Written evidence from the Chemical Industries Associtation (DHH0091)

About us

CIA is the organisation that represents chemical and pharmaceutical companies located throughout the UK.

The UK chemical and pharmaceutical industries have a strong record as manufacturing’s number one export earner (on a value-added basis) and a provider of essential inputs to UK value chains. This includes products and technologies which are key enablers of climate change solutions. We therefore have a strong contribution to make both to rebalancing and greening the economy.

However, the chemical industry is energy intensive, competes globally for market share and inward investment, and has already done much to reduce the emissions of our existing production assets. Our contribution is therefore critically dependent on secure and competitively-priced clean energy supplies and carbon reduction schemes which do not leave us internationally exposed. Energy is our number one issue.

Summary

The chemical industry is energy intensive and competes internationally for market share, which means we have a significant interest in the nature and cost of the UK’s future energy system. The transition to clean sources of heat in homes is fundamentally linked to the broader energy system and the overarching policy and pricing framework that applies to that system.

Below we provide a response to three of the critical questions you are addressing in your inquiry, focussing on technology pathways, policy support and the distribution of cost. We would be very grateful if you would take this submission into consideration within your inquiry.

Decarbonising heat in homes

Q2 - What key policies, priorities and timelines should be included in the Government’s forthcoming ‘Buildings and Heat Strategy’ to ensure that the UK is on track to deliver Net Zero? What are the most urgent decisions and actions that need to be taken over the course of this Parliament (by 2024)?

Q3 - Which technologies are the most viable to deliver the decarbonisation of heating, and what would be the most appropriate mix of technologies across the UK?

1. The above questions, 2 and 3, relate to technology pathways and associated policy support. The decarbonisation of domestic heating cannot be considered in isolation from the broader energy system. As a sector, we could decarbonise a lot of our low-grade heat via electrification if the price of electricity were competitive, but much of our higher heat processes would require hydrogen for heat. Like many other manufacturers therefore, we are reliant on an energy system that provides access to both zero carbon power and zero carbon gas, at a price which still allows us to be internationally competitive.
2. As well as decarbonising heat in homes, hydrogen could play a pivotal role in eliminating the carbon footprint of energy and feedstock in the chemical sector. A reliable and competitively priced hydrogen network in the UK would help to enhance the competitiveness of UK industry and would attract inward investment. To establish a successful hydrogen economy, the UK needs a long-term and flexible strategy that establishes the conditions needed to invest. This strategy should have at its heart the objectives in paragraphs 3-9:
3. Cost reduction: Significant and long-term financial support is required, for the development, deployment and operation of hydrogen technologies. The government must increase the funding available to demonstrate the safety and reliability of hydrogen for heat, and to allow the market to begin to drive cost and efficiency improvements. The government should consider grants or tax incentives, to encourage businesses and individuals who are considering replacing existing assets, to invest in more expensive hydrogen-ready technology.
4. Infrastructure: Strategic planning will be needed to store and transport hydrogen through our interconnectors, ports, transmission and distribution networks, safely and efficiently.
5. Research and innovation: Support is required to progress hydrogen technologies at low Technology Readiness Levels (TRLs), and to improve, upscale and lower the cost of existing technologies.
6. Free trade: In the current natural gas market, security of supply is ensured by interconnectors and liquified natural gas (LNG) shipments. Free trade of hydrogen must be guaranteed through adequate planning, policy and regulatory provisions.
7. Certification: The government must work with closely linked markets (e.g. the EU), on standards for certifying the carbon intensity of hydrogen production, and to establish “guarantee of origin” certificates.
8. Demand-side measures: Support for hydrogen in the home and for transport would help to boost demand for the fuel, allowing market forces to engage and bring down the cost of supply. The government should facilitate the amendment of the Gas Safety Management Regulations to allow for hydrogen injection into the domestic grid and legislate for the roll-out of hydrogen ready boilers as and when home boilers are replaced. The government should also look to progress hydrogen and hydrogen-related (e.g. ammonia and synthetic fuel) solutions for heavy road transport, shipping and aviation.
9. Competition: Once the hydrogen economy starts to accelerate, the regulator must ensure that the hydrogen market is subject to effective competition, to help drive down prices.

Q5 - How can the costs of decarbonising heat be distributed fairly across consumers, taxpayers, business and government, taking account of the fuel poor and communities affected by the transition? What is the impact of the existing distribution of environmental levies across electricity, gas and fuel bills on drivers for switching to low carbon heating, and should this distribution be reviewed?

