The Cat’s Out of the Bag: High Energy Prices Are Strangling What’s Left of UK Industry

A bit of metaphorical ink has been spilled recently, especially in sceptic circles, regarding the fact that the UK government’s publication (The UK’s Modern Industrial Strategy) appears to recognise both that high energy prices are strangling what’s left of UK industry and that the reason energy prices are high is at least in substantial part due to the cost of “green” levies to support renewable energy and the Net Zero project.

However, although I may have missed it, what I haven’t yet seen is any sort of detailed analysis of the contents of the report and of its implications for the UK’s energy strategy. It was only when I read Nils Pratley’s excellent report in the Guardian that I realised that this woeful government is – despite the noise and bluster – simply kicking the can down the road. Basically, having recognised that there is a problem caused by its core beliefs in net zero and decarbonising the grid, but unable to abandon those core beliefs, the government simply doesn’t know what to do. And so it opts for the worst of all worlds – carrying on with the policy that is causing the problem, while deferring any attempt to deal with the problems is is causing.

As Mr Pratley puts it:

…the new “British industrial competitiveness scheme” won’t arrive until 2027, which leaves an uncomfortably long period for more crises to occur. Shouldn’t the government have made up its mind by now?…

And so I thought I would take a look at the detail of the UK’s “Modern Industrial Strategy” and see what precisely it says. As is the way of these things, it takes 160 pages (including endsheets, foreword, executive summary, introduction etc). A word search tells me that it contains 149 references to “energy”, which might suggest an understanding that this is important when considering the UK’s modern industrial strategy. However, a more detailed word search tells me that it appears 56 times as references to “clean energy”. Apart from the obvious fact that there are very many ways in which renewable energy (which is what the government means when it talks about clean energy) is not clean (or green), it also produces an immediate conflict with the stated aim (from page 28 onwards) of reducing energy costs.

Starting at page 28 we find awareness of the basic problem:

Industrial electricity prices in the UK are significantly higher than those in most competing economies, particularly throughout Europe and North America. Energy-intensive firms paid twice the European average in electricity costs last year. This issue is one of the most pronounced challenges to the competitiveness of our energy intensive sectors and the attractiveness of the UK to foreign investment, albeit gas prices are comparable to those in the rest of Europe.

It’s interesting that this paragraph compares (unfavourably) our high electricity costs with those in Europe and North America, but when it comes to gas, they choose to compare our prices only with those payable in Europe, and ignore the fact that gas prices are significantly lower in North America. One can only assume that is because they acknowledged this fact, they would also have to acknowledge that it undermines Mr Miliband’s oft-repeated claim that there is no point in the UK using drilling for and using its own gas, because – as he claims – there is a global gas price.

It’s absurdly simplistic of me to rely on AI (though the UK government seems very keen on it). However, I note that when searching online for anything these days, the first result is always the AI version. Searching for a comparison between the price of natural gas in the UK and in North America, AI tells me:

Natural gas prices are generally higher in the UK than in the US. This difference is primarily due to the UK’s reliance on imports, while the US is a major natural gas producer.

Still, one doesn’t have to trust AI to be aware that gas costs significantly more in the UK than it does than in the US. There many websites, such as this that one can search to see this for oneself.

But I digress. Returning to the government’s “analysis”, we find that its focus is entirely on the need to speed up grid connections and to accelerate “decarbonisation” of the grid. This rather ignores the fact that – as Jit has shown – “The more of your electricity you obtain by harvesting wind, the more expensive it gets.”

Undeterred by reality, the document next claims:

Our wider stakeholder engagement has also highlighted the impacts of the unpredictability of UK energy prices compared to our international competitors, thanks to the prevalence of gas in our energy mix, which makes it harder for businesses to plan and invest.

Despite the document being liberally scattered with footnotes linking to studies, websites, academic findings etc., to justify the various claims made, I note the absence of any footnote offering evidence to establish the veracity of this particular claim. Still, the following paragraph does go on to grasp the essential problem:

If we are serious about being a leader in advanced manufacturing, net zero technology, and regional rebalancing, we must do what we can to address the uncompetitive cost of industrial energy.

I would query the reference to net zero technology, but leaving that aside, I think we can all agree that addressing the uncompetitive cost of industrial energy should be a vital part of any government’s modern industrial strategy. However, if that problem is to be addressed satisfactorily, then the government must first ascertain precisely why the UK faces such high industrial energy costs. Without that basic understanding, it is difficult – if not impossible – to take effective measures to address the problem.

Worryingly, it is at this point that the analsyis goes completely off the rails:

The Government recognises the strategic importance of tackling these barriers. This is why we offer price relief, through the British Industry Supercharger, for the most energy intensive companies and why we are reforming grid connections for generation and demand projects, which could accelerate connection dates for some projects by 5 to 7 years.

