CONFIDENTIAL
Walking the carbon tightrope: Energy intensive industries in a carbon constrained world
POST BUDGET ADDENDUM
Prepared for: The Trades Union Congress and
Prepared by: Orion Innovations (UK) Ltd
Date: 17 April 2014
Walking the carbon tightrope: energy intensive industries in a carbon constrained world: Addendum
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correct, you should be aware that the information contained within it may be incomplete, inaccurate or may have become out of date.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 (UK) Ltd 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 (UK) Ltd. 1 Quality Court Chancery Lane London WC2A 1HR Tel: +44 203 176 2721 Email: info@orioninnovations.co.uk
Walking the carbon tightrope: energy intensive industries in a carbon constrained world: Addendum
Orion Innovations (UK) Ltd. 1 Quality Court Chancery Lane London WC2A 1HR Tel: +44 203 176 2721 Email: info@orioninnovations.co.uk
Walking the carbon tightrope: energy intensive industries in a carbon constrained world: Addendum
Contents 1 Context for this addendum...............................................................................................5 2 UK budget 2014, energy policy and EII support packages.....................................................6 3 EEAG state aid guidelines and EII support packages.............................................................7 4 Reflections of case study participants.................................................................................8 5 Conclusions and recommendations..................................................................................12
Glossary BCC
British Ceramic Confederation
BIS
Department for Business Innovation and Skills
CHP
Combined Heat and Power
CHPA
Combined Heat and Power Association
CM
Capacity Mechanism
CO2
Carbon dioxide
CPF
Carbon Price Floor
CPS
Carbon Price Support (under the CPF mechanism)
DECC
Department of Energy and Climate Change
EEAG
European Economic Advisory Group
EEAG
Environmental and Energy Aid Guidelines
EIIs
Energy Intensive Industries
EU ETS
EU Emissions Trading System
FiT
Feed in Tariff
FiT CfD
Feed in Tariff Contracts for Difference
GVA
Gross Value Added, the value of goods and services produced in an area, industry or sector of an economy
GW
Gigawatts
GWh
Gigawatt hours
LEC
Levy Exemption Certificate
MPA
Mineral Products Association
MW
Megawatts
MWh
Megawatt hours
NER
EU ETS New Entrants Reserve
Ofgem
Office of Gas & Electricity Markets
RO
Renewables Obligation
ROC
Renewables Obligation Certificates
TUC
Trades Union Congress
4
Walking the carbon tightrope: energy intensive industries in a carbon constrained world: Addendum
1
Context for this addendum
Orion Innovations was commissioned by the Trades Union Congress (TUC) to prepare a brief report exploring the impact of climate change policies and proposed support measures on energy intensive industries (EIIs) through four specific case studies 1. These case studies examined the impact of policies on: •
An electro-intensive UK steel company that is part of a Europe-wide business group.
•
The heavy clay ceramics sector, which has not historically been exposed to extensive international trade but is experiencing a significant up-lift in imports.
•
The climate for investment in capital-intensive cement and lime sectors within the mineral products industry.
•
The merits of combined heat and power (CHP) generation, one of the primary options for industrial carbon abatement.
Evidence from these case studies suggests that well-intentioned energy and environmental policies, and inadequate support packages, are adding significant cost to UK manufacture relative to EU and international competition, and undermining the climate for investment. •
Steelmaker CELSA, shared insights from their European operations that show that its UK plant in Cardiff is one of the most energy and labour efficient in Europe, but faces the highest electricity prices within the Group. Planned unilateral UK climate change policies and tariffs, such as Carbon Price Floor (CPF) and Contracts for Difference (CfD) are expected to exacerbate this situation, undermining the long-term prospects of this highly efficient, low carbon business.
•
Recent trade data suggests that the heavy clay ceramics sector, including clay roof tiles and bricks, previously less exposed to carbon leakage is now seeing a significant increase in imports. Uncompetitive energy prices, unpredictable future energy tariffs, lack of access to compensation and gas and electricity supply insecurities are cited as significant contributing factors. A number of electro-intensive ceramics companies have relocated away from the UK in the past due to high electricity costs. It is now proving difficult to attract new investment to the sector and further companies are deemed to be exposed.
