Innovative Energy Consultancy Ltd
Innovative Energy Consultancy Ltd

Warning on business bills from climate watchdog

The government’s climate advisors – the Committee on Climate on Change (CCC) – have outlined the increasing business energy costs associated with supporting the deployment of green energy.

Cost of low-carbon

Published on 16 March the new research gave a detailed breakdown of business energy bills facing firms now.

Currently, energy costs make up around 0.9% of operating costs across the commercial sector, 2.0% across manufacturing and 3.8% for more energy-intensive sectors. The costs from low-carbon policies are currently approximately 0.2% of operating costs for the commercial sector, 0.4% for manufacturing and 0.7% for the more energy-intensive sectors.

Energy expenditure in the commercial sector is currently split between electricity (81%), gas (16%), and oil (3%). Across the commercial sector, the main energy costs are for heating and hot water (25%), lighting (18%) and cooled storage (14%).

Rising energy prices have increased energy costs as a proportion of operating costs by 0.4 percentage points (pp) across the commercial sector, 0.8pp across manufacturing and 1.4pp for the more energy-intensive sectors between 2004 and 2016. The costs from low-carbon policies increased energy costs as a proportion of operating costs by around 0.1pp for the commercial sector, 0.3pp for manufacturing and 0.5pp for the more energy-intensive sectors.

Forecasting the future

Looking ahead to 2030, the CCC projected that low-carbon policy costs as a proportion of operating costs could increase to 0.5% for the commercial sector, 1.0% for manufacturing and 1.6% for more energy-intensive sectors.

Continuing the shift to low-carbon power will increase support costs for low-carbon generation, increasing prices by 1.5 p/kWh in 2016, 2.8 p/kWh in 2020 and 4.4 p/kWh in 2030 for all consumers, except those receiving compensation.

For a medium-sized commercial business, electricity prices are projected to increase by 13% to 2020 and 50% to 2030. Of this, low-carbon policy will be responsible for a half of the increase to 2020 and 2030.

For more energy-intensive sectors current low-carbon policy costs are equivalent to 10% of their gross operating surplus, therefore increases in these costs could potentially have a greater impact on a firm’s future if they cannot pass these through to consumers, or if they do not receive compensation and exemptions from government for these policy costs.

However, energy-intensive manufacturing sectors deemed most “at risk” are already largely compensated for these costs. The committee recommended that compensation for firms at risk of “carbon leakage”, where manufacturing is outsourced abroad, should be predictable and reliable.

Energy efficiency opportunity

Despite these significant projected rises, the CCC also predicted that energy efficiency will provide significant scope for offsetting the coming energy bill increases.

The research estimated average potential savings of around 16% of annual electricity consumption and 5% of gas consumption for the commercial sector and 10%-15% for energy-intensive manufacturing by 2030. This is comprised of a range of different savings: a 9% energy saving can be achieved through measures such as energy management and building fabric efficiency measures, an estimated further 7% saving is possible from replacing appliances and products, due to EU regulations on minimum efficiency standards for electric appliances.

Examples of best practice suggest even larger reductions are feasible in many instances.

Broader lessons

The research also looked wider at the broader implications of the low-carbon transition and international comparisons.

The CCC found that UK electricity prices for businesses are higher than those in comparable countries, such as France and Germany, but gas prices are lower than those in comparable European countries. Higher electricity prices are largely explained by higher UK wholesale and network costs.

The committee called for more detailed study and greater transparency about the different costs of electricity supply across Europe.

The CCC also identified a range of opportunities for business arising from the transition to a low-carbon economy. The UK low-carbon economy already makes up 2-3% of GDP and employs hundreds of thousands of people. Its direct contribution to the economy is the same as the oil, gas and coal extraction sectors put together.

The CCC concludes that the low-carbon transition will create opportunities “across current and new sectors of the economy.”

The committee also suggests that investment in low-carbon generation in the power sector could additionally reduce volatility in energy prices and energy bills by minimising exposure to uncertain fossil fuel and carbon prices.

Lord Deben, CCC Chairman, commented on the findings: “Action to deliver a cleaner, more efficient energy system is already delivering benefits for households and businesses. UK emissions are falling – down 38% from 1990 to 2015 – while GDP has risen by almost 65% in the same period […] The UK’s progress to reduce emissions, and its comparative advantage in important areas such as the automotive sector, offer opportunities for future growth and employment while delivering vital action to tackle climate change.”

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