Building our Low Carbon Industries by Orion Innovations

CONFIDENTIAL

Building our low carbon industries: Economic, employment and fiscal benefits of securing the energy intensive industries in the UK

FINAL REPORT

prepared for: The Energy Intensive Users Group and the Trades Union Congress

Prepared by: Orion Innovations LLP

Date: July 2012

Building our low carbon industries

IMPORTANT NOTICE Whilst reasonable steps have been taken to ensure that the information contained within this Report is correct, you should be aware that the information contained within it may be incomplete, inaccurate or may have become out of date. Accordingly, Orion Innovations LLP makes no warranties or representations of any kind as to the content of this Report or its accuracy and, to the maximum extent permitted by law, accept no liability whatsoever for the same including, without limit, for direct, indirect or consequential loss, business interruption, loss of profits, production, contracts, goodwill or anticipated savings. Any person making use of this Report does so at their own risk.

Orion Innovations LLP 1 Quality Court Chancery Lane London WC2A 1HR Tel: +44 203 176 2721 Email: info@orioninnovations.co.uk

Building our low carbon industries

EXECUTIVE SUMMARY Introduction The widespread belief that energy intensive industries (EIIs) are labour intensive and heavily polluting remnants of a bygone era could not be further from the truth. EIIs, which include cement and lime, ceramics, chemicals, glass, industrial gases, iron and steel, non-ferrous metals, pulp and paper, and coke and refined petroleum product industries, are the bedrock of the UK manufacturing industry. They produce primary inputs for much of what we manufacture and consume, and contribute significant sums to the social and economic fabric of the country. UK EIIs are often more efficient and less polluting than competitor operations in other parts of the world, and their outputs are essential to the delivery of a low carbon future. Whilst these industries are mature, with the right policies and business environment, they continue to offer significant prospects for growth. The sponsors of this report, the Energy Intensive Users Group (EIUG) and the Trades Union Congress (TUC), both support the shift to a low carbon economy as an essential response to the challenge of climate change, and believe that EIIs are vital to realising this transition. However, EIIs have been placed under enormous pressure as a result of both the general economic climate and UK and European environmental and energy policies. There is significant evidence that these policies are having a corrosive effect on the viability of individual businesses and entire industry sectors within the UK. The impact if any of these industries were to fail would be significant. Without EIIs in the UK, their products would need to be transported, often great distances, to serve UK demand. This not only means a loss of UK employment, GVA, taxes and other benefits, but a likely significant increase in carbon emissions. Building our low carbon industries seeks to demonstrate the economic, fiscal and employment benefits of sustaining EIIs in the UK and therefore the potential impact if these industries were to be lost. This report outlines a number of policy challenges which must be addressed so as to mitigate a potential decline in EIIs. Data was gathered through desk-based primary and secondary research. A database of evidence was assembled for all EIIs based on UK Office for National Statistics (ONS) information. Qualitative insight was sought through the deployment of a questionnaire with industry trade bodies and associations; discussions with the TUC and its affiliates Unite, Community, GMB and Unity; and a number of phone-based interviews with EII enterprises. The study has focused on three industries and the regions in which they have a significant presence. These were ceramics manufacture in North Staffordshire, the glass container industry in Yorkshire, and the chemicals industry in the North West of England, North East of England and Scotland. Findings EIIs make a direct contribution to the social and economic fabric of the UK economy through gross value added, fiscal contributions, and employment. In addition, they sustain their suppliers through the purchase of goods, materials and services, and their customers through the provision of cost-effective products. The staff induce further value add and employment through their wage spend, and there is evidence that EIIs are important contributors to skills development and training, and act as anchors for industry-wide innovation. EIIs employed in excess of 160,000 people in the UK in the year to end March 2011. More than four times this number are estimated to be employed in their derivative supply chains. EIIs have a combined turnover in excess of £86 billion and account for approximately 20% of UK manufacturing turnover and 3% of the UK economy as a whole. EIIs are relatively high value added, with a combined GVA in excess of £14 billion. In the year to end March 2008, GVA for individual EIIs ranged from approximately £40,000 per employee in the ceramics industry and £50,000 in glass, to £120,000 in chemicals and £150,000 in petroleum products. This compares with the UK average for the same period of £46,000. EIIs purchased £68.6 billion of goods, materials and services from their suppliers in the year to March 2008, equivalent to 21% of the UK manufacturing total. Employment costs, including wages national insurance and pension contributions were in excess of £6.6 billion or £38,000 per employee. EII businesses are often large (e.g. steel and chemicals) and/or clustered together to benefit from shared feedstocks and infrastructure (e.g. ceramics and glass). As such, they are often the dominant employer and source of GVA in a particular region. As the largest industrial energy consumers in the UK, there is often a mistaken assumption that EIIs are energy inefficient. However, by virtue of the importance of energy to their overall costs, most EIIs have been driven to maximise the efficiency of their operations over several decades. In

Building our low carbon industries

many instances, EIIs in the UK are believed to be best in class in terms of energy efficiency and environmental impact. EIIs are typically commodity businesses, operating in globally competitive markets. Without them, the UK would import their products, or those of their customers. Economic and social value and environmental costs would simply be accrued abroad. Conversely, with a strong and internationally competitive industry, the export potential for the UK is significant. Most EIIs are capital intensive, and the most significant emissions abatement opportunities require innovation and capital investment. Many EIIs are international conglomerates, with individual UK businesses competing internationally for capital. Realising energy efficiency therefore requires a stable and competitive business environment that encourages long-term capital investment and innovation. EIIs and their supply chains account for a large proportion of UK energy use and associated emissions. Ensuring that they, and their supply chains, are efficient is critical to realising UK and international carbon emissions abatement objectives. However, EIIs are also a key part of delivering a low carbon economy. They provide the raw materials and infrastructure that support the production and installation of low carbon energy generation technologies such as wind turbines and solar panels, and energy efficient solutions such as insulation and low energy lighting. It is their continued innovation that will deliver important new products such as light weight glass, hydrogen fuels and scientifically applied fertilisers. The policy challenge There is significant concern amongst those EII members contacted during the course of this study that Government policy, both current and historic, risks jeopardising the well-being of industry and could fail to deliver emissions abatement objectives. Current policies rely heavily on enhancing the economics of energy efficient interventions through increased energy prices. In practice, this approach reduces the industries’ capacity to invest, and if applied unilaterally, distorts international competition to the detriment of the UK. The resulting leakage of manufacture to both developed and developing world economies, can give rise to an increase in energy use and emissions through the use of inferior processes, more carbon-intensive electricity, and greater transport of goods. As the primary variable in EII cost of manufacture is typically the price of energy, international success is reliant on competitive energy prices. By implication, policies are needed that encourage investment in energy efficient plant and innovation, but which also ensure internationally competitive energy prices. Broader industrial policy is seen as being a key influencing factor as to whether companies invest in new and more efficient plant in the UK. On this, the UK is seen as lagging behind key competitors in mainland Europe and elsewhere, with a number of respondents reporting a reluctance to invest in the UK due to negative business environment and policy uncertainty. Industry has concerns about UK policy makers’ commitment to EIIs and their understanding of the importance, complexity and fragility of these sectors. Policies that result in the loss of key components of any supply chain, or of critical mass within an industry, risk undermining the sector as a whole and incurring significant economic and social cost. The EIUG and TUC believe that the interests of EIIs, policy makers and key stakeholders should readily be aligned with one another and that current failings result from a poor understanding of these sectors, inadequate debate, and a failure to work in close partnership. It is their objective, and the purpose of this report, to enhance understanding and encourage debate between these key players. Recommendations We recommend the creation of a common vision for all EIIs in the UK, shared by Government, industry and other key stakeholders. Given the importance of EII’s to the UK, both in terms of economic value and employment, and in terms of realising a low carbon future, we believe that this vision should be to ‘develop and grow the world’s most energy efficient EIIs in the UK’. This vision should be reflected in a consistent approach by all Government departments and other policy stakeholders. In particular, industrial strategy needs to be linked to energy and environmental policy. We believe that these policies should: 

Maintain and enhance the international competitiveness of UK EIIs, in particular with regard to energy prices and carbon costs;



Encourage investment in energy efficiency and emissions abatement; 3

Building our low carbon industries



Recognise multiple energy sources uses;



Avoid carbon leakage, in particular to countries with less stringent environmental constraints.

Critical to realising this is an industrial strategy that: 

Sets clear objectives for policy interventions that encompass industry competitiveness, energy and the environment;



Provides policy stability and long term clarity of Government intent, for national and international businesses contemplating investment in the UK;



Takes a cross-industry and cross-supply chain perspective, and minimises the possibility of suboptimal decision making;



Enables investment in cross industry infrastructure and actions (e.g. recycling);



Proactively supports and accelerates the development of new energy efficient processes, technologies and applications;



Secures high quality, highly skilled and high value employment for the UK economy.

And an energy strategy that should: 

Provide long term security of supply, and minimise unnecessary fluctuations in price e.g. through investment in gas storage capacity;



Provide a clear path to decarbonise energy supply using a cost effective mix of energy sources.

In order to develop and realise a common vision and strategy, we believe that it is important for policy makers, trade bodies and other stakeholders to build lasting and effective partnerships with one another, possibly through new industry bodies and/or forums. It is also essential to develop and maintain reliable databases of information which can be used to make more informed decisions, as good governance needs accurate and reliable data. This report has highlighted that official ONS data, currently used for making critical policy decisions, is highly flawed. Maintaining EII competitiveness is vital to the delivery of a low carbon economy. However this will only be made possible with cross-stakeholder cooperation and inclusion. Government has a responsibility, as part of its industrial policy, to ensure this happens. How to read this report In reading this report, each section may be read on its own, or the report can be read in full. The report is structured as follows:  Section one provides an introduction to the study, its background and methodology;  Section two is a more detailed summary of each EII and should be read if you want to know more about a specific industry, or indeed to briefly introduce you to an unfamiliar industry;  Section three is an analysis of the importance of EIIs to the UK economy and employment. It is based on Government data and publically available information;  Section four explains how EIIs are critical to the delivery of a low carbon economy;  Section five documents the current policy challenges and current practices;  Section six briefly outlines what might happen if these challenges are not addressed;  Section seven concludes with our recommendations.

Building our low carbon industries

TABLE OF CONTENTS EXECUTIVE SUMMARY ......................................................................................................... 2 LIST OF ACRONYMS ............................................................................................................ 6 1. INTRODUCTION TO THE REPORT .................................................................................... 7 1.1 Background to the study ....................................................................................... 7 1.2 Methodology and participants ................................................................................ 7 1.3 Disclaimer .......................................................................................................... 8 2. INTRODUCTION TO EIIs IN THE UK ................................................................................ 9

2.1

Overview ................................................................................................. 9

2.2

Cement and lime ....................................................................................... 9

2.3

Ceramics ............................................................................................... 10

2.4

Chemicals and Industrial Gases ................................................................... 10

2.5

Glass .................................................................................................... 11

2.6

Iron and steel ......................................................................................... 11

2.7

Non-ferrous metals .................................................................................. 12

2.8

Pulp and paper ........................................................................................ 12

2.9

Coke and refined petroleum products ............................................................ 13

2.10 Supply chain and regional inter-connectivity ................................................... 13 IMPORTANCE OF EIIs TO THE UK ECONOMY .................................................................. 16 3.1

Overview ............................................................................................... 16

3.2

Number of Enterprises .............................................................................. 19

3.3

Employment ........................................................................................... 20

3.4

Turnover ............................................................................................... 21

3.5

GVA ..................................................................................................... 22

3.6

Turnover and GVA per employee .................................................................. 22

3.7

Purchased goods materials and services ........................................................ 24

3.8

Wages and social security contributions ......................................................... 25

3.9

Corporation taxes and levies ....................................................................... 25

3.10 Regional variation .................................................................................... 26 EIIsâ&#x20AC;&#x2122; ROLE IN THE TRANSITION TO A LOW CARBON ECONOMY ........................................ 29 4.1

Energy intensive but efficient ...................................................................... 29

4.2 Primary inputs to low carbon solutions .......................................................... 32 THE POLICY CHALLENGE ............................................................................................. 34 5.1

Introduction ........................................................................................... 34

5.2

Maintain international competitiveness .......................................................... 34

5.3

The Autumn Statement ............................................................................. 35

5.4

Encourage investment for energy efficiency and emissions abatement ................... 36

5.5

Recognise multiple energy sources and uses ................................................... 39

5.6 Avoid carbon leakage ................................................................................ 40 PENALTIES OF FAILURE .............................................................................................. 42 6.1

The domino effect .................................................................................... 42

6.2

Lessons from history................................................................................. 43

6.3 Economic, employment and fiscal impacts ...................................................... 44 7. CONCLUSIONS AND RECOMMENDATIONS ..................................................................... 46 APPENDIX: EII QUESTIONNAIRE RESPONSES ....................................................................... 48 Cement and Lime ....................................................................................................... 49 Ceramics ................................................................................................................... 51 Chemicals.................................................................................................................. 54 Glass ........................................................................................................................ 56 Iron and Steel ............................................................................................................ 58 Pulp and paper ........................................................................................................... 60 5

Building our low carbon industries

LIST OF ACRONYMS ABS

Annual Business Survey

BLA

British Lime Association

BRES

Business Register Employment Survey

CIA

Chemical Industries Association

CHP

Combined heat and power

EII

Energy intensive industry

EIUG

Energy Intensive Users Group

EU ETS

European Union Emissions Trading Scheme

GVA

Gross value added

IDBR

Inter-Departmental Business Register

MPA

Mineral Products Association

NEPIC

Northeast of England Process Industry Cluster

ONS

Office of National Statistics

RHI

Renewable Heat Incentive

ROC

Renewable Obligation Certificate

TUC

Trades Union Congress

Building our low carbon industries

1. 1.1

INTRODUCTION TO THE REPORT Background to the study

Energy intensive industries (EIIs), which include cement and lime, ceramics, chemicals, coke and petroleum, glass, industrial gases, iron and steel, non-ferrous metals, and pulp and paper, are the bedrock of the UK manufacturing industry. They produce primary inputs for much of what we manufacture and consume, and contribute significant value to the social and economic fabric of the country. EIIs are currently under significant pressure as a result of both the general economic climate and UK and European environmental and energy policies. The sponsors of this report, the Energy Intensive Users Group (EIUG) and the Trades Union Congress (TUC), both support the shift to a low carbon economy as an essential response to the challenge of climate change, and believe that EIIs are vital to realising this transition. Energy intensive sectors make a vital contribution as national or regional employers, providing direct and indirect employment for some 800,000 workers. Employment in these sectors generally comprises skilled, relatively well paid workers, with many long-standing union recognition agreements. Many plants sit at the heart of the communities in which they operate, and their futures are vital to the local economies. However, these industries share concerns about UK policy makersâ&#x20AC;&#x2122; commitment to EIIs and their understanding of the importance, complexity and fragility of these sectors. The EIUG and TUC believe that the interests of EIIs, policy makers and key stakeholders should readily be aligned with one another and that current failings result from a poor understanding of these sectors, inadequate debate, and a failure to work in close partnership. It is their objective, and the purpose of this report, to enhance understanding and encourage debate between these key players. This report, commissioned by the TUC and EIUG, is based on primary and secondary research and analysis into the economic, fiscal and employment benefits of sustaining EIIs in the UK. It also examines some of the policy challenges associated with sustaining these industries in the UK. It builds on two past studies completed for the TUC and EIUG by Water Wye Associates1 and the Centre for Low Carbon Futures2. Water Wye Associates looked at the Cumulative Impact of Climate Change Policies on UK Energy Intensive Industries and concluded that, as tax structures stand, EIIs are carrying the greatest burden of polices to tackle climate change and reduce energy use. The report concluded that, in future, the impact will become even more disproportionate and intense. The report called on Government to consult with industry and trade unions to develop a policy framework that would avoid the loss of jobs and investment to overseas competitors who have weaker climate change policies or none at all. It found that the fundamental threat is carbon leakage, not only the loss of jobs, but also control over carbon emissions. The Centre for Low Carbon Futures study looked at the role of EIIs in the delivery of a low carbon future, and the technologies likely to be available in 2050 which have the potential to assist in meeting national emissions reduction targets. It came to the conclusion that EIIs are critical to realising a low carbon future, but that there is a need for sizeable investment in capital plant and innovation. The report identified a number of significant barriers to this investment that include the price of energy, availability of capital, lack of Government financial support for R&D, and regulatory uncertainty. The report concluded that there is a compelling rationale for Government to develop an industrial low carbon manufacturing policy and a technology innovation strategy, in particular for EIIs, which also encompasses sector-wide solutions such as carbon capture and storage. This third study seeks to demonstrate the economic, fiscal and employment benefits of sustaining energy intensive industries in the UK and therefore the potential impact if these industries were to be lost. 1.2

Methodology and participants

EIIs are defined as industries that have the highest energy intensity Evidence of the economic, fiscal and employment benefits of sustaining EIIs in the UK was gathered through desk-based research, selected phone-based interviews with a range of employers across the energy intensive industries, consultations with the TUC and its affiliates Unite, Community, GMB and Unity, and the deployment of an industry questionnaire. 1

Water Wye Associates, The Cumulative Impact of Climate Change Policies on UK Energy Intensive Industries â&#x20AC;&#x201C; Are Policies Effectively Focussed?, July 2010 2 Centre for Low Carbon Futures, Technology Innovation for Energy Intensive Industry in the United Kingdom, July 2011

Building our low carbon industries

A database of evidence was assembled for all EIIs based on public domain information. In particular, information was gathered from the Office of National Statistics (ONS) Annual Business Survey (ABS) for 2008 and Inter-Departmental Business Register (IDBR) for 2009 and 2011. These provide a consistent set of data across all industries and regions. The ONS data has limitations in terms of its accuracy and availability at a detailed level. For this reason, a questionnaire was deployed with the trade associations for all EIIs, the results of which are contained within the Appendix to this report. Where there is an obvious discrepancy with ONS data, we have sought to explain this in the appendix. Lastly, in order to fully understand the importance and interdependencies of individual EIIs, and their sensitivity to energy policy and price, we conducted a number of phone-based interviews. For expediency, we focused on three industries and the regions in which they have a significant presence. These were ceramics manufacture in North Staffordshire, the glass container industry in Yorkshire, and the chemicals industry in the North West of England, North East of England and Scotland. We spoke to the following trade associations and businesses, to whom we extend our thanks.

