Written evidence submitted by the Chemical Industries Association (COP0007)

 

The Energy White Paper

 

Follow-up to the oral evidence session on 12 January 2021

 

 

 

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 improve the energy efficiency of our existing production assets. Our contribution is therefore critically dependent on secure and competitive energy supplies and carbon reduction schemes which do not leave us internationally exposed. Energy is our number one issue.

 

 

Summary

The chemical sector is the foundation of a net zero economy. We provide the advanced materials used to make: batteries, wind turbine blades and solar PV; novel fuels like hydrogen, ammonia and synthetic fuels; lightweight materials for transport; and insulation to keep our homes warm. Continued access to a diverse and innovative chemical sector at home will provide the UK with the raw materials to compete in these newly arising low-carbon industries, ensuring that the electric vehicles we drive are made here, because batteries are made here. Without skilled, equipped, and competitive chemistry assets, these nascent industries will take root elsewhere.

Chemistry is energy intensive and the cost of energy is a barrier to investment in the UK. The UK’s chemical sector competes in global markets but faces disproportionately high and rising energy and climate-related policy costs, which are eroding our international competitiveness. These higher prices make the UK an unattractive investment prospect for manufacturing, meaning that new investment goes elsewhere where it supports comparatively more carbon-intensive manufacturing techniques. The result is that highly skilled science-based jobs and manufacturing capability are offshored, and global carbon emissions increase.

 

 

Positive steps forward

There are some important developments in the Energy White Paper (EWP), which we welcome:

1.       Recognition of the challenges facing industry. The EWP recognises three of the key challenges faced by our sector, namely that: a) comparatively high electricity and carbon costs are a barrier to investment in UK industry; b) net zero production would require carbon capture and storage (CCS) and/ or fuel-switching to hydrogen or electricity, both of which have a higher capital and operational cost than conventional techniques; c) we compete in international markets and so cannot pass through the cost of our decarbonisation until the market sets a price-premium for zero-carbon goods.

2.       Recognition of the importance of our industrial clusters. We welcome recognition in the EWP that industrial clusters often underpin regional economies. The UK’s chemical assets provide direct employment for 153,000 people in areas outside of the South East, namely, the North West, North East, South Wales and Grangemouth in Scotland. Our exports are worth £56bn and we add £19bn of GVA to the UK economy each year. We pay significantly above the national and regional average

 

 

 

 


 

 

wage, supporting highly skilled jobs in science and engineering, and local supply chains mean that our economic contribution has a very strong regional multiplier. We support 350,000 jobs indirectly.

A significant portion of our sites are located in the major industrial clusters and our members are engaged in all of the ongoing cluster decarbonisation projects, as well as their own individual ones,

e.g. Tata Chemicals are mentioned in the EWP as investors in the UK’s first industrial CCUS project.

3.       A call for evidence on the affordability and fairness of energy. The government has committed to a strategic dialogue between government, consumers and industry, commencing in April 2021. This is critical for us. 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 comparatively more carbon-intensive manufacturing techniques. The result is that UK jobs and manufacturing capability are offshored, and global carbon emissions increased.

4.       A consultation on the future of natural gas. Government has committed to an assessment of the role of natural gas in the transition to a clean energy system. This will include examining the potential to blend hydrogen into the gas grid, by amending the gas quality standards, and also how the grid could be repurposed for CCS infrastructure.

Our sector views hydrogen as a critical element of the net zero economy, as it can decarbonise our high heat processes when burnt and it can replace fossil fuels as a raw material input to our products. But changes to the gas grid will impact our operations and the cost of switching to hydrogen will affect our competitiveness. If the cost of deploying a low carbon gas like hydrogen is levied on the bill-payer, as with the decarbonisation of the electricity system, then industry will not be able to foot the bill. We have seen the start of this process with the recent proposal for a Green Gas Levy on gas bills, to fund biogas injection to the grid.

5.       A Biomass Strategy in 2022: Biomass resources are limited in the UK but will likely play an important role in our net zero economy. Along with waste, the chemical sector sees biomass and biogas as an important source of raw material for chemicals in a circular economy. It is critical that use of this resource is prioritised, so that it is directed to where it can create most value.

 

 

The remaining challenges

In our Nationally Determined Contribution to the UNFCCC, the UK government has set a world-leading ambition to reduce emissions 68% by 2030, from 1990. Given the scale of change industry is being asked to make, the EWP does not set out appropriate proposals to mitigate competitiveness impacts and does not provide enough clarity to drive investment at the scale and speed required. Recent policy announcements in the Ten Point Plan and EWP are welcome, but do not add up to a clear strategic plan for delivering net zero manufacturing. The fundamental challenges we still face are outlined below:

6.       The cost of energy: We estimate the current cost of UK energy and climate policies to the chemical sector to be ~£1.2bn per year, including EU ETS1 costs (after free allocation) and the pass-through cost of renewable subsidies in electricity bills.

