membership do not,” Buckley says. It comes at a time of paramount importance for the economy as Britain prepares to leave the European Union. At the same time the cost of importing parts is rising and attracting skilled labour is becoming more difficult.
Today, an annual electricity bill for one of Britain’s top 10 highest energy users stands at around £120m a year, but within a few years this will rise to £170m
If Helm had his way, all the costs of subsidising Britain’s low carbon power projects – such as wind, solar and new nuclear plants – would be scrapped from industrial bills altogether.
Ilesh Patel, from Baringa Partners, spent the summer working with large industrial users hoping to manage the looming cost crisis.
In a worrying twist he found the most effective efficiency tactics in use today risk accelerating the energy cost crunch for those users with the highest electricity appetite.
“The more sophisticated energy-intensive companies are looking at things in three ways,” Patel explains.
The first is by reducing their reliance on the main power grid by generating their own electricity from small-scale power projects on their own sites. These could take the shape of solar panels or micro gas plants which create both heat and power. The mini-system could also include battery storage. “The immediate impact on a bill would be material and clear – just by buying less from the grid,” Patel says.
The second option is to pay less for what you buy. Patel says there is an increasing appetite among major companies to lock-in bilateral deals directly with renewable power generators which can supply long-term, fixed-rate electricity at below the market price.
“The price agreed today would be the same price in 15 years’ time, and there’s no variability on that. That’s what makes it so powerful for energy consumers or a manufacturing facility,” he adds.
Finally, Patel says companies are trying to use less energy in the first place. Efficiency measures may be a relatively low-tech route to tackling spiralling costs but every little bit helps in a crisis with no magic bullet.
The end energy vision for a high-energy manufacturer, water company or data centre could involve using less energy, generating their own power as much as possible, and where not possible contracting to buy someone else’s. The common denominator is using less from the national grid.
For those which are able to insulate themselves against the higher prices of grid-bought power, costs can be reduced. But for those left behind the move away from grid power could mean the problem escalates.
Patelel’s three-point plan is not an option for all energy users. For example, a typical one-megawatt solar project – very small compared to a 50-megawatt steel plant – would need land the size of a football pitch.
Trying to find 50 football pitches of land, and then install batteries, is just not practical for a very high energy user, he says. Those left behind will be the most energy-intensive industries and manufacturers which support thousands of jobs across the country, as well as low-income and socially vulnerable households which cannot afford to embrace the new technologies which might be able to help save them money.
“The big question is when will we reach a tipping point,” says Patel. “This is all relatively small-scale stuff when only a few hundred customers can move off the grid, but soon cost reductions in solar and battery storage will make it viable for the vast majority of industrial, commercial and domestic customers to follow.
“Britain will still need its national grid, and will still need the smaller regional networks. But as more customers only ever use the grid as a backup, how can we charge for the network use?”
The cost of maintaining the country’s pipes and wires is calculated by the energy regulator based on how much power or gas is used. If commercial customers only use the grid for backup it will fall to those less able to be self-sufficient to bear the brunt of the grid’s maintenance costs.
Proponents of off-grid generation rightly point out that the trend will help reduce the overall cost of maintaining the grid – but not low enough to protect heavy industry from spiralling costs.
“The very largest energy users will struggle to get their bill down without some kind of Government intervention in the cost base. The levers just can’t be pulled by them in the same way as can be done for the vast majority of industrial and commercial consumers,” Patel warns.
The concern is front and centre on policymakers’ agenda but Ofgem’s current review of network costs does not go far enough, according to some.
“The scope of the review that has been launched is woefully narrow in my view,” says one industry insider, who asked not to be named.
“They haven’t included the really long-term issues. How do we charge for legacy costs in a world where domestic and commercial solar is becoming more affordable for high net-worth but not affordable for really low-income or squeezed middle families? Their review doesn’t include this at all.”
Ofgem’s so-called “significant code review” will reveal its findings and proposals in the second quarter of next year and will deliver decisions around three months later. These will only take affect early next decade.
In the meantime, the pressure on industry is unlikely to ease.