Sector

Ceramics

Chemicals

Glass Containers

Trade Association

British Ceramic Confederation

Chemical Industries Association NEPIC

British Glass Manufacturers’ Confederation

Companies

Ibstock Dudson Ltd Endeka Johnson Tiles

GrowHow INEOS Grangemouth INEOS ChlorVinyls SABIC Tata Chemicals

Stölzle Flaconnage Beatson Clark Allied Glass

In all cases, we sought to gain an understanding of: 

The importance of the business and/or industry and its value to the wider economy. In particular research looked at the nature and scale of upstream and downstream supply chains, and of local interdependencies (e.g. shared skills and resources);



The nature and governance structure of the business (e.g. local or international ownership; single or multiple sites; diverse or narrow business focus), and the basis for key decision making (e.g. local or international decision making; factors influencing decisions; internal/external competition for resources);



The importance of energy price to the business (e.g. energy intensity, exposure to international competition), and impact of energy policy and price on the business (e.g. on capital investment and operating decisions);



Any recent or planned decisions that would have a significant impact on the future of the business in the UK, and which have been influenced by energy policy and price;



The role that EIIs see themselves playing in a future low carbon UK economy, and the extent to which these roles been realised to date.

1.3

Disclaimer

Work has been completed on a best endeavours basis. We are aware that there are limitations to the reliability of ONS data and where possible, this information has been checked with industry bodies. There are likely to be remaining inaccuracies. However, we do not believe that these would alter the key findings and conclusions from this study. We are also mindful that interviews have been conducted with just three EIIs in specific regions. However, the findings from these interviews are reinforced by previous studies and we believe them to be applicable to all EIIs and all regions.

Building our low carbon industries

2. 2.1

INTRODUCTION TO EIIs IN THE UK Overview

EIIs share a number of characteristics, which can be summarised as follows:  Regionally significant: EII businesses are often large (e.g. cement, chemicals, petroleum, industrial gases, iron and steel) and/or clustered together to benefit from shared infrastructure and resources (e.g. ceramics and glass). As such they are often the dominant employer and source of GVA in a particular region;  Mature, commoditised and internationally competitive: EIIs are mature, often supplying commoditised products to internationally competitive and price-sensitive markets;  Capital intensive: Most EIIs are highly capital-intensive, dependent upon long term fiscal and regulatory stability in order to attract investment;  Multi-national: EIIs are often multi-national concerns, with inter-company competition for capital investment. Many are foreign-owned;  Centred on large and complex supply chains: EIIs have large and valuable supply chains, and are in turn important elements in the supply chain of downstream industries;  High value and highly skilled employment: EIIs employ relatively skilled and well paid workers, with average wages in excess of UK and manufacturing averages. This initial section provides a brief overview of EIIs in the UK, the nature and scale of their activities, the key players, their manufacturing processes, the uses for their products and their supply chains. This is followed by a brief introduction to EII supply chains and their intra-regional connectivity which illustrates how EIIs provide the primary inputs for much of what we manufacture and consume, and explains their importance to the UK economy. 2.2

Cement and lime

The cement and lime industry comprises the following subsectors: manufacture of cement and manufacture of lime and plaster. The Mineral Products Association (MPA) is the trade association representing all six UK cement manufacturers, whilst the British Lime Association (BLA) represents the four largest lime manufacturers. In the UK there are 12 cement kiln sites plus 8 cement grinding and blending sites. These are owned by 5 international companies: Hanson Heidelberg Cement Group (3 sites), Lafarge Cement UK (11 sites), Cemex UK (3 sites), Anglo American plc (1 site that is operated by Tarmac Buxton Lime and Cement), and Kerneos Aluminate Technologies (1 site); and one UK owned company, Quinn Cement (1 site). There are 7 sites that produce commercial lime. These are owned by UK companies: Singleton Birch (2 sites) and Steetley Dolomite Ltd (2 sites); and international companies: Lhoist (1 site) and Anglo American plc (2 sites operated by Tarmac Buxton Lime and Cement). In addition there are 6 sites that produce lime largely for their own use. These sites are owned and operated by Tata Steel, British Sugar and Specialty Minerals. Cement works have traditionally been built on deposits of limestone, chalk, and clay or shale so as to minimise the transport of heavy raw materials. The proximity to cement markets also affects the location of new sites, as it typically becomes uneconomic for cement to travel more than 200 miles from the plant to the point of use. The primary raw materials used in cement manufacture are calcium carbonate, silica, alumina and ferric oxide which, when burned in kilns, produce cement clinker. The clinker is then ground with additives such as gypsum (a setting retardant) to form cement. This is stored on-site and transported either in bulk or packed in paper or plastic-lined paper bags before shipment. Historically, primary fuel inputs were petcoke, but use of natural gas as a fuel source has increased in recent years. There are 27 types of cement manufactured in conformance with a European Standard. The principal cements consumed in the UK are: Portland cement, Portland blast furnace cement, sulphate resisting Portland cement, masonry cement, Portland pulverised-fuel ash cement. Most cements are manufactured using a similar process. Cement is the essential ingredient in concrete, which is the world's second most consumed substance after water. Its main downstream use is in construction. Lime plants have been historically located on deposits of limestone or chalk (calcium carbonate), or Dolomitic limestone (calcium carbonate and magnesia), with a distinct concentration of plants located in the Midlands region. The raw material is cut, crushed and chemically altered in a kiln by heating to approximately 1000 to 2000 degrees Celsius. Through the process of adding heat

Building our low carbon industries

quicklime or Dolomitic lime is created and the addition of water then creates hydrated or slaked lime. Lime products have many different uses and are used in large quantities in iron and steel production, construction, paper processing, drinking water purification and food production. 2.3

Ceramics

The ceramics industry includes the following sub sectors: mining of clays and kaolin; ceramic household and ornamental articles; refractories; ceramic sanitary fixtures; ceramic insulators and insulating fittings; technical ceramic products; other ceramic products; ceramic tiles and flags; and bricks, tiles and construction products in baked clay. The British Ceramic Confederation (BCC) is the industry’s association which represents the interests of key players such as Ibstock, Morgan Ceramics, Dudson, Johnson Tiles, Endeka and Ideal Standard, as well as many other enterprises. Although some of the firms are UK owned, many of the larger firms are based overseas. The ceramics industry is spread across the whole of the UK. There are approximately 160 BCC member sites around the country. Sites making clay construction products such as bricks, roof tiles and clay drainage pipes are co-located with clay quarries and are concentrated in the South Downs, East Midlands, West Midlands, and Yorkshire, depending on geology. Much of the tableware and giftware sector is centred on Stoke on Trent together with many suppliers. There is also a concentration of refractory manufacturers in Yorkshire. Otherwise the industry is dispersed throughout the country, with many enterprises employing only a few people. Materials used in the manufacture of ceramic products are sourced from quarries and works across the UK, as well as some specialist materials from further afield, such as white flint from Belgium. The manufacturing process consists of a number of steps, namely grinding of raw materials, shaping, drying, firing and cooling. The latter steps may be repeated a number of times, using heat in the process. This is where much of the energy, primarily natural gas, is used. Ceramic products are varied, widely used and perform many functions in the modern society. They are consumed across healthcare, all high temperature industries (refractories e.g. for glass, steel , cement, chemicals, aluminium), hospitality, homeware, and building and design sectors, amongst others. Products include household and ornamental goods (e.g. plates, cups and vases), larger household fixtures (e.g. basins and toilets), building materials (e.g. tiles and bricks),and electrical, technical and medical ceramics.. 2.4

Chemicals

This study covers the basic chemicals sector, which encompasses the manufacture of: industrial gases; dyes and pigments; inorganic basic chemicals; organic basic chemicals; fertilisers and nitrogen compounds; plastics and synthetic rubber. However, in a few cases where data cannot be subdivided, charts reference the broader ‘chemicals’ sector which also includes the manufacture of other chemical products, such as paints; soaps, detergents and personal care products; adhesives; flavours and fragrances; industrial speciality chemicals, agrochemicals and pharmaceuticals; and plastics and rubber processing. Chemicals firms can be found in almost every area of the country, but there are four regional concentrations in the Northwest, Northeast, Yorkshire and Humber, and Scotland. The Chemical Industries Association (CIA) is the industry’s representative body, supporting enterprises across the UK in many of the chemicals sectors. It represents all sizes of chemical and pharmaceutical businesses and approximately 70% of members are headquartered abroad. There are a small number of key players involved in basic chemical manufacturing. They are typically large businesses, often with international subsidiaries or ownership. Some key players include Tata Chemicals, SABIC, INEOS, and GrowHow (Yara). EIUG members sitting outside the CIA include the two large industrial gases concerns in the UK; Air Products and BOC. Organic materials, derived primarily from oil and natural gas, and inorganic materials, such as salt/brine and minerals, are the primary raw materials used in basic chemical manufacturing. The process of creating most organic chemicals begins with an ethylene cracker, which in turn feeds multiple derivative plants. These processes are typically highly energy intensive in both gas and electricity. Inorganic materials are manufactured in a variety of ways, notably the electrochemical process that produces chlorine and caustic soda from brine (See Figure 1). The UK’s chemical companies produce a broad range of commodity, speciality and consumer chemicals. These feed into many downstream sectors and enable the manufacture of thousands of products (ranging from medicines to insulation), a high proportion of which are exported and many of which support carbon reduction in other sectors of the economy (see Figure 2 for example products). In fact, over half of the chemical industry’s outputs are bought by other industries for use in the manufacture of their own products, many of which are critical to a low carbon economy. The industrial gases sub-sector is a key supplier to oil, chemicals, glass and steel, and although it 10

Building our low carbon industries

has almost no trade exposure itself, its costs are a significant contributor to these export sectors remaining internationally competitive. 2.5

Glass

The UK glass sector is made up of sub-sectors that include: manufacture of flat glass; shaping and processing of flat glass; manufacture of container or hollow glass; manufacture of glass fibres (covering continuous filament glass fibre and glass wool with the latter outside the scope of this report); and manufacture and processing of other glass, including domestic and technical glassware. The British Glass Manufacturers' Confederation (British Glass) represents the UK's glass industry. The industry is made up of a range of different sized companies from large manufacturers employing 100s of people to very small enterprises with limited resources. Glass manufacturing can be found across the country, but much of the mass production is undertaken in Yorkshire and the Northwest. Over the past ten years, the number of companies manufacturing glass in the UK has roughly halved, meaning that many products with long and rich British histories have now been offshored. Furthermore the harsh business conditions have led to major rationalisation within the glass industry so that there remain only ten comparatively large companies operating a total of eighteen sites across the UK. A small number of SMEs also exist to serve the special, technical and domestic sectors. Only two of these companies are UK owned, with four owned and managed elsewhere in the EU and four owned and managed from outside of the EU. Key players include NSG (Pilkington Glass), St. Gobain, Guardian, Ardagh Group, O-I, Quinn Glass, StĂślzle Flaconnage, Beatson Clark, Allied Glass and PPG. Sand, limestone and soda ash are the principal virgin raw materials used by the industry and recycled cullet is used as much as possible. The glass manufacturing process requires a large and continual supply of fuel to ensure furnaces remain hot and glass molten. Furnaces typically last for 12 years and are never cooled. Interruptions to fuel supply are costly and potentially extremely damaging. The UK glass industry produces an estimated four million tonnes of glass per year. Glass is unique in that it is inert and will not degrade in quality over time. It is also infinitely recyclable. Glass products are used extensively in three key industries: food and beverage, medical, and construction. Some technical or high quality glasses have special formulations and for these high end products, use of recycled glass is less common. Glass also contributes to the manufacture of low carbon technologies, such as solar panels. 2.6

Iron and steel

The manufacture of iron and steel comprises the following subsectors: manufacture of basic iron and steel and of ferro-alloys; manufacture of tubes, pipes, hollow profiles and related fittings, of steel; cold drawing of bars; cold rolling of narrow strip; cold forming or folding; and cold drawing of wire. The steel industry association is part of the EEF Manufacturers Organisation (Engineering Employers Federation) which has a membership that includes every steel producing company in the UK as well as many steel processing companies. The UK steel industry is dominated by global players such as Tata Steel Europe (formerly Corus) which have operations across multiple continents. The UK steel industry is concentrated in the North East and Wales. It has three integrated steelmaking sites (producing steel from virgin raw materials) at Scunthorpe (Tata Steel), Port Talbot (Tata Steel) and Teesside (SSI). The latter is currently mothballed, but planning to restart shortly after investment by its new owners. It also has five secondary steelmaking sites (recycling scrap steel into new steel, known as electric arc furnace steelmaking) at Sheffield (Sheffield Forgemasters and Outokumpu), Rotherham (Tata Steel), Cardiff (Celsa Steel) and Sheerness (Thamesteel â&#x20AC;&#x201C; currently in administration). There is a further mothballed furnace at Newport (Mir Steel). All steelmakers other than Sheffield Forgemasters are foreign owned and part of larger steel groups. There are re-rollers mainly in the West Midlands, South Wales, North East, Scunthorpe and Sheerness: some owned by Tata and several independent. Tubemaking takes place in Corby, the Northeast, West Midlands and South Wales. Located in Yorkshire, West Midlands and North Wales, wire and other cold drawing ownership is mainly independent of the steelmakers. Iron ore, carbon (coke) and limestone are the main raw materials used in the production of iron, which is subsequently refined, strengthened and moulded to create steel. The major energy use is in initial stages of production, at the coke refinery and then within the blast furnace. Steel is also

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one of the most recycled materials in the world. Each tonne of scrap recycled by the steel industry saves 1.9 tonnes of iron ore and 0.6 tonnes of coal. Iron and steel based products contribute to a wide range of industries such as buildings, bridges and transport. They are also key components in the development of a low carbon economy, for example in the construction of wind turbines. 2.7

Non-ferrous metals

The manufacture of non-ferrous metals comprises the following subsectors: precious metals production; aluminium production; lead, zinc and tin production; copper production; other nonferrous metal production; and processing of nuclear fuel. The NFA (non-ferrous alliance) represents a large cross-section of the non-ferrous metals industry in the UK with a membership which includes the trade associations representing the aluminium, copper, nickel, lead, zinc, magnesium, titanium, cobalt, molybdenum, tungsten and the metals recycling industry as well as precious metals and minerals companies. Non-ferrous metal manufacturing sites are located across the UK, but specifically the Midlands, North West, North East and South Wales. Some 30 or so metals are in commercial use. The structure of the industry varies metal by metal. No company produces all non-ferrous metals although there are a few pan-European companies producing several metals such as, aluminium, copper, nickel, lead and zinc; often seen as the five most important non-ferrous metals. Non-ferrous metals are produced from natural mineral ores, which are sourced from national and international markets. There is also an increasing share of production originating from scrap. The production of non-ferrous metals is highly energy intensive. Non-ferrous metals are an essential and integral part of modern life. They are used as feedstocks for further manufacturing processes, but are also used in a wide range of other sectors such as copper wiring for telecommunications and aluminium in vehicle manufacturing. It’s worth noting that the United Kingdom has only one aluminium producer, Rio Tinto Alcan, which has recently announced plans to close. This plant currently accounts for about 1% of global output. About 59% of the UK's aluminium output is newly manufactured, with the remainder recycled from scrap. The aluminium production industry is expected to generate revenue of about £2.03 billion in 2011-12, compared with £2.90 billion in 2006-07. 2.8

Pulp and paper

Pulp and paper manufacturing consists of the following sub-sectors: manufacture of pulp and the manufacture of paper and paperboard. The Confederation of Paper Industries Ltd (CPI) is the leading organisation working on behalf of the UK paper-related industry. CPI represents the paper chain from the recovery of used paper through papermaking and conversion to distribution. Picon Ltd is the leading downstream industry trade association representing manufacturers and suppliers in the printing, papermaking and paper converting sectors. The UK has 55 Paper Mills, producing around half of the paper used in the UK. The industry is primarily multinational with ownership predominantly outside the UK. Most operators have multiple sites. Production is spread throughout the UK, with concentrations in the North West and South East of England. Key players include, Aylesford, Arjowiggins, DS Smith, UPM Kymmene, Kimberly Clark, SCA, Smurfit Kappa, Sofidel, De La Rue, Iggesund, Palm and Saica. Raw materials for the production of paper are primarily recycled paper and wood. Over recent years the amount of recycled paper used in manufacturing processes has grown substantially. Most paper made in the UK originates from recovered paper, with over 70% of fibres used coming from recycled paper - the overwhelming majority collected in the UK. This UK based recycling infrastructure provides an important outlet for collected recyclate and income for recyclers. Virgin fibre is only made in quantity by two UK mills, both of which are integrated and use their production to make into paper on site. Market pulp is no longer made in the UK and mills that require virgin pulp import their needs from outside the UK. Virgin pulp is produced through mechanical and chemical pulping processes that separates fibres and changes their properties ready to make into different grades of paper. Paper making can happen directly at the pulp mill or (as is predominantly the case in the UK) at a separate site. During papermaking dilute pulp is formed into a continuous sheet with a series of rollers and driers then removing water – the smallest modern machine making a generic grade would produce a minimum of 250,000 tonnes of product each year, often far more. During the finishing process, paper is sized and cut, and additives such as chalk or china clay can be coated onto the paper for various effects. Again this can either be at the paper mill or at a secondary remote converting site.

