Financial Impacts of UK’s Energy and Climate Change Policies on Commercial and Industrial Businesses
Chye Peng Anga, Bruce Toperb, Ajay Gambhira,[1]
a Grantham Institute for Climate Change, Imperial College London, South Kensington Campus, London SW7 2AZ, England, United Kingdom
b Energy Knowhow Limited, Hertfordshire United Kingdom
Abstract
This study analyses the cumulative impact of UK energy and climate change policies on the historical and projected unit energy costs and energy bills of two case-study company sites (one in the manufacturing sector and one in the retail sector) to compare results to published studies of the theoretical impact of policies on industrial energy costs. The study also reports the views of the companies on how, if at all, policies will impact on their business competitiveness.
We find that projected energy bills for one site are rather higher than those projected for its sector by the UK government, owing to a discrepancy in the achievable level of energy efficiency. So the results of existing theoretical studies such as those by the government may not be fully representative. In addition, we find that, with projected 2020 energy costs accounting for around 1% and 5% of total costs for the two sites, the policies would add 0.37% and 0.45% respectively to overall business costs by 2020, if all other non-energy costs were to stay the same – an impact not considered to be significant with respect to competitiveness.
This study provides a detailed case study assessment of two business sites in the UK, to understand the policy drivers of increases to their energy costs and energy bills, considering all current UK energy and climate change policies. We compare our findings to more generalised, theoretical calculations of the policy cost impact on energy costs and bills – we have found no other studies as comprehensive as ours in terms of policy coverage.
We find that for one site the government has over-estimated the likely energy savings due to energy efficiency options. Such differences in estimates should be taken into account when considering the efficacy of climate change policies on future energy savings. The overall impact of energy and climate change policies on costs will be of the order 0.4% of total business costs by 2020. This provides an important metric for the near-term cost of mitigation to meet longer-term climate change goals.
Keywords
UK energy policies;
UK climate change policies
Energy bills;
Competitiveness;
Leakage;
Energy efficiency;
- Introduction
Addressing the challenge of climate change will require significant levels of emissions reductions from all sections of the economy. This will entail both the more efficient use of energy, as well as the decarbonisation of energy supply (IPCC, 2014). A number of countries including the UK have enacted policies to achieve such aims. The Climate Change Act commits the UK to reducing its greenhouse gas emissions by at least 80% from 1990 levels by 2050 (Great Britain. Climate Change Act 2008). In order to reduce emissions in the UK, several energy and climate change policies have been introduced. Most of these policies work by setting an explicit or implicit price on energy use or carbon emissions, or by providing subsidies or tax breaks to encourage investment in energy efficient or low carbon technologies. A key concern over such policies is the impact that they have on energy costs for both businesses and households Many of these policies affect businesses in the UK, in particular by increasing energy bills (Bassi, Dechezleprêtre & Fankhauser, 2013). There are concerns that these policies could put UK businesses at an economic disadvantage in international competition and potentially drive manufacturing location to other countries, resulting in an increase in carbon emissions in other parts of the world, causing the phenomenon of carbon leakage (CCC, 2013).
In recent years, a number of studies have attempted to investigate the extent of cumulative impacts of the UK’s energy and climate change policies on businesses’ energy prices and bills. There is a general consensus among these studies that energy and climate change policies will result in an increase in businesses’ energy prices and bills. However, the extent of impacts varies quite significantly among the studies largely because of differences in methodologies, assumptions and coverage of policies. Furthermore, the analyses of existing studies on the impacts of policies on energy prices and bills, are broadly speaking, based on hypothetical energy users with certain assumed energy consumption and energy mix. However, the impacts of policies on energy prices and bills depend largely on the sector the business belongs to and its energy consumption and energy mix. Hence there is a research gap around specific analysis of specific businesses, covering all relevant policies.
The primary objective of this study is to assess the cumulative impacts of the UK’s energy and climate change policies on the energy prices and bills of real businesses. It examines both the actual cumulative impacts on energy prices and bills in the past, as well as the cumulative impacts in the future. Secondary objectives of the study are to The study also addresses the cumulative impacts of the policies on competitiveness loss and carbon leakage for the businesses studied, their examine the businesses’ energy saving measures for mitigating the impact on energy bills, as well as the barriers to the implementation of such measures, as well as the impacts of the policies on competitiveness loss and carbon leakage for the businesses studied. In examining these, this study provides an in-depth detail of how energy and climate change policies affect real companies and how these real companies respond to the impacts of policies on energy prices and bills. This allows us to go beyond theoretical studies found in existing literature; and compare real life findings against theoretical ones. This paper begins by describing the research methodology used to address the objectives of the study and a brief review of the literature material (Section 2). Section 3 presents the results for the businesses being assessed and Section 4 analyses the results and offers a discussion on the findings of the research undertaken. Section 5 provides a summary of the key findings and conclusions.
