Reeves considers energy bill subsidy for manufacturers

Times

4 hours ago

Rachel Reeves is scrutinising proposals to provide a £1 billion annual subsidy to manufacturers after being warned that Britain faces rapid deindustrialisation if she fails to reduce energy costs.
The chancellor is considering lowering energy costs for industry amid fears that they are holding back investment and the country's competitiveness.
The plans include a scheme by which taxpayers would compensate manufacturers when the price of electricity rises above a fixed level and the companies would pay the government when the price falls below the agreed level. Several European countries have adopted a similar model, including France, Denmark, Greece and Hungary.
The proposal has been seen by Sir Keir Starmer, Jonathan Reynolds, the business secretary, Ed Miliband, the energy secretary, and Reeves. A source close to Reynolds said industrial energy prices were a 'live issue', while a No 10 source confirmed that measures to lower costs were under 'serious consideration'.
Reeves is preparing for Wednesday's spending review and the subsequent publication of the industrial strategy for eight key areas of the economy that the government has promised to promote to bolster economic growth.
Industry argues that the price it pays for energy is double that paid by European competitors and four times that of America, which is leaving Britain at a disadvantage.
It affects not just the country's existing steelmakers, ceramic industry and chemical businesses but also attempts by the government to attract new technologies, such as energy-hungry data centres.
In a document seen by The Sunday Times, the industry lobby group Make UK warned the government: 'If we do not address the issue of high industrial energy costs in the UK as a priority we risk the security of our country. We will fail to attract investment in the manufacturing sector and will rapidly enter a phase of deindustrialisation.'
Rain Newton-Smith, chief executive of the Confederation of British Industry (CBI), warned the chancellor last week that high energy prices were an 'anchor on our ambition, a crack in our economic security and must be fixed'.
The plan being drawn up by Make UK, which it calls a contract for difference, would cost £1.1 billion a year for five years from 2027 to provide a guaranteed energy price. But the organisation argues this 'upfront cost' should be considered in the context of its estimates that it would generate a medium-term boost for the economy of about £3 billion a year — or 0.1 per cent of gross domestic product — and also provide more tax revenue.
It claims the policy is politically expedient for the government as it would help the red wall constituencies in the Midlands and northern England where Labour is vulnerable to the threat posed by Reform.
The biggest energy-intensive companies already receive a subsidy through the British Industry Supercharger scheme, which was set up by the Conservatives in 2024 and which the Financial Times reported last week could become more generous under plans being considered by ministers.
But this does not benefit many industrial companies, which still say they are struggling with high energy prices.
When she appeared at an event hosted by the CBI last week, Reeves told the audience of business leaders: 'We know that one of the questions that we need to answer is how we're going to make energy more affordable, particularly for some of our most intensive energy-using businesses where the price differential with other countries is just too acute for many to be competitive. That's a question we know we need to answer and we will answer in the industrial strategy in a few weeks.'
Other ideas being presented to the government include stepping up drilling in the North Sea, which is likely to create tensions with Miliband.
Solving the energy situation is regarded as a crucial plank of the industrial strategy, which the business secretary put out for consultation six months ago to look at eight sectors: advanced manufacturing; clean energy; the creative industries; defence; digital; financial services; life sciences and professional and business services. The result of the consultation had widely been expected to be published alongside Reeves's spending review but it is not now expected for another two weeks. It is understood that the delay has been caused by a desire to resolve the issue of industry energy costs.
Stephen Phipson, chief executive of Make UK, said: 'If we don't want to lose the big corporates we have to get competitive and the government is going to have to make tough choices.'
Jakob Sigurdsson, chief executive of the FTSE 250 Lancashire chemical business Victrex, said the industry was not 'asking for handouts' but needed a government policy to ensure it was viable.
His energy bill is £12 million — double what it was before Russia's invasion of Ukraine pushed up oil prices — while profits are £60 million. 'When you look at it from a global perspective, for the price of power we're paying four to five times the price for electricity that a Chinese company would be paying,' he said, with a similar situation compared to the US.
'It's a cost disadvantage for us so a sound energy policy and how we deal with pricing mechanisms is paramount,' he said. 'This is not going to be solved through incremental changes. There needs to be a bold energy shift.'