Why the Spring Budget should mark a new turn towards manufacturing friendly energy efficient policies

Jim McConalogue, 13 March 2023

For many British businesses, the past year has spelt the dawn of a new era, whereby energy risks becoming not only too expensive, but dependent upon an infrastructure over which they have little control.

It is a significant threat to the UK’s manufacturing sector, much of which relies on large amounts of consistently supplied energy to power its processes, at an affordable rate. The solution advanced by respondents to a new research report we have just published suggests a cooled, more adaptable approach: one of ‘net zero realism’, meaning we can better achieve environmental aims through boosting business and growth plans.

Over the past four months, we looked into SME manufacturer’s views on costs, energy supply, disruptions and resilience, and held a wide range of conversations in Liverpool and London, through surveys, round tables and interviews.

On the big question of energy costs, SMEs (which are currently entitled to some cover with the energy relief scheme) found, for example, that their energy costs were less than one per cent of sales, but were concerned that this could increase to 6, 7, 8 per cent and would erode their bottom line. Some of our small-survey respondents also suggested they needed to know that there would be an overall cost benefit to their business when seeking to diversify their energy sourcing strategies.

On energy security, we found participants suggesting secure energy was slightly more important than green energy – than, vice versa. And more respondents were either very or fairly concerned about potential energy blackouts.

On energy resilience, it is known and widely expressed that the manufacturing sector is not sufficiently resilient to disruption in the security of supply. And, when asked whether they had contingency measures in place for when their usual source of energy power is disrupted, most responded they either had no contingency measures, or only some very informal measures.

On cleanliness of supply, it was often expressed that SMEs could be too busy doing their day job to think about cheap or sustainable energy – and there a whole range of obstacles, not least relating to leaseholder-landlord differences. As one SME described in discussing solar photovoltaics rollout across their factory roof, ‘If you don’t own the building and have a lease, you have to negotiate with a landlord and it can be difficult to make an agreement. … Building ownership, landlords, the value of infrastructure and the issue that we don’t even own the panels is difficult.’

We also found some concerns relating to quality of supply: although by no means clear-cut, electricity supply can be undermined by “micro” outages in which LED lights register a flicker. There does not appear to be a cost-effective answer to helping them resolve problems – for example, one SME described, ‘We have talked about batteries but don’t see the payback for that kind of need and they [the firm] don’t want to go there with the batteries just yet.’

The answer on how to plan for growth was difficult but conversations along the lines of there being ‘no tax to pay on breaking even’ had a common thread. A reasonable number thought they would increase their business’s capital investment plans over the next 12 months or at least maintain the same level. And when asked which range of policies might most help them in supporting business growth, most first supported financial support to boost capital investment projects, followed closely by support for Research and Development (R&D).

This led us to the conclusion that 10 top recommendations should be adopted:

1. To encourage No. 10 and wider government to adopt a pragmatism and policy of ‘Net Zero Realism.’
2. Target Energy Bill Discount Relief to protect SME manufacturers in order to reflect reliefs at today’s wholesale prices.
3. Extend the super-deduction capital allowance to let SMEs grasp a 50% effective tax relief on energy monitoring technology.
4. Develop DIY employee training and self-help tools on energy efficiency for smaller manufacturers.
5. To seek for a charitable energy educational trust to introduce a crib sheet on energy management for manufacturers.
6. Encourage government to coordinate UK universities in supplying low-cost postgraduate advisory teams for SMEs conducting energy management strategies.
7. Propose government and large manufacturers coordinate German-Swiss style networks for smaller manufacturers interacting with energy network providers in order to resolve renewables applications, grid balancing, outages and intermittency.
8. Encourage landlord incentivisation for energy efficiency improvements through tax reliefs and EPC-rating rewards for energy performance.
9. Introduce a simple, non-binding, minimalist, energy ISO Standard to apply across industry in order to resolve confusing carbon reporting and environmental compliance frameworks     
10. The introduction of a refined UK-wide Industrial Strategy.

Read the report here: https://civitas.org.uk/publications/adapting-the-manufacturing-sector-for-a-brighter-future-new-approaches-to-energy-resilience-among-smes/