10. We recognise that the government needs to find a way to support the decarbonisation of our heat system. In answering this question, we would urge the government to carefully consider the challenges that the UK’s industrial businesses are facing with regards to decarbonisation. A further increase in the cost of our energy would have a devastating impact on our sector, coming on top of the significant indirect costs we already pay for decarbonising the power grid and the direct charges we pay for our emissions. Industry needs a just transition to net zero, which includes support for our decarbonisation pathway and interim protection from carbon leakage resulting from high energy costs.
11. As an energy-intensive industry competing in a global market, the UK’s chemical sector already faces disproportionately high and rising energy and climate-related policy costs, which are eroding our international competitiveness. These higher prices make the UK a relatively unattractive investment prospect for manufacturing, meaning that new investment goes elsewhere where it supports the use of more carbon-intensive energy sources than if it were in the UK. The result is that UK jobs and manufacturing capability are offshored, and global carbon emissions increased.
12. A recent Office for National Statistics report, on UK greenhouse gas emissions, showed that whilst the UK’s territorial emissions have decreased significantly over the last 20 years, our consumption emissions remain on a level comparable with 1990.[1] Defra’s UK carbon footprint, published March 2020, showed that UK greenhouse gas emissions related to imported products are 18% higher than in 1997 when their records began, whereas UK production emissions attributable to UK final consumption decreased 31%.[2] [3] This tells us that UK industry is cleaner than elsewhere, but UK manufacturers are losing out to overseas competition.
13. When considering the decarbonisation of heat, it is helpful to take the electricity system as a parallel. To date >£40 billion has been spent on policies to support the decarbonisation of our electricity supply (i.e. through Contracts for Difference, Feed-in Tariffs, the Renewables Obligation and the Capacity Market) and this figure increases every year. [4] This excludes the additional cost of the UK-only Carbon Price Support, which is embedded in the wholesale electricity price. All of this support has only partially decarbonised the grid and has led to spiralling network costs, as a greater reliance on renewables requires more funding to balance distributed and intermittent renewables. To put this in context, the UK’s electricity grid provided 325 TWh of energy in 2019, whereas the UK’s natural gas demand was 877 TWh.[5] Given the scale of the heat transition and the higher production cost of manufactured green gases (e.g. hydrogen and biomethane), a far more significant amount of long-term financial support will be required to decarbonise heat.
14. The subsidies mentioned above, which have paid for the decarbonisation of the UK’s electricity sector, have been paid for by electricity consumers, and energy-intensive foundation industries have disproportionately shouldered this burden. Electricity wholesale costs now represent just 49% of a UK industrial user’s bill, whilst policy costs make up 36% and are rising.[6] This leaves UK industry with electricity prices 71% higher than the EU median, the second highest in the EU and far above our EU-based  industrial competitors.[7] At the global level, UK industry faces the second highest industrial electricity prices, using data from the International Energy Agency.[8]
15. We cannot pass through the cost of decarbonisation to the consumer. UK chemical manufacturers compete in a global marketplace, in which customers can switch to suppliers based in locations that are not subject to the ambitious greenhouse gas, environmental and safety standards that UK manufacturers have worked hard to comply with. This means that, unlikely the energy sector, UK chemical manufacturers cannot share the policy cost of decarbonisation with our customers as increasing our prices would lose us market share. As we decarbonise, government must find a way to keep UK manufacturers competitive, by ensuring that we are able to pass that cost through to the end user. Otherwise, we will lose out manufacturers who do not pay the cost of emitting greenhouse gases and so are able to offer their products more cheaply. The UK will then import our manufactured goods from overseas, with no control over their associated emissions.
16. At the moment, we can stay in business because our gas prices (or heat cost) are (is) competitive within the EU, as they are unburdened by additional policy costs. Even so, they are higher than those faced by other indigenous gas producers such as the US and Middle East, which host some of our major competitors. If the cost of decarbonising our heat system is placed disproportionately on industrial consumers, as it continues to be with electricity, it will leave UK foundation industries unable to compete on the global market. This would have a significant economic impact on the UK, which will be felt particularly hard in regions targeted for “levelling-up” in the government’s election manifesto.
17. We need the government to help insulate cleaner UK manufacturers from the cost of decarbonisation, to help us to stay in business and ultimately contribute to a diversified net zero economy. The chemicals industry has lots to contribute to a net zero economy; batteries, wind turbine blades, silicon-based solar PV, hydrogen, ammonia, synthetic fuels, insulation and lightweight materials (to name a few) are all chemical products. But these products will be made elsewhere and imported, unless the cost of the energy transition is fairly and appropriately distributed amongst consumers. As advised by Dieter Helm’s Cost of Energy Review, the policy cost of decarbonising energy should be ring-fenced with industrial consumers being made exempt.[9]

December 2020