What Dieter Helm’s review and the industrial strategy might miss
Not all of the ten ‘pillars’ of the industrial strategy green paper will make it into the white paper expected by the end of this year. Civil servants working on the final strategy say the innovation, skills, place, business and infrastructure pillars are the ones likely to remain and the content of the affordable energy and clean growth pillar will be embedded across the strategy. If that can be done well it will better than having a standalone chapter, but if it is done badly, it will be a disaster for the UK’s low carbon transition.
That may seem an exaggeration. The industrial strategy is not a carbon budget, its job is not to deliver carbon reductions per se. However, it should be preparing UK businesses for the challenges and opportunities that a low carbon and resource efficient economy will bring. So what is the appropriate way to integrate environmental considerations into the industrial strategy?
Green Alliance has called for it to be futureproofed, by supporting the kind of productivity growth that prepares the economy to be successful in a low carbon and resource efficient world. The Industrial Strategy Commission’s report, Laying the foundations , recommends that six strategic goals, including decarbonisation of the energy system, are used to create a positive vision in response to the challenges the economy faces. And Time for Change, by the Commission for Economic Justice, sets out five challenges and opportunities for the UK economy, which include greening the economy. All three approaches want an industrial strategy that builds an economy fit for the future.
So, will green opportunities and challenges be well integrated across the industrial strategy or not? Individual green sectors, like offshore wind, electric vehicles and storage, seem to have been recognised as areas for potential UK leadership, but what about the energy and resource efficiency developments that could deliver productivity growth across the economy? Even an optimist would say that the signs over this summer have not been good.
Resources are no longer in the review’s remit
The Department for Business, Energy and Industrial Strategy (BEIS) took a long time to launch the energy cost review and only appointed Dieter Helm to chair the review in August, making it very difficult for him to conduct the comprehensive review required by the end of October. And then, perhaps to make the job fit the time available, BEIS shrunk his remit. Originally, the plan was for “a review of the opportunities to reduce the cost of achieving our decarbonisation goals in the power and industrial sectors” that emphasised “how energy cost can be contained or reduced by increasing resource and energy productivity”. However, the terms of reference for the review that have now been published have reduced the remit from energy to electricity and from costs to prices. Resources no longer get a mention.
There is a big question about whether it is possible to assess the most cost effective way to decarbonise the economy without looking at the interactions between energy systems for heat, transport and electricity, but leaving that aside, what are the implications of looking at energy costs through the lens of price.
The rationale for the energy cost review was to ensure that our industries, particularly energy intensive industries, were not put at a competitive disadvantage by industrial electricity prices, which are higher in the UK than in other European countries. However, the green paper was emphatic in emphasising the role of energy and resource efficiency in cutting energy bills for business. The Conservative manifesto in June went further and promised to establish an industrial energy efficiency scheme to help large companies install measures to cut their energy use and bills, as a route to delivering “the lowest energy costs in Europe”. Energy efficiency is still mentioned in the energy cost review’s terms of reference, so it is possible for Dieter Helm to give it the prominence it deserves, but it is worrying that he has been directed to focus on the electricity supply chain – ie generation, transmission, distribution and supply – which stops at the factory gate.
Total energy costs, from electricity, gas and coal use, are 0.9 per cent, 2.0 per cent, and 3.8 per cent of operating cost for the UK’s commercial, manufacturing and energy intensive sectors respectively. The proportion of that that is attributable to low carbon policies is 0.2 per cent, 0.4 per cent and 0.7 per cent for each of those sectors. That is significant for some businesses, particularly those operating on low margins but, rather than worrying exclusively about energy prices, surely we should be asking how we can reduce energy costs overall, and even more importantly, increase business margins.
Energy and resource efficiency can reduce industrial costs
There is a huge opportunity to reduce bills and add to the bottom line through industrial energy and resource efficiency. The Committee on Climate Change has calculated that, by 2030, efficient use of electricity and other fuels could reduce energy bills for even the most energy intensive businesses by 10 – 15 per cent, and that best practice shows even larger reductions are possible. If we widen the scope from energy, and consider water and material savings too, the Institute for Manufacturing says that improving the resource efficiency of manufacturers to the level of the best in their sector would yield an additional £10 billion in profits for UK firms and a 4.5 per cent reduction in carbon emissions. That is before we get to all the ways that digital technology can help manufacturers extract more value out of their resources, through optimised product design, cognitive enabled supply chains and digital ‘twins’ which monitor and manage assets being used by customers remotely.
If manufacturing is to thrive in the UK we need to think bigger and differently about how to support businesses to transform the way they use energy and resources. The signal government is sending at the moment with the energy cost review is that input prices are the most important component of industrial competitiveness. But that excludes a major part of the picture and could mean the industrial strategy misses real opportunities to reignite UK productivity growth.
Dieter Helm’s review is an opportunity to reassert the importance of energy and resource efficiency in delivering least cost decarbonisation path as well as its intrinsic link to manufacturing productivity growth and competitiveness. Let’s hope he takes it.
[Image: industrial dreaming by Petar from Flickr Creative Commons]