Confused energy strategy is hobbling UK manufacturing

David Workman
Wednesday, August 22, 2012

The recently published BIS report on future electricity costs for energy intensive industries (EIIs) only reinforces the view that many have held for some time - that current costs are higher here than in many of our global competitor nations and that this gap will only grow due to the implementation of a range of climate change measures here in the UK between 2013 and 2020.

There are two elements to electricity costs – direct and indirect. The indirect costs come about as a result of energy companies ‘passing through’ additional environmental taxes and with the costs associated with commissioning more expensive renewable power generation.

 The UK is pursuing a far more ambitious renewables target than most of our global competitors and with a bewildering array of highly complex policy initiatives, the most controversial of which is the Carbon Floor Price. This sets a minimum price for carbon emitted of £16 per tonne in 2013, rising by £2 per tonne each year until 2020. The current EU price is £5 per tonne and not expected to rise significantly in the near future.

Among other issues facing us are revised (and much more ambitious) targets under our Climate Change Agreements and in the next phase of the EU’s Emissions Trading Scheme – both coming into effect in 2013 – and a replacement for the much-criticised Carbon Reduction Commitment.

The BIS report highlights the extent to which UK industry is exposed to these, and other, additional costs. To be fair to the government it has realised that there is an issue and the chancellor has already announced a "package of support measures" worth £250m over two years. However, this is woefully inadequate and compares poorly with the amount of support available to industry in other member states – notably Germany.

Real uncertainty remains about the UK’s future energy mix and its carbon intensity (which will impact on cost). Currently, our major fuel sources are coal, gas and nuclear. However, we know that several coal fired power stations will need to close within the next few years to comply with the Large Combustion Plant Directive and others will come to the end of their useful lives. What will replace them? The nuclear option seems to be fading as a result of falling popularity in Europe.

The other ‘game changer’ is shale gas. Gas prices in the US have fallen to about a quarter of the level here. The BIS report only made fleeting reference to this phenomenon, but it could have a very profound effect. While we here in the UK pursue a very expensive policy of developing renewable energy sources, the rest of the world may develop cheap gas as a power source?

One option is to develop on-site power generation but this is mightily expensive and needs much more government support.

The EEF, in its latest Manufacturing Green and Growth publication calls on government to simplify its climate change policy and develop an energy strategy based on affordability. The fear is that unless government listens, UK industry will find itself at a huge competitive disadvantage in the coming years, which will jeopardise any chance of a manufacturing renaissance.

– David Workman, director general, CPI

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