Energy firms dominate UK industry’s green spending

Analysis of DEFRA's latest environmental expenditure survey

Energy firms dominate UK’s green spending

Spending on environmental protection by UK industry showed an apparent increase of 25% in 2006 to £4.2 billion, according to the latest survey for the Environment Department. The electricity and gas generation sector was the biggest spender, accounting for 36% of the total.

Environmental consultancy URS Corporation has conducted the survey for DEFRA on a regular basis since 1997. Last year, a sample of 7,850 companies active in the extractive, manufacturing and energy/water supply industries were invited to take part. Based on 1,599 completed responses, the estimated gross spend on environmental protection for 2006 has reached its highest point for six years since 2000 when the total was an estimated £4.3 billion.

However, the report’s authors warn that the figures for different survey years should not be compared directly because of the wide confidence intervals and improvements to data gathering and estimation procedures. With that caveat, the trends in environmental protection spending over the last four years (2003-06) are shown in table 1.

TABLE 1 ENVIRONMENTAL SPENDING BY INDUSTRY

The spending patterns are analysed in terms of capital expenditure and operational expenditure (which includes the in-house operating costs of a company’s own environmental protection activities, as well as payments to others for services such as waste disposal and consultancy).

Capital expenditure has grown from 15% of the total industry spend in 2003 to 29% in 2006. During this period, ‘integrated’ investments (on equipment which reduce emissions and discharges as part of the production procedure) have risen both absolutely and as a proportion of the total capital expenditure. Meanwhile, ‘end-of-pipe’ investments (on equipment to clean up at the end of the production process) are declining as a proportion of capital spend.

When asked about the main drivers for capital expenditure, 64% of respondents selected "equipment upgrades" as one of their key reasons, while 40% cited "regulatory compliance". "Customers' environmental requirements" was a driver for 17%, while a further 11% selected "parent company requirements", "corporate social responsibility" or "environmental taxes".

The primary spending sectors in 2006 were energy production and water (at £1,561 million), food, beverages and tobacco products (£525 million) and basic metals and metal products (£333 million). These sectors, together with the motor vehicle and transport equipment sector, have each significantly increased their share of the total expenditure over the last survey year (see table 2).

TABLE 2 ENVIRONMENTAL SPENDING BY SECTOR

Spending within the utilities sector – the bulk of which comes from electricity and gas operators - has increased as a proportion of total industry expenditure from 8% in 2004, to 23% in 2005 and 37% in 2006. Both of these large annual increases are attributable to two companies that have returned particularly large expenditures relative to others in the sector, according to the URS report.

Operating expenditure is shown to account for approximately 51% of the total spend by energy firms, while capital expenditure is much higher proportionally than the industry average. “The continued greater proportion of capital expenditure on integrated pollution control equipment over end-of-pipe is expected due to regulatory focus,” states the report, while a high level of external expenditure by these firms is “associated with the EU emissions trading scheme.”

The chemicals sector, meanwhile, has slipped further down the list – from being the industry’s top spender in 2003 at £610 million, it now lies in forth place at £293 million in 2006. According to the report, one of the main reasons for declining spend is the shift of manufacturing operations to the Far East and the associated rationalisation within the UK sector. External expenditure by chemicals firms has shown a continued decrease on the 2004 and 2005 figures.

The report’s authors told Environment Analyst: “An increase in waste minimisation and better resource management, reducing wastewater and solid waste disposal costs for [chemical industry] sites that have PPC [pollution prevention and control] permits, is likely to lead to an even further reduction in external expenditure. This can also explain the significant reduction in cost savings achieved associated with solid waste, potentially indicating that much of the cost savings in these areas have already been achieved in previous years and are now reflected in reduced operating costs in these areas.”

Other industry sectors with declining spends in 2006 include machinery and equipment, pulp & paper/printing and publishing, rubber & plastics and coke, petroleum and nuclear fuel.

External operational expenditure for the industry as a whole was bigger proportionally in 2006 than any time during the preceding four years, increasing to £2.0 billion from an annual average spend of £1.4 billion for 2003-05. Conversely, in-house operational expenditure is at a low point, which could suggest an increased demand for consultancy and other external environmental management services. URS consultant Sally Vivien, who heads the DEFRA survey project team, confirms: “This shift may attributed to more outsourcing/buying-in of services and maintenance of equipment, and possibly the need to meet regulator approved monitoring standards typically not held in house, as well as the continuous rising costs to dispose of hazardous waste.”

In terms of environmental media, expenditure on solid waste and wastewater account for 24% and 23% respectively of the total UK industry spend, while air pollution abatement measures comprise a further 20%. However, the largest expenditure was on “other measures” (30%), which includes regulatory charges. The remaining 2% is split between noise and nature protection.

Total estimated cost savings through environmental protection measures in 2006 equate to 8% of the overall industry expenditure (or £351 million). Income resulting from the sale of by-products has averaged at 4% of the gross spend during the last four years, totalling £173 million in 2006.

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