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Paper recycling involves turning waste paper into new paper products. Waste paper is sourced from three categories: paper trimmings from conversion operations, pre-consumer waste and post-consumer waste. The amount of contaminants that are acceptable in the recyclate depends upon the type of paper being produced. During the production process, waste paper is combined with water to separate fibres back into a stock ready to be made into new paper. Mechanical separation equipment can include coarse and fine screens, centrifugal cleaners, and dispersion units that break apart ink particles, a process called deinking. The recycling of paper can produce 100% recycled paper or a blended product containing both new and recycled fibre. After five to seven times through the recycling process individual fibres become too damaged to make into new paper and are generally used either for energy production or as a soil improver. While the sector has greatly increased both its energy efficiency and use of energy from renewable resources, producing pulp & paper is inherently energy intensive. Paper products such as newsprint, printing and graphics paper, hygiene and packaging are used throughout the economy. 2.9

Coke and refined petroleum products

Production of coke and refined petroleum products includes the following subsectors: manufacture of coke oven products and manufacture of refined petroleum products. The UK Petroleum Industry Association (UKPIA) represents ten member companies engaged in the UK downstream oil industry on a range of common issues relating to refining, distribution and marketing of oil products, in non-competitive areas. These companies include: BP Oil UK, ConocoPhillips, Essar Oil, Esso UK, INEOS refining, Murco Petroleum, Petroplus Refining and Marketing (in Administration 24 January 2012), Shell UK, Total UK and Valero UK. Oil refineries are a downstream sector of the wider global fossil fuel industry, taking in crude oil and natural gas from international conglomerates. UK refineries are based along the coast for easy access of oil imports either by ship or pipe with the South East, Wales, North West and North East being the UKâ&#x20AC;&#x2122;s main hubs. Oil refineries are typically large industrial complexes with piping carrying fluids between large processing units. The number of refineries in the UK has declined in recent years as there is strong competition from across Europe and further afield. Petroleum refinery products are the basic raw material upon which all refinery processes are based. Long, heavy carbon chains are cracked into smaller and therefore lighter petroleum products such as gasoline, diesel fuel, asphalt base, heating oil, kerosene, and liquefied petroleum gas. Petroleum products feed into chemical manufacturing processes as well as providing a range of fuels used in transport, manufacturing industries and heating. 2.10 Supply chain and regional inter-connectivity EIIs provide the foundations for the UK manufacturing sector. Their products feed into a vast number of downstream industries which rely on availability and affordability of UK EII outputs. EIIs are often highly interconnected, with products and outputs from one sector being used by another. This is particularly true of the chemicals sector where primary products feed into a wide network of interrelated industries such as the manufacture of cosmetics, soaps, paints, rubber, plastics and adhesives (see Figure 1).

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Figure 1: Simplified diagram of main material flows and product groupings in the chemicals 3 industry

The outputs from EII industries like cement and lime, ceramics, chemicals, glass, iron and steel, and non-ferrous metals feed into virtually all other manufacturing processes, and make their way into everything that we consume and use. The chemicals and steel industries provide examples (See Figure 2 and Figure 3). Figure 2: Derivative chemicals uses4

Chemicals products

Chemical Industry Association, 2011 Mckinsey and the ICCA (International Council of Chemical Associations), Innovations for Greenhouse Gas Reductions: A life cycle qualification of carbon abatement solutions enabled by the chemical industry, July 2009 4

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Figure 3: Derivative steel uses5

Coutinho & Ferrostaal, Steel Value Chain http://www.coutinhoferrostaal.com/valuechain.html

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3. 3.1

IMPORTANCE OF EIIs TO THE UK ECONOMY Overview

EIIs make a direct contribution to the social and economic fabric of the UK economy through gross value added (GVA), fiscal contributions (taxes and levies), and employment (staff and wages). In addition, they sustain their suppliers through the purchase of goods, materials and services, and their customers through the provision of cost-effective products (turnover). The staff induce further value add and employment through their wage spend, and there is evidence that EIIs are important contributors to skills development and training, and act as anchors for industry-wide innovation. These indirect impacts are more difficult to assess, although it is conservatively estimated that four times as many people are employed in EII supply chains as are employed in the sectors themselves. A high level overview of the key economic, employment and fiscal metrics for all EIIs, UK manufacturing and the UK economy as a whole are given in Table 1. These same metrics are presented on a per employee basis in Table 2. These show that the contribution made by EIIs includes the following:  EIIs employed in excess of 160,000 people in 3500 enterprises in the UK in the year to end March 2011. More than four times this number are estimated to be employed in their derivative supply chains;  EIIs have combined turnover in excess of £86 billion and account for approximately 20% of UK manufacturing turnover and 3% of the UK economy as a whole;  EIIs are high value added, with a combined GVA in excess of £14 billion. In the year to end March 2008, GVA for individual EIIs ranged from approximately £40,000 per employee in the ceramics industry and £50,000 in glass, to £120,000 in chemicals and £150,000 in petroleum products. This compares with the UK average for the same period of £46,000;  EIIs purchased £68.6 billion of goods, materials and services from their suppliers in the year to March 2008. This equates to 21% of the UK manufacturing total;  Employment costs, including wages national insurance and pension contributions were in excess of £6.6 billion or £38,000 per employee;  EIIs accounted for 47% of total manufacturing taxes and levies in the year to March 2008, in excess of £12 billion. Each of these metrics are reviewed and discussed in further details below.

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Table 1: Energy intensive industries (EIIs) totals6

Note: social security costs are the combined total of employer national insurance contributions and contributions to pension funds

Data for the years to end March 2008 sourced from the ONS Annual Business Survey. Data for the years to end March 2009 and 2011 sourced from the Inter-Departmental Business Register.

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Table 2: Energy intensive industries (EIIs) totals average per employee7

Note: social security costs are the combined total of employer national insurance contributions and contributions to pension funds

Data for the years to end March 2008 sourced from the ONS Annual Business Survey. Data for the years to end March 2009 and 2011 sourced from the Inter-Departmental Business Register.

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3.2

Number of Enterprises

The EII sectors comprised 3515 enterprises in the year to end March 2011. The glass, ceramics chemicals, iron and steel and non-ferrous metals, and pulp and paper sectors together accounted for nearly 95% of the total (See Figure 4). As outlined in Section 2, each of these sectors is dominated by a small number of large companies, supplemented by many smaller enterprises. Petroleum and cement and lime sectors account for the remaining 5% and comprise a small number of large companies and with far fewer small enterprises. Figure 4: Proportional split of the number of EII enterprises in 2011 (Total EII enterprises: 3,515)

There was a decline in the number of ONS declared enterprises in all EII sectors, other than iron and steel, between 2009 and 2011 (See Figure 5). The largest percentage falls were in the petroleum and cement and lime sectors, although the largest absolute fall was in the glass sector, with a decrease of 160 enterprises (See Table 3). The ONS data should be interpreted with caution. For example, British Glass indicate that given the relatively low number of actual EII enterprises in the UK glass sector (~18), the ONS quoted figure of 1,000 in 2009 can be seen to include other enterprises in the glass stakeholder chain. Figure 5: Percentage change in number of EII enterprises between 2009 and 2011

Table 3: Change in number of EII enterprises, 2009-2011 All EIIs and potential EII-related sectors Iron & steel Non ferrous metals Basic chemicals, fertilisers and nitrogen compounds Ceramics Glass Cement and lime Pulp and paper Petroleum

2009

2011

Difference

17,635 420 455 880 770 1,025 20 270 240

15,780 470 380 730 645 865 15 250 160

-1855 50 -75 -150 -125 -160 -5 -20 -80

% change -10.52% 11.90% -16.48% -17.05% -16.23% -15.61% -25.00% -7.41% -33.33%

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3.3

Employment

They employed in excess of 160,000 people in the UK in the year to end March 2011. More than four times this number are estimated to be employed in derivative supply chains. EIIs are capital intensive rather than labour intensive. As such, they account for a smaller proportion of the UK manufacturing employment total than GVA or turnover (see Sections 3.4 and 3.5 below). EIIs account for 6% of UK manufacturing employment (See Figure 6). Figure 6: EII employment as a proportion of total UK manufacturing (Total manufacturing employment: 2,601,801)

The chemicals sector accounts for the largest proportion of employment at 1.6% of the UK manufacturing total, closely followed by iron and steel and non-ferrous metals, each accounting for roughly 1%. Individual businesses within these sectors are generally large, and the dominant employer within their particular region. The glass and ceramics sectors each account for about 1% of the UK manufacturing total albeit less than the metals sectors. Petroleum and pulp and paper sectors account for less than 0.5%, whilst the cement and lime sector has the lowest employment numbers. Although EII sector employment is relatively low as a proportion of the UK manufacturing total, a far larger number of individuals are employed in downstream operations. For example, it is understood by industry that for every employee in the chemicals sector, there are a further five employed in derivative and related industries along the supply chain as well as in ancillary services. The figure for the ceramics sector is understood by the BCC to be a factor of three. Using estimated factors for each sector, EII direct and indirect employment is estimated to exceed 800,000 people. Between March 2008 and 2009 all but the glass sector saw an increase in employment according to the official statistics although this was not consistent with some trade association data e.g. ceramics. However, employment figures then fell substantially again in the two year period to 2011. With the exception of petroleum and iron and steel which saw slight increases in employees between 2008 and 2011, all other EII sectors have seen overall declines in employment numbers (See Figure 7). Figure 7: Percentage change in EII official employment between 2008 and 2011

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There are a number of explanations for this overall decline in employment. In part this reflects the state of the economy, which has seen unemployment rise from around 1.6 million at the end of 2008 to over 2.6 million at the end of 20118. The cement and lime sector which has experienced the largest percentage change over this three year period, will almost certainly have been impacted by the decline in the construction sector. In part however, these changes will also reflect longer-term downward trends in employment within individual EII sectors. During our interviews, we encountered numerous examples of companies moving operations abroad to benefit from more favourable business environments, or of losing business to imports from countries that are subject to less stringent energy and environmental constraints. The ceramics industry provides a specific example. In October 2009, SQW conducted a detailed survey of the ceramics industry in North Staffordshire which showed a steady decline in employment between 1999 and 2006, with the loss of almost 10,000 jobs (See Figure 8). This decline is attributed to the decline in demand driven by overseas competition and to a lesser extent, the arrival of new technologies that have resulted in human labour being replaced by machines. The North Staffordshire region experienced a particularly sharp fall from nearly 16,000 jobs (one third of the entire ceramics industry) to 6,500 (about a quarter of the total). Figure 8: Employment in the Ceramics Sector9

3.4

Turnover

EIIs are amongst the largest contributors to national GDP. In the year to end March 2008, they demonstrated a combined turnover (sale of goods and services) of ÂŁ95 billion and accounted for approximately 20% of the UK manufacturing total (See Figure 9). Figure 9: EII turnover as a proportion of UK manufacturing (2008) (Total manufacturing turnover: ÂŁ478.2 billion)

8 9

ONS, Labour Market Statistics, 2012 SQW Consulting, 2009, Growing the Ceramics Cluster in North Staffordshire

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With a turnover of approximately £40 billion, petroleum is the largest EII sector, accounting for 9% of UK manufacturing turnover. Chemicals is the second largest sector, with a turnover of approximately £24 billion in 2008, rising to £27 billion in 2011 and accounting for 5% of the manufacturing total. Iron and steel accounted for the third largest turnover at £12.5 billion in 2008 and £10 billion in 2011. Glass, ceramics, pulp and paper had turnover figures of £2 - £3.5 billion, whilst cement and lime has the lowest absolute turnover at under £1 billion per annum. In the year to end March 2011, combined EII turnover had declined to £86 billion, reflecting falls in all sectors other than chemicals and pulp and paper (See Figure 10). However, these sectors continue to make a substantial contribution to the UK economy. Figure 10: EII sector total turnover for 2008, 2009 and 2011

3.5

GVA

EIIs make a GVA contribution to the UK economy of £14 billion or 11% of the UK manufacturing total (See Figure 11). Despite its high turnover, the petroleum products sector has one of the smallest GVAs at 1% of the UK manufacturing total. The chemicals sector provides the largest GVA at 4%; iron and steel and non-ferrous metals each contribute roughly 2%; with ceramics and glass contributing approximately 1%. Figure 11: EII GVA as a proportion of UK total manufacturing (2008) (Total manufacturing GVA: £139.5 billion)

3.6

Turnover and GVA per employee

EIIs are high value-added sectors on a per employee basis. Average turnover per employee is approximately £250,000 per year across all EIIs in 2011, and ranges from £100,000 in the 22

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ceramics sector to £770,000 in the chemicals sector. These are dwarfed by the petroleum sector which averages £3.7 million per employee (See Figure 12 and Figure 13). Figure 12: EII turnover per employee, including petroleum (2008, 2009 and 2011)

Figure 13: EII turnover per employee, excluding petroleum (2008, 2009 and 2011)

2008 UK average £152,478

In the year to end March 2008, GVA for individual EIIs ranged from approximately £35,000 per employee in the ceramics industry and £50,000 in the glass industry to £120,000 in chemicals and £150,000 in petroleum products. This compares with the UK average for the same period of £46,000 (See Figure 14). Figure 14: EII GVA per employee (2008)

UK average £46,388

Although the cement and lime sector is the smallest in terms of GVA, on a per employee basis it is third only to the petroleum and chemicals sectors.

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Figure 15 below shows the contribution of EIIs, in terms of GVA and turnover per employee, relative to total employment numbers. The x axis indicates GVA per person, y axis indicates total sector employment and the size of the bubble shows average turnover per employee. Those sectors towards the top right of this graphic make the largest contribution to the UK economy in terms of GVA. Figure 15: GVA per employee by total employment and turnover per employee (2008)

The petroleum industry has the largest turnover and GVA per employee, but employs a smaller number of people than all other EII sectors, other than cement and lime. The chemicals industry employs more people and has a higher unit turnover and GVA than all other EII sectors, closely followed by both iron and steel and non-ferrous metals sectors. All, other than ceramics, have a higher GVA than the UK average. This clearly demonstrates that EIIs contribute significant value to the UK economy on a per employee basis. 3.7

Purchased goods materials and services

EIIs play an important role in sustaining their suppliers through the purchase of goods, materials and services. In the year to March 2008, EIIs purchased ÂŁ68.6 billion of goods, materials and services from their suppliers, equivalent to 21% of the UK manufacturing total. The petroleum, chemicals and metals sectors dominate, accounting for 91% of this total (See Figure 16) Figure 16: EII cost of purchased goods materials and services (2008)

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3.8

Wages and social security contributions

Employment costs, including wages, national insurance and pension contributions were in excess of £6.6 billion across all EIIs in 2008 (see Figure 17), or £38,000 per employee (See Figure 18). Figure 17: EII total employment costs (2008)

Total employment costs across all EIIs comprise approximately £5.5 billion in wages and £500 million in each of national insurance and pension fund contributions. The petroleum sector has the highest employment costs per unit labour at just over £57,000 per employee. Of this, contributions to pension funds account for £10,000, or approximately 17% of the total. The next highest costs are approximately £50,000 for the cement and lime industry, with a pension fund contribution of roughly 10%, and chemicals with £44,000 and a pension fund contribution of around 13%. The sector with the lowest per unit labour employment cost is ceramics at £28,000 (See Figure 18). Figure 18: EII total employment costs per employee (2008)

UK average £24,296

Across all EIIs the pay gap is relatively compressed in comparison to other industries, where it has been reported that the salary of a firm’s CEO can be well over 500 times and the average employee salary10. 3.9

Corporation taxes and levies

EIIs accounted for 47% of total UK manufacturing corporation taxes and levies (such as the Climate Change Levy) in the year to March 2008, with remittances in excess of £12 billion. These payments are dominated by the petroleum sector which accounts for £11.7 billion of this total. The contributions made by other sectors are shown in absolute numbers in Figure 19 and on a per employee basis in Figure 20. The chemicals sector accounts is the second largest contributor to Government coffers with taxes and levies totalling £107 million, followed by the metals sectors and glass.

