Energy costs a risk to growth

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In recent weeks we have blogged about manufacturers' expectations and plans for 2014 from EEF's Executive Survey 2014. In the survey, manufacturers identified input costs as the largest concern, and this was true for all manufacturing sub-sectors. This concern was particularly pronounced for metals manufacturers, amongst whom 72% saw materials costs as a risk in the year ahead.

Following those results, conversations with manufacturers made it clear that companies are especially concerned about energy costs. Energy costs are a large proportion of input costs for most manufacturers and, while increases to some prices such as raw materials can be passed on to customers, energy prices tend to be fixed and, therefore, have a greater impact on competitiveness.

In energy intensive industries, such as the metals, rubber and plastics, and non-metallic minerals sectors, energy costs are particularly challenging as they make up a relatively higher proportion of input costs and are less able to be passed on.

While manufacturers today are innovative and compete on more than price alone, remaining competitive on costs is still extremely important. In a global environment, high and rising energy costs in the UK which are not faced to the same extent by our competitors place our companies and their products at a disadvantage.

Looking at historical energy prices, UK companies have faced prices that are higher than the European Union median (excluding the UK) in seven out of the last nine years. And energy prices in both the EU and UK are significantly higher than those in the US. Price differences are illustrated on the chart below.

Growing gap between UK, EU and US industrial electricity pricesPence/KWhSource: DECC & Eurostat

Looking to the future, the UK government estimates that climate change and energy taxes will represent 50% of the total electricity costs for industrial electricity in 2020 and 70% in 2030. Government has started to make some progress in alleviating this impact through a package of measures that looks to compensate the most electricity intensive industries from some of the costs of carbon taxation and support for renewable energy but this still leaves manufacturers paying the full costs of some of the most costly policies, such as the Renewable Obligation. But we want to see more done to support industry, and EEF will be calling for an extension of the energy intensive industries compensation package and a flattening of the Carbon Price Floor trajectory ahead of the Budget.

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This person has now left EEF. Please contact us on 0808 168 1874 or email us at enquiries@eef.org.uk if you have any questions.

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