Decarbonising while reindustrialising

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First published on BusinessGreen on 26th October 2018.

Listening to the messages from Green Great Britain Week, it’s easy to be inspired by the new technologies emerging, companies setting carbon targets and potential of the low-carbon economy.

The transition needed is both exciting and necessary to meet our carbon targets, however there are also going to be some painful transitions and choices to be made. One area that is a real, and ongoing, issue for our members is the indirect cost of decarbonising the UK electricity sector. Not just the switch to renewable energy, but the upgrades to networks and technology transitions needed to make energy consumption smarter. It’s hard to talk about without sounding negative but it’s important if we want to remain a manufacturing nation and not outsource the industries on which low-carbon supply chains are built – and all the jobs they bring – to other countries.

 

Higher energy prices

Currently, funding for low-carbon power generation has been through the energy bills of domestic consumers and industry alike. Together with carbon pricing, this has led to over 30% renewable generation and brought us within reach of a coal-free grid. However, it has also increased energy prices for energy-intensive industries (EIIs), like steel, chemicals, paper and glass, relative to international competitors.

This time last year, EEF and UK Steel analysed the prices paid by steel producers based in the UK and, where possible, in Germany and France. These 2017/18 figures show that whilst prices have increased across the board, the average electricity price disparity between the UK and Germany is £18/MWh and £17/MWh between the UK and France. This means UK steel plants are paying 55% and 51% more, respectively, than their German and French counterparts, even after the compensation and exemptions that are available to EIIs.

It is important to clarify that the price disparity is not simply down to funding of low-carbon power generation (Germany’s base renewables surcharges are higher than the UK’s), but a range of factors including more generous exemptions for EIIs in other countries, discounts on transportation costs, the lack of a carbon floor price and differing energy mixes.

The situation could get worse. Ofgem is currently conducting a Targeted Charging Review designed to reallocate some of the costs of the electricity network. Its own analysis shows that this could increase costs for a sample industrial user by up to £9/MWh, while also removing incentives for demand management and onsite electricity generation.

 

Impact on Energy Intensive Industries

Higher energy costs will for some products mean higher prices for end consumers. However, many manufacturers operate in internationally competitive markets and do not have the option of passing on costs. Furthermore, higher energy prices deter investment, as money will instead go to markets with more favourable conditions, eroding future competiveness too. We, therefore, need to discuss how best to allocate the costs of decarbonising while ensuring UK competitiveness. Should costs be put onto energy bills rather than general taxation? Could EIIs be further exempted or link such exemptions to delivering demand-management activities?

Nearly three million people are employed in UK manufacturing today, contributing 10% of UK output, and 45% of exports. In a recent survey of public views, 70% of people agreed the UK cannot tackle future problems without a strong manufacturing sector, and 79% thought that the Government should place more value on manufacturing. Meanwhile, a majority of our member companies believe UK climate policy helps open up new markets, but many are also concerned about the impact on cost and their international competitiveness. Ways need to be found of balancing the opportunities in new emerging sectors against the impacts on existing manufacturers. More focus on industrial energy efficiency would be a start – bringing cheaper carbon savings than new infrastructure.

So as we move from 53.4% low carbon electricity (in 2018 Q2, as reported in Energy Trends) to 70%, 80%, and 100%, begin to transition our heating, and accelerate decarbonising transportation, there are decisions to be made and lessons learnt if decarbonisation is to work with manufacturing rather than against it.

Green GB Week is the start of something promising, helping address a concern we’ve noted before about companies outside a couple of obvious sectors not feeling like part of the low-carbon economy. However it also highlights the difficult balance that must be found if we are to decarbonise the economy without leaving parts of it behind.

Author

Senior Energy and Environment Policy Advisor

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