UK Markets closed

UK industry’s heavy energy users fear enforced winter shutdowns

·7-min read

At Dreadnought Tiles’ factory just outside Birmingham, specialist staff monitor its nine kilns 24 hours a day. The furnaces reach temperatures of 1,130C and are capable of churning out 40,000 roof tiles a day. Now Alex Patrick-Smith, the 217-year-old company’s managing director, faces the prospect of being forced to switch this nonstop operation off.

Dreadnought belongs to a select group of the UK’s heaviest power users, manufacturers that employ about 210,000 people and contribute £29bn to the economy.

From steelmakers and chemical firms to glass and ceramics manufacturers, the biggest players in this group suck up huge amounts of energy. The sector accounts for about 16% of Britain’s energy usage, behind transport and domestic use.

The energy crisis has brought two black clouds on to the horizon for these companies – further rises in sky-high bills, and then the prospect of government-enforced shutdowns. In officials’ worst-case winter projections, energy-intensive businesses would be asked to close to preserve power for hospitals, emergency services and households if a cold snap in the weather combines with gas shortages to trigger blackouts.

Patrick-Smith says: “We keep being reassured that there are no prospects of shortages of gas, and that we have multiple sources of supply within our own gift. But this argument rests on the basic premise that it is energy security at any price – that just doesn’t work in reality, because there comes a point where you just cannot afford to buy it.”

The government announced on Friday that it would consider increasing subsidies for some of the biggest energy users. It already offers discounts on renewable energy levies to big energy users in the steel, paper, glass, ceramics, and cement industries. Under the consultation, that discount could rise from 85% to 100%. However, only about 300 businesses, typically the largest users, will benefit.

Patrick-Smith’s monthly energy bill increased to £147,000 in June, from £58,000 the same month a year earlier. From next March, this could exceed £400,000 and, without government intervention, the company may have to trim its workforce.

“If we are putting sanctions on Russia then we need to acknowledge this is an economic war and, without support, there are lots of energy-intensive businesses that are going to find it very, very difficult to continue,” he said.

Many smaller manufacturers face an imminent reckoning when long-term hedging contracts, signed before the current energy prices were even imaginable, expire this autumn. With companies unlikely to want to fix at current high prices, they will be become exposed to the vagaries of volatile markets.

In October, Nuneaton’s Subcon Laser Cutting will come off a fixed energy contract that has been in place for five years, moving to a flexible deal that will see bills increase by up to five times. Its lasers cut items ranging from car parts to bespoke clock faces. Matt Brown, who runs the family business with his parents, said: “This energy crisis is cataclysmic for industry and there is no end in sight. It seems to be getting worse and worse, and businesses just cannot afford it.”

Brown said he expected his monthly energy costs to increase from between £15,000 and £20,000 to more than £50,000 a month.

Tom Stokes, who manages the family firm John Stokes Chrome, expects to pay a similar sum. That is well over double the amounts he paid – which were usually between £18,000 and £23,000 – under a fixed-rate contract that ended in June. Now his company, which turns over about £2.5m a year, will have to find an extra £300,000 at current rates – if prices do not rise even further. “I’ve got a factory full of work and I can’t make it pay,” he said. “It’s absolutely barmy.”

The company, based in the West Midlands town of Tipton, needs large amounts of energy to run electric current through metal components in an acid bath to deposit a thin layer of shiny and hard-wearing chromium on the surface. Spiralling energy prices mean Stokes may have to soon limit operations only to higher-margin bespoke work, to avoid making losses on every job.

He has already had to raise prices by 19% to electroplate components eventually used in cars, planes, hydraulics and the defence industry. That had prompted “difficult conversations”, he said.

Larger industrial users have longer-term contracts in place. The listed brickmakers Ibstock and Forterra have said they have hedged 90% and 85% of their energy requirements respectively for the remainder of the year. Many factories have teams dedicated to minimising energy usage, which – along with labour and materials – is typically among their biggest costs.

Britain’s industrial titans will also be closely watching the difference in energy costs between the UK and Europe. Industry body UK Steel estimated British producers paid 61% more for electricity than their competitors in Germany and 51% more than in France. It said domestic players had paid an extra £90m this year, and £345m over six years – the equivalent of almost two years of capital investment in the sector.

UK Steel’s head of policy, Richard Warren, said: “UK steelmakers face far higher electricity costs than their European competitors, even given the global rise in wholesale prices. The government should swiftly move to implement measures to reduce policy and network costs.”

Companies want a beefed-up successor to the retiring Triad scheme, which was designed to help big companies avoid using energy at peak times.

Manufacturers have few options to cut their existing use. Many already run night shifts to take advantage of cheaper market rates – but for smaller firms, the cost of paying higher wages to encourage employees to work unsociable hours is prohibitive.

The energy crisis has also sharpened the focus on investing in more efficient machinery.

Subcon has moved away from older machines with CO2-based lasers to newer fibre ones. Stokes is also looking at ways to reduce his energy use by investing in new machines. His company has joined a group of smaller companies which have banded together to buy energy at points in the day when it is cheaper – an option usually only available to larger firms. The group’s buying is managed by a consultancy, Control Energy Costs.

Brown believes that a price cap, akin to the curbs on domestic bills, should be introduced for businesses. “The focus has been on domestic customers, but if businesses aren’t here in the next five years, there’ll be no jobs for these people,” he says.

The government said last week that “households, businesses and industry can be confident they will get the electricity and gas they need”, but concerns over winter blackouts persist.

Tata Steel, owner of the vast Port Talbot steelworks in south Wales, said the company was following the situation “very closely”, although its operations were unlikely to be affected. Existing rules mean if government orders businesses to close, operations that could be irreparably damaged and have an asset value of more than £50m – which include blastfurnaces and steel plants – are exempt.

Patrick-Smith argues a “furlough-style” scheme needed to be implemented to protect jobs if companies are asked to shut. “There’s lots of overheads – insurance, rent – which we still have to pay if we’re shut down. But ultimately it’s people the government needs to support.”

Stokes adds: “In this very scary geopolitical environment we’ve got a very big concern as a sector that if there’s not action now, we won’t have a sector left. How many gut punches are we going to have before we say, you know what, they’ll be closing the doors?”