Listen to manufacturers and unions: high electricity prices are killing industry
The manufacturing lobby group Make UK and the Trades Union Congress have picked a bad moment to plead for urgent relief for the nation’s industrial companies from sky-high electricity prices.
The manufacturing lobby group Make UK and the Trades Union Congress have picked a bad moment to plead for urgent relief for the nation’s industrial companies from sky-high electricity prices. The cabinet is tearing itself apart over defence spending, so even a “one minute to midnight” call for an extra £3bn for manufacturers is likely to be shunted into the long grass until after the likely Labour leadership contest.
But the two bodies are correct on their main points. The cost of energy in the UK is a heavy drag on business competitiveness. Ministers’ talk about serious industrial revival is wishful thinking while UK companies are paying the highest electricity prices in the G7, including four times as much as US counterparts. High prices also cut across most of the big items on the government’s to-do list – everything from energy transition itself to, indeed, increasing domestic defence production.
The findings from Make UK’s survey of its members are startling but predictable. Almost one in 10 have already moved some production overseas, and 16% are considering doing so. Profit margins are being squeezed because energy bills are rising faster than the companies can put up the prices of their products. Almost four in 10 companies have delayed investment. The TUC’s direct concern, obviously, is the threat of job losses among the 2.5 million workers in the sector – more than a fifth of companies in the survey say they have reduced headcount.
The specific demand is for the government to expand the scope of the British industrial competitiveness scheme (BICS), the mechanism to cut electricity bills for qualifying UK manufacturers by up to 25% from next April (with a back-payment to cover this year). Only 10,000 companies qualify, a subset of those within the eight sectors of the government’s “modern” industrial strategy. Make UK would like all 130,000 manufacturers to be covered, which would cost £3bn, it calculates.
The size of that increase explains why a beleaguered chancellor might instinctively resist. The whole thrust of the government’s industrial approach, after all, has been to target support narrowly because that is all that is deemed affordable. The £600m – the cost of removing three levies from electricity bills – is to be covered by “changes within the energy system and Exchequer funding,” with details to follow in the autumn budget. But such shuffles are harder to perform when the demand is for £3bn.
Look how France and Germany do it, Make UK and the TUC would respond. Well, exactly. Over there, a far greater chunk of equivalent energy levies is absorbed into general taxation in the name of keeping industry alive and competitive. In the end, this is really a question of how to distribute the costs of energy transition and new grid infrastructure.
The BICS, as currently cast, was an acknowledgment that something had to give. So were the deeper discounts available to 500 heavy industrial users via the separate “supercharger” scheme to put UK companies on a level footing with European rivals. But they don’t add up to a comprehensive solution for the whole of UK industry.
A parallel debate over where levies properly belong – on bills or funded by the Treasury – is happening in the household sector, which prompted Rachel Reeves to cut £150 from average bills in April. But, to date, the government’s approach for business and industry has been to stick to its narrow and targeted philosophy. As Make UK says, it is not the “bold action” to bring down energy costs for business that the government occasionally still claims.
The crisis tends to be a slow-burner, which is perhaps why it never quite rises to the top of the political agenda. There are high-profile closures, such as the Grangemouth refinery, but the bigger hidden cost is the harder-to-measure one of multinationals choosing to expand production overseas rather than in their UK factories. The trade body’s downgrade of its growth forecasts for the manufacturing sector illustrates what is at stake: growth of 0.4% this year and just 0.1% next year would be anaemic.
The calls from the TUC and Make UK echo those a few months ago from the employers body CBI and Energy UK, which represents electricity generators and retailers. They are all making roughly the same point: if you want growth, electricity has to be cheaper. A proper strategy is needed, and can’t be dodged much longer.
