New energy support scheme: reaction from manufacturing

Posted on 10 Jan 2023 by The Manufacturer

A new scheme to support firms with their energy bills was announced in the House of Commons on Monday. The current scheme which caps the unit cost of gas and electricity for all businesses expires at the end of March. Under the new scheme, businesses will get a discount on wholesale prices rather than costs being capped as under the current one.

While some industry groups welcomed the announcement, others warned it fell short for business struggling with soaring costs. Read what the manufacturing industry has to say.

Manufacturers react to energy bill support being cut:

Stephen Phipson, CEO of Make UK, the manufacturers’ organisation said: “It is a welcome move that government has recognised the need for ongoing support for Britain’s manufacturing sector to protect the thousands of jobs across the UK. We will work through the detailed calculations when they are made available to us by officials to understand how today’s changes in energy support affects manufacturers.

“We will also need to work with government to make sure the ongoing help does actually deliver meaningful support for our sector. It is important to remember that Britain’s manufacturers are already sitting at a serious disadvantage to their major European competitors who are being shielded by more extensive and generous energy support schemes and UK companies risk being undercut across the board if the right support is not there. Government also needs to improve regulation of the industrial energy market to mirror the way it applies to domestic users, to ensure that manufacturers are not further overcharged during this crisis period.”

Make UK has also warned that high energy costs will force manufacturers to cut jobs and production this year, following the announcement that energy cost support for businesses will change after April. Victoria Brocklesby, COO at Origin, the UK’s leading door and window manufacturer, believes this will be even more harmful to businesses in the long run if they choose to reduce workforces and cut back on manufacturing output.

She commented: “Some manufacturers might think it’s tempting to reduce the size of the workforce to mitigate rising costs, particularly as salaries are often a business’s largest expense. This is not the case for Origin. We believe that this will only stunt output and productivity, limiting the amount of business a manufacturer can take on and therefore the money they can make as a result. With costs only rising, decreasing the ability to generate revenue is counterintuitive.

“For us, our business relies heavily on our ability to manufacture at a high output, so cutting jobs would be an ineffective way to save on our costs. Instead, we focus on making savings elsewhere. For example, our factories are heated by wood-burning stoves which vastly reduces our reliance on gas, and our electricity is all on a smart system. Elsewhere, we keep a close eye on our processes to value engineer how the company runs to ensure we remain efficient. This is a much more effective way of saving costs and allows us to maintain our industry-leading service to our customers.”

Ian Gadsby, Managing Director of Ylem Energy said: “The Treasury’s announcement will undoubtedly be welcomed by businesses across the UK, and the additional support to energy intensive sectors, such as food and drink production, manufacturers and chemical producers  will be a great help to  companies in these sectors..”

“The extension of support does not mean we can ignore the stark reality that energy costs are still around twice as much as businesses would have been paying this time last year. With the scheme set to end in March 2024, now is the time, for energy intensive industries to think about the future of their supply and consider on-site energy generation to remove themselves from the harsh winds of the on-grid market.”

Rob Flello, Chief Executive of the British Ceramic Confederation, said: “We welcome the Government’s decision to extend energy support to UK businesses and manufacturing through the Energy Bills Discount Scheme for another year.

“Government appears to have listened to our concerns and taken them on board in providing extra support for energy intensive industries and in recognising that UK ceramics is a critical sector in the United Kingdom.

“The new scheme provides a cushion for energy costs, but only if the wholesale costs are relatively benign, making the new scheme not as supportive or as far-reaching as the original Energy Bill Relief Scheme.

“As a gas-intensive Foundation Industry, exorbitant energy prices have put the UK ceramics sector under intense pressure. Internationally competitive energy and carbon costs are essential if we are to compete on a global stage.

“However, UK ceramic manufacturers are still competing against unrestricted imports from countries that provide a far higher level of support to their own manufacturers.

“The negative language the Government used in citing that the taxpayer could not continue to prop up failing and unproductive firms was disappointing and disheartening. The UK ceramics industry alone, without Government support, has invested more than £600million in energy efficiency over the last 10 years.

“UK ceramic companies are successful, well-run businesses, facing unpresented energy costs and unfair competition from abroad.

“We are working through the finer detail and are grateful that the Minister has agreed to meet with the British Ceramic Confederation to discuss the scheme.

“UK ceramics is the manufacturing backbone of this nation – without refractories there is no steel and no glass, and without the brick, tile, and clay pipe manufacturers there would be no housebuilding.

“Looking ahead, the threat presented by volatile energy prices has not gone away, and we will continue to support our members, working closely with Government.”

David Lloyd, Head of Connected Buildings at Johnson Controls said: “With the current freeze on energy prices for UK businesses set to expire at the end of March, organisations are going to face a challenging start to the year. The current scheme, set to replace the previously fixed price of energy bills, will be replaced with a discount on wholesale prices. In the aftermath of this announcement, business leaders will be left to their own devices to manage energy costs, which could see many struggle to stay afloat. It’s now about rallying to get to grips with what, when and why their buildings are spending on energy to save on costs. For example, what equipment is using energy? What time it is turning on? Where is it turning on? Businesses just can’t afford to keep the lights on when they are not needed.

“The only way to accurately measure energy usage at scale and quickly is to use an energy management platform. Users and owners alike need to gather the data and analytics on every major piece of building equipment. Organisations can then set a baseline to constantly review so they can improve the energy performance of the site. From there, they can then start to introduce smarter energy-saving technologies. Luckily, solutions already exist that are relatively quick to implement, such as a data platform. Unlike replacing operational technology or introducing renewables – that is time-consuming and expensive – energy performance financing against a guaranteed ROI is readily available and easy to introduce into a building.

