Blog – The Budget’s energy package for British manufacturers

British manufacturers and business groups were amazed last November when the Chancellor’s long heralded energy package failed to deliver help for businesses with the rising cost of energy. But it seems that this time around their voices have been heard.

The package promises energy costs savings for the economy of up to £7bn by 2018-19, the majority of which will go to businesses. The focal point of this package is a reduction in the UK’s carbon tax, costing the Government almost £900m by 2018-19. The tax works by ‘topping-up’ the price paid across Europe for carbon with a UK only tax on electricity producers. The tax, which was introduced by the current Chancellor in 2011, will now be capped at £18/tCO2 from 2016/17 instead of rising to around £21/tCO2 by 2020. This will be welcome news to many manufacturers but there will still be concern that this did not go far enough, as without reform of the EU cap-and-trade scheme their European counterparts will face a much more modest carbon price of around £6.

The remaining cost of the carbon price floor is some-what mitigated by the extension of the compensation package for energy intensive industries. In addition the Government has extended the scope of this compensation to other environmental levies, including the renewables obligation and small-scale feed-in-tariffs. Together these extensions will cost around £500m a year from 2016-17. However these supports will need to pass European Commission approval first, where compensation is usually capped at 80% of the cost. The approval process can be notoriously slow, with the existing carbon price floor package suffering delays in issuing payments while it awaits state aid clearance.

One of the small measures in the package, targeted at Combined Heat and Power (CHP) stations usually used by large industrials such as chemicals and petrol refinery, will be welcome news to the sector who are facing significantly rising costs and a loss of competitiveness as their competitors in the rest of Europe and the World freely (or almost freely in the case of the EU) continue to use cheap high carbon coal to run their plants.

Despite the limits of today’s announcement, overall manufacturing businesses should be content with the package on offer, with the Government estimating that the typical energy-intensive user will see a saving of around £6.25m in their energy bill in 2018/19. A medium sized manufacturer should see a saving of £50,000. Households will also benefit, albeit modestly, with a saving of £15 off the average bill in 2018/19.

Despite these savings for British manufacturers there will be consequences for investors in the future of the UK’s energy market. A wobble on the carbon price floor now might signal a turbulent future for the Government’s Electricity Market Reforms (despite the Government’s reassurances that nothing will change). Greater uncertainty in the investment market will only push up project financing costs and may even deter some from investing altogether. This will have consequences for the UK’s long-term energy future and ultimately the prices consumers will have to pay for their energy in the longer term. While the carbon price floor might have been eased today, the Government’s long-term emissions reductions and renewables targets remain. So is this just delaying the inevitable?