Guardian, 2009, Pay gap widens between executives and their staff

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Figure 19: EII total corporate taxes and levies (2008)

On a per employee basis, taxes and levies are more uniform, and range from £1,400 per ceramics sector employee to £2,600 per chemicals sector employee, reflecting the unit turnover and GVA of these industries. It should be noted that these taxes reflect corporate tax and thus do not represent all forms of tax that EII’s pay. They exclude for example employers’ national insurance contributions, which have been outlined above, other taxes such as import and export taxes and more importantly any VAT or environmental levies reflected in the costs of purchased goods, materials and services. Figure 20: EII total corporate taxes and levies per employee (2008) UK average £3,684

3.10 Regional variation Although EIIs exist throughout the UK, specific sectors are often dominant in particular regions, reflecting access to important raw materials or the history of their development. The regional bias of individual EII sectors has been described in Section 2, and important parliamentary constituencies for each EII are identified in the Appendix to this report. The most recent official Office of National Statistics (ONS) data, Inter-Departmental Business Register (IDBR 2009 and 2011) would appear to have limitations at regional level for a number key metrics, such as turnover, with numbers often reflecting the location of a company’s headquarters rather than manufacturing operations. A comparison of ONS IDBR data for 2009 and Annual Business Survey (ABS) data for 2009, supplied to us by the Chemical Industries Association (CIA), provides an interesting example (See Figure 21), with a majority of the industry turnover attributed to the South East of England in the former and more accurately reflecting the manufacturing locations of the business in the latter. IDBR data for 2009 and 2011 present a similarly distorted view of the regional split of chemicals industry turnover.

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Figure 21: Comparison of IDBR and ABS data for regional split of chemicals industry turnover

A comparison of employment numbers from ONS IDBR data for 2011 and the Business Register and Employment Survey (BERS) for 2009 shows much greater correlation between these two data sources. These figures appear to be more accurate and are supported by the CIA (see Figure 22). Figure 22: Comparison of IDBR and BRES data for regional split of chemicals industry employment

For this reason, we have chosen to show the geographic regional distributions of all EIIs based on the ONS 2011 employment numbers rather than turnover (See Figure 23). This shows the tendency for the majority of manufacturing to be located in the Midlands and Northern England. However, although the use of IDBR employment data is deemed to be more accurate than the use of turnover, there are still some anomalies. For example, glass shows a high level of clustering in the West Midlands, whereas British Glass indicates that this is a distortion of the reality. Nonetheless, employment data appears to provide a more accurate view than alternative ONS data options.

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Figure 23: UK EIIs regional employment (2011)

Note: regional data not available for cement and lime

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4. 4.1

EIIs’ ROLE IN THE TRANSITION TO A LOW CARBON ECONOMY Energy intensive but efficient

EIIs, by their very nature use a large amount of energy as feedstock or in their manufacturing processes. These include fossil fuels such as coal and natural gas, and grid electricity. DECC estimates that EIIs account for roughly 50% of UK industrial energy consumption (see Figure 24). Figure 24: Energy consumption by main industrial groups 201011

Total final energy consumption by industry: 27.5 million tonnes of oil equivalent The CO2 emissions of these industries are commensurately significant. Using Carbon Trust conversion factors for coal, natural gas and grid electricity, CO2 output can be estimated to be 55 million tonnes, equivalent to 66% of the UK industry total and 19% of the UK total (see Figure 25). Figure 25: Millions tonnes CO2 per unit of energy (electricity, natural gas and coal) (2010)12,13,14

The following SIC (2007) codes were used by DECC in preparing this graph: Iron and steel: 24 (excluding: 24.4, 24.53, 24.54); Non-ferrous metals: 24.4 (excluding 24.46), 24.53, 24.54; Mineral products: 08, 23; Chemicals: 20-21; Paper, printing and publishing: 17-18; Other industries: 16, 22, 31-33, 36-39.

The energy intensity of industry is defined in a number of ways. Many within industry use a measure of energy costs relative to total manufacturing costs; whereas the Government prefers use energy cost as a percentage of turnover or GVA. Figure 26 shows BIS’ current estimates for a number of industries. Note: BIS is currently consulting with industry on energy intensity, and more specifically electricity intensity, in order to effectively target compensation as proposed in the Chancellor’s Autumn Statement 2011 (see Section 5.3).

11 12 13 14

DECC, 2011, DUKES DECC, 2011, DUKES Carbon Trust, 2012, Resource conversion factors Orion Innovations analysis

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Figure 26: Energy intensity of different UK manufacturing industries, 200915

The energy intensity of individual EII sub-sectors, and their exposure to energy price, is open to debate and depends upon how broadly the envelope is drawn around each sector. Government data, which often combines EIIs and their derivative operations in a common category, is widely regarded as flawed by industry stakeholders (see Figure 27). Figure 27: Energy intensity of the British ceramics industry16 The British Ceramic Confederation (BCC) recently completed a rigorous bottom up analysis of the energy intensity of the ceramics sector after BIS estimates suggested that individual sub-sectors had energy intensities ranging, for example, from 4.6% of GVA for the manufacture of refractories, to 15% for manufacture of bricks, tiles and construction products, in baked clay in the years 2004 and 2007. Data from some sectors were missing completely. BCC gathered information from its members for energy costs and GVA, using an independently verified bottom-up methodology ringfencing UK manufacturing operations. This more accurate assessment revealed that energy intensity ranged from 24% to 31% for example, for the same two sub-sectors and the same years. BCC also gathered evidence for more recent years (2008 to 2010) and showed that in all but one sub-sector there has been a substantial rise in energy costs relative to GVA, with one sub-sector seeing an almost 100% increase in energy intensity. We have conducted a simple survey of all EIIs in the context of this study. Responses from those that define energy intensity in terms of energy cost relative to total manufacturing costs, suggests a range in energy intensity from 20% to 80% for individual EII sub-sectors. Those that define energy intensity in terms of energy cost relative to GVA suggest an energy intensity ranging from 15% to 65% (see Figure 28). Figure 28: Energy intensity of selected UK EIIs17 Basic chemicals 10-80% Manufacturing costs Cement 25-45% GVA Lime 35-60% GVA Glass 15-36% Manufacturing costs Ceramics 10-65% GVA Iron and steel Not made available Non-ferrous metals Not made available Pulp and paper Not made available Petroleum Not made available As the largest industrial energy consumers in the UK, there is often a mistaken assumption by Government and the public that EIIs are energy inefficient. However, by virtue of the importance of energy to their overall costs, most EIIs have been driven to maximise the efficiency of their

15 16 17

Department for Business Innovation & Skills, 2010, BIS Economics Paper No. 10A, Manufacturing in the UK: An economic analysis of the sector Telephone interviews conducted by Orion Innovations between November 2011 â&#x20AC;&#x201C; January 2012 EII industry associations

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operations over several decades. In many instances EIIs in the UK are believed to be best in class in terms of energy efficiency and environmental impact (See Figure 29). Figure 29: Dudson Ltd, a global leader in energy efficiency in the ceramics sector Dudson is a family-owned ceramics company based in Staffordshire that has been trading since 1800. The company has been at the forefront of initiatives within the ceramics sector to reduce environmental impact and energy intensity. The company invested in the recycling of waste materials as early as the 1960s. In more recent years, the company has made substantial investments in technical innovations that have, for example, enabled products to be fired once as opposed to multiple times, and for shorter periods. The company is believed to be at the forefront of the development of low carbon ceramics products and recently released a low carbon range called ‘Evolution’. According to independent testing by Endeka Ceramics Ltd on kiln firing processes, Evolution has the lowest carbon emissions of any ceramic hospitality tableware manufactured anywhere in the world. The company believes that it is as efficient as current technology and economics will allow, and describe themselves as being in a position of “diminishing returns” where only incremental improvements are possible. In a bid to mitigate the lack of step-change improvements, Dudson has sought to become more vertically integrated enabling greater control over the environmental impact, emissions and costs associated with upstream activities such as sourcing of raw materials. Companies in all sectors surveyed in the context of this study claim to have exhausted most, if not all, opportunities for operational improvement, maintenance and incremental investment that deliver greater energy efficiency. Further energy efficiency improvements are often only minor, and are dependent upon significant capital investment to replace manufacturing plants with between 10 and 20 years operational life. In the absence of opportunities to improve manufacturing energy efficiency, some companies are investing substantial sums in ‘decarbonising’ their energy supply through for example, the use of biofuels or carbon capture and sequestration (CSS). See Figure 30. Realising greater energy efficiency is therefore intimately linked to industrial policy and a business environment that encourages significant capital investment. The importance of capital investment, and the threat posed by high energy costs and policy uncertainty, is discussed in greater detail in Section 5. Figure 30: Carbon reduction options for the steel sector (Carbon Trust, 2011

Building our low carbon industries

4.2

Primary inputs to low carbon solutions

All EIIs are critical to realising a low carbon economy. They provide the raw materials, products and infrastructure needed to manufacture, install, maintain and operate renewable energy generation technologies such as wind turbines and solar panels. They and their derivative supply chains are responsible for products, such as insulation materials and light weight plastics, which deliver carbon emissions abatement benefits ranging from low-carbon buildings to light-weight and energy efficient automotives. Furthermore, innovation in EII-based products and applications will play an important role in delivering the innovative solutions needed in order to realise a low carbon economy, such as light weight glass products or scientifically applied fertilisers. As an example, McKinsey was recently employed by the International Council of Chemicals Associations (ICCA) in order to undertake a life cycle quantification of the carbon abatement solutions enabled by the chemicals industry18. They found that in 2005, the carbon emissions linked to the chemicals industry amounted to 3.3 Giga-tons CO2 (+/- 25%) on a global basis. A majority of these emissions resulted from the chemicals manufacturing process, the remainder from the extraction of feedstocks. By contrast, the emissions abatement resulting from the use of chemical products was estimated to be between 6.9 and 8.5 Giga-tons CO2. In effect, for every ton of CO2 emitted by the chemicals industry, between 2.1 and 2.6 tons were saved as a result of products and technologies provided to other industries. The biggest levers for these emissions savings were insulation materials for the construction industry, the use of chemical fertilizers and crop protection in agriculture, and advanced lighting solutions such as fluorescent lamps. Further benefits result from the use of plastic packaging, marine antifouling coatings, synthetic textiles, automotive plastics, low-temperature detergents, engine efficient lubricants and plastic piping (See Figure 31). McKinsey goes on to estimate that emissions would have been 8% to 11% higher in 2005 without chemicals. Looking out to 2030 the study forecasts that insulation will continue to deliver the greatest emissions savings. However, contributions from solar power, biofuels, wind power and CCS will become more important. The uptake of these solutions will mean that world chemical output will double, offering great opportunities for countries that encourage investment in these areas. Figure 31: Net CO2 emissions abatement that results from the use of chemicals products19 (MtCO2e per annum)

The pulp & paper sector has produced its own sector roadmap to achieve low carbon economy targets in 2050. This study highlights the role of existing technologies in meeting targets through to the 2030â&#x20AC;&#x2122;s but breakthrough technologies are required to reach the 2050 targets. With an operational life of at least 30 years for a new paper machine, these new technologies need to be developed and deployed now. A machine installed in the 2020â&#x20AC;&#x2122;s will still be active in 2050. With a new paper mill costing in the region of ÂŁ300m, companies will be increasingly reluctant to invest in the UK if Government polices run the risk of turning a site into a stranded asset, uneconomic to run yet with investment not yet covered. 18

Mckinsey and the ICCA (International Council of Chemical Associations), Innovations for Greenhouse Gas Reductions: A life cycle qualification of carbon abatement solutions enabled by the chemical industry, July 2009 19 Mckinsey and the ICCA (International Council of Chemical Associations), Innovations for Greenhouse Gas Reductions: A life cycle qualification of carbon abatement solutions enabled by the chemical industry, July 2009

Building our low carbon industries

We do not have the same analysis for all other EIIs. However similar anecdotal evidence has been given in support of their products and applications. These range from the use of glass20 in the manufacture of solar panels, and steel used in the manufacture of wind turbines, to the use of cement and bricks in the construction of long-life low carbon buildings.

See www.glassforeurope.com for more information

Building our low carbon industries

5. 5.1

THE POLICY CHALLENGE Introduction

Government policy towards EIIs should be driven by a common vision and reflected in a consistent approach by BIS, DECC, the Treasury and other policy stakeholders. Given the importance of EII’s to the UK, both in terms of economic value and employment (see Section 3), and in terms of realising a low carbon future (see Section 4), we believe that this vision should be to ‘develop and grow the world’s most energy efficient EIIs in the UK’. Given the capital and energy intensity of the EIIs, and the international and commoditised nature of their markets, we believe that this requires policies that:  Maintain international competitiveness, in particular with regard to energy price;  Encourage investment for energy efficiency and emissions abatement;  Recognise multiple energy sources and multiple energy uses;  Avoid carbon leakage, in particular to countries with less stringent environmental constraints;  Reflect integrated industrial strategy, and government approach to innovation, energy and the environment. Each of these is discussed in more detail below. 5.2

Maintain international competitiveness

EIIs, by their very nature, are sensitive to energy price, and in particular price relative to competitor suppliers in the UK, Europe and the rest of the world. Energy intensity, in terms of energy cost relative to manufacturing cost, GVA or turnover is an important indicator of a sector’s sensitivity to energy price. However, it does not necessarily reveal the full significance of energy price to the well-being and international competitiveness of individual companies. Often these companies operate in mature and commoditised internationally competitive markets. The price of primary feedstocks and products are broadly the same across these markets, and companies use largely similar manufacturing technologies. There is limited opportunity for differentiation based on preferential feedstock supply, manufacturing technology or product price. Energy cost is the most significant variable used by industries and countries to ensure the international competitiveness of their EII sectors. There is significant concern that current UK Government policy, as it relates to energy price, will seriously undermine the competitiveness of British industry. Water Wye Associates, in a report prepared for the TUC and EIUG21 in 2010, estimates that the increase in overall energy bills for EIIs as result of UK and European climate change policies will be between 18% and 141% in the period to 2020. For example, the current benchmark used to determine the emissions allowances for sites in the next Phase of EU ETS is in principle set by the average of the 10% most heat efficient sites anywhere in the EU. This fact alone means 95% of sites will be short of allowances. Additionally zero free allowances will be provided for electricity production or use. The Pulp & Paper sector estimate their sites will be at least a third short of the number of allowances required to cover emissions. A number of recent temporary and permanent plant closures have been attributed in part to current energy policy and the resulting impact on price (see Figure 32 and Figure 33). Figure 32: Dudson closes plant over Christmas22 Dudson, a Staffordshire-based ceramics company has two factories: one that employs >300 people and a smaller one that employs <50. Over the Christmas period and into January 2012, Dudson was forced to close the smaller of its two UK plants as a result of high energy costs. This resulted in a number of products produced at this smaller plant not being produced in this period. Dudson says that “closing the smaller plant for a more extended period at Christmas would never have been entertained eight years ago but saving energy has now become a priority due to higher prices and taxes”.

