Written evidence submitted by Confederation of Paper Industries (CPI) (EPM0018)

Energy pricing and the future of the Energy Market - Call for Evidence

The Confederation of Paper Industries (CPI) Submission

Introduction

1. About CPI.  The Confederation of Paper Industries (CPI) is the leading trade association representing the UK’s Paper-based Industries, comprising paper and board manufacturers and converters, corrugated packaging producers, makers of soft tissue papers, and collectors of paper for recycling.   CPI represents an industry with an aggregate annual turnover of £12 billion, with 62,000 direct and a further 100,000 indirect employees.  Many of the jobs provided by the sector are in disadvantaged areas targeted by the levelling-up agenda.

2. Our industry is based on sustainable forestry, recycling and resource efficiency.  Our Members continue to provide vital services during the COVID-19 crisis, reinforcing the importance of a domestic industry to keep supply chains operating effectively.  Having a domestic industry has been critical to the UK.   

UK Industrial Energy Prices

The Current Situation and Impact on the UK’s Paper-based Industries

3. Papermaking is an energy intensive industry therefore Energy Pricing has a profound impact on the operation of the industry. UK industrial electricity prices for large users are the highest in western Europe largely due to policy measures.  Policymakers need to act to ensure UK industry pays no more for energy than competitors outside the UK pay.  Without action existing sites will remain at a competitive disadvantage and new investments will be curtailed. 

4. All parts of the sector are currently wrestling with the significant increase in energy costs, as papermaking is intrinsically energy intensive. Cost increases of the current magnitude are not sustainable and there is no sign of when the current gas price crisis will end. CPI believes that the Government therefore needs to act urgently to address the crisis and prevent production being disrupted and longer-term damage to companies.

5. A key challenge is providing realistic and competitive zero carbon alternatives to natural gas for manufacturing.   CPI supports the ambition to meet the net zero challenge, but as accepted by the Committee on Climate Change, HMT and BEIS, Energy Intensive Industries (EIIs) – such as papermaking – need support through the energy transition to remain internationally competitive. 

6. It is critical for the long-term future of Ells in the UK, including the paper-based industries, that they can access competitively priced energy. CPI believe that Ofgem (as the Regulator) and BEIS (as the Government policymaker) must accept that policy costs and taxation are combining to make UK industrial electricity the most expensive in Western Europe and that this is a major issue for industry.

7. While the role of Ofgem is to ensure that all consumers are treated fairly, CPI would argue that this remit has been failed for industrial users; with installations based in the UK consistently paying more for energy than their competitors based outside the UK, notably for grid supplied electricity.   This fact has been confirmed by a number of industry studies, but has also been confirmed by Ofgem research (https://www.ofgem.gov.uk/sites/default/files/2021-07/Final%20report-%20Research%20into%20GB%20electricity%20prices%20for%20EnergyIntensive%20Industries.pdf)

8. There needs to be a wider conversation held around carbon pricing, especially in the context of the UK leaving the EU and the new UKEmissions Trading System.

9. Although the difference between UK wholesale electricity price and that of other major European countries varies over time, UK wholesale prices are consistently higher. This is partly due to an electricity generation mix that depends on comparatively expensive natural gas as the marginal plant. However, this will likely change over time due to decarbonisation efforts. The Carbon Price Support also increases the price of electricity generated using fossil fuels. The increasing number of physical interconnectors will ensure the market drives the commodity price of energy closer together across western Europe.  However without action on the non-commodity costs (transmission, distribution, policy and taxation) UK consumers will not benefit from similar costs for delivered energy at the point of use. 

10. A further consideration is UK policy costs which appear higher than the countries we draw detailed comparisons with (France, Germany and the Netherlands). While certain Ells in the UK can qualify for up to a 75% overall reduction on these costs, the comparator countries also offer reductions. The final policy costs in France, Germany and the Netherlands appear lower than the final policy costs in UK.

11. Network costs appear higher mainly because the comparator countries offer discounts on network costs for Ells, like the UK’s Paper-based Industries, that meet eligibility criteria on electricity consumption and off-peak grid utilisation. This allows eligible EIIs to lower their network costs by up to 90% in some cases. The rationale for these discounts focuses on the value of EIIs’ baseload demand to the grid.

12. One of the fundamental principles of the energy supply industry is they pass costs through to the consumers that have no option but to pay increased prices.  This is not the case with industry, where (over time) higher UK energy costs make new investment less likely and existing sites more likely to lose out on investment to keep sites updated.  However, if polices can be framed correctly, industrial investment can help deliver the transition to net zero through new plant and supplement the operation of the grid. 

Action Needed

13. Short term – In order to address the energy crisis CPI believes the following action should be taken:
1. Introducing Winter Cost Containment Measures on gas, electricity and carbon prices – to ensure that those most exposed to high costs can continue to operate. These measures must genuinely reduce costs to business, and not merely push them into the future.
2. Action to reduce Energy Intensive Installation network costs – so they move into line with costs faced by competitors outside the UK.
3. Support for companies so they can remain competitive as the UK economy decarbonises – we need global actions to address climate change.
4. Modifying the Gas Emergency Measures – so that sufficient gas is available and there are no emergency or sudden supply disruptions that can damage equipment.

14. Longer term - It is clear that the regulator, Ofgem, has a significant impact on energy costs for UK Industry in terms of policy. Regulators face both a short-term challenge (in supporting energy intensive users through the current price crisis) and long-term challenges (supplying energy intensive users with internationally competitively priced energy through the transition to Net Zero).  Ofgem needs to consider both of these issues when developing regulation.    

15. Where government provides existing compensation and exemptions for the high energy costs, CPI is calling for these schemes to be extended to bolster the global competitiveness of UK manufacturing. Continued action is required on energy cost as a pre-requisite to secure investment on the scale required to deliver the 2050 targets; the alternative is further deindustrialisation.

16.  The energy price cap only protects domestic consumers and the possibility to expand the coverage of the cap to all consumers should be considered.  With the current coverage limited to the domestic sector, then any associated costs (supplier of last resort, cost recovery by incumbents) must be limited to that sector.  Spreading this cost across all sectors would be manifestly unfair.   
     

17. With Net Zero being a legally binding target, it would be helpful for an explicit acknowledgement that Energy Intensive Installations must have their international competitiveness protected during the energy transition.    

January 2022