Energy Policy: Wrong Signal, Wrong Time

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The latest data on industrial electricity prices make grim reading for UK manufacturing. This makes it all the more troubling that the government announced yesterday that it expects its green policies to ratchet prices up significantly over the coming years.

Official statistics released today show a widening gap between UK and EU industrial electricity prices. In the second half of last year, medium-sized firms were paying 11% more than the EU average, up from a 3% premium in the previous six months.

The competitiveness gap for the UK's largest industrial consumers is even more alarming, doubling from 15% in the first half of last year to 30% in the second.

Looking further afield, industrial electricity prices in the UK are now roughly double those in the US.

If the situation today wasn't bad enough, the government announced yesterday that it expects its policies will be pushing up business electricity prices by 50% in 2020 and by 70% in 2030. This sends the worst possible message at the worst possible time.

With the economy continuing to flat-line, we urgently need businesses to invest, grow and create jobs. Yet for manufacturers deciding where to make their next investment, the direction that electricity prices are going in can only weaken the case for doing it in the UK.

In a recent survey of our members, a third said that more competitive energy prices were among the top three things that would make the UK a more attractive place to invest.

To avoid stymieing future investment, the government urgently needs to get a better grip on spiralling policy costs. Over the past 18 months, there have been some encouraging signs that the affordability and competitiveness of energy prices is being taken more seriously. The commitment to compensate the most energy intensive industries for some policy costs is an example. But there is clearly much more work to be done.

The place to start is taking a long, hard look at policies like the ‘carbon price floor', a steeply rising and unilateral tax on fossil fuel generation that comes into effect next week. Unlike direct support for cleaner sources of power like nuclear and renewables, which also push up prices, the environmental merits of this policy are highly questionable. There is a strong risk that it simply displaces investment and emissions overseas without cleaning up UK power generation.


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