Demand concerns over industry bills reforms

Government proposals to remove green levies from energy intensive businesses could lead to an unintentional rise in peak time demand, Energy UK has warned.

While generally supportive of the government’s Industry Supercharger proposals, Energy UK has called for an impact analysis to be carried out to “avoid unintended consequences”.

The proposed changes were unveiled in February. They would see around 300 energy intensive businesses exempt from certain green levies, such as those connected to the Feed in Tariff, Contracts for Difference and the Renewables Obligation, as well as Capacity Market costs.

The specific businesses that will benefit from the changes have not been named, however support will be made available to sectors particularly exposed to the cost of electricity, such as those who produce steel, metals, chemicals and paper.

In its response to the consultation, Energy UK “agrees that strategically significant industries delivering economic benefits should be supported so that they are not put at a competitive disadvantage internationally”.

However, the trade body raises “concerns with aspects of the proposals […] and would urge the government to carry out an impact analysis before implementation to provide a holistic view of the potential costs and benefits, including the impact this could have on other policy objectives such as security of supply and decarbonisation, avoid unintended consequences, and ensure any trade-offs are proportionate.”

Its response adds: “As capacity market charges are a strong driver of energy intensive industry (EII) behaviour, there is a risk that an exemption from these charges could increase demand from EIIs at peak times.

“We believe this, combined with the effective removal of TRIAD exemption revenues from winter 2023/24, could increase the peak electricity system demand compared to the current baseline. It is not clear what the scale of this impact would be, and so an impact assessment would provide welcome clarification.”

Furthermore, Energy UK calls for the following considerations to be made:

• The potential for additional costs to be incurred by market participants as a result of this being administered through an indirect exemption, such as reporting costs.
• The potential impact these proposals could have on non-EII businesses, such as large industrial users/demand centres which are not classed as EIIs, as well as the further increase in the cost burden for small end consumers by funding this policy measure via their bills.
• The possible short-term cashflow impacts on energy suppliers. Without due visibility ahead of implementation, some suppliers may face short-term cashflow impacts due to being unable to pass the cost of the scheme onto non-eligible consumers on fixed price contracts. The short-term cashflow impact would likely be more pronounced in the non-domestic sector where contracts are of higher gross value and are typically two to three years in length and agreed up to a year in advance. At the extreme, this may mean suppliers bear the cost of this policy for over four years.
• The impact of these proposals on the bankability of low-carbon hydrogen projects.

The consultation was launched this spring with a view to being rolled out in a year’s time.

This new initiative will supplement existing schemes to help businesses with rising energy costs.

In April 2022 the government extended the Energy Intensive Industries Compensation Scheme by a further three years, and more than doubled the budget. The scheme provides businesses with relief for the costs of the UK Emissions Trading Scheme (ETS) and Carbon Price Support mechanism in their electricity bills.

From April 2023 until March 2024, the new Energy Bills Discount Scheme will also provide support for UK businesses and other non-domestic users on high energy bills.