The Cumulative Impact of Climate Change Policies on UK Energy Intensive Industries – Are Policies Effectively Focussed? Water Wye Associates. July 2010 22 Telephone interviews conducted by Orion Innovations between November 2011 – January 2012

Building our low carbon industries

Figure 33: Rio Tinto to close aluminium plant in Newcastle upon Tyne23 In November 2011 Rio Tinto Alcan become the latest multinational to blame a factory closure on new carbon taxes, after it announced that it was shutting an aluminium smelter near Newcastle upon Tyne with the loss of 515 jobs. John McCabe, Rio's spokesman at Lynemouth said: "The smelter is no longer a sustainable business because its energy costs are increasing significantly, due largely to emerging legislation." He outlined a rising cost burden as the company prepared to pay new carbon taxes to be introduced by the EU and Britain from 2013. He estimated Lynemouth's energy bill would jump from £7m to about £100m by 2015 as a result of the EU emissions trading scheme and the UK carbon price support mechanism. Local Lib Dem MP Sir Alan Beith said: "Rio seems determined to concentrate its aluminium interests in areas where energy is cheaper or the regulatory regime is less tight. We have talked to them about other options but I am not sure they are serious about trying to keep Lynemouth open." In other instances, companies have chosen to relocate operations abroad in order to benefit from lower energy costs and more favourable investment environments (See Figure 34). Figure 34: Endeka Ceramic's energy intensive operations moved abroad24 Endeka Ceramics was formed in 2007 through the management buy-out of the materials business of Johnson Matthey. The company supplies glazes, coloured enamels, inorganic colours and frits to the ceramics industry. A number of these are produced in energy intensive processes including for example frits, the glass beans used in enamels, ceramics glazes and the manufacture of inorganic mixed metal oxide colours used in enamels and ceramic glazes. Until a decade ago, the company employed 2000 people at multiple sites across the UK. While it continues to be a significant supplier to the UK ceramics industry, it now only employs 42 people in the UK. Energy intensive operations, such as frits manufacture, have been moved to other countries. Multi-million pound investments have been made in manufacturing plant in Spain, Italy and India, which were deemed to benefit from more favourable energy policies and investment environments. Key products are now imported to the UK, and transported great distances. 5.3

The Autumn Statement

The Government has recently taken steps to alleviate some of the impact of energy policies on EIIs (see Figure 35). Figure 35: Extracts from the Chancellor of the Exchequer’s Autumn Statement25 The Government intends to implement measures to reduce the impact of policy on the costs of electricity for the most electricity-intensive industries, beginning in 2013 and worth around £250 million over the Spending Review period. Specific proposals include the following: The climate change levy discount on electricity for climate change agreement participants available from 1 April 2013 will be increased to 90 per cent. The Government will provide up to £100 million over the Spending Review period to mitigate the impacts of the carbon price floor on electricity costs to businesses that are electricity intensive and operate in internationally competitive markets from April 2013. The Government will provide compensation for the indirect impacts of the EU Emissions Trading System on electricity costs from January 2013 of up to £110 million over the Spending Review period, from existing departmental budgets. Eligibility will be based on EU rules, which are due to be agreed in 2012. The Government will explore options for reducing the impact of electricity costs arising as a result of electricity market reform policies, including the Feed-in Tariffs, on electricity intensive industries, where this significantly impacts their competitiveness and subject to value for money and state aid considerations. A further round of consultations with industry stakeholders on key elements of the Government’s compensation package is expected this Spring, with the object of preparing the UK Government’s submission to the EU for State Aid clearance of £250m worth of compensation payments. 23 24 25

The Guardian, 2011, Rio Tinto blames carbon tax for 515 job losses Telephone interviews conducted by Orion Innovations between November 2011 – January 2012 Treasury, 2011, Autumn Statement 2011

Building our low carbon industries

While there is broad consensus that this is a step in the right direction, there is concern that decisions are being made based on inaccurate data (See for example Figure 36), that the measures do not encompass all types of energy and energy use (see Section 5.4), and that they remain highly inadequate relative to the support given to EIIs in other countries (see Figure 37). Figure 36: MPA and BLA response to the Autumn Statement26 Mineral Products Association (MPA- cement) and the British Lime Association (BLA - lime) welcome the Government announcement of a package of support for energy intensive industries. However, there are concerns that: 1)

The data Government is using in discussions on how the support will be allocated is highly inaccurate. Inaccuracies in Government data were particularly apparent in the BIS compilation of sector rankings based on electro, gas, energy and trade intensity. MPA has submitted more accurate data to BIS and received a reply from Greg Barker MP agreeing that “what the Government currently holds on electro-intensive industries is limited and dated”. The letter from Greg Barker also indicated that more accurate data is to be collected in a consultation expected imminently on approaches to setting threshold criteria to determine compensation.

Historical trade intensity is not a reliable metric for future trade exposure because it will increase as EU products with a high total CO2 tax burden are replaced with imports from countries with less or no carbon constraints. This will be to the detriment of both the environment and the security of supply of essential materials. It is hoped these comments made to BIS will be reflected in the imminent consultation.

The allocation of the available support could result in competition distortion between competing sectors and, if allocated on a company basis, also within sectors.

Figure 37: UK to learn from Germans on protecting industry September 2011: Climate Change Minister, Greg Barker is quoted as saying, “German energyintensive industries have enjoyed sustained support from Government…That’s what we’re looking to replicate.” Barker, in Germany to meet with energy, chemicals and metals executives, said his Government will devise by the year-end ways to make a “material difference” to rising costs faced by manufacturers because of Britain’s carbon-reduction goals27. A perception amongst EII stakeholders interviewed in the course of this study was that UK companies have to fight to ensure that their Government maintains a ‘level playing field’ with international competitors. By contrast, it was felt that competitors in countries, such as Germany, start with the knowledge that their Government will work in partnership with them to maintain an internationally competitive position. This perception is important when it comes to UK subsidiaries of international conglomerates seeking investment in competition with subsidiaries in other countries. As members of the Energy Intensive Industries Task Group of the Green Economy Council, both the TUC and the EIUG have commented that the Autumn Statement 2011 should represent only the first phase of policy support for the energy intensive industries, particularly because a number of EIIs will derive little benefit from the initial package. 5.4

Encourage investment for energy efficiency and emissions abatement

Improvements in energy efficiency and emissions abatement in industry typically arise as a result of:  Operational improvements (e.g. reducing unnecessary energy use through changed working practices);  Plant maintenance (e.g. reducing energy use through repairs and incremental improvements of plant);  Investment in new and more efficient processes, technologies and equipment (e.g. investment in more up-to-date plant, such as furnaces, motors or heat exchangers). It is understood that improvements in operational practice and plant maintenance can have incremental benefits within the constraints of an existing plant. However, most UK EIIs are adequately incentivised by energy price and participate in Climate Change Agreements so have already invested in the most obvious and economic plant maintenance and operational improvements (see Section 4.1 and Figure 29).

26 27

MPA, 2011, Response to the Autumn Statement http://mobile.bloomberg.com/news/2011-09-27/u-k-minister-seeks-to-learn-from-germans-on-protecting-industry

Building our low carbon industries

The greatest energy efficiency and emissions abatement impacts now result from investment in new processes, technologies and equipment. For example, an ammonia plant built today uses 30% less energy per ton of product that one constructed 40 years ago, and 10% less than one built 10 years ago (see Figure 38). The same trends exist across all EIIs. The steel industry provides a further example. A steel plant built today uses 40% less energy per ton of product that one constructed 40 years ago, and 20% less than one constructed 20 years ago (See Figure 39). Figure 38: Improving efficiency of ammonia plants28

Figure 39: Improving efficiency of steel plants29

Most EIIs are highly capital intensive and capital investment decisions are taken intermittently and involve significant sums of money. A new glass furnace can cost tens of millions of pounds and have an active life of a decade or more. The same is true of a brick kiln or a steel rolling mill, with other plants, such as a chemical plant, lasting much longer. In order for UK EIIs to be the most energy efficient possible, they need to be encouraged to invest in new processes, technologies and plants.

28 29

EFMA, 2008, The European fertilizer industry is one of the worldâ&#x20AC;&#x2122;s most efficient EEF Steel, 2012

Building our low carbon industries

Investment decisions are made with the long-term prospects of a particular business in mind. Energy policy matters, but so do broader industrial strategy and the stability of the business and policy environment. Realising energy efficiency therefore requires a stable and competitive business environment that encourages capital investment and innovation. Under these circumstances, perception matters and many industrial stakeholders contacted in the course of this study expressed concerns that that UK Government policy, both current and historic, risks jeopardising the well-being of industry and failing to deliver emissions abatement objectives. A key concern relates to long term fiscal and regulatory stability and policy certainty. Where this does not exist, it risks undermining the environment for investment. As an example, the government’s Carbon Plan recognises the need to incentivise energy efficient gas fired combined heat and power generation (CHP) which is widely used on EII sites in the chemical, paper and food and drink sectors. However, use of this technology is being disincentivised relative to less energy efficient alternatives due to Carbon Price Support being wrongly applied to inputs used for heat, and the removal of Levy Exemption Certificates from April 2013. Treasury accept this is an issue, but the protracted delay in providing a solution means a hiatus in investment decisions until a final decision on the treatment of CHP is made. Current policies rely heavily on enhancing the economics of energy efficient and low carbon interventions through increased energy prices and carbon costs for EIIs. In practice, this approach reduces the industries’ capacity to invest, and if applied unilaterally, distorts international competition to the detriment of the UK. Broader industrial policy is seen as being a key influencing factor as to whether companies invest in new and more efficient plant. On this, the UK is seen as lagging behind key competitors in mainland Europe and elsewhere, with a number of respondents reporting a reluctance to invest in the UK due to negative business environment, uncertainty over Government commitment to industry, and the long term fiscal, regulatory and policy environment (see Figure 40 and Figure 44). Figure 40: The need for a stable and favourable investment environment: Tata Chemicals and ROCs30 During our research, we encountered a number of examples of companies holding off from making an investment in the UK, or who have found it more difficult to secure investment, due to policy uncertainty. Tata Chemicals, part of a large Indian conglomerate whose activities range from steel manufacture to hotels, provides an example. Tata Chemicals operates the former Brunner Mond soda ash facility in Northwich in Cheshire. As part of its 20 year plan to reduce CO2 output by >70%31, Tata has been planning an investment in a sustainable energy from waste combined heat and power (CHP) plant. By generating both heat and electricity, with energy utilization rates of 80%, CHP plants offer a very cost effective way of reducing carbon footprint for many EIIs. When the primary feedstock is waste, the carbon emissions abatement benefits are further improved. The recent introduction of Renewable Heat Incentives (RHIs) is intended to encourage the use of renewable heat sources. As a heat intensive company, Tata was encouraged in its plans by the value of the RHI tariff for energy from waste CHP plants, when these were announced by DECC. However the EU subsequently forced a reduction in tariff from £26/MWth to £11/MWth. Furthermore, DECC has since announced that there is a defined pot of money available on a first come, first serve basis. For projects with a long lead time between contract signing and commissioning this can be an unacceptable commercial risk and prevent the project being signed off. So, there is uncertainty about both the value and availability of funds. In Tata’s view this is therefore an incentive that has little value. Tata believes that any government incentives must be structured so as to be ‘bankable’. It must be possible to rely upon them when preparing a business case or when companies go to banks to borrow money for the investment. Unless the incentives are certain as well as bankable, they will be disregarded by company Boards or banks when coming to make decisions. In Tata’s case, because of the uncertainty surrounding RHIs they have had to consider ROCs. ROCs are aimed at electricity generation whereas Tata’s energy from waste CHP plant’s primary aim is to generate heat. Furthermore, the recent reduction in value from 1ROC to 0.5 ROC for Tata’s project means that they are in effect progressing with a £350m investment in a low carbon project with no meaningful government support.

30 31

Telephone interviews conducted by Orion Innovations between November 2011 – January 2012 CHP, clean fuel and alternative energy. The TATA Chemicals story. Martin Ashcroft MD, 2011

Building our low carbon industries

Many EIIs are multi-national concerns, with UK companies competing internationally for capital investment. Often these capital investment decisions are made by international headquarters outside of the UK. We encountered several instances where companies had moved UK activities abroad at the time at which investment in new plant was needed, due to more favourable conditions (see Figure 34), with significant impact on UK employment and economy, and negligible or negative impact on global carbon emissions. The findings from this study reinforce those of a Centre for Low Carbon Futures study undertaken for the TUC and EIUG which looked at investment in technology innovation for EIIs in the UK 32. It found that the primary barriers to low carbon investment included: the price of energy; availability of capital, particularly for UK companies that are subsidiaries of global organisations; lack of Government support for R&D: and regulatory uncertainty. As outlined in above, and in previous TUC/EIUG studies33, key to building efficient EIIs and realising a low carbon future, is long-term investment in new plant and in innovation, it also requires active Government engagement to develop and deploy industry and sector-wide strategies, in particular where market forces and the interests of individual commercial concerns will not provide an automatic solution. A specific example is provided by the need for recycling policies and infrastructure to support paper and glass industries (See Figure 41). Figure 41: Paper recycling in the UK The pulp and paper sector is highly competitive. Market pulp is no longer manufactured in the UK, with most production using fibre from recycled paper, accounting for 70% of feedstocks. Although a number of UK paper mills focus on more specialist product (seeking competitive advantage by avoiding competing in high volume, low price sectors), most paper mills compete in commoditytype grades and therefore require economies of scale. This leaves them vulnerable to changes in the international trade of paper for recycling. This UK based recycling infrastructure provides an important outlet for collected recyclate and income for recyclers. However, there is an increasing disconnect between the amount of material collected in the UK and the UK manufacturing capacity. Over 50% of collected material is exported for recycling, much to the Far East. The chaos caused to UK recycling in 2008 when China reduced purchases of UK material emphasises the risks to UK recycling and the importance of having a strong indigenous recycling sector. Through a clearly defined and integrated industrial strategy, the government is able to signal intent to commercial concerns and minimise business uncertainty. 5.5

Recognise multiple energy sources and uses

The Chancellor of the Exchequerâ&#x20AC;&#x2122;s recent Autumn Statement is focused on mitigating the impact of climate change policies on large scale electricity consumers. However, industrial, energy and environmental policies that seek to ensure the development and maintenance of the most efficient EIIs in the UK, need to take account of multiple energy types (gas, electricity, oil and solid fuels) and energy uses (e.g. process heat, process energy and feedstock materials). There are numerous examples of UK EIIs that are significant consumers of process heat, often derived from natural gas, oil or solid fuels (see Figure 42), or consumers of natural gas as primary feedstock for their products (see Figure 43). Retention of these industries is equally critical for realising the vision of sustainable, efficient EIIs in the UK. Figure 42: Tata Chemicals soda ash heat energy usage34 Tata has an 80-90% market share of the UK soda ash industry, and is a critical supplier to many downstream industries such as glass, detergents and chemicals. Its production energy constitutes a large proportion of costs. These costs are split 10:1 in favour of heat energy over electrical energy; enough to heat 100,000 homes for a year. Many UK EIIs are world leaders in efficiency and key contributors to emissions abatement but compete with companies outside of Europe that are not subject to the same policy constraints (see Figure 43).

32 33 34

Technology Innovation for Energy Intensive Industry in the United Kingdom, July 2011. Centre for Low Carbon Futures Centre for Low Carbon Futures, Technology Innovation for Energy Intensive Industry in the United Kingdom, July 2011 Telephone interviews conducted by Orion Innovations between November 2011 â&#x20AC;&#x201C; January 2012

Building our low carbon industries

Figure 43: GrowHow and the sustainable use of fertilisers35 GrowHow is the UK’s only manufacturer of ammonium nitrate fertilisers and the largest single consumer of natural gas. GrowHow has made significant investments in improving the efficiency of its ammonia production. In 2010 GrowHow deployed the latest catalyst technology to reduce its emissions of nitrous oxide from its nitric acid process. The project, which cost £9 million, will reduce manufacturing emissions by over 1.3 million tonnes of C02 every year36, and help ensure that GrowHow is amongst the most greenhouse gas efficient manufacturers of fertilizers in Europe. GrowHow also takes a leading role in encouraging farmers to use soil sampling techniques to target the use of fertilizers, optimising yields and, minimising wastage and nitrogen losses. However, the company is very exposed to gas prices. In the past, it has had to temporarily cease operations in winter months when the UK has suffered from a gas price ‘bulge’ due to inadequate gas storage. Its products also compete with imports from countries such as Russia and Egypt, which are subject to very different business and energy policy environments. In some instances there are opportunities for companies to choose as to whether they use gas or electricity for process heat or energy. In these instances, Government policy can proactively influence outcomes. However uncertainty, such as that which results from the Chancellors recent Autumn Statement, can cause delays in decision-making (see Figure 44). Figure 44: Importance of policy certainty: Allied Glass37 Allied Glass is a container glass manufacturer located in Knottingly in Yorkshire. Allied Glass is contemplating the replacement of a number of furnaces. However, the lack of clarity and integrated long term Government policies towards energy, the climate and industry is delaying decision-making. The company has the option to use gas or electricity-fired furnaces. It has undertaken modelling of the capital and operating costs associated with each of these scenarios. However, energy cost forecasts are a key factor in these long-term investment decisions and are impacted by uncertainty surrounding Government policies. In the absence of certainty, there will be an inclination to go with the tried and tested technologies, which may not be the least carbon intensive. In order to incentivise the use of new technologies and lower carbon energy sources, the company believes that the Government must minimise long term policy uncertainty. 5.6

Avoid carbon leakage

EIIs produce primary inputs for much of what we manufacture and consume. Their complex supply chains and regional connectivity have been illustrated in Section 3.2. Without EIIs manufacturing aluminium, cement and lime, iron and steel, chemicals, ceramics and so forth in the UK, businesses would import their products or those of their downstream customers. 38

In 2010, Civitas looked at the threat of British energy policy to manufacturing industry , and included specific mention of INEOS Chlor, one of the UK’s largest consumers of electricity in particular for the electrolytic manufacture of chlorine and caustic soda from brine. They concluded that if the INEOS Chlor plant in Runcorn were to close, either in part or in full, many downstream industries would close too. Chlorine is not readily transported so downstream businesses would migrate to countries and regions where chlorine is produced. UK would continue to consume products containing chlorine, such as derivative plastics, polyvinyl chloride (PVC) or disinfectants. These would simply be made abroad. The same logic applies to most, if not all other EIIs. The closure of the Rio Tinto aluminium works in Lynemouth will almost certainly result in the import of more aluminium to the UK. It may also undermine the viability of downstream industries and lead to the increased import of aluminium-containing products. In order for this carbon leakage not to be detrimental to the environment, it would be necessary for imports to result in fewer emissions than domestic manufacture. There is significant evidence that the reverse is likely to be the case. In many instances, loss of UK manufacture will be to countries that use more carbon intensive energy, and produce products with less carbon efficient processes (see Figure 45, Figure 46 and Figure 47). Furthermore, it results in greater transport of goods, with resulting emissions impacts.

