Government energy report shows key manufacturing sectors face major competitive disadvantage

· UK Steelmakers pay considerably more for energy than their competitors in other major countries

· Report finds that the net cost of energy taxes for energy intensive industries in the UK are significantly higher than elsewhere

Some of the UK’s key manufacturing sectors are being put at a significant competitive disadvantage because energy and climate change policy is making electricity more expensive, according to a report commissioned by the government(1).

Amongst a range of finding the report demonstrates that:

· Steelmakers in major competing countries such as Germany, Russia, India, USA and China can expect to pay considerably less for their electricity than steelmakers in the UK. At the extreme, in 2020 UK steelmakers can expect to pay over 280 per cent more for the impact of government policies on electricity prices than American and Russian competitors(2).

· It is a similar picture for manufacturers making cement, industrial gases and chlor-alkali, who provide the building blocks for thousands of products from energy efficient building materials, solar panel to electronics and fibre optics.

· The research indicates that the situation will become especially acute by 2020.

EEF believes this proves conclusively that the absence of a global deal on climate change is creating a ‘beggar thy neighbour approach’ with different countries pursuing carbon reduction policies at different rates and cost, even within the EU. This puts British industry at a major disadvantage.

Commenting on the release of this report, Terry Scuoler, Chief Executive of EEF, the manufacturers’ organisation:

"This report provides clear, independent evidence supporting concerns we have long put to government - that UK manufacturers in energy intensive sectors are paying more for their electricity than many of their global and European competitors.

“Both the Treasury and DECC believe we must not outpace our competitors in loading costs onto hard-pressed businesses. However, this report shows that there is a mismatch between intent and reality.

“The proposed package of measures announced by the Chancellor in the Autumn Statement are welcome but only last until 2015. Similar measures must be put in place for 2015-2020 to give manufacturers certainty and a level playing field with their competitors.”

"UK manufacturers want to play a key role in helping to deliver the low carbon economy. But they can't with one hand tied behind their back. Government should follow the German model by ensuring that the country invests in low carbon technology affordably and without burdening the most exposed industrial sectors with high costs.”

Ian Rodgers, Director of UK Steel, said:

“However you cut this report, the findings paint an extremely worrying picture for the UK's steel industry, from now to 2020. The fact is that we’re operating in a global marketplace but operating under different economic rules. UK government policy is making it more expensive to do business in the UK. Until the Government’s compensation package for energy intensive industries is implemented and measures are put in place for 2015-2020 our sector's competitiveness is being slowly eroded.

"Indeed, the report confirms that the measures set out by the Chancellor do not go far enough. Despite the report clearly demonstrating that rolling-out renewable energy accounts for the biggest proportion of the increased cost, the government has yet to commit itself to helping offset these unilateral price increases and ensure the UK remains a competitive economy.”

In the UK the cost of bringing in renewable energy constitutes a major component of the increased costs. The impact of the third phase of the EU Emissions Trading Scheme, which will be much more stringent than the previous phases, will also have a significant impact. The government's unilateral Carbon Price Floor(3) also adds additional costs not faced by competitors.

This has an impact on the competitiveness of domestic industries and investment in sectors vital to the emerging low carbon economy. In a recent survey by EEF two-thirds of UK manufacturing companies saw an emerging low-carbon economy as an opportunity. However, in the same survey only one in eight viewed the UK as a favourable place to invest in this area.

The ability to pass on the cost of energy and carbon is limited for those sectors which compete in fiercely globally competitive markets such as steel. EEF has warned that, unabated, this could lead to “carbon leakage,” where production and investment is shifted to regions without carbon controls and where manufacturing costs are therefore cheaper.

Even in Europe there are differences despite being subject to the same emissions reduction targets. The report provides evidence that energy taxes for energy intensive industries (EIIs) in the EU Member States considered in the study are generally lower due to their governments providing significant reimbursements. Reimbursements to EIIs appear most significant for Germany, Denmark and Italy, and are also relatively high for France. However, this is an area where further investigations by Government are needed.

ENDS

Notes to Editors

(1) An international comparison of energy and climate change policies impacting energy intensive industries in selected countries (11 July 2012), ICF International for the Department for Business Innovation and Skills

(2) Source: See p.12 of report:

Indicative incremental impacts on electricity price (£/MWh) of energy and climate change policies (total impact)

(3) The Carbon Price Floor is a new taxation policy that is charged at the point of generation on electricity, which is based on the carbon content of that power. The tax is intended to set a floor price for allowances used within the EU ETS. The UK is the only in country in the EU to adopt this approach despite the scheme being EU-wide. See http://www.hmrc.gov.uk/budget2011/tiin6111.pdf for more information.