•
The mineral products cement and lime sectors, in common with most other EIIs, are capital intensive and operate on long investment cycles. Policy uncertainty and support mechanisms that extend no further than Treasury spending review periods were found to be adding risk and having a corrosive impact on the climate for investment and on the long term viability of these businesses. In particular, they were found to be stifling innovation and making offshoring of new investment a more attractive proposition to multi-national parent companies.
•
Combined Heat and Power policy changes, in particular the removal of CHP Levy Exemption Certificates (LECs) from the market and the imposition of the CPF from April 2013, were found to have undermined incentives to deploy one of the most effective and proven means of industrial carbon emissions abatement.
Subsequent to the completion of this study in early March 2014, there have been two significant developments that impact upon climate change policies and support packages. These are: •
The UK Chancellor of the Exchequer’s Budget, presented to Parliament on 19 th March 2014.
•
The European Commission’s adoption of European Economic Advisory Group (EEAG) state aid guidelines on public support for environmental protection and energy on 9 th April 2014.
This report examines the impact of these developments on the individual case studies, and resultant conclusions and recommendations. It is structured as follows: •
Section 2: Provides a high level summary of the relevant aspects of the UK budget 2014.
•
Section 3. Provides a high level summary of EEAG state aid guidelines as they relate to EIIs.
•
Section 4: Reflects case study participants’ views on the impact of the UK budget and EEAG state aid guidelines on their businesses and industry sectors.
•
Section 5: Presents conclusions and recommendations.
1
Walking the carbon tightrope: Energy Intensive industries in a carbon constrained world; Orion Innovations; 17 March 2014
5
Walking the carbon tightrope: energy intensive industries in a carbon constrained world: Addendum
2
UK budget 2014, energy policy and EII support packages
The UK Budget 2014 includes 4 initiatives of particular relevance to energy intensive industries, energy and environmental policy and proposed support packages. These are outlined below. 2.1
Capping of the Carbon Price Floor at £18.08 per ton of CO 2 from 2016-2020.
As outlined in Section 4.4.3 of the main report, the Carbon Price Floor (CPF) is a UK-specific mechanism intended to incentivise investment in low carbon technologies by providing a predictable minimum price for carbon in the medium to long term. A carbon price support (CPS) tax is paid on fossil fuels used to generate electricity, equivalent to the difference between the CPF and EU emissions trading scheme (EU ETS) carbon price. The CPF came into effect on 1 April 2013 and was set at £15.70/tCO2 relative to an EU ETS carbon price of approximately £4/tCO2. The government proposed that it would follow a straight line to £30/tCO2 in 2020, rising to £70/tCO2 in 2030 (real 2009 prices). The CPF, more than any other policy mechanism, has faced significant criticism for the impact that it has had, and is likely to have on the competitiveness and sustainability of UK industry relative to the EU and rest of the world. In Budget 2014, the Chancellor announced that that the CPF would be frozen at £18.08/tCO2 from 2016/17 to 2019/20, saving all UK business an estimated £4.0 billion over the three years. The government will review the CPF beyond 2020 once the impact of reform of the EU ETS is clear. 2.2
Extending existing EII compensation for CPF and EU ETS to 2019/2020
In the Autumn Statement in 2011, the Chancellor announced the government’s intention to implement measures to reduce the impact of policies on the cost of electricity for the most electrointensive industries. A commitment of £250 million was given for the period 2013-2015, including up to £100 million in compensation for the CPF and £110 million for the indirect costs of the EU ETS. In Budget 2013, this package was boosted by a further £150 million and extended to 2016. In Budget 2014, the Chancellor announced the further extension of this scheme to 2019/20. The design of the compensation scheme for the EU ETS was published in May 2013 (see Section 4.10.1 of main report). The CPF compensation scheme remains subject to EU state aid approval. 2.3
Compensating EIIs for the costs of RO and FiTs from 2016.
