Energy competitiveness in the Budget – going for cheap and dirty, not lean and clean

Steel-MakingMuch of the discussion of today’s Budget will be about wins for pensioners and bingo players, but another winner was energy-intensive industry. Setting the background, the Budget text involved some fairly selective data and glided over a few inconvenient facts. Starting off by noting the key role that manufacturing is playing in the UK’s recovery, the Budget argued that:

“As a vital export industry, manufacturers produce more than half of the UK’s exports, but the cost of energy acutely impacts the international competitiveness of the sector”

In fact, across the whole of manufacturing, energy makes up a relatively minor proportion of costs, around 3%, although it is clear there are fears about rising future costs. Obviously for energy intensive industries (EIIs) energy costs are more important. the Budget text goes on to note that:

“a typical EII in Britain currently pays almost 50% more for their electricity than they do in France, and the cost to businesses of policies to deliver new low-carbon energy infrastructure is set to increase by around 300% by 2020.”

These statements are true, but they obfuscate some basic issues. First, the underlying reason for high electricity prices in the UK is high gas prices in Europe. One reason for the contrast with France is France’s use of (subsidised) nuclear energy. Germany’s large industrial energy users pay prices that are as high or higher than the UK’s, once tax is taken into account. And while it is true that the cost of low-carbon infrastructure is likely to rise sharply to 2020, it does so from a low base. Policy costs are responsible for less than a quarter of the rise in industrial electricity prices between 2004 and 2011.

So cutting the climate policy costs in energy prices for British industries may help a bit, but it won’t protect them from underlying energy price changes, which so far have been far greater. What would help in this regard would be greater energy efficiency, or energy productivity, in British business. According to data from the comparative European source ODYSSEE, UK firms have higher energy content per unit of product than firms in Germany and Denmark in paper, steel, cement and chemicals. However, instead of the Budget offering investment in greater energy efficiency, it offers cuts in energy prices, which disincentivises such investments. This is a short-term fix, doubtless politically astute, but won’t actually help the “doers and the makers” compete internationally in a sustainable way.

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