UK businesses must take action to combat fuel poverty
July 1st 2008

By Dr Craig Lowrey, EIC head of energy markets

The focus of the UK energy market has shifted in recent years from one based solely on domestic issues to one where the country's status as an 'energy island' will continue to be seriously challenged. The decline in production from the UK Continental Shelf (UKCS) and the uncertainty over the future of a large proportion of the country's electricity generating fleet has once again raised the dual spectres of supply stability and security, not to mention the extent of mainstream media coverage of the UK being 'held to ransom' by 'unstable' nations for energy supplies.

The fact is that the global energy framework is changing, reflecting the developments in the global economy itself.

The growth in the economies of Asia – and China in particular – is redrawing the international economic map in a way that is moving influence away from developed nations towards their developing counterparts. The exponential economic growth of these nations is increasingly becoming a determinant for the prices of everything from metals to food.

The one consolation with global drivers on prices is that industry across the world is facing the same pressures, albeit to different degrees. The policies of the government are essential to ensure that companies do not experience any major competitive disadvantage as a result.

Unfortunately, much of the UK government's response to rising energy prices has been to focus on the price of petrol and fuel duty rather than adopting an integrated approach to the problem.

Whilst the impact on road transportation is a key factor in the UK economy, it's not the only one that needs to be considered.

The government has been happy to let the energy market operate and determine prices for end users and investment incentives for suppliers to ensure that infrastructure is in place. However, this has meant that UK business has found itself reliant on an energy market that does not necessarily bear any resemblance to that faced by their overseas competitors in the European Union.

Here, there is an essential requirement to level the playing field in terms of energy market structures within Europe, particularly the move away from the closed and regulated markets that have traditionally dominated the UK's fellow EU member states. The government must do all it can to ensure that UK business does not pay the price for operating in an energy market that has been hailed as the benchmark for competition globally because of the intransigence of other EU governments seeking to protect their own industries.

The extent of the energy price increase means that it is not just the large energyintensive sectors that are experiencing difficulties in meeting their energy bills.

While fuel poverty has been hailed by politicians as a new "social evil" more and more businesses are finding themselves in effectively the same position as low income domestic users. Based upon the standard definition of fuel poverty commonly applied to domestic customers, i.e. where energy spend is equal to or greater than 10% of income, a recent survey found that almost one in five small businesses spend at least ten per cent of their annual turnover on their energy bills.

Unfortunately, such businesses do not have politicians and the mainstream media to champion their cause, and may not be aware of the options open to them in terms of managing their energy spend through risk management or promoting greater energy efficiency.

Indeed, the industrial sector has been repeatedly required to shoulder a large proportion of the national burden when it comes to the areas of energy efficiency and greenhouse gas emission reduction.

The government's proposed Renewable Energy Strategy, as well as directives from the EU, are likely to lead to a bill of £6 billion per year for the period to 2020, a large proportion of which will fall on business customers. Comments from the Business Secretary that such a cost is 'worth paying for' will be little comfort for those businesses facing what is expected to be a 15% increase in their energy bills just to meet these national obligations – not to mention the impact of rising wholesale energy on their spend.

In this environment, it is essential that businesses obtain a better and more indepth understanding of their energy spend. With fears over the UK economy potentially moving into a recession, a full understanding of costs and how to manage them is essential, and energy is no different than any other part of the production process. In short, industrial business would be crazy not to risk manage their energy spend in the current climate. There's simply no other way to weather such increasing volatility.

EIC is a major sponsor of the Energy Event 2008 which is held at the National Motorcycle Museum in Birmingham. Dr Craig Lowrey's seminar on Energy Purchasing & Market Fundamentals will take place on 10th and 11th September, 13.00 – 14.30.

To register for the seminar email theenergyevent@eic.co.uk. Business can find out more about managing their energy spend through risk management by visiting EIC at stand 238.

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