In Budget 2014, it was announced that a new EII compensation scheme will be introduced to compensate EIIs for higher electricity costs resulting from the Renewables Obligation (RO) and small-scale Feed in Tariffs (FiTs). The RO is currently the main support mechanism for larger scale renewable electricity projects in the UK. It is also arguably “the green levy” with the greatest impact today for industry. As an example, the RO, along with FiTs, will cost most EIIs about £10.50 per megawatt-hour (MWh) from April 2014, whereas competitors elsewhere in Europe will either be completely exempt, or have their charges for equivalent schemes capped at €0.50/MWh. HM Treasury estimates that the combined benefits of extending the existing EII compensation scheme to 2019/2020 and introducing new compensation for RO and FiTs will cost around £500 million a year from 2016-17, with a typical EII benefiting from savings of £6.25 million in 2018/19. Government intends to consult over the summer about the scope of the scheme, but a number of officials have indicated that the scope will be much narrower than that permitted by the EEAG. 2.4
Exempting Combined Heat and Power plants from the Carbon Price Floor
Combined heat and power (CHP) offers the potential for significant emissions abatement, in particular on large industrial sites that consume substantial quantities of heat. In Budget 2011 the Government announced plans to remove CHP Levy Exemption Certificates (LECs) from the market in April 2013, so removing a key financial incentive to invest in industrial CHP. The imposition of the CPF in April 2013 further eroded the economic rationale for CHP. The CHPA, TUC and numerous industry bodies called on the government to make investment in CHP more attractive, and in particular to provide relief from the CPS on fuel used to make electricity. In Budget 2014 the Chancellor announced the exemption from CPS of fuel used in CHP plants to generate electricity used on-site. 6
Walking the carbon tightrope: energy intensive industries in a carbon constrained world: Addendum
3
EEAG state aid guidelines and EII support packages
3.1
EEAG summary overview
On 9 April 2014, the European Commission adopted revised Environmental and Energy Aid Guidelines (EEAG) which will come into force on 1st July 2014 and remain valid until 2020. These guidelines are intended to support member states in realising 2020 climate targets whilst addressing market distortions that result from subsidies granted to renewable energy. As such, they set out the criteria that State aid related to renewable energy must fulfil in order to be authorised by the Commission. Key features are outlined below. th
3.1.1
Promotion of a gradual move to market-based support for renewable energy
The guidelines call for the gradual replacement of feed-in tariffs by feed-in premiums, which expose renewable energy sources to market signals, and for the introduction of market based mechanisms, such as competitive bidding processes for the allocation of public sector support. A pilot phase in 2015 and 2016 will allow countries to test competitive bidding procedures. 3.1.2
Imposition of a time-limit on renewable energy support
The 2014 guidelines take a stricter position on renewable energy support than either the 2008 guidelines or earlier consultation drafts. It is proposed that renewable energy sources should become grid-competitive between 2020 and 2030. The EEAG introduces a 10 year limit on authorisation for aid schemes, after which time measures need to be re-assessed. 3.1.3
Introduction of support for EIIs, infrastructure and capacity mechanisms
The new guidelines include criteria for supporting energy infrastructure, focused on projects that improve cross-border energy flows and promote infrastructure in Europe's less developed regions. They also permit aid to secure adequate electricity generation when there is a real risk of insufficient capacity. This will allow Member States to introduce capacity mechanisms to encourage producers to build new capacity, discourage them from shutting down existing capacity, or to reward load-shedding in periods of peak consumption. Lastly, it is recognised that renewable energy-related charges levied on businesses add significant cost and expose EIIs in particular, to the risk of carbon leakage. The guidelines therefore allow for a reduction in the burden for selected energy intensive sectors and electro-intensive businesses. 3.2
Overview of EII-related support
A number of criteria define the basis for EII-related support. These include 3.2.1
Focus on selected industry sectors and electro-intensive businesses
Aid is limited to sectors that are exposed to competitive risk due to the costs resulting from renewable energy support, their electro-intensity and exposure to international trade. These sectors are listed in Annex 3 of the Guidelines 2. In addition, Member States can include businesses in their national schemes if these businesses have an electro-intensity of at least 20% and belong to a sector with a trade intensity of at least 4% at EU level (i.e. in Annex 5). 3.2.2
Restricted to the costs of supporting renewable energy
