Today, UK industry is still heavily reliant on fuels such as gas or petroleum. In many ways this is unsurprising, as low cost coal and gas were the driving forces behind the industrial revolution and underpinned the manufacturing sector for decades.
However, by maintaining the status quo, the UK risks being left behind as the world enters a new industrial age with the journey to net zero at its heart. Net zero is an economic growth opportunity for the UK but first we need the investment incentives, skills systems and regulatory environment in place in order for those opportunities to be exploited.
Electrify Industry, powered by Make UK, has come together to create a voice to ensure that the right policy is developed for electrification. Daniel Paterson, Director of Policy, Make UK Modular, spoke to The Manufacturer about the electrification of UK industry and the journey the country needs to take to get there.
There is no silver bullet solution when it comes to net zero and the country will need a healthy decarbonisation mix for it to work. And, Daniel began by explaining that the route to decarbonisation is not about picking one option over another, but rather, creating genuine choice that enables manufacturers to decarbonise in a way that is best for them.
He said: “Despite the name on the tin, Electrify Industry is actually technology agnostic. It’s not about saying that all industry or manufacturing has to move towards electrification for heating or cooling processes. There is going to be a host of industrial players for whom hydrogen or carbon capture, for example, is the best route.”
However, for many businesses, electrification will be the most efficient and preferred option to decarbonise and many of the UK’s global competitors are already heading down this route, aided by government incentives and lower electricity prices.
The cost inhibitor
When it comes to electrification, the elephant in the room for UK industry, which has been present for quite some time, is of course, cost. As you can see from the chart below, the UK currently has the highest electricity prices in Europe, and there are a number of consequences of this high cost that are currently impacting the decarbonisation strategy.
Fundamentally, the UK has not invested in electrification in the same way that competitive markets have, which has contributed to this higher price point. This is a generational issue; the UK has traditionally used gas to create electricity and while that has worked to an extent, we are now decarbonising industry and our economy, raising the question of how viable gas will be in the future.
In terms of product sales, manufacturing is worth around £430m and represents over ten per cent of GDP when you include the wider supply chain. Currently, much of manufacturing still uses gas for many of its processes, and while all manufacturers acknowledge the need to move away from a hydrocarbon economy and are on some kind of sustainability journey, the UK needs to ensure that decarbonisation does not mean de-industrialisation. Therefore, there needs to be a clear business case to decarbonise.
“The challenges we are facing are two-fold from an electricity price point of view”, Daniel added. “The first is around international competitiveness, and the cost of creating manufactured goods in the UK. If you just look at steel, for example, there has been around £600m of additional fuel costs since 2017/18 to last year, just to create the same product, so this is having a real impact on UK industry.
“The second part of the competitive issue is what we call the spark gap. This is the difference between the cost of gas and the cost of electricity,” said Daniel. Under the UK’s existing electricity pricing policies, the spark gap in the UK is higher than many competitor markets, effectively deterring a shift towards electrification. “If you are running an industrial process in the UK, there are very limited circumstances where a business case can be made to a board to invest in electrification, because the cost of electricity in the UK is just so much more.
“This has led to the development of supporting supply chains and a focus on training for a gas-led UK industry. That is an inhibitor and a drag anchor to investment in the UK, and with the advent of climate change the status quo must be tackled at pace.”
Knock-on impact
Daniel added that the current gas-focused landscape is connected to and has an impact on the wider supply chain, related skills, and the research and development that the UK is going to need in order to decarbonise industry. For example, the cost of electricity in the UK currently means the demand for electrification is relatively low. As such there is a lack of incentive for businesses to invest in related training, further inhibiting skills growth.
As for supply chains, even the industrial players that are buying in goods, equipment and components in order to electrify their processes are experiencing huge lead times – seven to nine years on basic infrastructure in some cases. Daniel explained that this is in part because the UK doesn’t have a domestic supply chain in the UK for electrification. Why? The answer once again comes back to cost. The price of electricity is so high there isn’t a market for electrification at this present time.
And, just to compound the problem, UK neighbours such as France, Spain and Germany are all on the electrification journey, meaning they are already in the queue for the infrastructure, equipment and components they need.
