UK residential electricity cost spike subsidises usage of large industries

12 November 2018

When purchasing power parity was accounted for, consumers in the UK faced one of the largest jumps in the cost of electricity in Europe last year, with the 5% increase only surpassed by Estonia and Romania. At the same time, the cost per megawatt-hour of large industries in the country did not grow at the same rate, while still remaining at a far lower level.

Global energy consumption has more than tripled in the past 50 years, and while technologies to improve energy efficiency will ultimately see this growth plateau and eventually reduce, while the growing use of renewables will hopefully reduce the negative externalities of consumption, the spiralling price of electricity shows no sign of slowing. The state of play has become so drastic in Britain in recent years that even the usually laissez-faire energy ombudsman Ofgem has been forced to back a new energy price cap as of 1 January 2019, saving 11 million customers an average of £76 a year on their gas and electricity bills. While the move means suppliers will have to cut the price of their default tariffs to the level of the cap or below it, however, the benefits may be short-lived, as Ofgem said the cap could rise in April 2019, reducing the annual saving.

When considering spot prices – the half-hour price of wholesale market electricity – a new study from Capgemini has also found that the UK presently hosts the most expensive energy across a multitude of European markets. The World Energy Markets Observatory Report 2018 shows that having fallen beneath the prices of France, Spain and Italy in early 2017, the 7-day rolling average price on a megawatt per hour (MWh) basis, the UK’s EPEX, an exchange for power spot trading, soon reclaimed its position as the most expensive among comparable economies.Electricity spot prices on the main European markets (2017 and H1 2018)

At the same time, Britain saw residential electricity prices increase at one of the fastest rates among EU economies. The total bloc of 28 countries saw an increase of well below 1%. The price in euros per MWh – with purchasing power parity taken into account – of the UK for household electricity meanwhile spiked by 5%, double the increase seen in Germany. While Germany’s electricity remains the most expensive in Europe meanwhile, it is largely due to levies placed on consumption to encourage people to lessen their usage, accounting for more than a quarter of the overall price.

While the UK was surpassed by Estonia and Romania in terms of its rising prices, the increase in electricity prices in Eastern Europe largely related to the upward trend of coal prices combined with a severe winter. This saw Estonia and Romania witness increases of 7% per MWh. Elsewhere, the largest falls in electricity prices were recorded in Italy (-11%) and Croatia (-7%).

Residential electricity prices in Europe - all taxes includedWhile these results suggest consumers are facing tough conditions in the UK, the energy industry would still point out that the analysis shows that the UK is still among the least expensive nations for residential electricity. At the same time, the UK hosts the most expensive scene for MWh use of electricity for medium to large corporate sources. These high electricity prices in the UK are partially explained by a higher domestic carbon floor price of £18/ton (€20/ton) compared to other EU countries (€6/ton for the EU-ETS quotas).

At the same time, however, it is also worth pointing out that even in this context, the price per MWh of electricity for large industrial use is cheaper than it is for residential rates. Sitting at just under €120 per MWh, the price for electricity of medium to large industries is more than €40 less, while according to Capgemini’s analysis, the price increased by less than 1%, compared to residential use.Industrial & Commercial electricity prices in Europe - VAT excluded

Indeed, this is a pattern seen across the remaining European nations, perhaps best illustrated by Germany. While previously mentioned levies see German electricity prices sit at close to €300 per MWh, compared to close to €90 per MWh for medium and large industries. Similarly, Italy sees its MWh price for residential use at over €200, while for medium to large industries, it is at just under €120.

The nature of the economy is that it is always cheaper to buy in bulk, and large industries use a larger amount of energy than residential consumption accounts for. However, these figures could be pointed at in order to argue that firstly, consumers are to an extent subsidising the prices of electricity for some of the world’s largest and wealthiest corporate interests, while they are being expected to contribute significantly more to tackling climate change thanks to the substantial levies mentioned..