In order to ensure that the aid supports energy from renewable sources, Member States will need to demonstrate that the additional costs reflected in higher electricity prices faced by the beneficiaries, result from support to energy from renewable sources only. As an example, UK CPF is likely to fall outside this framework and support will therefore be limited to sectors included in Annex II of ETS State Aid Guidelines, rather than the broader EEAG Annex 3 and 5. This effectively now precludes compensation for a number of sectors in this study including ceramics, cement, lime, glass and kaolin / ball clay. 3.2.3 Beneficiaries to pay at least 15% of costs Beneficiaries will need to pay at least 15% of the renewable energy related costs. Member States do have the option of further limiting costs at a business level if renewable energy-related costs exceed 4% of gross value added. For businesses with an electro-intensity of at least 20%, Member States can limit the overall amount paid to 0.5% of the business gross value added. 2
http://ec.europa.eu/competition/sectors/energy/eeag_en.pdf
7
Walking the carbon tightrope: energy intensive industries in a carbon constrained world: Addendum
4 4.1
Reflections of case study participants Introduction
Orion Innovations report3 prepared for the TUC, examined the impact of climate change policies and proposed support measures on EIIs through four specific case studies. These case studies were prepared with significant input from TUC affiliates, trade associations and individual companies, in particular the British Ceramic Confederation, CELSA UK, Combined Heat & Power Association, Ibstock, Lafarge Tarmac, Marley Eternit, Mineral Products Association, Northwood and WEPA, Singleton Birch and UK Steel. These organisations were asked to comment on the impact of both the UK Budget 2014 and the EEAG state aid guidelines on their businesses, and on the findings and conclusions of the case studies. Their views are reflected in the sections below, and the resulting conclusions and recommendations are given in Section 5. 4.2
Steel sector case study
The steel case study examined the impact of policies on the competitiveness of CELSA UK relative to its counterparts within the CELSA Group. CELSA UK, an electric arc furnace steelmaker, is the largest producer of steel reinforcement in the UK. It is part of the CELSA Group, Europe’s largest producer of long steel products with similar operations in Spain, Poland, France and Norway. CELSA shared detailed cost and performance information from their European operations that show that their UK plant in Cardiff is one of the most energy and labour efficient in Europe. However, it faces the highest electricity prices in the Group. Despite operating a new plant with superior energy efficiency, CELSA UK has had the highest energy costs within the Group per tonne of product produced in five of the past seven years. The Chancellor’s plans to cap CPF at £18.08 per ton of CO 2 from 2016-2020, extend existing EU ETS compensation to 2019/2020, and introduce compensation for RO and FiTs from 2016 are all welcomed and of benefit to the steel sector. However, they do nothing to address the current gap between the electricity prices paid by UK EIIs relative to their EU counterparts. Luis Sanz, Managing Director CELSA UK, issued the following statement post UK Budget 2014: “CELSA welcomes the Chancellor’s recognition of the corrosive impact high energy prices are having on Energy Intensive Industries in the UK and the effort he has made to take steps to mitigate this impact in a neutral budget. Announcement of the mitigation of Renewable Obligations, as well as the extension of current measures, has been very well received as this is the major burden Steel Industry and Energy Intensive Users are currently facing. It is important that the Chancellor recognises the ongoing large disparity between UK energy prices and those in other European countries such as France, and starts taking action against it. Despite that, we remain concerned that energy taxes and levies payable during the next two years will be higher than in 2013/14, therefore we will continue in dialogue with the Government to explore an earlier implementation of these measures according to the rules already drafted by the European Commission to that respect.” 4.3
Heavy clay ceramics sector case study
The ceramics sector case study focused on the heavy clay sub-sector that includes the manufacture of bricks, pavers, clay roof tiles and drainage pipes, with particular input from two leading companies, Ibstock and Marley Eternit. Ibstock is the UK’s largest producer of bricks and Marley Eternit, part of the Belgian headquartered Etex Group, is a large producer of clay tiles. Heavy clay products have not historically been subject to significant international trade, with UK demand being met by domestic production. The case study showed however that there is evidence of a recent significant increase in imports. Uncompetitive energy prices, unpredictable future energy tariffs, lack of access to compensation and gas supply insecurities are cited as significant contributing factors.
