Tuesday 27 October 2015

Guest Blog: Dave Cockshott – Steel yourself for higher energy costs

The news of steel industry job losses and plant closures is a huge blow for British manufacturers, but it could also be an unwelcome sign of things to come should rising energy costs take their toll. A whole range of economic factors have influenced the decision to mothball and close plants altogether, but it’s no surprise that high energy costs have been cited as a major factor behind the issues facing our energy intensive steel industry.

Let’s look at the facts: Whilst we might be enjoying sustained relief from volatility and high prices in the wholesale markets, non commodity charges have carved out a 50% share of the bill and it’s these charges that are causing so much pain – and which have the potential to cause far more.  An energy intensive user will have seen their non-commodity costs rise by over 150% since 2005.

Whilst the latest energy intensive relief package should alleviate the cost of RO and FiT to a tune of around £12/MWh by next year, if commodity costs return to 2013 levels we would see an additional £10/MWh, cancelling out any relief and threatening non-energy intensives.

My concern about these rising costs is two-fold: will the support for energy intensive users really be enough to allow them to remain internationally competitive over the next decade? And what about those high energy users who don’t qualify for support? With the full impact of carbon and renewable policies on industrial and commercial users set to rise from £15/MWh today to £42/MWh by 2020 – not to mention the added cost of subsidising new nuclear build such as Hinkley Point, which alone could exceed £3/MWh - what likelihood is there of other industries and sectors experiencing similar problems to the steel industry?

Whilst the current consultation on business energy taxes is supposedly fiscally neutral, it is clear that there will be winners and losers here too: scrapping the CRC would see CCL costs rise, and some industries currently benefiting from CCAs could find themselves with reduced benefits or stripped of the exemption entirely.

Stemming the rising tide

The need to focus on alleviating budget pressure, through greater innovation and proactive steps to reduce costs, has never been greater. Take load management as an example: this month’s Winter Outlook Report stated that 1.3GW has been secured through Demand Side Response (DSR) schemes to help keep the system balanced during peak demand this winter. But many businesses still have capacity for load management outside of official DSR schemes to help reduce costs – how many have acted upon it?

When it comes to energy efficiency, 10,000 of the largest organisations in Britain will soon be in possession of a whole list of measures and opportunities in their business when their Energy Savings Opportunity Scheme (ESOS) report lands on their desk (…even if that isn’t until early next year for those struggling to meet the deadline!) Yet moving beyond the low hanging fruit requires investment which is usually the biggest barrier for businesses looking for ways to curb costs. The energy tax review is also considering ways to financially incentivise energy efficiency measures for businesses. With reducing consumption arguably the only way to stem rising costs, what better motivation to have your say on a change that could bring about major benefits?

Those of us who have been in the industry for a long time will be used to the talk of ever-increasing costs and might have accepted it as inevitable, but the crisis in the steel industry is a very real reminder of the bottom line impact of such pressures. Whether it’s reviewing your energy strategy, taking advantage of every opportunity to turn down consumption and reduce costs, or having a say in the changes to the energy tax landscape, the time for action is now.

Inenco is hosting a webinar with Arjan Geveke from BIS on what the proposed energy efficiency tax review means for your business on Thursday 29 October at 11am. To register, click here.

 To make sure your views are heard, you can have your say on the energy tax review at www.inenco.com/haveyoursay  

Dave Cockshott is the Chief Commercial Officer at Inenco.

This is a sponsored article.