“The biggest concern for all businesses now is wasted energy usage amid rising prices and a reduction in government help. With rising charges and continual changes in government legislation, businesses must look to technology for a better, brighter way of managing utilities.”

Jonathan Andrew, CEO of Bibby Financial Services commented: “The government’s rationale for dialling down energy bill support is understandable. But the past few years have served blow after blow for the UK’s small and medium sized enterprises as they bounce from one crisis to another. Low on cash, and short of resilience, too many will find themselves on the precipice of collapse come April unless other specific support is put in place.

“At this stage in the year, SMEs need stability and consistency to enable them to plan ahead and overcome challenges associated with unpredictable economic conditions. Sky high costs and interest rates are squeezing cash-strapped businesses at both ends. Ultimately, access to finance to enable cashflow and investment will be critical to businesses’ ability to ride out this storm. But, anecdotally, we know many are struggling to pay back loans, while others face finance blackspots with lenders retrenching from markets, and overall, there appears to be a lack of awareness of what financial support is on offer.

“Urgent action is required from the government to provide clear direction to ensure SMEs can access finance, while ensuring the right level of support to keep them growing. Those SMEs that are equipped to build resilience and invest in their futures will play a vital role in leading the UK out of recession.”

Mike Hawes, SMMT Chief Executive, said: “A new energy support scheme to help all businesses next winter is welcome. Energy remains the second largest automotive manufacturing input cost and UK businesses already face the highest electricity costs in Europe. However, automotive will not qualify for the additional higher-level support afforded energy intensive sectors, despite being one of the UK’s largest exporters and trade intensive sectors, and facing energy bills that cripple its competitiveness.

“The upcoming Budget should go further, therefore, allowing vehicle producers and suppliers to qualify for additional measures in line with energy intensive industries, ensure climate change agreements are maintained and energy efficient capital investments are incentivised.”

Stephen Morley, President of the Confederation of British Metalforming, the trade association for UK manufacturers of fasteners, forgings and pressings, cold-rolled and sheet-metal products, said: “A lot has already been written about yesterday’s announcement, but the CBM wants to draw attention to the Government’s fixation on giving additional support to Energy Intensive Industries (EII) at the expense of other heavy energy users whose costs are relative to EII’s as a percentage of their turnover.

“Heavy energy users do not qualify for both the current and future schemes and other approved exemptions because the current formula used to categorise an EII is based on high electricity costs and doesn’t reflect the fact that many manufacturers use more gas.

“Prices for the latter have gone through the roof and we have been working hard to develop a new energy intensity calculator that covers both forms of energy and provides a ratio against gross value added (profit and payroll costs). We call on the government to adopt this formula and revise the list of approved EII industries immediately to include heavy energy users.

“This gives a far more realistic view of what is happening in industry, especially for SMEs who have had less opportunity to hedge future energy purchasing and have less room to pass costs on. Many excellent businesses are at a tipping point and this drastic reduction of government support will only exacerbate this situation and hamper UK manufacturing’s competitiveness in export markets.

“The government says it is only giving what it can afford and they say we have to be more realistic, but they are ignoring the long-term cost of jobs not being retained or even businesses being lost forever.

“Rises in unemployment simply stops people spending money in other sectors, so the impact will not be purely felt in industry and will come at a far greater cost to the government and the country as a whole.”

CBM on the general aftermath of the announcement…

“Yesterday’s news about the introduction of an Energy Business Discount Scheme (EBDS) is yet another example of the government failing manufacturing again. The EBDS is the replacement for the current Energy Business Relief Scheme (EBRS), which runs to the end of March 2023 and is currently giving manufacturers vital breathing space as they weather continued supply chain issues and the combined after-effects of COVI-19 and Brexit.

“It also mitigated some of the impact from the surge in energy costs, particularly in gas prices that had historically been lower than electricity. Companies still saw huge increases, which were only tempered by the EBRS, leaving many still struggling to survive. The CBM have held several meetings with BEIS officials and made representations directly to the Secretary of State for Business, clearly warning about the negative impact of existing support not being extended.

“Our lobbying to ensure the ‘cliff edge’ was removed has been ignored, as all yesterday’s announcement does is sound the death knell for lots of well-run companies by pushing some over the cliff edge – exactly what we wanted to avoid.

“From the outset, we provided clear evidence of the huge increases in energy costs that our members were facing and detailed how much the support scheme would cover. However, even with the current EBRS in place, many CBM members warned that they would struggle to survive and in one case, we have a manufacturer who has seen energy costs rise from £1m to £4.5m and a turnover that remained relatively flat. How do you even begin to find an answer for that?

“We also warned government that the EBRS only covered the wholesale costs portion of the bill. This works out at around 35% of the total price, so the support only covers a proportion of that depending on the cap. In addition, the CBM has continually asked for the government’s support in ensuring suppliers were kept in line, but instead, what we’ve seen are numerous examples of unscrupulous suppliers profiteering by putting up associated costs, such as standing charges.

“Over 60% of our members’ electricity bills are made up of taxes and other non commodity costs of which they receive no support by way of Government approved exemptions. Finally, there has also been evidence of several members being ‘coerced’ into new long-term contracts at higher rates at a time when they didn’t know what the future would hold. With wholesale prices now reducing, suppliers will reap the benefit at the expense of our members who are good, traditional manufacturing businesses.”