- Methods
2.1Literature review
A comprehensive review of the existing literature was undertaken to examine the past, existing and recently announced UK’s energy and climate change policies affecting businesses, as well as studies relating to the cumulative impacts of these policies on businesses’ energy prices and bills, competitiveness loss and carbon leakage.
2.1.1UK’s energy and climate change policies
A description of past, existing and recently announced energy and climate change policies in the UK, in chronological order of their implementation is shown in Table 1. As can be seen by the table, there is a large and complex policy landscape affecting business energy bills.
2.1.2Cumulative impacts of policies on energy prices and bills
There is a limited number of studies that have evaluated the cumulative impacts of UK energy and climate change policies on businesses’ energy prices and bills (DECC, 2013a, 2011; CCC, 2014, 2012; WatersWye Associates, 2011, 2010).
The study by DECC (2013a) analyses the cumulative impacts of energy and climate change policies on energy prices and bills in 2013, 2020 and 2030, for medium-sized energy users and energy intensive users. Policies assessed in the 2013 study include CCAs, CCL, CPF, CRC, Ecodesign Directive, EMR, EU ETS, FITs, Green Deal and RO. Figure1and Table 2 show the results of the analysis. The impact of policies on unit energy prices differs among the different types of users since policy impacts depend on the sector the business belongs to and its energy consumption and energy mix. The impact on unit gas price stays fairly constant, whereas the impact on unit electricity price rises over time due to increased impact of the CPF, EU ETS, EMR, FITs and RO.
The impact of policies on unit energy prices translates to a 26% and 22% increase in energy bills for a non-CRC and CRC participants respectively in 2020. For energy intensive users policies are estimated to add between 6 and 36% to the energy bills in 2020. The lower end of the range reflects relatively gas intensive users who meet their electricity needs through onsite generation and therefore are not affected by policy costs passed on from energy suppliers. The higher end of the range reflects relatively electro-intensive users who buy all their electricity from an energy supplier. For both CRC participants and energy intensive users, the main drivers of increase in electricity bills by 2020 are the EMR, RO and CPF. By 2030, the main drivers are the EMR and EU ETS.
In another study, the UK Committee on Climate Change (CCC) (2014) examines the cumulative impacts of energy and climate change policies on energy prices and bills between 2004 and 2013, 2013 and 2020, as well as2013 and 2030, for commercial and industrial users. Policies assessed include CCL, CCAs, CfDs,CPF, CRC, EU ETS, FITs and RO. Table 3 shows the results of the analysis. For commercial users, these policiesare estimated to add4.2 p/kWh (or 67%) and 6.2 p/kWh (or 86%)to the unit electricity price in 2020 and 2030 respectively. For industrial users, policies are estimated to add3.6 p/kWh (or 68%) and 5.9 p/kWh (or 98%) in 2020 and 2030 respectively. Tables 4 and 5 compare the CCC findings against that from the DECC study. The impact of policies on unit energy prices in absolute terms is comparable in both studies. However, in terms of percentage increases, the figures from the CCC study are generally higher, which means that lower wholesale and network costs were assumed in the CCC study.
In another separate study conducted by a consultancy, Waters Wye Associates (2010), for the Energy Intensive Users Group (EIUG) and the Trades Union Congress, results show that by 2020, policies are estimated to increase energy bill by £5.3 million or 17%, compared with what the bill would have been without policies. This is in the higher end of the range in DECC’s estimate of 6 to 17% for gas intensive users.
1.12.1.3Cumulative impacts of policies on competitiveness loss and carbon leakage
Competitiveness risks could arise if energy and climate change policies disadvantage certain business sectors in international competition, impacting profits and employment and driving location of plants to other countries. This relocation could lead to what is known as carbon leakage (CCC, 2013). In terms of the impacts of energy and climate change policies on competitiveness and carbon leakage in the UK, some studies suggest that energy and climate change policies would only negatively impact a few manufacturing industries. In another study, the CCC (2013) estimates that higher electricity prices from energy and climate change policies could reduce the total profits of electricity intensive industries by £150 million to £600 million in 2020. However, it highlights that the profit impacts are commensurate with support under the already announced policies and thus reaches a conclusion that competitiveness risks are limited and manageable. On the contrary, industry studies point to significant competitiveness risks from rising energy costs. For example, a recent survey by the EEF (2014) found that the most cited risk to growth for manufacturing in 2004 is rising input costs – mainly the cost of energy.Certain studies have also attempted to examine the impact of energy and climate change policies on the way businesses make decisions relating to investment and relocation. In general, studies show that decisions made are based on much more than just climate change policies and the costs induced by them.