To date >£40 billion has been spent on subsidies to decarbonise of our electricity supply - through Contracts for Difference, Feed-in Tariffs, the Renewables Obligation and the Capacity Market - and this figure increases every year.2 These subsidies have been funded through electricity bills. They have supported an increasingly significant decarbonisation of the grid, but have led to spiralling network costs, as a greater reliance on renewables requires network reinforcement and expansion, to balance distributed and intermittent renewables. Energy-intensive foundation industries have disproportionately shouldered this burden, as Ofgem has shifted the policy and network cost burden away from domestic households and onto industry.

The result is that UK manufacturers have paid for the country’s clean electricity transition at the expense of our own competitiveness. Electricity wholesale costs now represent just 49% of a UK industrial user’s bill, whilst policy costs make up 36% and are rising.3 This leaves UK industry with electricity prices >70% higher than the EU median and far above our EU-based industrial competitors.4

 

 


1 UK ETS costs could be higher, given the lower cap adopted by the UK government.

2 BEIS, Consumer-Funded Policies Report, November 2016

3 2018 large user data – in correspondence with BEIS statistics team

4 BEIS Quarterly: Industrial electricity prices in the EU for small, medium, large and extra-large consumers (5.4.1) – June 2020

 


 

 

Data from the International Energy Agency shows UK industry faces the second highest industrial electricity prices globally.5

Furthermore, the EWP’s commitments with regards to the electricity sector will come with additional policy and network costs for consumers. These commitments include 40GW more wind power, expensive new large-scale nuclear sites and CCS abated gas-fired power.

Until now, carbon leakage protection in the form of electricity price compensation, together with comparatively low natural gas costs, have helped us to remain in business. But compensation is not available to all and does not cover all of the increasing cost burden. Moreover, our heating (gas) bills will rise to unaffordable levels if the cost of decarbonising heat is levied on the bill-payer, as was done with electricity.

Underlying all of this is the fact that if our sites close, not only will the UK lose well-paid jobs in science- based industries but, the increased network and policy cost that industry has so far absorbed will be reapportioned to the remaining bill-payers. On the current trajectory, we would lose productive UK assets and still end up with expensive domestic energy bills.

The government should act now, to benchmark our industrial energy prices against those of our competitor nations. Providing UK industry with a level playing field on energy prices, during the clean energy transition, will mean low-carbon UK goods are able to compete for market share around the world, lowering the global footprint of consumption. This would allow the UK to nurture highly skilled, well-paid jobs in science and engineering, whilst showing the world an attractive pathway to decarbonised manufacturing.

7.       New and additional support: There is little new and additional industrial energy policy in the EWP. Most of what is there comprises a high-level reiteration of commitments in the Prime Minister’s Ten Point Plan. Notably, there is nothing new on industrial energy prices despite the EWP’s recognition that “the cost of energy impacts the competitiveness of UK-based industry”. Instead, the EWP cites existing compensation schemes, which are not accessible to all and do not go nearly far enough to provide competitive prices.

The Committee on Climate Change (CCC)’s Sixth Carbon Budget makes clear that industrial electricity prices are “well in excess” of the costs that would reflect supplying low-carbon electricity and that this is a barrier to decarbonisation. In contrast to the EWP, the CCC recommend reform of electricity prices to support industrial decarbonisation through electrification.6

8.       Carbon capture and storage (CCS): We welcome the increased ambition of the Industrial Clusters Mission, as announced in the Ten Point Plan and reaffirmed in the EWP. £1bn for two industrial clusters by the mid-2020s, and a further two by 2030, is an ambitious improvement to the Mission. However, all our industrial clusters are developing plans for deep decarbonisation and these should be supported to the same timescales, to avoid distorting intra-UK competitiveness.

The second commitment on CCS is a funding model for industrial carbon capture, to be proposed in 2021 and rolled-out in 2022. We have a serious concern that BEIS’ initial proposed model (published December 2020) does not provide business with an incentive to invest: it would leave industrial operators exposed to an increasing market carbon price on an increasing portion of their emissions, regardless of whether these have been captured. There is also a vague provision in BEIS’ proposal, that operators may be asked to relinquish their free allocation, which would further undermine the business case to invest.

9.       Hydrogen: In the Ten Point Plan, the government established a target of 5GW of low carbon capacity by 2030, with 1GW by 2025. We welcome this ambitious target but would highlight that Germany has committed to the same target and backed their goal with €7bn of public funds, compared with just

£500m proffered by UK government.