35 36 37 38

Telephone interviews conducted by Orion Innovations between November 2011 – January 2012 http://www.cia.org.uk/Portals/0/Documents/Low_carbon_brochure_final2LR.pdf Telephone interviews conducted by Orion Innovations between November 2011 – January 2012 British energy policy and the threat to manufacturing industry, Civitas, April 2010

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Figure 45: Carbon intensity of PVC: UK vs China39 INEOS ChlorVinyls, have completed a comparative study of the impact of transferring polyvinyl chloride (PVC) manufacture to China, based on a bill of materials published by independent consultants40. Chlorine is made using the same electrochemical process in both locations, although China is dependent upon more carbon-intensive electricity. However the greatest differential results from the manufacture of PVC from chlorine and acetylene in China, as compared to the use of chlorine and ethylene in Europe. Acetylene is produced in an energy intensive process by reacting lime and coal at high temperatures to produce calcium carbide, which in turn is reacted with water. This results in substantially greater emissions. INEOS found that the carbon intensity of PVC when produced in Europe is approximately 1.9 t CO2/t PVC, compared to 8.8 t CO2/t in China. Figure 46: Potential loss of fertilizer manufacture to Middle East and Russia41 The current benchmark used to determine the emissions allowances allocated to ammonia plants under the EU Emissions Trading Scheme, is believed to be set so low that even the most efficient plants struggle to meet it. GrowHow, a UK manufacturer of ammonium nitrate fertilisers, estimates that resulting penalties could be of the order of £3-5 million a year, depending on the C02 price GrowHow has reduced emissions by one third. The majority of its remaining emissions are limited by the chemistry of its process. As a business its core driver is, in any case, the energy efficiency of its ammonia production process. Any remaining projects to improve the energy efficiency of this process are expensive, and the improvements, incremental. Additional EU ETS costs simply make ammonium nitrate production in the UK increasingly less attractive and result in imports from countries in the Middle East and Russia, which are not subject to EU emissions controls. Figure 47: Loss of glass manufacturing42 A number of glass container manufacturers have reported moving production abroad to benefit from cheaper labour and more favourable energy costs. Beatson Clark a privately owned Yorkshirebased glass containers business buys glass products from Czech and Taiwan to be sold in the UK market, that they previously manufactured in Yorkshire. Similarly one multinational producer, recently moved some production to Poland due to cheaper labour, energy and materials costs. In both instances there is an increased transport of goods and negligible change in manufacturing efficiency and therefore carbon emissions.

39 40 41 42

Telephone interviews conducted by Orion Innovations between November 2011 – January 2012 World Vinyls Analysis 2008 published by Chemicals Markets Associated Inc (CMAI): Page 383 Telephone interviews conducted by Orion Innovations between November 2011 – January 2012 Telephone interviews conducted by Orion Innovations between November 2011 – January 2012

Building our low carbon industries

6. 6.1

PENALTIES OF FAILURE The domino effect

The supply chain and regional inter-connectivity of EIIs has been outlined in Section 3. Loss of any individual energy intensive business can have a far reaching impact on other businesses. It can undermine the economic viability of:  Companies down the supply chain that have historically procured its products;  Companies up the supply chain that have historically supplied raw materials and other inputs to its processes;  Companies that share supply chains or infrastructure (e.g. shared feedstock processing plants, power plants and utilities);  Other companies within the sector, in particular those that share physical and human resources or are reliant on critical mass to sustain services, training, education and innovation.  Companies providing services to the sector (e.g. construction of maintenance services). The recent closure of Dow Chemical’s ethylene oxide plant in Teesside in 2009 provides an interesting example, the impacts of which have probably yet to fully unwind (see Figure 48). Figure 48: The petrochemical industry and closure of the Dow ethylene oxide plant43 The chemicals sector is one of the most highly inter-dependent sectors of all the EIIs. Hundreds of products are derived from only a handful of feedstocks, with multiple process plants highly dependent on one another. For example, an ethylene cracker may feed dozens of derivative plants. Historically these crackers and their derivative operations will have been developed and owned by a single commercial entity. While this situation prevails in many parts of the world, in the UK, with the demise of large corporates such as ICI, these plants have been sold into separate businesses. These individual businesses make decisions which are optimum for their operations, but which may be sub-optimal for the combined portfolio of inter-related businesses. In doing so, an individual business can undermine the long term prospects of many others. Dow Chemicals closed its ethylene oxide plant in Teesside in 2009 with a loss of 75 jobs, and consolidated manufacture at its plants in mainland Europe. At the time the company said that “the closure of its ethylene and ethylene-derivatives production plants fit into its strategy of reducing its reliance on cyclical and commoditized basic chemicals production, and increasing its focus on less 44 volatile higher-value specialty chemicals” . While this decision may have been entirely appropriate for Dow, it has had a significant and lasting impact on a number of related businesses. These include Croda International and Shell, both of whom closed surfactants plants at the site with significant loss of employment, as well as other smaller speciality chemicals makers in the UK who are now forced to import ethylene oxide, a hazardous material, at greatly increased cost, making them less competitive. SABIC which owns the ethylene cracker, and other derivative businesses which shared primary feedstock and utilities supplies with the Dow ethylene oxide plant were impacted too. In many instances, the domino effect resulting from the decline or closure of a particular plant of business is less immediately obvious. Instead, a series of small closures have a gradual and corrosive impact on the long term viability of the sector. In all three sectors surveyed, examples were given of the underlying impact of plant closures on the sector as a whole. These include the disappearance of sector specialised education and training, and of key technology and service suppliers. For example, one particular UK-based engineering company that 10 years ago had more than 30 staff supplying ceramic plate production machinery to global customers, now only has one person selling second hand equipment. Similarly, Staffordshire University (formerly Staffordshire Polytechnic) no longer offers a valued ceramics management course; likewise UMIST has closed its paper making courses and is seeking to dispose of its specialist training equipment as many UK mills now use specialist training facilities in Germany. Specific training courses for glass have tended towards providing generalised engineering training, with one university reporting a swing towards the hobby orientation or retirement market rather than potential professionals. Inevitably, businesses can only take decisions that are in their individual interests. However failure of a single plant or company can undermine the viability of many others, or indeed the sector as a whole. Only Government, through sector strategy and industrial policy, can take a more holistic view of the industry and so influence the interests and decision making of individual companies.

43 44

Telephone interviews conducted by Orion Innovations between November 2011 – January 2012 http://www.dailyfinance.com/2009/07/01/dow-chemical-announces-plant-closures-says-its-savings-plan-is/

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6.2

Lessons from history

Insights into the impact of sizeable plant closure can be gathered from history. Figure 49 summarises the long term impacts that resulted from the closure of the MG Rover plant in Longbridge in 2005. Although MG Rover was not an EII, the impacts are likely to be applicable to all EII sectors. This case was chosen as it shows how the large scale, anticipated and well documented loss of a manufacturing industry can have wide spread and lasting effects on not only former employees, but their families, the local community and wider sub-regional economy. It should also be noted that the Longbridge closure took place during a period of relative national economic prosperity. Post 2008, it would be unlikely that redundancies from a closure of similar scale would be as readily absorbed. Figure 49: Closure of Longbridge MG Rover Plant, 2005. The closure Closure of the MG Rover Longbridge Factory in April 2005 with the immediate loss of 6000 jobs was one of the largest single redundancy events in Britain since the closure of British Steel at Shotton in 1980. MG Rover went into administration and its remaining assets were sold to Nanjing Automobile Corporation. The impact of the closure on the MG Workers, their families and the wider community has been closely documented over three time periods, three months, eight months and three years after the event45,46,47,48. Prior to closure there had been a considerable amount of work done to prepare for the anticipated redundancies and to minimise damage. The Government set up a Regional Task Force under the leadership of the Regional Development Agency. This Task Force was funded with £176m in order to assist suppliers to diversify and stay in business, support the workers to find new jobs, and provide assistance to the community. A telephone hotline for workers was set up, as well a website giving advice and contact details for MG Rover suppliers, employees and for the local community. A helpline was also established by the Birmingham City Council to provide support for local residents. An MG Rover Jobcentre Plus hotline was launched to provide advice on job opportunities and benefits available. A package of tailored support for suppliers was also developed. Economic impact of closure was felt throughout the region Some shops and restaurants closed while others experienced a decrease in their business activity. The location of the factory near good road communications and the mix of workforce meant that the impact was felt in a much wider (sub-regional) geographical area than the immediate neighbourhood of Longbridge and Northfield. This ripple effect was compounded by 55% of workers living outside Birmingham. Re-employment occurred but not at a similar level By 2008 >90% of MG Rover workers were back in work, and around 60% had undertaken some form of education or training. Although the majority of Rover workers were officially back in work one year after the closure, long term unemployment was still not back to pre-April 2005 levels in the areas of Longbridge, Northfield, Bromsgrove, Dudley and Birmingham by April 2007. While competition for jobs increased and long-term unemployment remained It is likely that there was a displacement of less qualified workers by the relatively higher skilled MG workers. People already unemployed now had to compete with ex-MG Rover workers coming into the labour market, thereby resulting in an increase in long term unemployment. Lower-skilled workers suffered the most Many were forced to accept lower status jobs due to an absence of skilled jobs. This had a profound effect on physical and mental health and there is there is compelling evidence to suggest that ‘less skilled’ employees were more prone to mental illness, coronary heart disease and gastrointestinal conditions. Major life changes were seen in other members of the household, including partners who had taken up work, and children whose education had been affected.

Life after MG Rover, A report prepared for BBC Radio 4, Kathy Armstrong, 2006 The impact of factory closure on local communities and economies: the case of the MG Rover Longbridge closure in Birmingham. Caroline Chapain and Alan Murie, Centre for Urban and Regional Studies, University of Birmingham, May 2008 47 Life after Longbridge: Three Years on. Pathways to re-employment in a restructuring economy, David Bailey Caroline Chapain, Michelle Mahdon, Rebecca Fauth, Nov 2008 48 Dealing with plant closures and redundancies Key lessons from MG Rover, Briefing Note, David Bailey, Gill Bentley, Caroline Chapain, Alex de Ruyter, Stephen Hall and Michelle Mahdon, Birmingham Business School 46

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Summary impact of the closure  >90% of workers found work within three years;  70% reported finding their current job through personal networks or initiatives;  £5600 a year average fall in income;  >40% saw their job as worse than at MG Rover;  15-20 % had seen a GP or been in hospital;  Costs of closure fell most heavily on those unable to move to new locations.  Evidence that less skilled workers were displaced in the market place, resulting in sustained long-term unemployment Conclusion The anticipated closure and resulting Government support helped to minimise its impact. However, there were many clear and well documented examples of decline in regional employment, health, crime and economic opportunities. The fundamental challenge on the Longbridge site was to reconcile the short, medium and long term expectations of 1) those who had suffered from the closure; and 2) those who benefited from the new opportunities presented by redevelopment. It is important to note that these are two different groups49. 6.3

Economic, employment and fiscal impacts

To date there has been no attempt to accurately assess the impact of failing to sustain EIIs in the UK. The economic, employment and fiscal value associated with EIIs is profiled in Section 3 of this report and were all EIIs to disappear overnight, this and more value would be lost. In the absence of active Government support, a gradual decline with intermittent closure of individual plants is more likely. ONS data suggests that there has been a 7% decline in employment numbers across all EIIs between 2008 and 2011, and a 9% reduction in turnover. Industry stakeholders contacted within the context of this study talk about a tipping point, where investment in new plant is made unattractive by energy prices and industrial policy, and existing plants become uneconomic. They also talk about whole industry sub-sectors being undermined through loss of critical mass and associated specialist resources and infrastructure. EIIs make a direct contribution to the UK economy through GVA, fiscal contributions (taxes and levies), and employment (wages and social costs). In addition, they sustain their suppliers through the purchase of goods, materials and services, and their customers through the provision of costeffective products (turnover). Their staff induce further value add and employment through their wage spend. We estimate of the economic and fiscal cost associated with the loss of EII employment, based on current EII averages, suggests that loss of GVA to be more than £77,000 per person (See Table 4). This is not an appropriate estimate for loss of employment as a result of efficiency improvements, as GVA would continue to reside within the company. It is however a legitimate estimate if a business was to be lost overseas. Note that these figures exclude the petroleum industry, which pays substantial taxes and levies and which distorts the average. Table 4: Average EII GVA, wages, social payments, taxes and levies per employee (2008) (Excluding the petroleum sector)50 Low

Average

High

GVA

£39,963

£77,146

£122,292

Wages

£24,246

£31,694

£41,931

£2,076

£2,700

£3,285

£822

£2,483

£5,667

£1,363

£1,959

£2,611

£28,507

£38,836

£53,494

Employer National Insurance Pensions contribution Taxes and levies Total

This estimate does not take into account the knock-on effect both up and down the supply chain. When Dow closed its ethylene oxide plant in Teesside (See Figure 48), more jobs were lost in downstream Croda International business than in the Dow plant itself.

Dealing with plant closures and redundancies Key lessons from MG Rover, Briefing Note, David Bailey, Gill Bentley, Caroline Chapain, Alex de Ruyter, Stephen Hall and Michelle Mahdon, Birmingham Business School 50 Note: calculated by combining EII 2008 totals from Table 2 and identifying the low, average and high values

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On average, more than £200,000 is spent on third party goods, materials and services for each person employed within EII sectors. In turn, products worth in excess of £280,000 are sold to downstream customers (See Table 5). As is evidenced in the case study above, even where re-employment occurs, there often a longterm reduction in wages and GVA and a sustained increase in unemployment. These in turn have financial costs, in terms of unemployment and social security payments, as well as significant social costs. Table 5: Average EII turnover and spend on goods, materials and services per employee (2008) (Excluding the petroleum sector)51 Low Turnover Cost of goods, materials and services

Average

High

£101,814

£281,103

£582,460

£62,852

£205,604

£462,335

These estimates may be crude, but go some way to demonstrating the potential economic, employment and fiscal impact of losing EIIs. We would encourage further and more detailed studies around this subject, particularly as the impact of the recession has been felt throughout manufacturing industries across the world, severely threatening their future operations. As demand and therefore production fell over the recession so too did the value that EIIs provided to the economy. However, as we emerge from these difficult years and given the consensus on the need to rebalance the economy, boost manufacturing and reduce our trade deficit, there is a golden opportunity to create more robust and efficient EIIs that will ensure the UK remains an important industrialised nation far into the future.

Note: calculated by combining EII 2008 totals from Table 2 and identifying the low, average and high values

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CONCLUSIONS AND RECOMMENDATIONS

This report has provided evidence of the economic, employment and fiscal benefits of securing EIIs in the UK. In addition, it has shown how the development of the most energy efficient and internationally competitive EIIs can give rise to significant growth opportunities. In Section 2, we briefly introduced each EII, highlighting their common characteristics which include their scale and regional significance; their maturity, the commoditised and internationally competitive nature of their products and markets; their capital intensity; their importance and position in large and complex supply chains; the skilled nature of their workforce, and the multinational ownership and operations of many EII businesses. In Section 3, we demonstrated the value of EIIs to the UK economy. EIIs make a direct contribution to the social and economic fabric of the UK economy through gross value added, fiscal contributions, and employment. In addition, they sustain their suppliers through the purchase of goods, materials and services, and their customers through the provision of cost-effective products. The staff induce further value add and employment through their wage spend, and there is evidence that EIIs are important contributors to skills development and training, and act as anchors for industry-wide innovation In Section 4 we dispelled the myth that EIIs are inefficient. As energy constitutes such a large proportion of costs, EIIs have been incentivised over many decades to ensure that their plants are as efficient as possible. UK factories, mills, plants and furnaces are often more efficient than competitor operations in other parts of the world. EIIs are also critical to delivering a low carbon economy. They provide the raw materials and infrastructure that support the production and installation of low carbon energy generation technologies such as wind turbines and solar panels, and energy efficient solutions such as insulation and energy efficient lighting. In Section 5 we introduced some of the policy challenges associated with sustaining EIIs in the UK. In particular we highlighted the importance of industrial strategy, of ensuring internationally competitive energy prices, of encouraging investment in energy efficient plant and innovation, and of avoiding carbon leakage, in particular to countries with less stringent environmental constraints. In Section 6 we highlighted the significant economic and social costs that will result from a failure to support EIIs in the UK. In particular, we outlined the ‘domino effect’ that results from the closure of a single plant or business in these highly interconnected industries. This analysis gives rise to the following recommendations: 1. We recommend the creation of a common vision for all EIIs in the UK, shared by Government, industry and other key stakeholders. Given the importance of EII’s to the UK, both in terms of economic value and employment, and in terms of realising a low carbon future, we believe that this vision should be to ‘support, develop and grow the world’s most energy efficient EIIs in the UK’. 2. This vision should be reflected in a consistent approach by all Government departments and other policy stakeholders. In particular, industrial strategy needs to be linked to energy and environmental policy. We believe that these policies should: 

Maintain and enhance the international competitiveness of UK EIIs, in particular with regard to energy prices and carbon costs. The UK cannot afford to diverge significantly from competitor nations in Europe and the rest of the world;



Encourage investment in energy efficiency and emissions abatement. Investment in capital plant and innovation are essential to realising an energy efficient industry and a low carbon future;



Recognise multiple energy sources, including natural gas and electricity, and multiple energy uses, both as a feedstock and a utility;



Avoid carbon leakage, in particular to countries with less stringent environmental constraints.

