Budget 2014 energy reforms: What are the benefits?

What is the rationale behind the latest reforms to UK energy policy? How do businesses and homeowners stand to benefit?

With the economy on the rebound after a prolonged recession, businesses across the UK are targeting growth and expansion. Many are increasing investment levels, in a bid to capitalise on new commercial opportunities and fill gaps in the market that appeared during the downturn.

Consumer confidence has risen significantly in recent months, and this is giving companies the chance to boost sales and operate more profitably. But at the same time, many organisations are being faced with increased costs – particularly in terms of resources and overheads.

Energy costs are rising

One of the main areas of expenditure for many businesses – including those considered most vital to the economic recovery – is energy. Fuel bills have risen sharply in recent years, putting both business and household budgets under pressure. As companies have been forced to pay more for electricity and gas, business costs have increased and profitability has fallen.

The government has recognised that high energy bills can be a major inhibitor to business growth, and have the potential to hamper the economic recovery as a whole. Earlier this month, energy minister Michael Fallon claimed that not enough is being done to protect UK businesses from rising prices. He argued that existing compensation and exemptions were not enough, and relief needed to be found from other policy costs. “Without further action on energy costs the competitiveness gap between Europe and the US is becoming unbridgeable,” he said.

Changes in government policy

And so to the 2014 Budget, which was delivered by George Osborne in the House of Commons, on Wednesday March 19th. Addressing MPs, the chancellor announced a series of measures designed to cut energy costs for business. The £7 billion package includes a freeze on the Carbon Price Floor (CPF), one of the green levies on UK energy bills, and new exemptions from green taxes for organisations which consume a lot of energy.

The CPF sets the amount of tax that polluting firms must pay to emit carbon. This requires polluters to pay more to operate, and therefore has the effect of increasing the cost of electricity. According to the BBC, the CPF was expected to add between £30 and £50 to household energy bills by 2020. But the chancellor has frozen the CPF at £18 per tonne of CO2 emitted in 2016-17, in a bid to keep costs under control.

Other government measures include exempting Energy Intensive Industries (EIIs) from the cost of two green measures – the Renewables Obligation and Feed-in Tariff – which are designed to encourage renewable energy generation. The Treasury has also extended a scheme which compensates EIIs for low-carbon policies up until 2019-20 – a decision which should save businesses a combined £19 million.

The response from industry

The Confederation of British Industry (CBI) said the government had delivered a “significant and much-needed energy package” that will help support UK businesses, and underpin vital investment in British industry. “Our energy intensive industries are crucial to building a low-carbon economy and it’s right the government is taking action to mitigate the cost for these firms,” the lobby organisation claimed.

“Many more businesses across the country are struggling with high energy costs and these measures will help support key sectors against tough international competition,” the CBI stated. “We now need to see action from ministers to secure an ambitious European Union-wide 2030 emissions reductions target to drive investment in our low carbon future.”

Gareth Stace, head of climate and environmental policy at EEF, said the freezing of the CPF will translate into “greater clarity” for manufacturers’ energy bills through to 2020 and provide much needed investment certainty. “The Renewables Obligation compensation for energy intensive industries will also help to level the playing field these companies need to compete effectively with others around the globe and, keep production here in the UK,” he stated.

The case for energy efficiency

The government’s latest energy reforms acknowledge the fact that many businesses need to consume large amounts of fuel to be productive, to sell goods and services, and create jobs for the economy. These are large-scale energy consumers, who need additional financial assistance in order to deliver benefit for the greater good.

If UK industry is successful, it creates additional scope for investment in energy-efficient technologies, which can be used to reduce consumption – or at least cost – across the board. Take for instance, lighting manufacturing. Continued innovation over a number of years has led to major technological advances, which are enabling homeowners across the UK to reap the benefits.

The design, development and production of energy-efficient solutions – such as GU10 LEDs – means businesses and households across the UK are able to save up to 90 per cent on their lighting bills. Because these bulbs require just a fraction of the electricity consumed by traditional incandescent or halogen bulbs, users can pay much less to illuminate their property. It is simply a case of replacing older bulbs with the newer, more efficient solutions.

Such developments would not be possible without a thriving manufacturing sector, where businesses have the financial flexibility to invest in research and development, and bring innovative new solutions to the market. The government realises it must do all it can to support industry – both to boost the economy and to advance technology. With this in mind, everyone – businesses and households alike – stands to benefit from the latest energy reforms, which are fully geared to supporting organisational growth.

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