Walking the Carbon Tightrope

Energy intensive industry

Energy intensive industry

Orion Innovations has recently been involved in preparing a report for the TUC that explores the impact of climate change policies on energy intensive industries (EIIs). Our thinking was developed by looking in detail at four specific case studies. You can read the full report here.

We believe that evidence from the case studies shows that well-intentioned energy and environmental policies are adding significant cost to manufacturers located in the UK (relative to EU and international competition) and are therefore undermining the climate for investment. Here are a few of our findings:

  • Steelmaker CELSA’s UK plant based in Cardiff is one of the most energy and labour efficient in Europe, but is high cost as a result of facing the highest electricity prices within the CELSA Group. Although the steel sector does benefits from a number of recent UK policy changes (e.g. capping the Carbon Price Floor) they do nothing to address the current gap between the electricity prices paid by UK EIIs relative to their EU counterparts.
  • The heavy clay ceramics sector is seeing a significant increase in competition from imports and it is proving difficult to attract new investment to the sector. Uncompetitive energy prices, unpredictable future energy tariffs, and gas and electricity supply insecurities are cited as significant contributing factors.
  • In common with most other EIIs, cement and lime sectors are capital intensive and operate on long investment cycles (a typical lifespan of kilns is 35-40 years). The uncertain policy framework, unilateral burdens on UK producers, and unrealistically short timeframes for support packages in the UK are adding risk to the investment climate and long term viability of these businesses. In particular, they are stifling innovation and making offshoring of new investment a more attractive proposition to multi-national parent companies.
  • Use of CHP is one of main means of achieving industrial CO2 emissions abatement. However, the removal of CHP Levy Exemption Certificates (LECs) and introduction of CPS (Carbon Price Support) on fuel used to generate electricity were found to have undermined the economic rationale for CHP. The introduction of exemption from CPS for in Budget 2014 has in part remedied this situation, but returns only about half of the lost LEC value to generators.

As most EIIs are mature and make use of similar manufacturing processes across all countries, it is in the best interest of the UK economy to make sure that they:

  • Remain in the UK and do not succumb to leakage of jobs, investment and emissions.
  • Deploy the most carbon-efficient processes available to them.
  • Invest in innovation to reduce the environmental impact of their activities.
  • Have available proven and commercially viable cross-sector solutions such as CHP and CCS.
  • Retain and develop highly skilled, well paid jobs in the UK.

Budget 2014 went some way towards recognising that UK EIIs are competitively disadvantaged by existing policy mechanisms, and that this needs to be mitigated. This is welcome. However, there remains a view shared by all case study participants that the proposed measures do not go far enough. Our report therefore called for a number of near-term measures to limit the adverse impact of energy and environmental policies on EIIs, and a longer-term fundamental re-think of our approach to the delivery of our low carbon future:

  • Freeze the CPF immediately. The carbon tax will still raise over £1.2 billion a year, and the Carbon Reduction Commitment a further £1 billion. Capping the Carbon Price Support should be a prelude to scrapping it, in particular given the constraints to compensating the large number of EIIs that are not included in EU ETS Annex II.
  • Introduce RO and FiT compensation packages immediately. In the steel sector, RO is currently costing CELSA UK £8.66 per megawatt hour (MWh) and the feed-in tariff a further £2.12/MWh. Competitors elsewhere in Europe are either completely exempt or have the charges from equivalent schemes capped at €0.50 per MWh.
  • Fully exploit the opportunity to mitigate the costs of all renewable energy-related policy measures by 85% or, ideally higher, as permitted under EU regulations. Support packages should encompass all policy measures and there should be no additional UK eligibility criteria.
  • Explore ways of incentivising investment in new CHP capacity with a bespoke policy appropriately funded in order to meet ambitious deployment goals.
  • Reduce complexity and risk by rationalising UK policies, including CPF, RO, CFD FITs, CRC, and CCL into a single policy mechanism and support package.
  • Create a well-funded programme to support industrial energy efficiency and low carbon solutions, with incentives for investment. The current reliance on driving energy efficiency and carbon reduction through higher energy prices risks carbon leakage if undertaken unilaterally in the UK.
  • Create a high level Energy Intensive Industries Council, with representation from industry, trade unions and government, tasked with developing comprehensive long-term industrial strategy to secure jobs, growth and the low carbon transition.