What is the strategy?
The document sets out the UK government’s industrial strategy for the next decade and its central message is that government wants to take a ‘muscular approach’ toward what they consider the most vital UK industries in the name of growth and productivity. The sectors identified in the strategy are interpreted to be best placed to ‘create wealth, jobs and higher wages’ and have been labelled the ‘IS-8’. The sectors in the IS-8 include: advanced manufacturing, the creative industries, life sciences, clean energy, defence, digital and technology businesses, financial services, and professional services.
Despite their potential for growth and productivity, the strategy identifies these industries as being beleaguered by several problems, including many relating to energy. These include the high industrial electricity costs that the UK’s most energy intensive industries face, which in-turn is limiting their ability to investment in strategic investment projects which could help the UK in its transition toward net zero and fighting climate change. Other challenges identified include receiving timely grid connections and strengthening connections with the EU energy market.
The strategy therefore wants to help those businesses in the IS-8 facing these challenges, with the hope that the support will enable the UK to become a clean energy manufacturing and innovation ‘superpower’ and takes advantage of the ‘economic opportunity of the century’ in net zero. The 10-year ambition is to have business investment of £30bn in clean energy industries, double the current figure.
Reducing Electricity Costs, Accelerating Grid Connections and Promoting Industrial Decarbonisation
A central concern of the UK’s most energy intensive industries has long been the impacts of the ‘unpredictability of UK energy prices compared to international competitors thanks to the prevalence of gas in our energy mix’. These concerns are evidenced in the fact that energy intensive firms in the UK pay twice the European average for their electricity in the last year, which is then combined with long waits for new or reinforced grid connections. Some businesses have been told they may have to wait as long as a decade to connect projects up.
The government currently supports the UK’s most energy intensive consumers through the Energy Intensive Industries Compensation (EIIC) which bases its eligibility on a business having a relevant 4-digit NACE code and being able to pass the 20% electricity intensity test. Those eligible currently receive:
- Compensation of 100% for the cost of renewable policies including Renewable Obligations (RO), Feed-In-Tariffs (FiTs), Contracts for Difference (CfD) and Capacity Market Service Charge (CMSC).
- Compensation of up to 60% on network charges, including Balancing Services Use of System (BSUoS), Transmission Network Use of System (TNUoS) & and Distribution Network Use of System (DNUoS) through the British Industry Supercharger Scheme.
The strategy wants to continue this support for energy intensive industries through two measures:
- British Industrial Competitiveness Scheme- To be introduced from 2027 and will help reduce energy costs by around £35-£40/MWh through allowing those eligible to be exempt from paying the costs of RO, FiT and the CMSC. This support would help slash bills by around 25% for around 7,000 businesses who are described as being ‘manufacturing and foundational industries’ within the IS-8.
- Network Charges Compensation- To be introduced from 2026 and will increase the existing discount from 60% to 90% and would help reduce costs by around £6.50/MWh for those eligible, which is around 500 businesses described as the most energy intensive, coming from industries such as steel, aluminium, ceramics and glass.
The specifics of who will class as a ‘manufacturing and foundational’ business or an ‘energy intensive’ business is still currently unknown, with exemptions set to be determined through a two-year government consultation. The strategy also states that the government will ‘continue support for the Energy Intensive Industries Compensation scheme’ but that it will conduct a review of the scheme at the end of 2025 and how it will continue to support energy intensive industries once the Carbon Border Adjustment Mechanism (CBAM) is implemented in 2027.
Other measures to help accelerate grid connections and promote industrial decarbonisation include:
- Support the development of the Corporate Power Purchase Agreement (CPPA) market to help secure stable and long-term electricity prices.
- Reduce grid connection waiting times for strategically important projects through a ‘connections accelerator service’ which will act as a concierge and hope that it will help create jobs and speed economic growth.
- Consideration of reforms to the electricity market and particularly the issue of zonal pricing which is being studied through the Review of Electricity Market Arrangements (REMA) consultation.
