Energy Intensive Industry Compensation Package - Two Steps Forward, or One Step Back

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Here at EEF, we have always supported the Energy Intensive Industries (EII) Compensation Package and therefore welcome this latest stage in its development, published yesterday. We recognise that government is keen to ensure a level playing field with our competitors both within Europe and globally.

First, let's recall the stated aim of the Package, namely ‘[the] aid aims to avoid the risk of increased global greenhouse gas emissions due to shift of production from EU countries to those outside the EU that are not subject to emissions reduction targets'.

However, we remain concerned that the proposed details of the Package will result in failure to meet this aim for two key reasons.

· The package will only compensate about two thirds of the additional pass-through costs within electricity prices for energy intensive industries from the EU emissions trading scheme and the carbon price floor. It therefore only partly addresses competitiveness risks.

· The lifetime of the package is only three years. This is highly inadequate and sends the wrong signal to investors in UK manufacturing. The government must, at the forthcoming spending review, commit to a much longer time frame for this Package if it is to bolster investor confidence.

Although I am critical of these two design features of the Package, I do believe that government is working hard to ensure that the right sectors are recompensed.

An example of this is the regional emission factor, i.e. the amount of carbon dioxide emitted per unit of electricity generated. The BIS consultation from last year proposed to use a factor of 0.411tCO2/MWh, rather than the regional emission factor of 0.58tCO2/MWh proposed by the Commission. By using this lower figure, the UK would effectively be compensating its EIIs less than other Member States. We called on BIS to opt for the higher figure to ensure a more level playing field. The guidance, published yesterday, confirmed that the UK government is now proceeding with the higher figure. This is very welcome. So this is a step in the right direction, but it still doesn't mean that the unilateral cost increases, faced by UK energy intensives, are in any way fully addressed

Of course this all hangs in the balance pending State Aids approval for part of the package – namely the carbon price compensation. Unless we receive a positive outcome from the Commission very soon, the UK government risks not being able to backdated compensation for the carbon price floor to April 2013. This would mean that the UK's EII manufacturers will be paying uncompetitive electricity costs, in relation to their overseas competitors.

So if anyone says to you that this is job done, in relation to addressing the competitiveness problems that energy intensive industries face, in relation to higher energy prices, then I would say, look again at the detail.


Director of UK Steel

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