Turning energy support into investment leverage

If electricity costs are proving a constant headache for British industry, then the next few months might induce a migraine. High energy prices have been the norm since Russia's invasion of Ukraine, but volatile fossil fuel prices are once again on their way up as conflict in the Middle East sends energy markets haywire. Unlike domestic consumers who are at least protected until July by the Ofgem price cap, businesses are feeling this now. The Labour government responded to industry concern over electricity prices when they announced their Modern Industrial Strategy last summer. They unveiled the British Industrial Competitiveness Scheme (BICS), an effort to cut electricity costs by up to 25 per cent for manufacturing businesses within the "IS-8" group of priority industrial strategy sectors.

There are roughly 32,000 businesses in this group and not all can benefit – there is only enough fiscal room to support around 7,000 of these companies according to the government's own press release. The Department for Business and Trade is now designing the eligibility criteria that will decide how the scheme is targeted, and is expected to publish its decisions in the upcoming response to the BICS consultation very soon. This is a pivotal moment for the new industrial strategy.  

Britain's industrial base faces two problems that feed off each other: chronically low business investment and persistently high energy costs. For some businesses, high electricity costs are a threat to short-term survival but not a blocker of investment. For others, these costs are holding back investment in new technologies and innovation. Government will be under most pressure to support the former, but the long-term competitiveness of British industry rests on the latter. Some short-term support could be warranted for businesses at the sharp edge of this latest energy shock. However, there is also an acute need for a scheme that addresses investment in the long-term.  

The industrial strategy revolves around investment

Underinvestment is widely understood to be a core driver of Britain's economic stagnation - the government even named its industrial strategy green paper 'Invest 2035' to highlight the point. But Invest 2035 goes further than diagnosis. It highlights three critical opportunities that align with the UK's strengths and global investment cycles: the net zero transition; AI, digitalisation and automation; and changing patterns of demand and demographics. 

Britain has an opportunity to ride this wave, but decades of underinvestment have left it far behind. The Productivity Institute has shown that British workers have access to far fewer tools, equipment, software and infrastructure needed to turn their time into output. Our analysis shows this 'capital gap' is even starker for manufacturing, where UK capital intensity is 47 per cent below peer economies. This is reflected in areas such as robotics adoption, where the UK severely lags Europe and manufacturing leaders such as China, South Korea and Japan. This is a major disadvantage in a world where highly advanced ‘smart factories’ are outcompeting traditional facilities.  

This has direct implications for how BICS should be designed. The shift to new forms of automation and digitalisation increases electricity consumption. High energy prices therefore act as a brake on the very investments British industry needs to make if it is to remain competitive in the future.  

BICS needs to be designed around investment too

Unfortunately, the policy as outlined in the consultation does not attempt to solve for investment. The scheme has two broad stated objectives: first, to grow the economy by retaining and attracting investment in frontier manufacturing industries within the eight priority sectors. Second, to protect the basis of the economy by supporting 'foundational' manufacturing industries – those that supply critical inputs to frontier producers, such as chemicals, metals and minerals – that have high electricity costs. The mechanism for deciding which 7,000 businesses to support uses an 'electricity intensity' threshold – that is, a measure of how central electricity is to a business's cost structure. Sectors with higher electricity costs relative to others are prioritised. This creates a conflict between the two stated objectives of the scheme – foundational industries are most electricity intensive, and it is unclear whether frontier industries would even get a look-in. 

The problem is that this approach has nothing to say about what the support will actually achieve. It assumes that the most electricity-intensive businesses will deliver the greatest economic benefit from lower energy costs. But the relationship between energy prices and investment is not so straightforward. Research by UNIDO and the OECD shows that, when energy prices rise, businesses in "frontier" sectors – such as those making transport equipment or machinery – can be just as sensitive to energy costs as those in "foundational" industries, and sometimes more so. A reflection of the fact that energy costs hold back investment in ways that are not directly related to how dominant those costs are within the overall cost structure.

This means an electricity intensity threshold will leave investment on the table. Sectors that might respond with higher investment could be left out entirely, while businesses with energy-intensive processes pocket the support and stand still. Consider two manufacturers. A chemicals processor with electricity at 15 per cent of turnover qualifies easily but plans no new investment, using the subsidy to manage existing cost pressures. A car manufacturer at 4 per cent is ready to install new automated production lines - investment that would be viable with lower energy costs but is stalled without support. Under the current threshold, the first qualifies and the second does not. The chemicals producer would increasingly be under threat by competition from more technologically advanced, energy efficient competitors around the world. Taxpayers would increasingly be called on to provide a lifeline to an old, creaking facility. The car manufacturer on the other hand would keep up with global competitors, provide skilled new jobs and act as an anchor for other parts of the supply chain for years to come.  

When government can only support around 1 in 5 manufacturers within scope of the industrial strategy, they must think harder about outcomes. The current approach asks one question of each sector: "how electricity intensive are you?". It does not help government identify where lower energy costs are most likely to unlock new investment. Ministers should be asking a different question: "how responsive is investment in this sector to electricity prices?". This is especially important because the loudest voices in this debate are established energy-intensive industries lobbying for support that benefits them, not necessarily the sectors where lower costs would drive the most new investment. The British Industrial Supercharger already exists to protect industries most exposed to offshoring. The energy bill support for the Middle East Crisis could be delivered through a re-run of the Energy Bill Discount Scheme designed during the last energy crisis. BICS should be doing something different.  

This does not require a complex new bureaucratic process. Government analysts can assess investment responsiveness to energy costs at the sector level using existing data and published research. That analysis should then be used to adjust the scheme's eligibility parameters. For example, by setting separate electricity intensity thresholds for frontier sectors where investment is highly responsive to energy costs, or by narrowing the eligible sector list to focus on those industries, both foundational and frontier, where lower costs are most likely to translate into capital spending. The existing policy architecture can stay but its parameters should reflect an investment objective, not just an energy cost objective.

The government has set out a serious and ambitious investment agenda, one that can generate skilled jobs and stronger manufacturing across the country. The long-term trends Invest 2035 identifies do not disappear because a crisis is dominating the inbox. BICS should be designed to ask not how much electricity weighs on today's balance sheet, but how much a sector is likely to invest in tomorrow's economy if given the chance.