The UK government has also committed to a Hydrogen Strategy in early 2021. Again, although this is a positive development, others are moving faster: Australia, Japan, South Korea, Canada, Germany and China already have hydrogen strategies in place. The UK must move quickly and with substance, if we are to preserve a competitive advantage in the hydrogen economy.

The CCC’s Sixth Carbon Budget advises that government establish funding mechanisms to enable hydrogen-use in manufacturing, by 2021. It makes clear that these should support both the upfront and operational costs and we fully support their recommendation. The government must also accelerate development of hydrogen production business models. Green hydrogen production requires significant amounts of electricity, but high electricity prices and the absence of investible business models are driving green hydrogen investments abroad.

 

 


5 BEIS Industrial electricity prices in the IEA (QEP 5.3.1) – September 2020

6 CCC (2020) Policies for the Sixth Carbon Budget and Net Zero

 


 

 

10.    UK Emissions Trading System (ETS): The vast majority of industry was relieved that, post-Brexit, the government opted for a UK ETS rather than a carbon tax for industrial operators. The carbon tax, as proposed, would have left UK operators at a significant competitive disadvantage to EU counterparts and would have increased the risk of carbon leakage from the UK. However, even with the clarity concerning the future direction of carbon pricing, further uncertainty was created by two proposals in the EWP, to look at: a) expanding the UK ETS to the two thirds of uncovered emissions;

b) linking the scheme to another carbon market.

Long-term policy certainty is a pre-requisite of business investment decisions. Specifically, on point a, we would caution that the UK ETS is designed with industry in mind and may not be efficient where different sectors have a different marginal abatement cost. This can be seen in the comparative success of the EU ETS in reducing the emissions of power relative to manufacturing. On point b, the uncertainty seen in the run up to the decision on UK carbon pricing, in December 2020, must be avoided in any future agreement on linking. The cost of uncertainty was significant, counted in lost investment and an inability to plan ahead. We ask government to consult well in advance on any proposed expansion to the UK scheme, as well as any link to another market.

11.    Other industrial support measures: Existing support measures are listed in lieu of any new policies. Addressing some of those specifically: a) the Industrial Energy Transformation Fund has a pot of

£315m to be dispensed over five years. This will not go far given the scale of the change required; b) the £250m Clean Steel Fund is only accessible to the steel sector; c) the CCUS and hydrogen business models could be an effective tool for change, but the CCS model as proposed in December 2020 is inadequate (point 8).

There is also no model proposed for fuel-switching to electricity, another recommendation of the CCC in the Sixth Carbon Budget. In that publication, the CCC also recommend providing tailored loans at below market rate, or funding via an National Infrastructure Bank. We look forward to details of the proposed new National Infrastructure Bank, later this year.

 

 

The support needed

Below we outline what support is needed to get industry to net zero:

12.    Industry’s just transition to net zero would include the following policy support: 1) In the near- term, carbon leakage protection - including appropriate free allocation under the UK ETS and insulation from high energy prices - to maintain our international competitiveness during the transition;

2) In the short/ medium-term, tax-payer funded capital grants and ongoing operational subsidies to switch to net zero manufacturing techniques, and; 3) In the long-term, carbon border tariffs and minimum carbon standards, to allow us to pass through the cost of decarbonisation to the end consumer. The CCC’s Sixth Carbon Budget supports this policy pathway and estimates that £2-3 bn would be needed per year, to support manufacturers at risk of carbon leakage in the early 2030s.6

13.    An Industrial Decarbonisation Strategy: The Industrial Decarbonisation Strategy, to be published in spring 2021, must bring together commitments in the Ten Point Plan, National Infrastructure Strategy and EWP, and provide clarity on the support measures required to get to net zero (point 12).

14.    A joined-up approach: The cumulative burden of energy and climate policy threatens to overwhelm industry. Industry is currently facing significant and detrimental energy price reform, on top of carbon market reform and all of the business-as-usual energy compliance and pricing schemes (e.g. the Industrial Emissions Directive, the Climate Change Agreements/ Levy, the Energy Saving Opportunities Scheme and Streamlined Energy and Carbon Reporting).

The complex cumulative cost impact of policy on industry remains poorly understood by government. It is not managed strategically - as in Germany for example - and, as a consequence, acts as a significant and growing deterrent to industrial investment in the UK. Post-Brexit, the government should reassess the palimpsest of UK climate policy and move towards a more streamlined and effective regime.

The Cabinet Committee on Climate Change and Industrial Energy Stakeholder Forum are good steps towards a joined-up approach from government. But there is a need to go further to ensure all policy teams within BEIS, relevant to industrial decarbonisation, are coordinated. Furthermore, BEIS must work ever more closely with other departments, including the Treasury, and with the energy regulator, Ofgem.

 

 

January 2021