How will the Budget affect your business energy costs?

The Chancellor’s speech may have made little mention of anything energy-related, but the government documents that were subsequently released offer some insights into the UK’s energy future.

Electricity Pylon UK Energy Costs.
Manufacturers are facing the tenth successive year of rising energy costs.

It’s fair to say that most manufacturers are concerned about their escalating energy costs.

Industrial business in the UK pay a lot for the energy they use. Aside from labour, energy can be the largest overhead for many manufacturing businesses, and as a result, many manufacturers have become very efficient at using it.

Efficiency, however, can be hard to sustain in an ever-changing regulatory and political landscape.

Which makes understanding the government’s recently released energy documents a key priority for all businesses – but particularly those operating within energy-intensive sectors such as chemical, food, basic metals (iron, aluminium, iron), rubber and plastics, and paper – most of which, incidentally, the UK is something of a world-leader in.

Recognising that many manufacturers are ‘time-poor but insight-hungry’, The Manufacturer sat down with David Oliver – an energy expert from business utility specialists, Inenco – to discuss how the Budget will affect industrial businesses energy costs and commitments.

How will commodity costs be affected by the changes in the Budget?

David Oliver: Recently, we’ve seen rising gas and electricity prices, and it looks as though prices will remain high for the foreseeable future.

Part of the reason for high prices is the cost of carbon. The Carbon Price Support (CPS) has been frozen for 2020-21, so it will stay at £18/teCO2. However, we’ve seen the other main carbon tax for generators – the European Emissions Trading Scheme (EU ETS) – increase significantly in the past year.

The Budget confirmed that in the event that the UK leaves the EU ETS when we leave the EU, the government will introduce a new Carbon Emissions Tax to ensure we meet our carbon reduction commitments under the Climate Change Act. This tax will initially be set at £16/teCO2, which is similar to current EU ETS price for carbon.

This means that the UK’s power generators will continue to pay both the CPS and the EU ETS or Carbon Emissions Tax, and these costs will be passed on to business customers.

Winter Outlook: Manufacturers’ energy cost forecast for 2018 and beyond

Inenco - Winter Outlook: Manufacturers’ energy cost forecast for 2018 and beyond - Report - FCAs we approach a new year and the Brexit deadline looms, many manufactures are concerned about the upcoming political and economic changes and how their bottom line will be affected.

Faced with record-high costs and ongoing uncertainty, it pays for manufacturers to re-assess their energy risk management strategies to consider how the cost of energy will impact their organisation.

A new report provides a forecast of energy costs for manufacturers over the coming months, comparing manufacturers with and without Energy Intensive Industries exemption and Climate Change Agreements.

To read a comparison between three manufacturing businesses showing the impact of differing non-commodity charges and exemptions, along with a demonstration of the steep curve that continues to rise, please click here.

Is there better news when it comes to non-commodity costs?

Many businesses will have noticed that non-commodity costs have been on a steady incline for some time, but so far, we’ve only seen gradual changes to the Climate Change Levy (CCL).

However, this will increase significantly next April as ‘lost revenues’ caused by the closure of the Carbon Reduction Commitment will be replaced by large increases in CCL, particularly for gas.

The Budget has also confirmed earlier policy announcements that CCL rates on gas will be increased at a greater rate for the next few years and is expected to achieve parity with CCL on electricity by the mid-2020s.

CCL on gas is currently around a third of the rate for electricity. However, in 2019, the gas rate will rise to around 40% of the CCL tax compared with electricity. By 2021-22, this will be increased to 60% of the value of electricity.

Fortunately, the rebalancing exercise is intended to be revenue-neutral to the Treasury, so while the CCL on gas will increase, the levy on electricity will fall.

Many manufacturers are eligible for the Energy Intensive Industries (EII) exemption, which exempts them from a significant amount of some non-commodity costs – to find out more, visit Inenco’s EII hub.

For those manufacturers who are part of a Climate Change Agreement, securing them exemptions from much of the CCL, it will be more important than ever to meet carbon reduction targets to avoid penalties, or even being removed from the CCA scheme and forced to pay the full CCL.

With the government’s drive towards a low-carbon future, did the Budget contain any incentives for businesses to become more sustainable?

The Budget has confirmed that the government will continue to invest in green business incentives, but there will be a few changes in how they do so.

From April 2020, they will be scrapping the Enhanced Capital Allowance (ECA) scheme, which allows businesses to set 100% of the costs of certain energy and water efficiency technology against taxable profits.

However, the government has pledged to introduce a new Industrial Energy Transformation Fund, to which they have committed £315m in funding. This fund will support energy-intensive companies to become more energy efficient and reduce their carbon emissions.

The ECA scheme will be extended, however, for companies that invest in electric vehicle (EV) charge points up until 31 March 2023.

There will also be a slight change to vehicle duty, which will now be based on the Worldwide Harmonised Light Vehicle Test Procedure (WLTP). This means that the fuel economy of vehicles will be determined by ‘real world’ tests, which is likely to reduce the tax benefits of hybrid vehicles and instead favour fully electric vehicles.

The government will also issue a call for evidence on a new energy efficiency scheme for SMEs, and they are considering a new tax on waste incineration to encourage recycling.

Overall, will this Budget have a positive or negative effect on manufacturers’ energy bills?

Energy bills are determined by such a wide range of factors, from government legislation to the price of oil, that the Budget alone is unlikely to make a significant impact.  However, it does seem that the government is working hard to ensure that UK manufacturers don’t see significant energy cost increases after Brexit.

While the rebalancing of the CCL will cause cost rises for those with high gas consumption, it’s unlikely to affect many manufacturers as the majority will have almost total exemption from the CCL.

It’s also good to have clarification on carbon prices, so manufacturers can budget for higher energy costs and implement efficiency measures to mitigate these costs – which the new Industrial Energy Transformation Fund should support them with.

Obviously, Brexit negotiations are ongoing, and depending on the Brexit deal (or lack thereof), the Chancellor admitted that we could see another Budget in the spring.

So, while this Budget seems promising for manufacturers, we’d always recommend that businesses seek external support from an independent consultant to ensure that they have an optimum energy strategy.