With nearly all attention now focussed on the general election it can be easy to forget that this year’s Budget announcement is just around the corner. Usually one of the biggest events in the political calendar, the 2015 Budget has most certainly taken a back seat to discussions on televised debates, SNP surges and Natalie Bennett’s underwhelming performances. Even if this were to be bumper Budget is would be tough to compete with the drama of the most unpredictable election in almost a century but with very little spare cash knocking around the public coffers and further budget cuts to come, it would be reasonable to expect that this year’s Budget will be a subdued affair and the details may be quickly lost in the noise of campaigning.
Nonetheless, for energy intensive industry (EII) the coming announcement is of the utmost importance as it represents the last practical opportunity for Government to complete the package of compensation measures for EIIs in advance of April 2016.
EEF estimates that by 2020, without any intervention, energy and climate change policy will increase electricity bills by £37/MWh (real 2012 prices) accounting for a third of the total electricity price. BIS’s own analysis showed that this projected cost exposure was higher for energy intensive industries in the UK than for those elsewhere in the EU and significantly higher than for competitors outside the EU. The estimated figures showed a climate change cost for energy intensive industries of some £13/MWh in Germany, £17/MWh in Italy and close to zero in the US. These significantly higher costs are on top of the above average wholesale and transportation costs already faced by UK industry.
Government has taken significant action recently to help rectify this situation through the announcement and introduction of the EII compensation and exemption package. Compensation for the costs of the EU ETS and the Carbon Price Floor (CPF) have been available to eligible companies since 2013 and 2014 respectively and it was announced that compensation from the costs of the Renewables Obligation (RO) and small scale feed in tariffs (FiTs) will be made available but not until April 2016.
The urgency of the situation requires action before this date. Informal discussions with BIS indicate that state aid approval for the scheme could be achieved by early autumn and we urge government to commence compensation payments as soon as reasonably possible after this is achieved, taking into account that the compensation process should not be very different from that of the EU ETS and CPF current compensation.
It is estimated that the combined costs of RO and FiTs will be in the region of £14/MWh from April 2015, representing some 15% of an industrial electricity user’s bill. To place this in the context of the steel industry; it takes an average of 570 kWh of electricity to produce a tonne of steel in an electric arc furnace. This means the costs of the RO and FiTs during 2015/16 will increase production costs by around £8/tonne. For a commodity product, such as reinforcing bar, this can represent 2.5% of the traded price, and with companies operating on razor thin margins, this can mean the difference between profit and loss. There is a very real risk that some operators will not be able to withstand these kinds of losses for a further year. Every additional month that compensation is not available costs the steel sector a further £3.5 million pounds and the wider EII sector £22.8 million.
Budget 2015 represents the last opportunity for the government to take this vital step to demonstrate it recognises the urgency of the situation and signal a firm commitment to the steel sector in the UK. It would enable the government to show that, even as the political world focuses on electioneering, it is still capable of taking decisions that impact on the long term competitiveness of key sectors of the economy.