Long-term regulatory and policy changes needed to avoid stalls to business decarbonisation

In light of the financial pressures faced by businesses from rising inflation and interest rates, tight supply chains and labour markets, alongside high energy bills, there is a high chance corporate investment in decarbonisation could be in trouble. In Cornwall Insight’s latest Insight paper “Business net zero: Making progress in a challenging economy” we set out a range of regulation and policy changes the government could examine if it wants to avoid a slowdown or stalling of business investment in decarbonisation. .

The paper echoes Tony Danker, director-general of the CBI, who cautioned that without a green strategy, the UK could lose the green race for growth.

It is important for the UK’s competitive economic position that it sustains strong levels of investment in businesses’ net zero strategies and in pursuit of their environmental, social and governance (ESG) commitments. As other parts of the world, like the US, introduce investment-friendly policies targeted at green growth, UK policy Ideas from Cornwall Insight including fiscal measures to incentivise electrification and addressing the grid constraints of getting renewables onto the network will help the UK keep pace and not miss out on economic growth.

Our research confirms that net-zero targets remain a priority for many businesses, with many wishing to progress decarbonisation plans, even more so if they are viewed as being beneficial ethically and financially to businesses in the long run. But realising plans will not be easy.

Our research finds that businesses are currently facing significant pressures as challenging economic conditions, including continuing high energy bills, hit their finances. The recently announced Energy Bill Discount Scheme (EBDS), coming in from April, will not ease this pressure, as businesses see their support levels drop from the more generous scheme it replaces, whilst energy costs remain elevated to previous norms. As a result, there is a rising risk that corporate capital investment in decarbonisation could be overshadowed by falling business earnings and squeezed cash flows.

To address this, Cornwall Insight suggests that long-term regulatory and policy changes could be implemented which will help protect businesses, encourage investment in decarbonisation and prevent net zero plans from being put on the back burner whilst businesses face unusually difficult circumstances. These include:

  • A boost to energy efficiency and electrification – energy efficiency awareness campaigns can provide quick wins and immediate savings.
  • Longer-term fiscal measures for decarbonisation progress – including levelling policy costs to incentivise process electrification. Coupled with deterrents for carbon-intensive practices, these could be used as part of a ‘carrot and stick’ approach.
  • Devising a market design fit for net zero – with many Energy Intensive Industries (Ells) reliant on mass electrification for decarbonisation, there is a clear need to reform the existing market design to maximise the efficient distribution of cheaper renewables sources of power.
  • Reducing energy costs – with power prices in the UK elevated compared to other global markets due to the additional levies on energy bills, the competitiveness of UK businesses is hindered. Harmonisation of levies applied to gas and electricity could help close the cost gap.
  • Addressing grid constraints – there is a need to bring generation and storage assets onto the network as quickly and cost-effectively as possible, alongside ensuring that industries switching to electrification are able to access sufficient grid capacity to make this transition.
  • Tackling labour shortages and accelerating digitalisation – there is a severe labour shortage in the UK currently, particularly in net zero skills. Programmes designed at upskilling workforces as well as policies to enable efficient digitalisation of business operations could both help businesses in reducing costs and accelerating their net zero journeys.
  • Encouraging direct investment – promoting the growth of businesses and supply chains that support net zero within the UK can help increase security and reduce dependence on external markets.

The report has also outlined a range of options available to businesses to progress decarbonisation plans themselves, from understanding and then reducing their energy consumption and implementing energy efficiency measures to investing in on-site generation or setting up corporate power purchase agreements (CPPAs), which both aid decarbonisation and help businesses manage their volatile energy costs. But in reality, small and medium sized businesses may not be able to access all of the benefits of many of these strategies by virtue of their scale. As a result, a partnership with government emerges as a credible way to ensure viable businesses of all shapes and sizes are able to continue to cut emissions.