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UK manufacturing sees orders slow amid Brexit anxiety

11 April 2019

Manufacturing in the UK saw negative growth for the end of 2018, reflecting a wider slowdown in the UK economy to 0.2% for the quarter, followed by three months at the start of 2019 which saw continued softening in orders. With uncertainty still hitting the sector ahead of Brexit’s deferred deadline, the industry faces a difficult 2019.

Despite a perpetually changing economic landscape, manufacturing remains a keystone industry in the UK. Optimism in the industry has been riding high in recent years, reflecting the perceived potential of automotive technologies, but last year saw a slight dip in business performance, ahead of what seems set to be a turbulent period for British manufacturing. Ordinarily, the sector might have expected to recover its footing relatively quickly, but with the looming spectre of Brexit making the economy’s future completely uncertain, this has not been the case.

The uncertainties of Brexit have continued to create headaches for companies on both sides of the channel. As contingency planning continues, new analysis from BDO and the Make UK explores how manufacturing – a segment likely to be hard hit by Brexit – has fared in the final quarter of 2018.

Output balance stable

Manufacturing remains a key industry in the UK, generating around 10% of total economic output and supporting around 2.7 million jobs. Yet while the industry has seen a number of years of strong optimism as well as demand, Brexit is set to throw a spanner in the works, with a range of manufacturing companies leaving the UK, or considering it. Indeed, UK manufacturing’s output currently sits at a 15-month low as the industry anticipates a cliff edge Brexit.

In terms of growth for various parts of the UK economy, a slowdown was noted in the final quarter of 2018 compared to Q4 2017. Manufacturing, in particular, saw growth declines coming in at almost -1%, with a similar trend in production. Construction saw a sharp contraction, falling 2 percentage points to below 0% growth in December 2018. Only services managed to have positive % growth in the final quarter. The final quarter as a whole saw growth of 0.2% in the UK economy – the lowest level in six years.

Output across most sectors in the industry remains positive, with the percentage balance of change in output at 22%. The result is the tension quarter of positive percentage balance of change, with stagnation on the final quarter of 2018. The firm is projecting a slight softening of output going into Q2 2019. The firm notes that there is some stockpiling taking place, with orders and outputs unaligned going into 2019.

Order balance remains positive but dips further

While there is a broadly positive picture for output, the firm does note considerable differences between subsectors. Basic metals for instance, saw a net 24% fall to -18% over the past three months. Metal production is also seeing relatively poor performance as demand from the automotive industry enters a period of acute uncertainty. However, most industries are to see improved output on balance, with rubber & plastic increasing from a net 11% to net 56%.

Export trade

Having been buoyed by the lowered value of the pound, UK export orders are up slightly on the previous quarter, but remain well below the most recent peak in Q3 2018. Domestic orders were relatively strong, with a year between the most recent peaks for the segment. However, Q2 2019 looks to see domestic orders fall sharply, to half Q1’s result, while export orders too are set to see declines.

The decline reflects a decrease in basic metals, possibly a reflection of changes affecting the auto industry. Meanwhile, export orders are down due to Brexit cross-border uncertainty – the effect of the sterling devaluation unable to continue to buoy the market. Basic metals and metal products are both in negative territory for the coming three months.

Investment and employment intentions

UK employment figures reached new milestones, with total unemployment down to 3.9% while participation rates hit record highs. Employment planning continues to be in net positive territory, with a net positive balance of 22% in Q1 2019. The coming months are projected to see a slight dip, again, largely resultant from uncertainties around Brexit. Basic metals is the sector most likely to see a negative trend, reflecting the expected decline in orders.

Investment intentions meanwhile continue to be in positive territory. However, again, the now acute uncertainty about Brexit – the UK government has boxed itself into a corner – mean that confidence around investment could wane rapidly.

Commenting on the wider economy, Peter Hemington, a Partner at BDO, said, “Manufacturing firms have been ramping up their preparations for a disorderly Brexit, in large part through the stockpiling of imported goods. This has had the effect of inflating activity levels… It’s too late to do anything about this now.  But a disorderly Brexit would be far worse than the current relatively mild slowdown, possibly disastrously so… We are concerned it looks more likely than ever that we will exit the EU without a deal.”