Climate policies have minimal impact on business energy bills, government advisers find

16th March 2017

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Simon Baldrey

Policies to reduce CO2 from business and industry have increased bills, but the impact on total costs of production has been limited, according to the body that advises the government on climate change.

The Committee on Climate Change (CCC) has analysed how the UK’s carbon budgets and related policies have affected energy bills. Its report found that, on average, energy costs in 2016 comprised of 0.9% of operating costs for firms in the commercial sector, 2% for manufacturers and 3.8% for the fifth of the manufacturing sector defined as energy intensive, such as steel, cement and aluminium.

The costs associated with low carbon policies made up 0.2%, 0.4% and 0.7% of operating costs in these sectors respectively, the committee said. These are estimated to increase to around 0.5%, 1% and 1.6% by 2030.

Business energy costs - source: The Committee on Climate Change

If all the costs of low carbon policies were passed on to consumers through product prices, a £10 basket of goods and services in 2016 would have cost an extra three pence and be six pence in 2030, the committee said.

However, it pointed out that the analysis did not include benefits from energy efficiency, which would reduce costs on business operations.

Energy use varies significantly across businesses, as do energy policies and the impact of measures to reduce carbon emissions, the committee said. The cost of energy is a much larger proportion of total expenditure for companies in energy-intensive industries, but these firms are eligible for compensations and exemptions from policy costs.

The UK government had been slower than administrations in other European countries to pay this compensation, the CCC found. ‘We think what the government has done in terms of providing compensation is about right,’ said Lord Deben, chair of the committee. ‘But it has to be done better. People need to know more clearly what they are able to get, they need it to get to them and compensation schemes need a transparency which at the moment they don’t have.’

The committee found that electricity prices in the UK are high by European standards. The differences in prices across the bloc stem primarily from higher wholesale and network costs rather than the effects of climate policy, the CCC said, although it could not identify why this should be the case.

‘The committee has tried to find out why. There’s been no proper research into this. The reasons could be perfectly well be put right. I’m very annoyed at the fact that utility companies blame things which are out of their control and perhaps don’t concentrate on things that are in their control,’ Deben said.

Wholesale prices and network costs are under the control of energy companies, and these put extra costs on businesses, Deben said. Transmission costs appear to be rising, which makes it more urgent to understand why they are so expensive, he added.

The government should look at this issue in its review of business energy costs announced in the consultation on the industrial strategy, he added. The issue was extremely complex due to the difficulty of making cross-country comparisons, he explained.

Claire Jakobsson, head of climate and environment policy at manufacturers’ trade body EEF, said: ‘Despite attempts to mitigate the costs of high electricity prices in the UK, they remain substantially higher than those faced by our competitors. While the committee is right to say low-carbon policies may not be the only factor reducing industrial output in some sectors, we believe it is a significant one and one where government can act, especially in respect of unilateral costs which our competitors do not face.

‘The anecdotal evidence we receive from companies suggests the impact of climate regulation on where companies make investment decisions should not be underestimated. At the same time, government needs to do more to help UK companies take more advantage of the potential opportunities of a low-carbon economy where these really do exist,’ she said.

The committee also looked at the opportunities for businesses in the low-carbon sector. It found that the sector contributes around 2–3% of GDP, comparable in size to energy-intensive manufacturing, and that it has been growing faster than the rest of the economy.

The UK is particularly well-placed to take advantage of growing global markets for low-emission vehicles; low-carbon finance, insurance and consulting; low-carbon electricity; smart grids and energy efficient products, it said.

On household energy bills, that committee found that low carbon policies made up around 9% of an annual dual-fuel household energy bill of around £1,160. This was more than offset by a cut of more than £20 a month due to reduced energy demand, mainly from more efficient lights and appliances.

The shift towards low-carbon electricity could add a further £85-120 a year to a typical bill by 2030 if further policies to meet UK climate objectives are put in place, the committee estimated. This would be more than offset by further improvements in energy efficiency, however.


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