2.12.2Research approach
The case study approach is well suited for this study because of its ability to address the research objectives appropriately. Both quantitative and qualitative research methods were employed to meet the objectives of this study. As the impacts of policies on energy prices and bills depend largely on the sector the business belongs to and its energy consumption and energy mix, a two-case study approach was adopted to investigate the financial impacts of policies on energy prices and bills for a commercial sector business and an industrial sector business. These sectors are as defined in DECC’s Digest of United Kingdom Energy Statistics Table 1G (DECC, 2013g). Company A, a UK-based food retail organisation, is the case study company in the commercial sector business; while Company B, a UK-based soft drinks manufacturer and supplier, is the case study company in the industrial sector business. As several policies apply at the level of site rather than company, different parts of the same business can be subject to different policies. This study thus focused on an in-depth analysis of only one site from each company.
The period of assessment of past impacts was set to be between 2005 and 2013 due to unavailability of data prior to 2005 in both case study sites. For assessment of future impacts,uncertainties increase the further the projections and hence for this analysis, the period was set to be between 2014 and 2020. The methods to be used in quantifying the past and projected impacts of each policy on unit energy prices and energy bills were established using background knowledge gathered from the literature review phase. To investigate the impacts of policies on competitiveness loss and carbon leakage, as well as energy saving measures for mitigating the impact on energy bills and the barriers involved, responses were sought from the companies. A formal questionnaire was designed to gather data for the two case study sites in order to assist in meeting the research objectives. Alongside the primary data collected through the questionnaire, secondary data on the basis of assumptions used in existing studies was collected through literature review and clarifications with officials in the CCC and DECC.
3Results
1.23.1Company A
3.1.1Background of case study site
The food retail store selected as the case study site for this study is a superstore commissioned in 2005. It has a gross floor area of around 6,500 m2 and a sales floor area of around 4,200 m2. Both electricity and natural gas are used at the site. The site has a 140 kWe natural gas-fired combined heat and power (CHP) system that was commissioned in 2010 to generate heat and electricity for use onsite. The CHP has been certified by DECC as a Good Quality CHP (DECC, 2013h).
3.1.2Past cumulative impacts of policies on energy prices and bills
The findings on the cumulative impacts of the policies on energy prices in the past are illustrated in Figure 2. In 2005, energy and climate change policies that had an impact on unit electricity price included the CCL, EU ETS, Hydro Benefit and RO. The total impact of these policies was 1.156 p/kWh, about 22% higher than the electricity price without policies. Three key policies were responsible for majority of the price impact: EU ETS (47%), CCL (37%) and RO (15%). Until 2009, the site continued to be subjected to these four policies, with the EU ETS, CCL and RO accounting for the majority of the price impact. The only exception was in 2007 where carbon prices collapsed and thus the indirect price impact of the EU ETS was negligible. By 2013,the total impact of policies was 2.633 p/kWh, adding around 37% to the unit electricity price. Key policies responsible for the majority of the price impact were: RO (31%), CRC (24%) and CCL with CCAs (18%). There was a 128% increase in unit electricity price impact between 2005 and 2013, compared with general price inflation of 26% over the same period (Office for National Statistics, 2014). Thus, in real terms, Company A experienced an increase in unit electricity price impact of 13% per year between 2005 and 2013.
The only policy that had an impact on unit gas prices between 2005 and 2011 was the CCL, which in 2005 added 0.150 p/kWh or 7%, to the unit gas price. This increased to 0.163 p/kWh in 2009, but fell 0.096 p/kWh in 2010, due to the introduction of the CHP plant at the site. Gas supplies to Good Quality CHP plants are exempted from the CCL.Gas used elsewhere on the site are still subjected to the CCL. In 2012, the CRC started having an impact on unit gas price. The total impact of policies was 0.228 p/kWh, adding around 8% to the unit gas price, with the CRC accounting for majority of the price impact (97%). The impact of the CCL was negligible as most of the gas purchased in 2012 was used for the CHP plant. In 2013, the total impact of policies was 0.141 p/kWh, adding around 5% to the unit gas price, with the CCL accounting for the majority of the price impact (74%). The impact of the CRC was much smaller than in 2012 because from 2012/2013 onwards, the input fuels for CHP have been treated as out of CRC scope.
The cumulative impacts of the policies on energy bills in the past are illustrated in Figure 3. Efficiency savings achieved through the existing Ecodesign Directive (specifically a lighting retrofit project in 2012) resulted in a slight reduced impact on electricity bills in 2012 and 2013. In 2005, energy and climate change policies added around 22% to the electricity bill, rising to 33% in 2013. Policies added around 7% and 5% to the gas bill in 2005 and 2013 respectively. Looking at the combined effect of changes in electricity and gas prices on total energy bills, policies added around 21% to the combined energy bills in 2005; this rose to 27% in 2013.