UK Manufacturing's Energy Crossroads: How Tax Incentives and Policy Shifts Are Driving a New Era of Efficiency

The UK manufacturing sector faces a pivotal moment. Soaring energy costs have long been a thorn in the side of industries like chemicals, metals, and ceramics—sectors classified as Energy Intensive Industries (EIIs). Yet, a confluence of underutilized tax exemptions and an upcoming Industrial Strategy could transform this challenge into an opportunity. Companies that master these policy tools now stand to secure a competitive edge, while investors should take note of the sector's hidden value.

The Energy Cost Crisis: A Drag on Competitiveness

The UK's energy prices rank among the highest in Europe, squeezing margins for EIIs. For instance, the baseline electricity price for EII exemptions—used to calculate eligibility—jumped from £166.84/MWh in 2023 to £204.37/MWh in 2024 before settling at £190.51/MWh in 2025. This volatility complicates planning for manufacturers, particularly those near the eligibility threshold for the EII exemption scheme. The scheme requires businesses to prove that electricity costs account for 20% or more of their Gross Value Added (GVA), a hurdle that many struggle to clear.

Why EII Tax Exemptions Are Underused—and Why That's a Problem

Despite their potential, these exemptions remain underutilized. A 2024 study by HMRC found that only 34 of 40 surveyed businesses intended to claim the super-deduction tax allowance, a similar incentive, due to confusion over eligibility or administrative burdens. For EIIs, barriers include:
- Complex documentation: Proving electricity costs tied to manufacturing processes requires precise metering and financial records.
- Dynamic thresholds: Fluctuating baseline prices (e.g., the 2025 reduction) can disqualify marginal applicants overnight.
- Limited awareness: Smaller firms often lack the expertise to navigate HMRC's evolving rules.

The cost of this underutilization is staggering. For a mid-sized chemical manufacturer, claiming exemptions could slash energy-linked tax costs by 15–30%, according to the British Industry Supercharger framework. Yet, many businesses are leaving this money on the table.

The Industrial Strategy: Fixed Pricing as a Game-Changer

The UK's upcoming Industrial Strategy aims to address these challenges by introducing fixed energy pricing mechanisms for EIIs. Unlike volatile market rates, fixed prices would stabilize costs, enabling long-term investment in efficiency upgrades. This aligns with the Network Charging Cost Compensation (NCC) scheme, which now covers up to 60% of grid charges for EII certificate holders.

Combined with the 100% exemption from renewables levies (up from 85% in 2024), these policies could reduce energy costs by £24–£31/MWh for sectors like steel and cement. The Industrial Energy Transformation Fund (IETF)—allocating £185 million until 2028 for decarbonization projects—adds another layer of support.

Case Study: Lanxess UK's Success

Take Lanxess UK, a specialty chemicals firm. By optimizing its energy use and leveraging exemptions, it reduced its electricity spend to 22% of GVA—a clear pass for the BLT. The company's shift to renewable energy sources (via Climate Change Agreements) and its proactive reapplication for exemptions post-policy updates allowed it to slash tax liabilities by £12 million annually. This freed capital enabled expansion into low-carbon polymers, positioning Lanxess as a leader in sustainable manufacturing.

Investment Opportunities: Now Is the Time to Act

The path forward is clear for investors: target manufacturers with the agility to exploit these policy shifts. Look for companies:
1. Near the EII eligibility threshold: Firms like Alent (ALNT.L), a ceramics producer, could qualify for exemptions if they refine their energy reporting.
2. With decarbonization projects: Johnson Matthey (JMPLY), a chemicals and catalysts firm, is investing in green hydrogen infrastructure, aligning with IETF funding priorities.
3. Already optimizing energy costs: Glenigan (GLNG.L), a construction materials supplier, has reduced energy intensity by 15% since 2020 through automation.

Risks and Considerations

• Policy uncertainty: The EII scheme's extension to 2025 is positive, but longer-term guarantees are needed.
• Supply chain bottlenecks: Delays in equipment procurement (a common issue post-Brexit) could hinder projects.
• Carbon leakage: Without global coordination, some companies may still relocate to cheaper energy markets.

Conclusion: Policy Meets Profit

The UK's manufacturing renaissance hinges on two truths: policy must be paired with private-sector agility, and now is the moment to act. For investors, the underutilized EII exemptions and fixed pricing proposals create a tailwind for energy-efficient firms. Companies like Lanxess prove that with the right strategy, these tools can turn cost burdens into competitive weapons.

The message is clear: manufacturers that master the EII framework and capitalize on the Industrial Strategy's fixed pricing will dominate the next decade. For investors, this is no longer a gamble—it's a calculated bet on Britain's industrial future.