3
Walking the carbon tightrope: Energy Intensive industries in a carbon constrained world; Orion Innovations; 17 March 2014
8
Walking the carbon tightrope: energy intensive industries in a carbon constrained world: Addendum
The impact of budget announcements on the ceramics sector, and on the heavy clay sub-sector in particular is heavily influenced by EEAG state aid guidelines. Sectors eligible for support and listed in Annex 3 of the Guidelines 4 include the manufacture of glass fibres, refractory products, ceramic tiles and flags, sanitary fixtures, insulators and insulating fittings, and other ceramic products. It also includes the manufacture of clay bricks, tiles and construction products. Companies within these sectors could be eligible for the proposed RO and FiTs compensation scheme announced in Budget 2014, but will be subject to any as yet unannounced additional UK criteria. Ceramics sectors not listed in Annex 3 but in Annex 5, will need to show that their electro-intensity at a company level exceeds 20% of their GVA in order to be eligible for compensation. This includes those involved in the mining of clays and kaolin, and the manufacture of ceramic household and ornamental articles, technical ceramic products and abrasive products. There is concern that UK manufacturers will remain at a very significant disadvantage to competitors in other member states which may intend to compensate up to the maximum amount possible under EEAG. The UK is very likely to operate a very limited compensation by comparison. All ceramic sectors, in common with the rest of UK business, will benefit from the capping of the CPF at £18.08 per ton of CO2 from 2016-2020. British Ceramic Confederation comments on Budget 2014, EEAG state aid guidelines and their impact on their members are given below. These comments reflect the views of case study participants, Ibstock and Marley Eternit too. Carbon Price Floor will be capped at £18.08 per ton (approx. £10 per MWh) starting in 2016/2017 and frozen until 2020. DECC 2013 forecasts indicated that CPF was £11/ ton in 2020 so this is likely to only save £1 / MWh for our members in 2020. So while welcome in principle, will have little material effect. This tax remains completely uncompensated for all of our members for the foreseeable future and is a tax which overseas competitors do not pay. We were very disappointed to hear that the state aid guidelines (EEAG) will exclude sectors not on annex 2 for EU ETS including those for whom BIS was going to apply for compensation for. We welcome in principle the partial compensation from the Renewables Obligation and small scale Feed in Tariffs from 2016/2017 to 2019/2020 for “some” energy-intensive industries. We await what additional criteria the UK government imposes and how this will be funded. We are very unclear to what extent the UK ceramics industry might benefit, if at all – and some members are concerned they may, as for CfD, end up paying for exemptions for competitors operating in other sectors while remaining at a disadvantage to overseas competitors. We welcomed in principle the measures to abolish the Carbon Price Floor tax on electricity selfgenerated and used on site from Combined Heat Power schemes from 2015/2016. But for companies to have the confidence to invest in this technology in the UK, they require the certainty of a more secure UK gas supply. The Chancellor said the Office for Budget Responsibility (OBR) warn that an escalation of the situation in Ukraine risks higher commodity prices. Despite raising the topic of the risk of higher gas prices, the Chancellor missed this opportunity to take tangible action to improve gas security and reduce price volatility, for example by supporting more gas storage and the requirement to use it through a Public Service Obligation. We welcome the extension of Help to Buy linked to new build to 2020 as this gives the ceramic industry, which includes brick, tile and toilet manufacturers more confidence to invest in increased capacity in future to meet extra demand. We welcome the doubling of Annual Investment Allowances from next month to £500,000, as this will encourage more investment during the economic recovery although this will only have a marked effect on smaller projects. However, we are disappointed there is no commitment to extend this beyond the end of 2015, as this would stimulate longer term investment in UK manufacturing.
