Decarbonisation cost ‘minimal’ for most firms, says Climate Change Committee, but set to double


Greater Gabbard wind farmThe cost of low carbon policies for most commercial and industrial companies is currently a fraction of one percent of operating costs, according to detailed analysis by the Committee on Climate Change.

Using government data as its source, the CCC found that the costs of low carbon policies in 2016 were around 0.2% of operating costs for the commercial sector, 0.4% for manufacturing and 0.7% for the more energy-intensive sectors.

While it projects these costs will increase by around 50% by 2020 and double by 2030, the Committee said that equated to around 3 pence on a £10 basket of goods or services for all but the most energy intensive sectors. In 2030, its central case modelling suggested that would rise to around 6p, or broadly double.

Bill breakdown: The squeezed middle

However, as well as percentage of overall operating costs, the report provides a detailed picture of how much low carbon policies are adding to energy bills themselves. The table below shows energy costs, and the percentage of the bill represented by low carbon policies across all sectors in 2016, and estimates those costs based on the CCC’s central case modelling out to 2030.

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In terms of electricity bills, the CCC’s data shows a significant and growing proportion of the amount business pay is towards green taxes or subsidies.

Medium sized commercial firms are the hardest hit, according to CCC analysis. Some 33% of their power bill goes towards low carbon policies. For medium-sized manufacturers, green levies are 30% of the power bill. Small commercial firms spend 24% of their bill on low carbon policies; large manufacturers 15% and for the largest energy users (mainly metal and mineral industries) which are given some compensation for policy costs, it’s 9%.

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Gas carries less of the policy costs, but bills include charges for EU ETS, CRC and CCL.

Medium sized commercial firms again take the biggest proportional hit, largely due to the CRC, with those levies making up 19% of their gas bill. For small commercial firms it is 7%. For large firms captured by the EU ETS, it is 11% and for large firms in metal and mineral manufacturing it is 7%.

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The CCC notes that the reduced burden on gas costs compared to electricity could have negative consequences for decarbonisation goals.

“Overall, this implies a significantly lower impact of low-carbon policies on gas prices compared to electricity, which risks incentivising a shift in fuel from electricity to gas. This is contrary to the direction set out in our decarbonisation scenarios, which, involves a shift in demand from hydrocarbon energy to low-carbon electricity for most non-energy intensive industries,” the report states.

Price rises: Commercial

Examining data from 2004 to 2016, the report notes that business energy prices, like the cost of many services have risen at above the rate of inflation.

Commercial businesses paid 92% more for energy in 2016 than they did in 2004. Low carbon policies were responsible for two fifths, roughly 40% of that rise, the report states. However, the CCC noted that despite strong growth (+30% output) in the commercial sector, its electricity use has remained broadly flat, suggesting that some cost increases have been offset by energy efficiency.

Lighting and more efficient computers contributed to efficiency gains, but demand from air con and printers increased, wiping out some of those improvements, the CCC found. The total commercial lighting stock grew by 6% over the period while electricity consumption from lighting fell 26%. Electricity demand from air conditioning systems increased 33%, and demand from printers rose 43%, according to the report.

Price rises: Manufacturing

On a like for like basis, manufacturers paid 58% more for energy in 2016 than in 2004, the report found, with green policies responsible for nearly half of that rise. Overall energy consumption from the sector fell 30% over the period, driven largely by the decline in manufacturing over that period, through the CCC says it found some evidence to suggest energy efficiency improvement of around 7%.

Business outlook: taxes

The CCC predicts support levels for low carbon generators to triple by 2030, from 1.5p/kWh in 2016, to 4.4p/kWh for all consumers accept for the most energy intensive sectors.

It predicts that the carbon price support will remain flat out to 2020 and then increase by 50% over the decade to 2030 to reach 1.2 p/kWh. Meanwhile the CCL will probably rise to make up for the scrapping of the CRC, it suggests.

Business outlook: electricity prices

Energy bills for small commercial firms will rise by 17% out to 2020, the CCC believes. By 2030 they will be 51% higher. Of this, low carbon policy will be responsible for over two-thirds of the increase to 2020 and three-fifths of the total increase to 2030, mainly through support for low carbon generation and increased CCL costs.

Medium sized commercial firms face electricity rises of 13% by 2020 and 50% by 2030, with low carbon policy responsible for half of the increase, it suggests.

According to the report, large manufacturers without compensation face the biggest short term price hikes. Electricity prices are projected to increase by 22% to 2020 and 73% to 2030, with low carbon policy behind three quarters of those rises to 2020 and three fifths to 2030. Carbon price support and low carbon generation subsidies are the key drivers.

Large and intensive manufacturers with compensation will also see significant price rises out to 2030, but as an overall percentage, decarbonisation costs will be lower due to those compensation schemes.

Business outlook: gas prices

The outlook for gas price increases is less steep for commercial firms, but large manufacturers face significant cost increases due to low carbon policies, mainly the EU ETS and extra gas network costs, according to the CCC (see table below).

Screen Shot 2017-03-16 at 10.05.08Outlook: energy efficiency

While some of the business energy bill hikes due to decarbonisation policy appear steep, the report suggests that “the Government’s forthcoming plan for meeting the fourth and fifth carbon budgets should provide opportunities for energy efficiency improvements, which in our scenarios would cut energy costs by 7% on average”. It thinks many companies could make much greater energy efficiency savings to offset bills.

The report, which also contains data for the domestic sector, as well as a comprehensive chapter on how the UK can remain competitive in a decarbonised environment, makes interesting reading. Download it here.

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