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British food and drink manufacturers halting growth to cope with UK energy policy costs

Published: 8 April 2015 - Marianne Evans

Following an extended period of policy development, businesses across the UK will soon feel the impact of the Electricity Market Reform (EMR), which is intended to keep the lights on and move the UK to a lower carbon economy. In light of this, new research from npower shows that 75% of UK food and drink manufacturers said that rising energy costs are a factor in decisions to expand the business.

In April 2015, the costs of two elements of the EMR – Contracts for Difference (CfDs) and Capacity Mechanism (CM) – will start to appear on the bills of large energy users, and suppliers will need to start recovering the operational costs incurred. Although the impact will be minimal at first (£0.4/MWh), costs will ramp up on a quarterly basis, with DECC claiming that large energy users’ bills could increase by £8 to £10 per MWh by 2020. DECC has estimated that by 2020 this additional amount represents increased electricity charges of about 10%.

In anticipation of this change, npower spoke to 100 decision-makers from food and drink manufacturing businesses across the UK to find out how they are responding to the imminent increase in bills due to UK energy policy, how prepared they are and indeed how aware they are of the expected changes.

Compared to 75% of businesses worried about rising energy costs, only 44% of respondents claimed that tax policies were important to their business and skills shortages were important to 41%; suggesting that energy costs are very significant and rising in importance on the boardroom agenda.

Of the businesses that were aware of the new EMR charges, it would appear that significant and potentially even drastic action has been taken to cope with rising energy costs. Over a quarter (26%) of food and drink manufacturers said they have either planned cuts to employees or freezes on recruitment, while 16% have considered moving production offshore and 15% said that they plan to offset the increases in energy policy costs by passing the costs on to customers.

On top of this, 65% of respondents feel that the Government is not providing enough financial compensation to help businesses fund UK energy policy. Adding to this, 38% of businesses polled feel that they have had too little warning or explanation of the impending new charges on their bills; these figures indicate a clear level of industry-wide dissatisfaction.

Wayne Mitchell, director of Markets & Innovation for npower Business Solutions, said:

“Hoping that global oil prices will take care of your energy cost problems is not a long-term solution. Our research clearly proves that energy management should be one of the top priorities of every company board.

“The reality is that energy bills will start to increase from April, yet we continue to underestimate the impact on large businesses. Cut backs and carbon leakage are a concern for UK plc; not only do we risk losing productive, viable businesses but the overall objective of reducing carbon emissions could be lost as well.

“Government and energy suppliers must do more to engage businesses about the impact of energy policy. We should be doing everything we can to help them mitigate the risk of rising prices, maintain their competitiveness, and even turn energy into a commercial opportunity where possible.”

Stephen Reeson, head of Climate Change & Energy Policy at the Food and Drink Federation also commented:

“As this research shows, Britain’s food and drink industry is increasingly concerned about the impact of rising energy prices. Ultimately it is consumers who will feel the impact in their weekly shopping basket if companies are unable to keep absorbing these costs. But rising energy prices will also substantially impact our sector’s ability to fund low carbon technologies and grow exports in highly competitive global markets. 

Whilst we fully support the governments focus on greenhouse gas emissions reduction and energy supply security – which is vital to the operations of our sector – we cannot ignore the rising energy prices we continue to face.

A strong focus on energy efficiency management and investment in our sector will deliver energy cost savings and help counter future price rises. Under the FDF’s Climate Change Agreement, we reduced our energy consumption per tonne of product by over 20%, meaning energy bills were around £300m lower than they might have been otherwise. We expect further savings as we work towards our 2020 target of a further 18% improvement in energy efficiency.”

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