Financial Assistance to Industry

Claire Perry Excerpts

Monday 18th December 2017 General Committees

[The Minister for Climate Change and Industry (Claire Perry)]

I beg to move,

That the Committee has considered the motion, that this House authorises the Secretary of State (Greg Clark) to undertake to pay, and to pay by way of financial assistance under section 8 of the Industrial Development Act 1982, compensation to eligible energy intensive industries in respect of a proportion of the indirect costs of funding the renewable obligation (RO) and smallscale feed in tariffs (FIT) totalling more than £30 million and up to a cumulative total of £565 million maximum.

It is a pleasure to serve under your chairmanship, Ms Buck. I hope not to detain the Committee too long, but it is extremely important that we consider this substantial and necessary motion.

The motion was laid before the House on 6 December and is being made under the Industrial Development Act 1982. I draw the Committee’s attention to the very helpful explanatory memorandum that my officials circulated ahead of time to enlighten Members about the more technical aspects.

[Dr Alan Whitehead (Southampton, Test) (Lab)]

Just ahead of time.

[Claire Perry]

Well, it was unusual to have it, and it was rather a helpful process.

In order to meet our climate targets, we have implemented a number of policies designed to incentivise generation of energy from renewable sources. As we know, the costs of such policies are recovered through obligations and levies on suppliers, who pass those costs to end users, usually in their electricity bills. Such costs can put the most energy intensive industries at a competitive disadvantage. Indeed, as set out in the clean growth strategy, our industrial electricity prices for large consumers in 2016 were the second highest in the EU15, after Italy. That can place some of our most important strategic and productive electricity-intensive manufacturing industries at a competitive disadvantage and increases the risk of businesses relocating due to the costs associated with meeting our climate targets, which no one wants to see.

We have taken steps to reduce the cumulative impact of these policies on industrial energy prices for sectors such as steel, paper, plastics, cement and chemicals. At the Budget in 2014, the coalition Government committed to compensate energy intensive industries for the indirect costs of the renewables obligation and feed-in tariffs. The compensation scheme was launched in January 2016. It provides for eligible energy intensive industries to receive compensation for up to 85% of the costs of funding the RO and FIT. We have now paid more than £352 million under the scheme to 147 companies. That has been estimated to have reduced industrial electricity prices by £17 per megawatt-hour in 2016, or around 15% of an eligible company’s electricity bill. The scheme has played a significant role in supporting the competitiveness of these vital industries.

We have tried to focus our resources on sectors that are most exposed to electricity price rises—those that are both electricity-intensive and exposed to international competition. Committee members will agree that those are incredibly important strategic industries that offer highly productive jobs right across the UK.

Under section 8 of the Industrial Development Act, Parliament must authorise the amount of compensation we can pay to these companies for the indirect costs of funding the RO and FIT as the amount exceeds £30 million. In March 2016, we authorised spend up to a cumulative total of £371 million. The motion seeks authorisation to pay up to a cumulative total of £565 million. That is a maximum number—it is not a target—and is intended to enable Government to continue to pay RO and FIT compensation to eligible EIIs until replacement exemption schemes are introduced. I know that many Committee members served on the various Committees in which we introduced those pieces of legislation.

The spending review and autumn statement 2015 set out our intention to provide an exemption from the policy cost, to ensure that EIIs have long-term certainty and remain competitive. Those exemptions are intended to replace the current compensation schemes. I will not go back through the arguments for why exemptions are better than the compensation method; suffice it to say that they are quicker, provide much more certainty of cash flow and are welcomed by the companies.

Sadly, it has taken longer than originally expected to secure state aid approval from the European Commission for the move from compensation to an exemption. We have received approval for the renewables obligation scheme, which we will implement from 1 April 2018. State aid considerations for the FIT scheme are more complex and will take longer to resolve, which is why we need approval to maintain the current compensation system while we deliver on the state aid requirement. The compensation scheme will continue for a little longer, until we have state aid approval, and costs will therefore arise in excess of the £371 million that was originally authorised. However, as I said, they will be capped at £565 million as a result of the motion, which I hope the Committee approves.

It is crucial that we continue to provide compensation until an exemption comes in. The sectors that are eligible for the relief employ around 230,000 workers and have gross value added of more than £30 billion—2% of the UK economy—and turnover of around £115 billion. About 60% of the businesses have exported products in the past 12 months. Crucially, many of the companies that are eligible for the compensation are located in areas of relative economic disadvantage and are a vital and strategic part of our industrial base. As Members will know, we want to work with these industries through the industrial strategy to boost workers’ earning power, improve living standards and create jobs so that everyone across the country can share the benefits of our economic success.