There are two immediate flaws in this analysis. The first is that using taxpayer funds to subsidise high energy costs for some energy-intensive industries might ameliorate the problem for the industry concerned, but it does nothing to solve the underlying problem that affects all businesses (and, for that matter, domestic electricity customers). As Nils Pratley observed:

…the tally of 7,000 firms in the new scheme is not enormous in the context of a broadly defined UK manufacturing sector of 140,000 companies. The hospitality industry and others grumble about how painful electricity bills also bite on them, but most within manufacturing sector will also be outside the fold. Food and drink manufacturers, which are still a substantial part of the economy, are not a priority, for example.

The second is that accelerating grid connections for renewables will exacerbate the problem, and will certainly do nothing to solve it. Another issue is that of talking the talk, but not of walking the walk. Thus, while we are told that “we also recognise the need to act quickly to support sectors with high-growth potential or significant exposure to high electricity costs”, there is no sign of any actual urgency on the part of the government to do anything about it.

The plan – which is better than nothing, though tackling the root cause of the problem would be a better plan – is to “[r]educe electricity costs for IS-8 manufacturing industries and foundational industries and increase support for our most energy-intensive industries”, but not before 2027, and then only up to 2030.

However, it’s when we see how this support is to be implemented that we realise that the cat is well and truly out of the bag:

Eligible businesses will be exempt from paying the costs of the Renewables Obligation, Feed-in Tariffs and the Capacity Market. The scheme will bring GB electricity costs more in line with other major economies in Europe, and level the playing field for GB businesses.

If that isn’t an explicit acknowledgement that it’s the renewables subsidies that are hiking UK electricity prices, then I don’t know what is. One might think that the obvious corollorary to this belated understanding on the part of the government would be a conclusion that the dash to decarbonise the grid – with its associated costs – should be brought to a shuddering halt, since this is the cause of the problem. Instead, we get this mind-numbing piece of stupidity:

These measures will be funded by bearing down on levies and other costs in the energy system. The Government also intends to use additional funds from the strengthening of UK carbon pricing, including as a result of linking with the EU carbon market.

This, however, won’t be introduced for at least another 18 months (the document talks of a possible implementation date of January 2027). The idea is:

…to ensure that highly traded, carbon intensive products from overseas face a comparable carbon price to those produced here. This is to ensure that UK decarbonisation efforts lead to a true reduction in global emissions, rather than simply displacing carbon emissions overseas. The UK CBAM will give industry the confidence to invest in decarbonisation in the UK knowing these efforts will not be undercut.

Well, good luck with that. Of course, all that means is that UK consumers end up paying more for all products affected by the CBAM, with unfortunate implications for inflation and the “cost of living crisis”. It will do nothing to make UK electricity prices, or manufactured goods, cheaper.

They also repeat that they intend to reduce grid connection waiting times for strategically important projects, even though this will exacerbate rather than solve the problem. Such projects will depend on the award of contracts under the Contracts for Difference AR7 (or AR8 et seq.), and we can see that these contracts are being awarded at ever-higher prices, which exceed the current market price.

There is also talk of moving forward with a zonal pricing model, where electricity prices vary by region, but this represents nothing more than moving the deckchairs on the Titanic. We will still be heading for the iceberg.

When we reach page 33, we are confronted by a section in a big box, presumably reflecting the government’s view of its importance. You’ve probably guessed how it’s headed: “Accelerating to net zero”. I really don’t know where to start with this stupidity. But perhaps this is as good a starting place as any:

…our net zero economy is already making a significant contribution to growth in the UK, rising by 10.1% since 2023, three times faster than the overall UK economy.

It obviously hasn’t occurred to them that this is because they have decimated the UK economy by shackling it to higher energy costs arising from net zero, and because the “net zero economy” benefits from substantial subsidies paid for by the rest of the economy. It would be a surprise if the economy didn’t react as it has done, but it’s far from being a success story, given that jobs in the regular economy are disappearing more quickly than they are appearing in the so-called green economy.

How about this?

There can be no plan for economic stability or sustainable growth that does not include a credible plan for net zero.

When you have core beliefs that are based on ideology rather than on real-world data, it’s remarkably easy to turn facts on their head.

The document rambles on for many more pages, but we’ve reached the end of the part that is relevant for current purposes. It continues to baffle me how they can conclude that the problem is urgent, but fail to do anything about it for 18 months or more; equally, how they can correctly analyse that the problem of high electricity prices is the cost of renewables subsidies, only to conclude that the solution is to double down on the policy that requires the subsidies to be paid at an ever greater rate. If I said that I despair, I think I would be guilty of under-statement.