Energy-intensive Industries

Ian Swales Excerpts

Thursday 11th September 2014 Commons Chamber

[Ian Swales (Redcar) (LD)]

I congratulate the hon. Member for Stockton North (Alex Cunningham) on securing the debate. On this issue, I regard him as an hon. Friend, and I was delighted to support his motion. Our constituencies are divided only by the River Tees, but they are joined by many pipelines.

I have taken a keen interest in these issues since I entered the House. I worked in the electricity industry for five years, and in an energy-intensive part of the chemical industry for more than 20 years, so I am very familiar with many of the issues.

As the hon. Gentleman said, the Tees valley is a “hotbed”—an interesting word to use—of such businesses. In fact, it has 18 of the 30 largest carbon emitters—energy-intensive industries—outside the energy sector in the UK. My constituency has the Sahaviriya Steel Industries steelworks, Tata Steel activities, Sabic petrochemicals and Lotte petrochemicals, which are some of the biggest businesses, as well as many others.

As the hon. Gentleman said, there is a proud history of such businesses in the north-east. On the wall of my office in Portcullis House is a picture of Lambeth bridge lying in pieces before it came down from Middlesbrough to be installed close to this place. When I took the Secretary of State for Business, Innovation and Skills around the Tata beam mill in my constituency, the work force were making beams for the new World Trade Centre. They told us proudly that their beams are in nine of the 10 tallest buildings in the world. That emphasises the point made by the hon. Member for Newcastle upon Tyne Central (Chi Onwurah), which is that steel cannot be melted without using a great deal of energy. Steel beams cannot be made without using a great deal of energy. There are physical and chemical limits to what companies can do.

When I first became an MP, one of the key requirements for me was to get the steel works in my constituency going again. It will be of no surprise to Members that I therefore had to meet Ministers at the Department of Energy and Climate Change. The new owners wanted reassurance about the UK’s energy policy and an assurance that they would get the emissions allowances that were required to restart the plant. The owners were probably slightly naive and did not ask enough questions about how many issues they would face on the energy front. They have been surprised by the depth and breadth of the various environmental obligations on them.

As Members have said, Governments in other parts of the world are nowhere near as aggressive towards energy-intensive industries as ours seem to be. The former Minister of State, Department of Energy and Climate Change, the right hon. Member for Bexhill and Battle (Gregory Barker), who was recently moved out of office, was told by his civil servants that energy costs in the UK were not out of line with those in other countries. That is the line that Ministers were being sold. He visited Germany because of the representations that he kept hearing from industry and was shocked by what he found. He had not realised that industry gets such a lot of support in Germany and that industrial energy costs can be as low as half the cost of domestic energy. The comparisons that the hon. Member for Stockton North has given became clear to him.

I was keen, along with other Members and particularly the hon. Member for Penistone and Stocksbridge (Angela Smith) in the early days, to form the Energy Intensive Users Group. The group was originally envisaged as an offshoot of the all-party parliamentary group for the steel and metal related industry, but we realised that it was a far bigger issue.

[David Mowat]

The hon. Gentleman made the important point that Germany’s electricity costs for energy-intensive industries are substantially lower than ours, even though its domestic energy costs are substantially higher, because it has a cross-subsidy. Does he know, or does anybody know, why that is not an issue in respect of state aid?

[Ian Swales]

The hon. Gentleman makes an extremely good point, which I will return to later. When I see the UK’s attitude to these sorts of policies, I often feel like we are playing cricket, while other countries are playing rugby, boules or other sports that we do not recognise.

At the first meeting of the Energy Intensive Users Group, I was stunned not just by the number of outside attendees from industry, but by their seniority. We quickly realised that it was a huge issue that faced many industries, some of which have been mentioned. I do not think that paper has been mentioned. That is yet another industry that sent a representative from its trade body. As a result, there has been a great deal of representation to the Government. I am pleased to see at least some bending in response.

