Soaring energy prices have resulted in a significant increase in energy bills, leaving many struggling to make ends meet. The impact of soaring energy prices is not limited to households, however, as different sectors of the economy are also feeling the pinch. This article takes a closer look at what parts of the economy are most affected by these price rises. We will explore the reasons behind the rising energy prices, how it affects households, and the implications of high energy prices for different sectors such as industries and global markets.
Manufacturing and Industrial Sector
The manufacturing and industrial sector in the UK is significantly affected by rising energy prices. This sector is energy-intensive, and any increase in energy prices can significantly impact its operations and competitiveness.
Manufacturing industries rely on energy for a wide range of purposes, including powering machinery, heating and cooling systems, lighting, and other industrial processes. As energy prices rise, the cost of operating and maintaining these energy-intensive systems also increases, which can result in higher costs of production for manufacturers.
Moreover, the manufacturing and industrial sector also uses energy to produce goods that are then transported to various destinations. Therefore, any increase in energy prices can also increase transportation costs, which can further add to the cost of production.
In addition to higher costs, rising energy prices can also impact the competitiveness of the manufacturing and industrial sector. As the cost of energy rises in the UK, manufacturers may find it more challenging to compete with firms in other countries with lower energy prices. This can lead to a decrease in demand for UK-manufactured goods and can also cause manufacturers to relocate to countries with lower energy prices.
The UK steel industry is one of the energy-intensive sectors that have been affected by rising energy prices. In 2018, the UK government announced that it would raise the cost of energy for industrial users, which led to concerns that the steel industry would face higher energy costs.
Tata Steel UK, which operates several steel plants in the UK, reported that it spends around £200 million per year on energy, making it one of the company’s biggest costs. Rising energy prices have a significant impact on the company’s profitability and competitiveness.
In response to rising energy prices, Tata Steel UK has implemented several energy efficiency measures to reduce its energy consumption, including using energy-efficient lighting, improving heat recovery, and installing energy-efficient motors. These measures have helped the company reduce its energy consumption by 11% since 2012.
However, despite these efforts, the company still faces significant challenges due to rising energy prices. The CEO of Tata Steel UK, Bimlendra Jha, has warned that energy costs could result in the closure of some of the company’s UK plants, putting thousands of jobs at risk.
This case study highlights the significant impact of rising energy prices on the UK steel industry, which is a crucial sector of the country’s economy. It demonstrates the need for energy efficiency measures and policies that support the development of low-carbon technologies to mitigate the impact of rising energy prices on energy-intensive industries.
Transportation Sector
The transportation sector is affected by rising energy prices because it heavily relies on energy, particularly oil, to power vehicles and move goods and people. As energy prices increase, the cost of fuel also rises, which directly impacts the cost of transportation services, including air travel, rail, trucking, and shipping.
For example, airlines depend on jet fuel to power their aircraft, and any increase in jet fuel prices results in higher operating costs, which can translate into higher ticket prices for passengers. Similarly, the trucking industry relies heavily on diesel fuel to move goods from one place to another, and any increase in diesel prices can result in increased transportation costs for businesses that use these services.
Moreover, transportation is an essential aspect of most economic activities, and any increase in transportation costs can ripple throughout the economy, leading to higher prices for goods and services. Higher transportation costs can also lead to decreased demand for goods, as consumers may opt for alternative products or services that are more affordable.
In 2018, UK transport companies faced higher fuel costs due to rising oil prices, which led to increased operating costs and reduced profitability.
For example, in the same year, Stagecoach Group, one of the UK’s largest transport companies, reported that its fuel costs had increased by 8.6% compared to the previous year, which had a significant impact on the company’s financial performance. The company responded by implementing fuel efficiency measures and investing in alternative fuel technologies to reduce its fuel consumption and lower its operating costs.
Similarly, British Airways reported that its fuel costs increased by £200 million in 2018 due to rising oil prices, which affected the company’s profitability and led to higher ticket prices for customers.
Agriculture Sector
The agriculture sector is affected by rising energy prices because it requires significant amounts of energy for various operations such as irrigation, machinery operations, fertilizer production, and transportation. Energy is a critical input in the agriculture sector, and any increase in energy prices can result in increased costs of production for farmers.
For instance, farmers use tractors and other machinery for planting, cultivating, and harvesting crops. These machines require fuel, and when energy prices increase, the cost of operating these machines also increases. The increased cost of fuel not only affects the operating costs of farmers but also increases the cost of transportation of agricultural products.
Moreover, the agriculture sector heavily relies on chemical fertilizers to enhance crop yields. The production of fertilizers requires energy, and any increase in energy prices will raise the cost of fertilizers, which in turn increases the cost of production for farmers. Higher fertilizer costs can also reduce crop yields, which ultimately affects the overall production and supply of agricultural products.
Households
Rising energy prices have a significant impact on households. Higher energy prices lead to increased household energy bills, which can cause financial strain for families. The impact of rising energy prices on households can be seen in several ways.
Firstly, higher energy prices increase the cost of heating and cooling homes. This can be particularly problematic during extreme weather conditions, such as hot summers or cold winters. Households may have to use more energy to maintain a comfortable indoor temperature, leading to a surge in energy bills.
Secondly, rising energy prices also affect the cost of electricity, which is essential for powering homes. As the price of electricity increases, households may have to pay more for essential services such as lighting, cooking, and running household appliances.
Thirdly, the impact of rising energy prices on households extends beyond direct energy costs. Energy prices tend to affect the prices of other goods and services, such as food prices and transportation costs. This is because energy is a critical input in many industries and sectors, and changes in energy prices can impact the cost of production and distribution.
Lastly, households that are on a fixed income or have low-income are more vulnerable to the impact of rising energy prices. This is because energy expenditure takes up a more significant portion of their total income, leaving less money for other essential needs.
To mitigate the impact of rising energy prices, households can take steps to improve their energy efficiency. This includes measures such as improving insulation, using energy-efficient appliances, and reducing energy consumption through behavior changes.
What has the UK Government done to combat household’s high energy bills?
The UK Government has taken a number of steps to combat households’ high energy bills in recent years.
The most known form of support the Government has provided is the price cap, alongside Ofgem. The Energy Price Cap rose by 20% on 1 January 2023, from £3,549 to £4,279 for a typical user. But with the Government’s Energy Price Guarantee discount, a typical household paying by direct debit will pay around £2,500 a year.
All households with a domestic electricity connection will also be automatically paid a £400 payment over 6 months between October 2022 and March 2023 to help with energy bills.
In addition, the Government has also implemented the Warm Home Discount scheme, which offers a one-off discount of up to £140 on electricity bills for eligible households. The Winter Fuel Payment is another scheme that provides eligible households with an annual payment towards their energy bills during the winter months.
Which sectors of the economy are least affected by rising energy prices?
No sector of the economy is entirely immune to the effects of rising energy prices, as energy is a critical input for most industries. However, some sectors may be less affected than others, depending on their energy intensity and ability to pass on energy costs to consumers.
One example of a sector that may be less affected by rising energy prices is the service sector, such as banking, finance, and information technology. These industries generally have lower energy intensity than the manufacturing and industrial sectors, and their energy consumption is primarily related to heating, cooling, and lighting their buildings. Furthermore, these industries may have more flexibility in adjusting their operations to reduce energy consumption and can pass on energy costs to consumers through higher prices more easily.
However, even service industries may face indirect impacts from rising energy prices. For example, if their customers are businesses or households that face higher energy costs, they may reduce their spending on services, leading to a decrease in demand and revenue for service providers.