Unlocking the future of the UK will require heavy investment in infrastructure, and optimising and increasing grid connectivity. That doesn’t just mean supply of electricity to site. More and more manufacturers and industrial users want to use on-site generation to create a supply back to the grid. However, that will require a grid upgrade and changes in regulations, so it is currently quite challenging to connect any on-site supply to the grid itself.
Reasons to be cheerful
Daniel continued: “On the surface, these issues could be considered in a negative light. However, it’s actually a great opportunity for UK investment and for manufacturing and industry. If we can address the cost of electricity in the UK, and get to grips with a business model that supports electrification, that would create a domestic market for the supply chain – whether that is from the point of view of goods, services or skills; we would argue it is all connected.
“Net zero is an opportunity for UK industry. Decarbonisation does not need to mean deindustrialisation; it can mean reindustrialisation. We hear a lot of language about a just transition, where people are moving out of the hydrocarbon economy and into industry as it will be in 20 years’ time.
“None of that is going to be possible unless we have business model support for electrification. We have seen some work done by the last government on the British Industry Supercharger programme, which has decreased network costs for energy intensive users by around 60%. That’s a good start but frankly, it’s not enough.”
This can be illustrated when glancing at the UK’s competitors. In France and Germany, for example, network costs for industry have been decreased by 90%, impacting the cost per megawatt hour. On top of that, there is also a conversation to be had around how we price electricity in the UK.
Daniel added: “If we want an industrial base in 20 years’ time, we need to start working on this now from a policy point of view. It’s one of the things that we’re talking to government and opposition about, and frankly, anyone who will listen.
“If we don’t solve this problem we are going to end up in a situation where we are either using energy processes that are not as efficient as they could or should be, or we are going to end up losing industrial actors unnecessarily. We need to get ahead of that and now is the opportunity to do so.”
Electrify Industry has highlighted six starting recommendations the UK should adhere to in order to smooth the pathway towards electrification.
Unlocking future growth in UK industry: Industrial businesses that will come to rely on electricity as a power source make up at least 9.3% of the UK economy. These are profitable businesses making world class products exported from the UK day-in-day-out. It is vital that a level playing field in energy pricing is guaranteed for our economy to continue to innovate and grow, and to further ensure that businesses are not forced to offshore their production to markets that offer a greater competitive advantage in this area.
Investing to grow through electrification: The UK needs a domestic level playing field in government policy to enable electrification. For decades UK industry has been driven to combust gas rather than use electricity for heating. Reducing electricity prices will naturally incentivise electrification and as part of a long-term robust and modern industrial strategy, we can positively incentivise industrial decarbonisation through policies that address capital outlays and longer-term operating costs.
Optimising and growing grid connectivity: There is considerable work to be done to ensure that companies aiming to electrify their processes are provided with the electricity grid connections that they need. The UK government must convene industry and grid stakeholders to ensure that a collaborative process is undertaken and that the time available is used in the most efficient way. Electrify Industry intends to work with partner organisations to ensure industrial connectivity is at the top of the government’s agenda for the next five to ten years.
Growing the supply chain: If the UK economy is to continue to innovate and grow, we must develop and maintain supply chains around electrification. Without these it will not matter how much electricity the UK is able to produce or the price at which that electricity might be purchased. UK industrial businesses will not have the capability to use electrified processes effectively or efficiently. As the industrial world looks to electrify, the global demand for electric options is set to grow beyond all recognition. It is clearly necessary for the UK government and industries to work together to accurately predict total demand for process equipment requirements. This can be a catalyst for the creation of a UK supply chain plan ensuring timely and secure delivery of the vital elements needed in the UK industrial transition.
Investment in skills to unlock growth: We need to ensure that future skills policy focuses on the energy solutions of today whether at the first stage education level or a retraining level. If we are committed to stopping the burning of fossil fuels people must learn how to heat, create and make in a post-hydrocarbon world.
Researching and innovating for growth: Industry’s historical reliance on combustion has defined research and innovation for many years. However, as the move away from fossil fuels becomes a necessity and the popularity of renewable electricity grows, the challenges that electrification poses for industry represents a significant opportunity for research and innovation. First and foremost industry will need to innovate to ensure that fuel switching to electrification retains and grows productivity and quality of product. To ensure the most efficient decarbonisation across industry, national demonstrators and information sharing will become more important and will help derisk investment in new technology.
Read Electrify Industry’s Programme for growth in the 21st century.
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