3. Critical to realising this is an industrial strategy that: 

Sets clear objectives for policy interventions that encompass industry competitiveness, energy and the environment;



Provides policy stability and long term clarity of Government intent, for national and international businesses contemplating investment in the UK;



Takes a cross-industry and cross-supply chain perspective, and minimises the possibility of sub-optimal decision making;

Building our low carbon industries



Enables investment in cross industry infrastructure and actions (e.g. recycling) that deliver the vision;



Proactively supports and accelerates the development of new energy efficient processes, technologies and applications, in particular where these involve cross -industry innovation;



Secures high quality, highly skilled and high value employment and associated benefits for the UK economy.

4. Energy strategy should: 

Provide long term security of supply, and minimise unnecessary fluctuations in price e.g. through investment in gas storage capacity and requirement to use this through a Public Service Obligation as in other competitor economies;



Provide a clear path to decarbonise energy supply using a cost effective mix of energy sources.

5. In order to do develop and realise a common vision and strategy, we believe that it is important for policy makers, trade bodies and other stakeholders to build lasting and effective partnerships with one another, possibly through new industry bodies and/or forums. 6. It is also essential to develop and maintain reliable databases of information, authenticated by industry, which can be used to make more informed decisions, as good governance needs accurate and reliable data. This report has highlighted that official ONS data, currently used for making critical policy decisions, is highly flawed. Maintaining EII competitiveness is vital to the delivery of a low carbon economy. However this will only be made possible with cross-stakeholder cooperation and inclusion. Government has a responsibility as part of an industrial policy to ensure this happens.

Building our low carbon industries

APPENDIX: EII QUESTIONNAIRE RESPONSES This appendix contains questionnaire responses from each of the industry associations contacted during the course of this study. These include:  Cement and lime: Mineral Products Association (MPA) and British Lime Association (BLA)  Ceramics: British Ceramic Confederation (BCC)  Chemicals: Chemical Industries Association (CIA)  Glass: British Glass Manufacturers’ Confederation  Iron and steel: UK Steel  Pulp and paper: Confederation of Paper Industries (CPI)  Coke and refined petroleum products: Not made available We sent a common questionnaire to each industry association which included questions relating to employment, economic and fiscal data, skills levels of employees, energy intensity, the regional focus and parliamentary constituencies in which these industries are most prominent. We provided ONS data for the respondents to review and comment on. In all cases there were sections that were difficult for the industry associations to complete, due to lack of access to data or confidentiality concerns. In most instances respondents had misgivings about the accuracy of the ONS data. Where possible, they have provided alternative data. This new data is not reflected in the graphs contained within this report but has been referenced through the course of the study.

Building our low carbon industries

Cement and Lime Industry association Cement and Lime (Mineral Products Association and the British Lime Association) Overview of the industry Each year the mineral products industry as a whole supplies in excess of £5 billion of materials to the £110 billion construction and other sectors. Industry production represents the largest materials flow in the UK economy and is also one of the largest manufacturing sectors. The UK cement industry includes both Portland Cement and Calcium Aluminate Cement. Cement and lime sites are located near natural raw material supplies. There are sites across the UK in England, Northern Ireland, Scotland and Wales. The greatest concentration of sites is in the Midlands, in close proximity to natural resources and within easy reach of customers. The cement sector and in part the lime sector are dominated by multinational firms, which operate on a regional basis. In the UK there are 12 cement kiln sites plus 8 cement grinding and blending sites. These are owned by 5 international companies: Hanson Heidelberg Cement Group (3 sites), Lafarge Cement UK (11 sites), Cemex UK (3 sites), Anglo American plc (1 site that is operated by Tarmac Buxton Lime and Cement) and Kerneos Aluminate Technologies (1 site) and one UK owned company: Quinn Cement (1 site). There are 7 sites that produce commercial lime. These are owned by UK companies: Singleton Birch (2 sites) and Steetley Dolomite Ltd (2 sites) and international companies: Lhoist (1 site) and Anglo American plc (2 sites operated by Tarmac Buxton Lime and Cement). In addition there are 6 sites that produce lime largely for their own use. These sites are owned and operated by Tata Steel, British Sugar and Specialty Minerals. In recent times two cement works have been closed and other kilns mothballed due to the economic downturn (cement sales decreased 33% between 2007 and 2010) and the large investment needed, while newly permitted modern plant is also yet to be built. The high capital cost of investment in the cement and lime industry means that, in the short run at least, investment in new capacity is most likely to take the form of the up rating of existing plant or the creation of additional capacity at existing plant. The rationalisation of production capacity into larger more economic units may lead to the closure of some small plants. Key metrics (data source: green indicates MPA and BLA supplied data, otherwise ABS 2008)

Cement and Lime

Number of Companies

2005 2008 2009 2010 2011 % change since 2005

Direct Employment 9 9 9 9

3,861.00 2,026.50 1,839.00 1,684.50

0.00

56.37

Indirect Employment

Employment Cost £million

339.00 311.40 345.40 225.15 Data not yet available 33.58

Turnover GVA £million £million 997.05 401.47 144 1,135.25 427.51 885.78 333.90 899.60 332.18

#DIV/0!

9.77

Notes: 1). Quinn cement is included in all data. 2). Kerneos data is included in turnover, GVA and number of companies but not in employment information. 3). BLA Associate members (Tata Steel, British Sugar and SMI) have not been included. 4). 2005 employment is estimated

Skills The cement industry employs highly skilled engineers, scientists and operatives across a wide range of disciplines. It maintains a popular and successful apprenticeship programme with as many as 40 individuals in the programme at any one time. This has continued throughout the economic downturn. The industry is characterised by very low rates of staff turnover. Energy intensity Energy consumption for cement 49

17.26

2010

2009

2008

Building our low carbon industries

Paper / Plastic mix

Packagi ng & RDF

Sludges (paper and sewage)

MBM Meat & Bone Meal

3,662,33 7.57

0.00

2,329,50 9.80

220,000. 00

1,472,61 8.38

4.63

8.53

0.00

5.43

0.51

3.43

18,265.6 5

1,365,91 1.68

3,024,89 8.92

0.00

2,925,13 0.97

175,360. 18

1,406,70 0.27

0.73

0.06

4.80

10.62

0.00

10.27

0.62

4.94

4.98

254,142. 67

13,609.0 0

1,653,86 3.50

2,882,22 3.99

0.00

3,678,74 0.39

109,875. 78

1,578,23 8.10

0.00

0.87

0.05

5.64

9.82

0.00

12.54

0.37

5.38

Natural Gas

Waste oils

Waste Solvent s

Tyres

239.92

204,289. 68

23,000.0 0

1,988,67 6.83

0.00

0.48

0.05

0.00

130,127. 00

0.00

208,438. 39

0.00

0.46

0.00

187,404. 31

0.00

98,803.7 7

0.64

0.00

0.34

Delivered electricity

Heavy Fuel Oil

Kerosen e

Coal

Petcoke

Coke

Gas Oil

G J

5,072,628. 79

25,140,1 65.29

2,406,65 4.62

0.00

256,034. 27

0.00

161,207. 80

11.81

58.55

5.61

0.00

0.60

0.00

0.38

G J

2,892,036. 27

14,694,5 12.34

1,387,82 7.82

0.00

246,186. 60

10.16

51.60

4.87

0.00

0.86

G J

3,252,023. 14

14,716,3 99.85

905,473. 22

0.00

11.08

50.16

3.09

0.00

LPG

Energy consumption for lime Data Electricity Natural gas Pet coke Coal SDF RFO

Unit GJ GJ GJ GJ GJ GJ

2008 515,714 3,819,123 1,286,925 1,679,118 946,799 15,872

2009 438,279 2,939,547 793,260 1,144,402 783,484 12,135

2010 480,618 3,300,987 516,151 1,760,155 884,402 1,411

Important Parliamentary constituencies  High peak  Brigg and Goole  Rutland and Melton  Ribble Valley  Rugby  Staffordshire Moorlands  Sedgefield  Wells  East Lothian  Alyn and Deeside Views on recently announced support for EIIs Could be very positive if the allocation of support does not create competition distortion between competing sectors and particularly within sectors, and data used in allocation is as accurate and reliable as possible. MPA Cement and the BLA welcome the Government announcement of a package of support for energy intensive industries. However, there are concerns that: 1) Inaccuracies in Government data were particularly apparent in the BIS compilation of sector rankings based on electro, gas, energy and trade intensity. MPA has submitted more accurate data to BIS and received a reply from DECC agreeing that “what the Government currently holds on electro-intensive industries is limited and dated”. The letter from DECC also indicated that more accurate data is to be collected in a consultation expected imminently on approaches to setting threshold criteria to determine compensation. 2) Historical trade intensity is not a reliable metric for future trade exposure because it will increase as EU products with a high total CO2 tax burden are replaced with imports from countries with less or no carbon constraints. This will be to the detriment of both the environment and the security of supply of essential materials. It is hoped these comments made to BIS will be reflected in the imminent consultation. 3) Support allocation could result in competition distortion. The allocation of the available support could result in competition distortion between competing sectors and, if allocated on a company basis, also within sectors.

Building our low carbon industries

Ceramics Industry association British Ceramic Confederation (BCC) Overview of the industry There are approximately 160 member sites round the country. Sites making clay construction products such as bricks, roof tiles and clay drainage pipes are co-located with clay quarries (eg concentrated in the Downs, E Midlands, W Midlands, and Yorkshire) – depends on geology. Much of the tableware and giftware sector is centred on Stoke on Trent – together with a number of suppliers. There is a concentration of refractory manufacturers in Yorkshire. Otherwise the industry is dispersed throughout the country. Many of the larger companies are owned by foreign owned parents and are stock-market listed– particularly so for construction side. A few companies are headquartered in the UK with sites around the world. Some are venture-capital owned or with a controlling stake. Some of the UK sites might have, say <100 employees even if they are part of a larger group. Many SMEs and indeed a sizeable proportion are privately owned or family owned, particularly in the tableware / giftware / heavy clay sectors. There have been some significant Management Buy Outs recently. Most sites are single-site manufacturers. Some exceptions eg Ibstock, Wienerberger, Hanson, Michelmersh (bricks / roof tiles), Morgan (technical ceramics and refractories), Dudson (tableware2 UK sites). The diverse focus: Some of the technical / refractory firms have constantly innovated and developed new markets for novel ceramics. In recent years the “heavy clay” sector has developed a very wide range of products to help insulate / refurbish homes or provide novel construction methods. The narrow focus: Most members have good product “niches” and that has allowed them to stay internationally competitive e.g. against Far Eastern bulk imports. Historically, many firms have been operating for a long time. Tremendous decline in employees in the industry in the last 20 years (combination of automation, rationalisations, increase in imports from Far East due to cheap labour and to lower energy costs/ taxes). Firms remaining are internationally competitive. The outlook is of real concern that cumulative taxes and costs of green policies in UK will exceed current profits for many companies in the short – medium term and that costs can’t be passed through to customers as firms compete internationally. A real concern where firms have state of the art energy efficient technology – just seen as a tax. Process emissions cannot be mitigated in the industry (dilute, spread over many installations, high temperature). However, many firms continue to develop novel products and enter new markets around the world. Key metrics (data source: Blue indicates BCC supplied data, otherwise ABS 2008 and IDBR 2009 & 2011) Ceramics Number of Direect Indirect Employment Turnover GVA companies employment employment cost £million £million £million 2008 2009 2010 2011 % change since 2005

100

16,000 13,000

13,000 -35%

581

2,117 2,000 1,574

581

Building our low carbon industries

Skills The technical ceramics / refractory part of 23.4 employs a much higher proportion of graduates and PhDs as product development and technical innovation is essential and these people are often also in a large number of technical sales roles. Even among tableware which has traditionally had a very low proportion of graduates, some employers, such as Churchill (a large employer) have been recruiting very large numbers of graduates for a number of years. Mechanical / electrical (or multiskill) apprentices are important to all sectors – and once qualified are highly valued and are in short supply. The ceramics sector, has been affected by the allocation of no Government training funds to the sector skills council, Proskills, in November 2011 (along with several other energy intensive sectors such as glass, paper and minerals). Alternative funding mechanisms will have to be developed to meet company needs in the ceramics sector. Energy intensity for some selected sectors (data source: BCC for 2008-2010) Description Energy Costs as % of GVA Manufacture articles Manufacture Manufacture Manufacture Manufacture Manufacture baked clay

of ceramic household and ornamental of of of of of

other technical ceramic products other ceramic products refractory ceramic products ceramic tiles and flags bricks, tiles and construction products, in

13 10 24 30 >>50 47

Important Parliamentary constituencies  Stoke North  Stoke Central  Stoke South  Stone  NW Leicestershire  Derby South  Stocksbridge / Penistone  Aldridge South  Mole Valley  Tamworth  Newcastle under Lyme Views on recently announced support for EIIs ”Government will devise by the year-end ways to make a “material difference” to rising costs faced by manufacturers because of Britain’s carbon-reduction goal. German energy-intensive industries have enjoyed sustained support from Government…that’s what we’re looking to replicate”. Full response: “The Government has moved more than we expected and although we have serious doubts about the scope and extent of the measures they are offering, this is a welcome first step at a time when public finances are constrained. We look forward to continuing to work with Government to help mitigate more fully the UK unilateral extra climate change costs and taxes. We need to be included directly in the discussions. However, time is running out, and some of our members have already relocated electro-intensive processes to other Western European countries where governments are more inclined to provide practical help.

