Reeves speech had a giant hole: the sky-high cost of energy for industry | Nils Pratley
We’ll have closer trade relations with the EU, be the fastest adopters of AI in the G7, shift some tax revenues to the regions and squash the nimbys if they stand in the way of growth “corridors”.It’s a plan.Or, at least, it’s a sketch of a plan since the EU will surely have its own ideas on what it wants from trade renegotiations.Still, Rachel Reeves’ big resetting speech this week set a direction.But then one comes to the elephant in the room: the sky-high cost of energy for UK industry.
The fact the UK has some of the highest prices in the developed world would, you’d think, trouble more deeply a chancellor who blames the slowdown in UK productivity since the financial crisis on “anaemic levels of investment”.After all, those globe-trotting AI firms will be scrutinising electricity costs when choosing where to plant their power-hungry datacentres.Reeves described high energy bills for business as an inherited problem (correct) but the message from half the boardrooms in the land is that the government’s response is too timid.Instead of selective tweaks, a mighty yank on the lever is required.Reeves mentioned the established “supercharger” scheme which will carry bigger discounts on energy bills from next month, but that covers only 500 heavy users.
As for the “British industrial competitiveness scheme” (BICS) for 7,000 firms from April next year, it has a long name but we’re still waiting for key details, such as how it will be paid for and what a discount of “up to” 25% means.In terms of a wider effort to reset the cost of energy for the whole of UK industry, or to remove levies that push upwards, there was nothing new.So one can’t blame industrial lobby groups for continuing to point out the obvious.Here’s Stephen Phipson, the chief executive of the manufacturing body Make UK, liking the EU and regional themes but stating: “The overwhelming priority for business is the need to get energy prices down and ensure the security of supply of oil as a critical material for primary manufacturing.This is the single biggest factor impacting on industry’s competitiveness and nothing should be off the table in addressing this.
So long as energy prices remain at current levels we will continue to face the threat of deindustrialisation and the loss of key industries.”And here’s Steve Elliott from the Chemical Industries Association: “It is important that governments have long-term ambition and plans but there is also the here and now.How do we stop our critical foundation industries disappearing because of government policy? America pays one quarter of what we pay for its industrial energy.”As he says, the chemicals crew are inside the tent of favoured sectors in the government’s industrial policy.If you want to boost defence, advanced manufacturing, life sciences and clean energy, you need some level of security and domestic supply chains.
UK chemicals output fell 60% between 2021 and 2025, says the association, in which time 25 sites closed,A joined-up strategy must mean more than the occasional 11th-hour rescue of last-of-their-kind plants, such as Ineos’s ethylene facility,What would be a different approach? Ministers could start by consulting big-brain Oxford professor Sir Dieter Helm, who has long argued that if you want to give industry competitive energy prices, start by defining what you mean by competitive,In an excellent podcast this week, he offered several ideas, the first of which would see industry given preferential prices based on the long‑run marginal system costs of electricity production, as opposed to loading full network costs on to them,Obviously somebody (the rest of us) has to pick up those network costs.
His point, though, is there’ll be more Grangemouths and others still standing to contribute to the overall costs of the system,As he notes, in pre-privatisation days, industry got a better deal as a matter of course,At a push, one might say the “supercharger” and BICS schemes are nods in the same direction,But one suspects they would fall into his category of selective bungs and sticking-plaster solutions,“What we need is a permanent solution to put British industry on a competitive basis with our rivals overseas or else the limited amount of manufacturing left in this country will crumble too,” he argues.
He has other proposals (carbon prices that flex with the price of oil to serve as a price stabiliser; take-or-pay contracts for North Sea production).From the Treasury’s point of view, such radical thinking may sound hellishly expensive or divorced from the current political panic over the impact of the Iran war on households’ energy bills.But the problem isn’t going away: even when $100-a-barrel oil and spiky gas prices pass, the towering crisis of uncompetitive energy costs for industry will remain.And it’s no use thinking the rollout of renewables and nuclear will reduce energy costs on its own: that won’t happen before the 2040s, say most analysts, given the enormous network build-out costs.If the aim is “a foundation of economic security”, as Reeves’ speech concluded, the cost of energy for industry today should be a far higher priority.
It is hard to grow future industries unless the challenge is faced.And, once the expanded greener grid is built, we’ll need some of the older ones still to be around to use it.
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