While the will for decarbonisation remains very strong, unfortunately, investment capability may be compromised without action by policymakers. Economic realities are taking their toll, and high energy bills and reduced government support are starting to hit some businesses’ financial standing. The picture varies by sector and business size. But where investment plans start to be reviewed under the shadow of challenging trading environments, we must wonder whether the decarbonisation of UK business will be one of the first victims as near term, and more existential pressures take precedence.

As the director-general of the CBI said , a green strategy is not about outspending to keep investment from leaving the country, but about outsmarting. The success or failure of the business and industry green agenda in the UK rests largely on the shoulders of companies and their shareholders. Of course, some businesses and sectors will be able to navigate this period, and continue progress, but certain sectors and business types are more susceptible to risk. While the government and businesses recognise the challenges of continuing direct bill subsidies, policymakers may want to counterbalance the loss of bill support with other green investment incentives. Whether the policy changes come through tax incentives, energy market design, informing behaviour changes, reducing energy bills or a mix of all of these, businesses clearly would benefit from knowing that the government has a clear road map for supporting their role in delivering our net zero ambitions.

There is a widespread feeling that the current policy landscape does not provide businesses in general with enough clarity to make long-term business and investment decisions. If we are to avoid the period after the pandemic representing a lost era of business progress on decarbonisation, regulatory and policy clarity will be essential. Indeed, this is a prerequisite to allow businesses to address the challenges brought about by the energy crisis, and to seize the opportunity unleashed by the net-zero transition.

Related thinking

Commercial and market outlook

Winter 2023-24 price cap forecasts fall further below 2022-23 EPG, but long-term prospects remain uncertain

The predictions for the Default Tariff Cap in this piece are out of date, please click here to find our latest forecasts and commentary on the cap. Our latest forecasts for the Default Tariff Cap (price cap) have shown energy bill predictions for a typical household1 have fallen to £3,208...

Commercial and market outlook

Tales of the unexpected: what’s happening with gas prices

The gas sell-off for contracts relating to this winter/spring & coming summer has continued in the last few days. On January 16th alone, contracts closed down c15%-17% on gas contracts for this spring and through into summer. This is despite some analysts predicting that gapping-up would occur on the promise...

Business supply and services

Early implications of the Energy Bill Discount Scheme  

People are beginning to take in the changes from the business Energy Bill Relief Scheme (EBRS) to the Energy Bill Discount Scheme (EBDS) that are scheduled for the end of March. As we outlined in our release earlier in the week, the government support is to be scaled back significantly....

Business supply and services

Our response to the announcement of the Energy Bill Discount Scheme 

The government have announced that the Energy Bill Relief Scheme (EBRS) will be replaced by a less supportive Energy Bill Discount Scheme (EBDS) from April 2023. The government have been managing expectations on reducing support levels for business energy costs now for several months and remain under pressure over control...

Home supply and services

Drop in wholesale energy prices sees price cap predictions fall below the EPG for second half of 2023

The predictions for the Default Tariff Cap in this piece are out of date, please click here to find our latest forecasts and commentary on the cap. Our latest forecasts for the Default Tariff Cap (price cap) have shown energy bills for a typical household are predicted to be below the government’s...

Energy storage and flexibility

Balancing Reserve: ESO proposes new regulating reserve service

In recent months National Grid ESO has been developing a new reserve service to improve the management of the system and enable the grid to accommodate zero carbon operation of the electricity system by 2025. On 28 September the ESO first announced at their Autumn 2022 Markets Forum, a proposal...

Home supply and services

Why short-term high wholesale prices aren’t the key driver of domestic energy bills

The current cold snap across most of western Europe has resulted in high wholesale electricity prices. Observed prices in the GB wholesale market are typically higher than those in neighbouring electricity markets, and here we provide an explanation of why this is likely the case but also why short-term periods...

Low carbon generation

RESS 3 consultation: DECC is listening, but the true test will be in the detail of the solutions incorporated 

The Department of the Environment, Climate and Communications (DECC) published the consultation for the third round of the Renewable Electricity Support Scheme (RESS 3) on 28 October 2022. Some of the issues drawn out in the consultation is a testimony that DECC has its ears on the ground and is...