- Introduce CBAM from 2027 to ensure that carbon intensive products face comparable carbon prices to those produced in the UK.
Clean Energy Industries
The strategy also wants to double-down on frontier clean energy industries with the greatest growth potential. The UK’s net zero economy has increased by 10.1% since 2023, three times faster than the overall UK economy and generating tens of billions worth of private investments. The industries identified for the highest growth include: wind (onshore, offshore and floating offshore), nuclear fission, fusion energy, carbon capture & storage, hydrogen and heat pumps.
To incentivise investment in clean energy and help the net zero transition the strategy will:
- Provide a clear mission to drive investment certainty with long-term plans for key technologies.
- Deliver targeted funding to clean energy industries includes a £1bn clean energy supply fund which is broken down by £300m for offshore wind, £544m clean industry bonus for offshore wind developers, £14.2bn for nuclear at Sizewell C, £2.5bn for small modular reactors and £9.4bn for carbon capture & storage projects.
- Breakdown investment barriers through the Planning & Infrastructure Bill.
- Ensure that the UK has a skilled workforce needed for working in clean energy industries by investing in specific investment zone areas of the country.
LGE’s Analysis
The continuing and increased support for energy intensive industries is a welcome announcement, especially as the non-commodity costs, which the schemes cover, are forecasted to rise over the coming years to pay for the transition toward clean power 2030 and net zero 2050. For example, TNUoS is forecasted to rise from 9% of a 30GWh customer’s total energy bill to 14% by 2030 and BSUoS from 6% to 9%, again for a 30GWh customer. It is these increases that would significantly challenge the productivity of energy intensive industries without the support outlined. Likewise, reaffirming support for accelerating grid connections is another welcome move that will help energy intensive industries move away from fossil fuel-based consumption and incentivise decarbonisation.
However, the strategy has a glaring omission in its approach to energy, namely dealing with the issue of wholesale electricity prices in the UK and their alarmingly high costs compared to European counterparts. Although the document mentions the prevalence of gas being the cause of this disparity, it does not offer any solutions for tackling the issue. With UK electricity pricing being set by gas 98% of the time, compared to 24% in Germany and just 7% in France, it is this issue which needs addressing. The document does refer to the investment into nuclear energy to try help rectify this issue but the announcement for the funding had already been previously announced at the spring statement and plans for Sizewell C have been in motion since 2010, meaning it offers little that represents a new and original strategy. With wholesale electricity prices also being at the mercy of external geopolitical tensions it should be imperative for the government to mitigate any domestic factors it can control such as having a strategy to decrease the reliance on gas. Commodity costs still make up 30% of an energy bill meaning that even with the support for non-commodity costs, energy intensive industries could be seriously hampered in the part they play for UK growth and productivity due to volatility of wholesale prices.
Moreover, are the savings going to be enough for some important industries that are already facing multiple crises, such as the British steel industry. Increasing the network charges discount to 90% is only expected to help achieve a saving of £15m for the steel industry, will this be enough for Tata and British Steel which have already had to be nationalised? The strategy focuses heavily on competitiveness with Europe but for industries such as steel it is steel giants in China & India who pose the most significant threat.
It is also unclear who is going to take the burden of the cost for the schemes. The document talks of bearing down on levies and funds from CBAM but will this be enough to cover the costs? Or will non-eligible consumers see an increase in their bills to cover this, as is already happening with the 60% network charges compensation which through the support levy sees suppliers pass the costs of the compensation onto non-eligible consumers. Questions of fairness will be raised by those consumers in industries such as hospitality and leisure who have also felt the pain of spiralling energy costs without having any targeted scheme for their energy bills. Would passing energy costs of those in the IS-8 have a latent consequence of hampering the productivity of other UK businesses?
Many details are yet to be resolved and LGE looks forward to hearing more on how the strategy will support the energy costs of the UK’s most energy intensive industries. Be sure to keep tuned into LGE’s newsfeed and social media accounts for future developments as they happen. For the full strategy document click here.