Energy intensive industries need to play their part in reducing emissions. Eight sectors, including steel, chemicals, glass and cement, are responsible for around two thirds of industrial energy use and two thirds of industry’s greenhouse gas emissions. They have worked effectively with the Government to produce industrial decarbonisation and energy efficiency action plans, which we look forward to bringing forward with the various players in those sectors.

I am content that the financial assistance outlined in the motion will benefit the UK’s energy intensive industries, and that section 8 of the Industrial Development Act is the appropriate means by which to make such payments. I therefore commend the motion to the Committee.

--- Later in debate ---

[Claire Perry]

I am grateful to the hon. Members for Southampton, Test and for Kilmarnock and Loudoun for their typically thoughtful comments about what we are trying to do.

I will try to answer all the points that were raised. I know that if I do not, the hon. Member for Southampton, Test will write to me. I want to pick up his point about his parliamentary question, rather than asking him to resubmit it. It is not a new levy. These exemptions are adjustments to the existing scheme, so I do not think they are classified as a new levy, but if he wants to put that question to me again, I am happy to ask the Department to respond.

We are not debating the idea of a switch from compensation to a levy. Businesses absolutely appreciate the fact that this is much more cash-flow positive for them and much less hassle. It reduces the risk of potential overpayments, which the hon. Gentleman raised. It is about smoothing cash flow for them and giving them certainty. As we know, whether the money is coming out of consumers’ pockets as taxes or in energy bills, ultimately we are all investing in this renewable transition together.

I want to pick up the point about the maximum amount of burden being put on businesses and slightly correct the hon. Gentleman’s statement about medium-sized businesses. It is actually medium energy-using businesses. All sizes of business, from small and medium-sized enterprises to large businesses, are eligible to bid into the scheme. The test is whether the energy cost is 20% of their profits plus something—I should know that. Essentially, any size of business can bid into this scheme. That is important. In the round, this is a cost increase of less than 1% of energy bills.

[Dr Whitehead]

If I did not put my point carefully enough, I apologise. I was seeking to suggest that the effect of non-exempt industries and companies being liable for the costs of green and social levies and this new levy would add £6,700 a year to the bill of a medium-sized non-exempt company.

[Claire Perry]

To clarify, a medium-energy user could be any size company. It might be a very large company with a very small energy footprint. As I said, on average, because we do not know by what revenue the £6,700 is divisible, it is about 1% of the total cost for consumer bills.

The point is about who we get to pay for the investment in the renewables of the future, for which we have pretty much cross-party support; we know that we need to make that transition. The good news is that thanks to the policy frameworks put in place by the coalition and Conservative Governments, we are reaching a point where renewable energy is being delivered subsidy-free. I opened the country’s first subsidy-free solar farm a few months ago, and we purchased offshore wind at £57 per MWh in the latest auction. Renewable companies, having been subsidised to get to this point, do not now require subsidy going forward.

It is important that we communicate why we are doing this. To address the point about overpayments made by the hon. Member for Southampton, Test, it is obviously right and indeed required under state aid laws that we recover any overpayments, which are infrequent. That process is continuing. Of course, if there is an exemption scheme, it is far less likely that the Government will effectively overpay on that basis.

I also want to point out that given the critical nature of many energy-intensive industries, there is an extremely long supply chain of different-sized businesses that depend on the health and wellbeing of those industries. The key test for the sector deals that we are putting together with those industries is by how much they can drive up the UK content in their supply chain. By making them more cost-competitive, we are boosting the whole UK supply chain, which is extremely important.

It was asked how we had got to the numbers. Effectively, the increase that we are debating in the motion covers renewables obligation compensation for the final two quarters of 2017-18 and FIT compensation for the final two quarters of this year and all of 2018-19. That is how those numbers stack up. I was asked how the measures relate to the CfD point. Because that is an exemption scheme of its own, this will not combine the two. They are completely separate schemes.

I wanted to pick up the point about research and development, which is crucial. In both the clean growth strategy and the industrial strategy, we have committed to the biggest spending increase on R and D that any Government have ever made, with £2.6 billion going into innovation in the clean space. The hon. Member for Kilmarnock and Loudoun and I have had many conversations about carbon capture and storage technology in which we agreed that it was vital to bring it forward. I look forward to getting those projects moving.

In conclusion, we know that businesses want us to do this, and it is extremely relevant now. It appears that we have consensus on making the changes. On that basis, I commend the motion to the Committee.

Question put and agreed to.