An energetic effort

Posted on 23 May 2014 by The Manufacturer

But will it bring benefits to manufacturers?

Laura Cohen, CEO of the British Ceramic Confederation digests recent energy policy and its implications for manufacturing competitiveness in the UK.

Laura Cohen, CEO, British Ceramic Confedaration.
Laura Cohen, CEO, British Ceramic Confedaration.

The Budget announcement in March brought a welcome sign of recognition from Government of the widespread campaigning of industry bodies over the punitive cost of energy in the UK.

But now that the dust has settled on the Budget, and we have commended government’s response to the concerns of industry, let’s unravel exactly what some of these policies mean to the competitiveness of UK industry.

How far will they really help and what barriers stand in the way of them achieving their full potential?

If we take the issue of climate related taxation and its impact on energy prices in the UK.

Climate related taxes, including the Renewables Obligation, small scale feed in tariffs, Contract for Difference and the Carbon Price Floor, were likely to amount to £43/ MWh on electricity bills by 2020.

This is on top of wholesale prices of £57/MWh and network costs of £22/MWh (all in 2012 prices).

Environmental policy costs are a significant and growing proportion of the bill and have been largely unmitigated.

It is therefore good news that, in principle, the Government wanted to tackle the issue in the budget through:

a)     Implementation of the mineralogical and metallurgical processing exemption on the Climate Change Levy (as identified in the 2013 budget).

b)     Measures on abolishing the Carbon Price Floor tax on electricity used on site from good quality Combined Heat and Power from 1 April 2015 – encouraging more manufacturers to use this important and efficient technology to generate their own electricity

c)     The capping of the Carbon Price Floor/support tax – albeit at the very high level indeed of £18 per tonne starting in 2016/2017 and frozen until 2020

d)     Continued compensation for energy intensive industries for higher electricity prices from the CPF and EU Emissions Trading System through to 2019-20.

e)     Compensating energy intensive industries for higher electricity prices resulting from the Renewables Obligation and small scale Feed-in Tariffs. The scheme will begin in 2016-17, subject to state aid clearance.

Energy Management

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However, the measures raise the following concerns.

If we consider each measure in turn:

a)     Implementation of the mineralogical processing and metallurgical exemption on Climate Change Levy applies to the mineralogical and metallurgical sectors only. This may be useful for the ceramics sector but provides only a trivial saving – about £1/MWh – for companies in a Climate Change Agreement on electricity bills.

b)     Manufacturers require the certainty of a much more secure UK gas supply – and need to have a process where the heat generated can be used.

c)     The capping of the Carbon Price Floor/support tax will only produce a saving of about £1 /MWh vs previous DECC estimates for 2020. However, this tax remains completely uncompensated for all of BCC’s members for the foreseeable future and is a tax which EU and non-EU competitors do not pay.

d)    The Environment and Energy State Aid Guidelines (EEAG) published on April 9  means companies outside a very narrow list of electro-intensive sectors (the “EU ETS Annex II” list) can’t receive any compensation for Carbon Price Floor costs.  Sectors such as ceramics, kaolin and ball clay, cement and glass are in the same situation.

The Government had wanted to put forward for Carbon Price Floor compensation some companies in all these sectors that were highly electro-intensive and is now prevented from doing so.

All these sectors are now at a major disadvantage compared with EU and non EU competitors. The EU recently approved the Carbon Price Floor for these “Annex II” sectors.

e)    The scheme to compensate energy intensive industries for higher electricity prices resulting from the Renewables Obligation and small scale Feed-in Tariffs is welcomed.

However, eligibility criteria compliant with the new state aid guidelines (EEAG) have yet to be developed by with the Government.

Initial indications are that some European competitor economies will use the new state aid guidelines to compensate all companies they can while the UK Government intends to develop a very much more restrictive approach and will consult shortly.

This will introduce incredible further electricity cost distortion between UK and other EU manufacturers, putting UK manufacturers in some sectors at a further disadvantage.

It is possible that 95% or more of companies in our membership will not receive any further compensation for environmental  taxes, whereas many of their European competitors in sectors as diverse as bricks, roof tiles, refractories, technical ceramics, kaolin, ball clay, tiles and sanitaryware manufacturing could receive the maximum compensation allowable.

In light of a possible referendum on EU membership, the Government needs to think carefully before introducing national legislation.

The UK clearly needs a better dialogue with both the EU and manufacturing industry – and has made the current situation very complex and frustrating for industry in particular.

The Government should understand all the angles and check that proposed national legislation does not undermine industrial competitiveness through an adequate impact analysis. If it does or might, then it needs to address up-front how to design in national legislation that won’t require a complex state aid case in tandem.

Unless the UK Government addresses this lack of a level playing field in Europe there will continue to be real risks to investment, businesses and jobs in the UK economy.