Energy intensive industries will be refunded against the cost of energy policy, David Cameron has promised.
The PM made that pledge during prime minister’s questions, stating that as soon as the move was granted EU state aid approval, “we will pay that immediately”. It is proposed that costs will be covered for the duration of the current parliament.
The news follows a government announcement this week that the steel industry would be given more time to meet EU emissions regulations, which are due to kick in from January. If the EU approves the move, plants will be given another four and a half year’s grace.
While wholesale energy prices have hit a six year low, transmission and distribution costs as well as costs for renewable generation are pushing up bills for business, particularly large industrial and commercial firms.
Some energy services firms have predicted that from next year, electricity costs will continue to reach new highs every year until 2020 (see chart below based on Utilitywise’s forecast model).
While projecting slight declines in wholesale costs, additions for low carbon and renewable power, as well as capacity market charges, could take average prices paid towards £110/MWh by 2019/20. That would represent a power bill increase of around 25% and mean that wholesale costs would represent less than 40% of the total.
Separately, changes to the energy industry’s cash out arrangements are likely to lead to higher spikes in power spot prices. According to research published by New Power magazine, energy intensive industries will be hit hardest.
While its survey respondents suggest that demand side measures could be one way of mitigating costs, the reality for many intensive industries is that equipment, processes and production patterns are not easily made flexible.
Any insulation from rising costs will be welcomed by what remains of UK industry. In managed decline for decades, manufacturing industries employ some 2.6 million people and in 2013 accounted for 10% or £150.7bn of national economic output.
However, if energy intensive users are protected from policy costs, it is likely others will have to pick up the tab.
Watch the PMQs session here.