4
http://ec.europa.eu/competition/sectors/energy/eeag_en.pdf
9
Walking the carbon tightrope: energy intensive industries in a carbon constrained world: Addendum
4.4
Mineral products sector Case study
The mineral products sector case study looked at the climate for investment in cement and lime sub-sectors. In common with most other EIIs, cement and lime sectors are capital intensive and operate on long investment cycles. Portland cement kilns have a typical lifespan of 35-40 years and are generally sited near to quarries with 50-60 years-worth of limestone. Lime kilns are similarly long-lived. Both need a stable legal and policy framework and consistent support mechanisms upon which to make long-term, large scale capital investment decisions. The case study found that rather than encouraging a transition to low carbon technologies, an uncertain policy framework, unilateral burdens on UK producers, and unrealistically short timeframes for support packages, are adding risk and having a corrosive impact on the investment climate and long term viability of these businesses in the UK. In particular, they are stifling innovation and making offshoring of new investment a more attractive proposition to multinational parent companies. Cement and lime sectors will experience lower costs as a result of the Budget 2014 announcements in relation to the Carbon Price Support tax freeze. Additional benefit concerning relief against the cost of renewables is less certain. Both sectors are included in Annex 3 of the EEAG state aid guidelines5 and as such may be eligible for inclusion in the proposed RO and FiTs compensation scheme. The decision will rest with BIS and whether Government chooses to include cement and lime in a State Aid application because the UK may impose additional UK criteria to reduce the list of sectors in Annex 3 of the EEAG. Cement and lime sectors, in common with the rest of UK business, will benefit from the capping of the CPS tax at ÂŁ18.08 per ton of CO2 from 2016-2020. However, despite being particularly exposed to carbon leakage, neither sector is listed in Annex II of the ETS State Aid Guidelines and as such will not benefit from compensation for either CPF or EU ETS. The Mineral Products Association assessment of the impact of Budget 2014 on their members, and on cement and lime sub-sectors in particular is given in Figure 1 and described below.
Figure 1: MPA estimate of the impact of Budget 2014 on cement and lime industries If the proposed CPF cap is maintained to the end of 2020, the reduction in CPS cost to cement and lime sectors would amount to ÂŁ23.7 million over six years. A freeze, as opposed to scrapping the CPF mechanism, will continue to cost the UK cement and lime sectors ÂŁ93.5 million over the same period. Cement and lime sectors are not included in EU ETS Annex II and will not benefit from existing or extended compensation for CPS, placing UK production at significant disadvantage relative to EU and international competition.
5
http://ec.europa.eu/competition/sectors/energy/eeag_en.pdf
10
Walking the carbon tightrope: energy intensive industries in a carbon constrained world: Addendum
Cement and lime sectors are included in Annex 3 of the EEAG and state aid guidelines and assuming 85% compensation for RO and FiTs could benefit from ÂŁ72.4 million over the six year period should the UK choose to provide the maximum compensation allowed. 4.5
Combined heat and power case study
The last of the four case studies looked at a company in the paper industry and at the impact of policy changes on the merits of combined heat and power (CHP) generation, one of the primary options for industrial carbon emissions abatement and improvement efficiency and competitiveness. The removal of CHP Levy Exemption Certificates (LECs) and introduction of CPS on fuel used to generate electricity were found to have undermined the economic rationale for CHP. The CHPA proposed exempting CHP from all CPS costs and presented analysis that showed that this would return approximately half of the lost LEC value to generators. The proposal was largely reflected in Budget 2014, with the introduction of exemption from CPS for fuel used in CHP plants to generate electricity that is used within the business (as opposed to being exported to third parties). The CHPA and many others have welcomed this change which will help to mitigate the loss of LECs in 2013. However, they maintain that further steps will be needed if the UK is to capture the opportunity which CHP can provide to both decarbonise UK industry while improving competitiveness. A recent study for DECC6 has shown that significant untapped potential for CHP remains, and DECC has previously acknowledged the need for a new policy mechanism if this potential is to be realised.
6
Projections of CHP capacity and use to 2030, Ricardo-AEA /R/ED56126 Issue Number 1.2 Date 20/03/2013
11
Walking the carbon tightrope: energy intensive industries in a carbon constrained world: Addendum
5 5.1
Conclusions and recommendations Conclusions
The main report7 concluded that since EIIs are mature and make use of similar manufacturing processes across all countries, the responsible approach is to ensure that they: •
Remain in the UK and do not succumb to leakage of jobs, investment and emissions.
