Business

Will the last packaging firm to leave Britain please turn out the light? Assuming, of course, you can afford to have it running in the first place. The recent surge in energy prices could, some fear, simply force UK firms to up sticks and leave the country. "There's undoubtedly the possibility of firms moving overseas as a result of the UK's high energy prices," says Jeremy Nicholson, director of the Energy Intensive Users Group (EIUG).

Nicholson suggests that those looking to invest in their business would be more likely to look at those areas where it is more commercially viable. From a business perspective it’s understandable why firms would invest overseas; but it’s regrettable for the UK economy, he says.

Energy prices are clearly having a significant impact on all packaging firms’ bottom lines – as borne out by a spate of recent results statements – but UK firms are hit particularly hard because they are paying more for gas and electricity than their counterparts in North America and, perhaps more importantly, the rest of Europe (see graph).

EIUG figures suggest that, on a year-ahead basis, UK gas prices are currently 16% higher than the oil-indexed supply price on the continent. For electricity, premiums are even higher, with UK firms paying up to 38% more.

Industry-wide concern
Anyone buying energy at the moment is taking a risk, says David Workman, director general of British Glass. Forward prices are high, but with spot prices there is complete uncertainty about paying in the future. While glass is the hardest hit packaging material, energy costs are a concern for the whole industry as most companies are in some way reliant on the energy intensive sector, for example, for raw materials.

Peter Davis, director general of the British Plastics Federation (BPF), says that some plastic packaging firms are faced with a take it or leave it situation on energy prices. Some years ago, energy prices were 2-3% of the total cost of manufacturing. Now it’s more like 8-9%. Some of our members are coming off two-to-three-year deals and facing cost increases of up to 100%.

Part of the problem is that the UK, unlike the rest of Europe, has open markets for energy. Despite the government’s efforts there are many EU member states that do not currently want to liberalise their own markets, which would have the effect of converging prices. European firms can freely purchase on the UK markets, but we do not have equal access to continental markets, or at least not on equal terms, argues EIUG’s Nicholson.

Another pressing issue is the lack of domestic supply and reliance on imports. There are major concerns that plans for nuclear and renewable energy facilities will not be sufficient to match the shortfall from the declining gas supply and closing down of coal-powered generators.

Likewise, the UK has not invested much in energy-from-waste facilities compared to other EU countries, such as Germany. My disappointment is that we’ve not been better at building on the money we’ve had coming into the country from decades of generating energy. There’s no real infrastructure, says Nick Mullen, director of the Metal Packaging Manufacturers Association.

Energy crunch
Dependence on imported energy supplies, perhaps such as liquefied natural gas (LNG), is further complicated by the woefully underprovided storage facilities in the UK. In comparison, the US and other major European countries have three to four times the level of storage that we do, relative to demand. We’re going to need a lot more, says Nicholson.

But perhaps the biggest concern is that the government is not perceived to be taking the issue seriously enough (see box). There are fears that an energy crunch could happen sooner rather than later – the BPF suggests around 2011 – while consistently high energy prices could lead to more firms closing down operations.

Last month, Eric Illsley MP, chairman of the All Party Parliamentary Group for packaging, urged the government to act to reduce energy prices to safeguard jobs; concerns that are felt throughout the industry. British Glass’s Workman adds: I wouldn’t suggest there are currently plans to close production, but if the customer base did shift overseas it would put another perspective on UK manufacturing.

The EIUG echoes this view. Plants close not for a single reason but for an accumulation of non-investment over a period of time, says Nicholson. Uncompetitive prices on a semi-permanent or long-lasting basis won’t help.

GRIN AND BERR IT
• The government says it recognises there are companies under particular pressure because of energy prices, although the precise situation is complex to assess, given the wide variety of business sizes.
• A spokesman for the Department for Business, Enterprise and Regulatory Reform (Berr) underlines, though, that it is making efforts to persuade other EU member states to liberalise their energy markets.
• The government is also working to deliver 10 or so onshore, and more offshore, storage facilities for liquefied natural gas. This should double the UK’s gas storage capacity by 2012.
• The government says energy is an important consideration in many areas of its policy, such as the planning bill that will enable the construction of more storage facilities as well as production plants for alternative energy formats.
• It’s about diversifying our energy mix so that, going forward, we are not reliant on parts of the world where energy sources are increasingly politicised, adds the spokesman.