Anyone who runs a business already knows that business energy costs in the UK are among the highest in the world – especially for electricity, where the UK tops the charts for developed countries and is almost four times that of the US.
An incoming PM looking for growth would find it hard to ignore. Business groups, from the CBI and British Chambers of Commerce to MakeUK and Energy UK, are vocal that it is hurting productivity and investment.
But what is really interesting is just how true that seems to be. Last month the Economist reported that the US has undergone a productivity miracle over the past 5 years, leaving the UK behind in its wake. Shock! But was that miracle down to AI, tax cuts, huge Biden-era public subsidies or the heroic American worker?
No, it turns out that falling energy costs have played a huge part in boosting US productivity and stemming the decline in industries that are struggling in the UK and Europe. Contrast that with here, where real and tangible investment in the industries of the future is being scuppered by high business energy costs and regulation. It’s clear we have got something wrong.
Our approach is also harming our transition to cleaner greener electricity. Today the Committee on Climate Change recommended making electricity cheaper to speed up the adoption of heat pumps and support energy intensive industries.
Wholesale energy prices still make up the lion’s share of commercial energy bills (40-50%) – and let’s not forget that they are still over twice their pre-Covid levels. That’s partly because the international spot price of gas still sets UK energy prices the majority of the time. But UK plc also has to shoulder a hefty burden of so-called “policy costs”– around 20% of the total for your typical small business energy bill.
These costs include:
All of these separate charges were introduced for ‘good’ reasons, and it’s possible to mount a defence for each of them separately, but collectively are now a weight around many businesses’ necks – and are harming economic growth.
And the most perverse thing is that these charges serve to make cleaner, greener electricity use relatively more expensive than gas usage, slowing down the energy transition and investment in sovereign electricity generation.
Government has not been totally ignorant of these accumulated burdens. They have introduced schemes for energy intensive industries, and more recently have targeted help at ‘frontier’ and ‘foundational’ manufacturers in areas deemedkey to the UK’s industrial strategy through the British Industrial Competitiveness Scheme (BICS). In effect the government has already conceded the point that placing these policy costs on bills isn’t sustainable.
However, the vast, vast majority of UK business have been left out in the cold, buffeted by the winds of the international energy market, and straining under the weight of these policy costs.
And for many, this comes at a time when various other ‘policy’ costs have mounted: from national minimum wage rises, to employer NICs, to Business Rates – the environment is tough.
These sectors, though un-flashy, determine the wages (and, by extension, labour productivity) for huge swathes of workers in the UK. They are central to the UK’s productivity story and for driving living standards.
It is time that government recognised that cross-cutting effect that high business energy prices are having in the UK, especially when layered on top of other policy costs, and consider how best to support these jobs-rich sectors to transition towards cleaner, greener, UK-generated electricity.
Blog