•
Deploy the most carbon-efficient processes available to them.
•
Invest in innovation to reduce the environmental impact of their activities.
•
Have available proven and commercially viable cross-sector solutions such as CHP and CCS.
•
Retain and develop highly skilled, well paid jobs in the UK.
Given this, Government policies need to: •
Ensure that UK energy prices are no higher than competitor nations at all times;
•
Shift policy from penalising EIIs to encouraging investment in energy efficiency and emissions abatement;
•
Deliver a long-term stable environment that encourages industry to invest in new plant, innovation and emissions abatement, just as the Government is endeavouring to do for nuclear and renewable energy sectors. Government policy should respect the fact that investment cycles for EIIs can be several decades in length;
•
Facilitate the development and encourage deployment of cross-sector carbon emissions abatement solutions such as CHP and CCS.
In this context, the report called for a number of near-term measures to limit the adverse impact of energy and environmental policies on EIIs, and a longer-term fundamental re-think of our approach to the delivery of our low carbon future. The implied recognition in Budget 2014 that UK EIIs are competitively disadvantaged by existing policy mechanisms, and that this needs to be mitigated is to be welcomed. Specific measures, including the exemption of CHP from CPS, the introduction of compensation of RO and small scale FiTs, the cap of CPF from 2016, and extension of CPF and EU ETS compensation to 2019/20 all go some way towards addressing immediate concerns. However, there remains a view shared by all case study participants that these measures do not go far enough. At best they maintain an existing disadvantage for UK EIIs, with some prospect of respite in 2016 and beyond for some, but certainly not all of those on EU ETS Annex II and EEAG Annex 3/5 lists. For all other EIIs, the budget offers little benefit. 5.2
Recommendations
To enable the transition of EIIs to a low carbon future, we would recommend that the government: •
Freeze the CPF immediately. The Carbon Price Support rate in 2015/16 is already almost twice that originally intended (at £18.08 as compared with the 2011 indicative rate of £9.86). This will constitute almost 10% of a large industrial user’s electricity bill. The carbon tax will still raise over £1.2 billion a year, and the Carbon Reduction Commitment a further £1 billion. Capping the Carbon Price Support should be a prelude to scrapping it, in particular given the constraints to compensating the large number of EIIs that are not included in EU ETS Annex II.
•
Introduce RO and FiT compensation packages immediately. The Renewables Obligation (RO) is currently the main support mechanism for larger scale renewable electricity projects in the UK and arguably the levy with the greatest impact today for industry. As outlined in the steel sector case study, RO is currently costing CELSA UK £8.66 per megawatt hour (MWh) and the feed-in tariff a further £2.12/MWh. Competitors elsewhere in Europe are either completely exempt or have the charges from equivalent schemes capped at €0.50 per MWh.
•
Fully exploit the opportunity to mitigate the costs of all renewable energy-related policy measures by 85% or, ideally higher as permitted under the EEAG, for those companies and industry sectors included in EEAG Annex 3 and 5. Support packages should encompass all policy measures and there should be no additional UK eligibility criteria.
7
Walking the carbon tightrope: Energy Intensive industries in a carbon constrained world; Orion Innovations; 17 March 2014
12
Walking the carbon tightrope: energy intensive industries in a carbon constrained world: Addendum
•
Introduce a simple process that extends support for the costs of all renewable energy-related policy measures to electro-intensive businesses not included in Annex 3, but in Annex 5, as permitted by EEAG.
•
Explore ways of incentivising investment in new CHP capacity with a bespoke policy appropriately funded in order to meet ambitious deployment goals.
•
Reduce complexity and risk by rationalising UK policies, including CPF, RO, CFD FITs, CRC, and CCL into a single policy mechanism and support package.
•
Create a well-funded programme to support industrial energy efficiency and low carbon solutions, with incentives for investment. The current reliance on driving energy efficiency and carbon reduction through higher energy prices risks carbon leakage if undertaken unilaterally in the UK.
•
Create a high level Energy Intensive Industries Council, with representation from industry, trade unions and government, tasked with developing comprehensive long-term industrial strategy to secure jobs, growth and the low carbon transition.
13