Building our low carbon industries

“We welcome that up to £100m may be available for loans to invest in suitable industrial and commercial energy efficiency projects during the next financial year through the Green Investment Bank. “All our members could benefit from the 90% electricity Climate Change Levy rebate – provided they meet very strict new targets. We were encouraged to see that the Government plans to relieve costs on Carbon Price Floor. This is installation-specific – and we think this is helpful, but the thresholds will be too high and benefit only a few of our members. Certainly one of main elements of the package, the indirect EU ETS pass through compensation appears not to help our members at all. Even the most electro-intensive ceramic processes might only receive perhaps an extra £2 / MWh relief in 2013 – hardly enough to mitigate all their extra UK-only climate-related costs and taxes. Overall we believe our members will receive just a couple of million pounds between them in 2013. This does not help growth or ‘ensure that energy-intensive industries remain competitive and that we send a clear message that the UK is open for business', nor may be enough to ‘keep businesses here’. Moreover, we are concerned that the package will benefit much less durable products than ceramics with higher lifecycle carbon footprints – which leads to market distortion. “We are aware of our responsibilities in reducing both our and our customers’ emissions as part of a 'green industrial transformation'. We weren't asking for special treatment, just a level playing field.” “For most of our members, the package does little to address the cumulative cost of the UK’s longer term emissions reduction targets. We would have liked to have seen some enhanced capital allowances for a greater range of equipment that improves energy efficiency and funding for demonstrators for technology projects that reduce emissions. Mitigation of other extra UK costs that overseas competitors do not have to pay is essential– such as for process emissions on EU ETS where technology solutions are not possible even in the longer term. This would have been an investment in our industry in the future. We want to continue this discussion with Government – we need growth in our industry." Recommendations for a second phase of support  Capital allowances  Support for technology demonstrators  Mitigation of process allowances in EU ETS that can never be abated (and are transposed so that UK companies will pay more than in some other EU countries)

Building our low carbon industries

Chemicals Industry association Chemical Industry Association Overview of the industry See main document, section 2.4 Key metrics Chemicals Number of Direect Indirect Employment Turnover GVA companies employment employment cost £million £million £million 2008 2009 2010 2011 % change since 2005

924 880 782 730

47,000 37,000

2,043 1900 1899 1880

34,000

27,185 19,347 21,743 23,000

5,185 5,025 6,412 6,600

Energy intensity Not made available Important Parliamentary constituencies Angus Ellesmere Port and Leston Great Grimsby Linlithgow and East Falkirk Liverpool Wavertree Middlesbrough South and East Cleveland Redcar Scunthorpe County Stockton North Stockton South Vale of Glamorgan Warrington South Weaver Vale Widnes, Runcorn and Hale Wirral West Worthing West Views on recently announced support for EIIs Energy Intensive Manufacturing - cumulative policy impacts on energy costs CIA brief in response to the Autumn Statement  We welcome the decisions announced thus far to mitigate UK and EU policy impacts on energy costs. These offer some much needed reassurance to energy intensive chemical businesses that are ideally placed to deliver both UK economic growth and our green future. However, we look forward to the Government also taking timely decisions to mitigate costs in the other intended policy areas. It will then be important to continue developing a comprehensive strategy for energy intensive manufacturing which offers the long term predictability business needs to invest. 54

Building our low carbon industries

Autumn Statement decisions  We welcome the decisions taken to mitigate the indirect impacts on our electricity costs as they arise from the EU Emissions Trading Scheme (EU ETS), Carbon Price Support (CPS) and Climate Change Levy (CCL) and the budgets to fund this for 2013/2014 and 2014/2015.  We look forward to working with Government to implement these provisions. It will be particularly important to ensure that the qualification criteria for compensation for CPS and EU ETS impacts take account of the electro-intensity of individual business to ensure that the compensation is targeted at those whose competitiveness is most at risk. Combined Heat and Power (CHP)  We welcome recognition of need to incentivise this energy efficient technology in the Government’s recent Carbon Plan. The plan recognises that gas fired CHP offers significant abatement opportunities in the industrial sector (efficiency gains of 15%) and confirms that Government will continue to incentivise CHP.  But we are disappointed there was no Autumn Statement decision on CPS relief or assurance on overall incentives for CHP. CIA members already source half their power and a significant portion of their heat from CHP but so far lack the clarity on power cost mitigation that’s been provided to non-CHP sites. CHP sites are additionally disadvantaged as the current CPS proposals wrongly tax the inputs to CHP used to generate heat.  We seek CPS exemption and a Feed-in-Tariff (FiT) - it is critical that Government provides CHP with full exemption from direct CPS on fuel inputs for heat generation. To ensure the economics of new and existing CHP schemes, a FiT should also be introduced with seamless transition from the Levy Exemption Certificate scheme which is currently scheduled to end on 31 Mar 2013. Electricity Market Reforms  Mitigation of additional costs from the Electricity Market Reforms should be finalised with the main policy settings. We welcome the Autumn Statement’s confirmation that Government intends to explore reducing the impact of costs including the FiT with contract for difference. Recommendations for a second phase of support  While we recognise budgets are currently tight we would like to see government increase the mitigation budgets In “Phase 2” of this strategy so compensation can be spread across a wider set of at-risk activities.

Building our low carbon industries

Glass Industry association British Glass Manufacturers’ Confederation Overview of the industry Over the past ten years the number of companies manufacturing glass in the UK has roughly halved, meaning that many products with long and rich British histories have now been “offshored”. Products such as borosilicate glasses (e.g. Pyrex) for cooking, special glass application such as windows for nuclear reactors and aerospace applications, optical fibres, glass frit for enamelling of tiles and metal (baths, panels) and large scale lighting and domestic, medical and scientific have all found more economically favourable conditions of manufacturing elsewhere. We cannot always include data from these companies as their relevant offices are no longer available to gives us this information – indeed it is no doubt lost. Furthermore the harsh business conditions have led to major rationalisation within the glass industry so that there remain only ten comparatively large companies operating in total eighteen sites within the UK. Products include recyclable bottles & jars, energy efficient flat glass for windows & photo voltaics and continuous filament glass fibre for reinforcement and light-weighting of, for instance, transport and architectural products. Of the overall emissions and production of glass products (that is, involving the production of glass by the melting of raw and recycled materials rather than downstream processing) , these represent over 99% of glass manufacture to our knowledge. Only 2 of these companies are UK owned, with 4 owned and managed elsewhere in the EU and 4 owned and managed from outside of the EU. Whilst the situation post-recession is buoyant for the container glass industry, the severe downturn in the building market has left the flat glass sector in a highly unfavourable position. Not only have they been forced to considerably re-evaluate the production of basic flat glass in the UK, manufacturers appear to be making a concerted move to the production of higher value-added products such as thermally efficient glass (advanced glazing) and glass for solar panels and photovoltaic applications. Continuous filament glass fibre glass has seen a recovery, largely due to a company-wide restructuring and refocusing of its products in the light of below market priced competition from Asia. Smaller glass installations still exist in the UK producing: glass Ballotini (small glass beads e.g. for road paints), decorative tableware, coloured lenses for transport and other specialist applications such as technical and medical. We do not have good financial data for these operations, but we do have employee numbers. Key metrics Glass Number of Direect Indirect Employment Turnover GVA companies employment employment cost £million £million £million 2008 10 5,928 27 1,113 2009 10 5,895 23 1,173 2010 25 2011 10 6,088 % change since 2005 -40% -10% to -24% -5% 35% NB: These figures include only existing manufacturing companies with British Glass

422 390 355 15%

This data significantly conflicts with ABI data and illustrate how careful government should be with using data derived from SIC code reporting. Skills Discussion from companies indicates that the UK Government’s apparent lack of interest in manufacturing as opposed to the “soft” skills over the last one and a half to two decades and the relative indifference to technical and engineering skills through the media has disadvantaged these subjects within UK educational institutions. This has led to a technical skills shortage in the industry with few people coming through as older experienced staff retire. 56

Building our low carbon industries

Furthermore there was a recent decision (November 2011) by the Commission on Employment and Skills not allocate BIS training funds to Proskills which has historically had a close training link with the glass sector or indeed an alternative training organisation. Energy intensity 2008

2009

2010

% change since 2005

26.64%

21.89%

21.01%

6.44%

High

39%

35%

36%

59.35%

Low

17%

18%

15%

-1.84%

Average

Geographic importance Region North East North West Yorkshire and The Humber East Midlands West Midlands East of England London South East South West Wales Scotland Northern Ireland

% industry split by region Employment No of sites 0.00% 32.51% 46.81% 0.00% 0.00% 0.00% 3.29% 0.00% 0.00% 0.00% 11.07% 6.32% Total = 100%

0.00% 31.58%

47.37% 0.00% 0.00% 0.00% 5.26% 0.00% 0.00% 0.00% 10.53% 5.26% Total = 100%

Important Parliamentary constituencies  Normanton, Pontefract & Castleford  Ellesmere Port  ST Helen’s North  Barnsley East  St. Helens South  Ochil and South Perthshire  Leeds Central  Fermanagh and South Tyrone  Doncaster Central  Rotherham Views on recently announced support for EIIs We welcome the spirit and principles behind the Autumn statement. We recognise however that it is the accumulative burden of taxation, levies and energy fuel costs that will determine whether or not the remaining glass manufacture continues to support the UK economy with UK production. Many of the proposed barriers to lower taxation or compensation for indirect costs may not be crossed individually however and it is therefore essential that the overall impact of such costs are always considered.

Building our low carbon industries

Iron and Steel Industry association UK Steel Overview of the industry The UK steel industry has three integrated steelmaking sites (i.e. producing steel from virgin raw materials) at Scunthorpe (Tata Steel), Port Talbot (Tata Steel) and Teesside (SSI). The latter is currently mothballed, but planning to restart shortly after investment by its new owners. It has five secondary steelmaking sites (i.e. recycling scrap steel into new steel, known as electric arc furnace steelmaking) at Sheffield (Sheffield Forgemasters and Outokumpu), Rotherham (Tata Steel), Cardiff (Celsa Steel) and Sheerness (Thamesteel – currently in administration). There is a further mothballed furnace at Newport (Mir Steel). All steelmakers other than Sheffield Forgemasters are foreign owned and part of larger steel groups. There are re-rollers mainly in the West Midlands, South Wales, North East, Scunthorpe and Sheerness: some owned by Tata and several independent. Tubemaking takes place in Corby, the North East (both Tata), West Midlands and South Wales. Wire and other cold drawing: ownership is mainly independent of the steelmakers. Located in Yorkshire, West Midlands and North Wales. Key metrics (data source: Blue indicates UK Steel (EEF) supplied data) Iron & steel Number of Direect Indirect Employment Turnover GVA companies employment employment cost £million £million £million 2008 2009 2010 2011 % change since 2005

23,000 20,300 18900 18,500

Note: The only definitive data we can provide is 18,900 employed directly in iron and steelmaking and hot rolling. We have no data for tubemaking and cold drawing, nor for indirect employment. The ONS data looks wrong in trend terms at least, as we have suffered significant job reductions in 2009 and 2010 – estimated at 7,000. Some of those have since been re-employed at Teesside. A further 500 job losses have been suffered in January 2012. Skills Not made available Energy intensity The following graph shows Gigajoules of energy per tonne of crude steel:

Building our low carbon industries

Geographic importance We do not have complete employment data available by region; number of companies is a fairly irrelevant metric as the sector is dominated by one very large company with sites in several regions (Tata Steel); GVA and turnover data are unavailable both nationally and by region. Parliamentary constituencies Not made available Views on recently announced support for EIIs The support announced was for electro-intensive industries, as these are the sectors adversely impacted by UK carbon reduction policies. (Gas-intensive industries had already benefited from the abolition of the renewable heat levy announced in the 2011 Budget.) The announcement was very positive, not least because it represented at last an understanding by Government about the importance of not pricing EIIs out of the UK. It is too early to judge however how great the real benefits will be. It is virtually certain that electro-intensive companies will continue to bear some burden from climate change policy. Potential benefits have also been partly offset by a Commission ruling on an exemption from the climate change levy that some steelmakers had previously enjoyed. It is also uncertain at present whether we will get any relief from the future costs of the renewables agenda; while the on-going cost of the Renewables Obligation was entirely excluded from the package. Recommendations for a second phase of support ď&#x201A;ˇ An urgent priority must be to end the in-built escalation of the Renewables Obligation, given that this is due to be replaced and is arguably already the most costly climate change policy. ď&#x201A;ˇ More work needs to be done on energy markets and security of supply. ď&#x201A;ˇ R&D and investment support is needed to help companies invent and install low carbon technology.

Building our low carbon industries

Pulp and paper Industry group Confederation of Paper Industries Overview of the industry The industry is primarily multinational with ownership predominantly outside the UK. Most operators have multiple sites, meaning investments are normally assessed on a pan European and increasingly at a global level. Unless sites are to serve the UK market, (where transport costs of finished product and naturally hedging costs by operating in sterling can play a significant role) securing investment requires the UK to be an internationally competitive location. Most paper made in the UK originates from recovered paper, with over 70% of fibres used coming from recycled paper - the overwhelming majority collected in the UK. This UK based recycling infrastructure provides an important outlet for collected recyclate and income for recyclers. However there is an increasing disconnect between the amount of material collected in the UK and the UK manufacturing capacity, with over 50% of collected material now being exported for recycling, much to the Far East. The chaos caused to UK recycling in 2008 when China reduced purchases of UK material shows the risks to UK recycling inherent in this situation. Virgin fibre is only made in quantity by two UK mills, both integrated and using their production to make into paper on site – market pulp is no longer made in the UK, meaning other mill using virgin pulp import their needs from outside the UK. The sector is highly competitive. If mills are competing in commodity type grades, they require economies of scale and indeed the some grades such as generic copier paper are no longer manufactured in the UK. A number of UK mills focus on more specialist product, seeking competitive advantage by avoiding competing in high volume, low price sectors. Production is still spread throughout the UK, though with concentrations in the NW and SE of England, with mills present in all four home nations and almost all English regions. The sector used to be particularly important in Scotland, though mill closures have now reduced this to 5 mills. Recent major investment have been made in two brownfield site, with new mills being built; one in East Anglia and the other in the North West, while other sites have invested in upgraded paper machines. Additionally a number of mills have invested in new power plant, normally CHP and often powered by biomass. However the closure of other mills has continued with a large number in 2008 during the previous energy price spike. Key metrics (data source: Blue indicates CPI sourced data) Pul and paper Number of Direect Indirect Employment Turnover GVA companies employment employment cost £million £million £million 2008 2009 2010 2011 % change since 2005

295 277 266

12,300 9,700 9,200

44,000 42,000 41,000

472 455 458

3,425 2,991 2,992

734 658 633

-11%

Skills Small sample sizes preclude the direct identification of much data that refers specifically to the 17.1 SIC code, but the following table and discussion provides a brief analysis of data available from the Labour Force Survey, Proskills, and National Employer Skills Surveys for the wider paper industry (SIC 17), which seems a reasonable proxy. The first table shows the highest levels of qualifications achieved by people in this industry.

Building our low carbon industries

Level 5

Level 4

17%

Level 3

19%

Level 2

26%

Level 1

25%

No qualifications

11%

Despite the fact that around 15% of the industry are employed in managerial and professional SOC occupations, there are relatively low levels of people qualified to graduate level. Indeed the LFS suggests that around 11% of the people in this industry are in occupations that should have a level 4 or higher qualification, but do not hold such a qualification. Around half of the workforce are employed in Process or Elementary roles, reflecting the relatively large numbers of people who have low levels of qualification achievement. The most prevalent vacancies in the paper industries are for process, plant and machine operatives (47%), and the largest proportion of skill gaps are also in these roles (36%). However, these lower level roles are predicted to reduce in number as adoption of technology increases, meaning that the importance of skilled, managerial, and professional roles will increase. This is likely to drive uptake of training and qualifications at medium- and higher-levels, most often in technical or engineering subjects. The Labour Force Survey suggests that around 15% of employees received training over a 13 week period, slightly lower than the all-manufacturing average of 18%. Vacancy rates and skills shortages are relatively low, but where they exist they are also mainly found in industry specific technical areas. In terms of apprenticeships, engineering frameworks are currently used for some specific occupations but the lack of an industry-specific framework has been a sticking point. However, a new technical apprenticeship framework for the industry has been recently developed, and will provide an alternative route into work for new entrants as well as a means of improving the skills of existing employees. NESS data suggests that planning of training is in line with the wider manufacturing sector, with around 16% of companies counted as formal planners (i.e. have a business plan, a training plan, and an associated budget) but low when compared to 25% of all companies across the economy. Energy intensity Generally the quoted figure is one third energy cost, one third raw material s and on third labour/capital – these vary as the costs move in relation to each other. Carbon emissions (as reported for EU ETS compliance) 2008 – 3,195,000, 2009 – 2,613,000, 2010 – 2,320,000 tonnes CO2. Note these figures are not adjusted to allow for electricity imported to sites (from the grid) nor for electricity exported to the grid (from sector CHP plant). Important Parliamentary constituencies  Bolton North East  Chatham and Aylesford  Westmorland and Lonsdale  Stretford and Urmston  Sittingbourne and Sheppey  Preston  Bridgwater and West Somerset  Hexham  North East Somerset  Macclesfield 61

Building our low carbon industries

 Blackburn  South West Devon  Calder Valley Views on recently announced support for EIIs We welcome the acceptance by Government that increased energy costs for UK based companies (compared to prices paid by competitors based outside the UK) are unsustainable in the long term and will inevitably cause damage to UK industry. In this context the announcements by Government are welcome, but simply do not go far enough – essentially the Government is saying new energy taxes being introduced in 2013 (the removal of free EU ETS allowances from electricity production and the Carbon Price Floor in the UK only) will not be applied to their full levels on EII. However the remaining level of new taxes is still significant and will increase operational costs for UK based installations. In particular the Carbon Price Floor and the escalation in its rate through to 2020 is particularly of concern. The mitigation announced for Energy Intensive Industries is quickly overwhelmed by higher CPF rates in later years. Specifically the increase in CCA discount to 90% mostly undoes the damage caused by reducing the discount from 80% to 65% in April 2011. We still await details of additional £210m compensation package announced in November. Recommendations for a second phase of support  Paper Mills should be 100% exempted from CPF and the UK should increase the support offered to compensate for the increased cost of electricity caused by the indirect costs of the EU ETS scheme.  Receipts from energy and carbon taxes should be used to support the research into and piloting of the new technologies required to meet the 2050 80% carbon reduction target.  The Government should follow the example of Germany and ensure that through a system of tax rebates the EIIs do not suffer the double whammy of direct carbon and indirect carbon costs from the energy companies and Government policies.  Review the wisdom of the UK’s decision to unilaterally impose a Carbon Floor Price.  Restore incentives for energy generation from CHP and the Renewable Heat Incentive (RHI) tariff for industrial biomass.  Work towards universal sustainability criteria for large scale biomass development.  Ensure that the development of Energy from Waste (EfW) plants does not divert recyclable fibres from the closed loop recycling stream.  Continue to promote the role of paper-based packaging (produced from sustainable, renewable resources) as a means of minimising food wastage and protecting products from damage.