U.K. must act fast on growing energy costs related to climate change policy, says CPI Director General David Workman; U.K. gas prices three-to-four times higher than in North America, paper product manufacturers fully exposed to policy
July 20, 2012
David Workman, Director General of the Confederation of Paper Industries (CPI), said that the government needs to “act fast” on growing energy costs related to climate change policy after an official report for the Department for Business, Innovation & Skills (BIS), showed that energy prices were set to rise faster in the UK than in other major economies.
The BIS report, published Friday 13 July, is the first to examine the consequences for UK manufacturing of pursuing current energy and climate change policies and according to Mr Workman, it makes for frightening reading. “Not only are our current electricity costs higher than our major competitors” said Workman “but the gap is expected to grow alarmingly between now and 2020. Additionally, the exploitation of shale gas in North America means that gas prices here in the UK are some three to four times higher than they are on the other side of the pond – a gap which is likely to at least be maintained over the medium/long term.
The forecasted increase in power costs is largely as a result of the UK’s pursuit of very ambitious (some would say unachievable) renewable energy targets and as a consequence of carbon pricing. The UK is the only country in Europe to have set a Carbon Price Floor (CPF) under the EU’s Emissions Trading Scheme (EU ETS); set at £16 per tonne from 2013 and due to rise by a further £2 per tonne each year until 2020. Phase III of the EU ETS (starting in 2013) also imposes much more stringent targets.
The BIS report is also alarming in two other respects. Firstly, it demonstrates that energy costs in Europe as a whole will rise further and faster than in other competing nations – Russia and the USA in particular. Secondly, within Europe, UK manufacturing is being exposed to the full effect of climate change policy whilst other countries – notably Germany – have sought to ensure that their manufacturing bases are protected.
In his Autumn Statement, the Chancellor announced a package of measures to ease the pain for the UK’s Energy Intensive Industries (EIIs), amounting to £250m over two years. This is but a drop in the ocean of what is going to be required, unless the government performs a massive U-turn in climate change and energy policy.
The other, often overlooked, consequence of government policy is the cost that it imposes on household energy budgets. Every additional £100 that householders have to pay for their gas and electricity is £100 that they are not spending in the wider economy on other goods.
If we are to rebalance the UK economy through growing our manufacturing base the government is going to need to act – and act fast.
We desperately need a meaningful manufacturing strategy with energy policy at its heart. The overriding objectives should be security of supply at internationally competitive prices combined with enhanced energy efficiency incentives for all sectors of the economy. We need to simplify the bewildering array of highly complex and costly climate change measures – particularly the Carbon Reduction Commitment
(CRC) – and abandon the CPF mechanism. Enhanced incentives for “on site” heat and power generation should be introduced. We also need to follow the example of the German government in protecting the most energy intensive manufacturing industries from the pass-through costs of decarbonising energy supply – if indeed that should remain an overriding objective given the lack of any global agreement on the issue.
Manufacturing competes globally and it needs to be able to access competitively priced sources of energy. Unless it can it will simply move to areas of the world less constrained by government imposed climate change costs.
Incidentally, the latest TUC/Energy Intensive Users Group (EIUG) report “Building our Low Carbon Industries” has also been published. The report summarises the position clearly as it states “The TUC and the EIUG fear that government is currently taking a laissez-faire approach to the threat of economic and fiscal losses from the closure of EIIs. It assumes that market forces alone will produce the right solutions. However, evidence from our study suggests this is wrong, and that without effective government intervention elements of EIIs will cease to be viable in the UK, leading to further carbon leakage and wider job losses across the manufacturing sector”.
The UK government needs to read and digest these two reports and then come up with a set of policies to support not just the EIIs but all of UK manufacturing.