The Rising Cost of Energy
Manufacturing firms are operating in an increasingly tough and competitive environment. Over the past year another obstacle to competitiveness has emerged – a considerable rise in the cost of energy.
Companies already have to deal with a range of cost pressures, including raw materials (particularly steel and petroleum products), insurance and pension costs. While some of these, such as rising steel and oil prices, are felt internationally, cost increases specific to the UK erode profit margins and competitiveness.
EEF has therefore surveyed its members to discover the extent of the recent price increases in both gas and electricity experienced by manufacturers, and to identify what measures, if any, companies are adopting to reduce the impact of higher utility bills on their business. We conducted a similar survey in 2004, which showed that companies were beginning to feel the effect of rising energy prices. The situation has deteriorated this year, with virtually no company left unaffected by rising prices. Our results are based on responses from 371 members.
The Highest Energy Costs in Europe
Only a few years ago UK firms were paying less for energy than their European counterparts. This situation has been reversed and evidence now confirms that large industrial users in the UK currently face both the highest gas prices and amongst the highest electricity prices in Europe, despite the fact that the UK has a fully liberalised gas market and remains the largest producer of gas in the EU.
Energy accounts for approximately 3% of total input costs in manufacturing, although this can vary widely from sector to sector. In the metals and chemicals subsectors, gas and electricity costs can account for over 10% of total input costs.
The rapid rise in energy costs is causing problems for manufacturers in adjusting to the increase in prices. Related to this is the problem of passing on costs for firms that are tied to contracts with customers. For energy-intensive firms this can cause substantial cash flow problems.
These costs, combined with others, have also increased the pressure on profitability, thus hitting the investment plans of some companies. In addition, some firms with foreign parents in energy-intensive sectors take the view that the uncertain cost situation and the squeeze on profitability mean that it is more sensible to load production to sites outside the UK.
The Impact of Energy Costs on Investment
Though it is unlikely to be the sole factor driving the decision, the steep rise in energy prices may provide the final push for companies to consider investing elsewhere in the world.
EEF has been carrying out extensive research on what factors have been driving the recent price increases. These include:
- higher world oil and gas prices;
- a deteriorating gas supply situation linked with market distortions in Continental Europe; and
- faster pass-through of the impact of the EU emissions trading scheme (ETS) in the liberalised UK energy market.