UK businesses that are involved in the generation and consumption of energy are saddled with up to seven different carbon taxes from the UK and Europe. Interestingly, even the senior executives of those businesses cannot always describe clearly what all the taxes are and what they do. Despite the action that the Government are taking, the trends are not great. It is estimated that political costs will increase the electricity bills of industry by a third by 2019-20. Policy makers do not seem to understand that if a company spends millions of pounds a year on energy, it already has quite an incentive to use less. It does not need to be beaten with a stick by the Government to persuade it to use less energy, let alone seven sticks. These companies know that they are spending a lot of money on energy, and are already doing a lot about it. They know that energy costs are a competitive issue, whether there are taxes or not. The irony of a heavy tax burden is that it removes cash from those companies that they could otherwise devote to energy-saving initiatives. Many companies work on thin margins or in commodity businesses that do not have high margins. The more taxes they pay, the less likely they are to be able to invest in reducing carbon consumption and generation.

A Minister from the Treasury rather than from the Department of Energy and Climate Change is responding to this debate, and I wish to ask about the attitude of the Treasury towards these taxes. Does it take the broad view about business competitiveness, look at the overall picture, and compare the taxes being rendered with those rendered from Europe, or is it just a way of raising money? These businesses are almost all competitive and traded internationally, so in this regard the UK is no more an island than the EU is. Our policy decisions affect these businesses on an international basis.

The hon. Member for Warrington South (David Mowat) mentioned the EU. The minute we want anything done, the standard response from civil servants is “State aid”. That is a perfect method of obfuscation and delay, which, in many areas, we as politicians are buying when we should instead be fighting a lot harder. I know there are specific issues with the steel industry and the EU, but many other industries are not as limited. Politicians should not allow state aid to be used as an excuse for delay or for no action, particularly given that some of the things we are talking about are, ironically, UK-only initiatives. I cannot see how the European Union can interfere with initiatives such as the carbon price floor, which are taken only in this country. I would like Ministers to be a lot more aggressive with civil servants, not just about whether state aid issues apply, but if they do, about how quickly they can be removed. Some of the issues I am thinking of have been washing around for most of the four years that I have been in this place.

Europe has the emissions trading scheme, which has not totally met its objectives, as the allowances originally given to companies were fairly generous but the tight market that was expected to lead to carbon trading has not occurred. Ironically, however, Sahaviriya Steel Industries in my constituency has a specific problem because it was virtually out of business during the reference period when the allowances were decided. It now pays $1 million a month in carbon cost to the EU, because it does not have enough allowances to operate. It is also expanding, so carbon costs are yet another handicap.

Businesses can do many things to reduce energy use, but as the hon. Member for Newcastle upon Tyne Central said, there are physical and chemical limits. I do not disagree with some of the EU moves on best available technology, or with new moves to look at what is technically feasible and ensure that companies in the EU move towards that best available technology. I hope that we do not get regulatory regimes that drive everybody else out of business if they are not the best, as that will not help anybody. However—I hope the Government will take notice of this—when the best available technology frameworks are established for different businesses, that will at least show what is possible with regard to reducing energy consumption and contribution to climate change. If a company is doing something in another country, we can do it here; if it is not being done anywhere, we must ask whether it is sensible to try to drive a company to use 50% less energy, for example. I would like to see constructive work with the EU on that, ensuring that we are as bold as we should be when dealing with its requirements.

Investment has been mentioned, and the manufacturing industry has been declining. During the previous Government, it went from being 19% of the economy to 10%, although some growth is occurring. I worry about these businesses because there is capital investment inertia. It is not about whether company A is operating today, tomorrow or next year; it is about what investment decisions are being taken. Are the plants being kept up to date and maintained? Above all, would the company concerned re-invest in such a business?

I remember my experience as a financial director in the chemical industry. We decided to get out of a business, but 24 years later that business is still running. It has never been renewed, but it has been patched up and sold three times since then. Those are the types of decisions taken. If we have an unattractive climate for investment in this country, things will close down not overnight but steadily, and we are seeing some of that.

The Engineering Employers Federation, which covers all the businesses we are talking about, says that energy costs are its No. 1 issue for growth and investment. Many of these companies are foreign owned. The biggest employers in my constituency are Singaporean, Thai, Indian, Saudi Arabian and Korean. Decisions are being taken not in the north of England or London, but in Seoul, Riyadh, Bangkok and so on. If our energy infrastructure costs do not look competitive and sensible, companies do not need to come here or re-invest.

Despite sounding somewhat critical, I welcome the Government initiatives. The mitigation moves that they have mentioned are helpful for big energy users in my constituency. I hope the initiatives will take place with due speed—that has been an issue—that there will be certainty and that they are not a one-off. We are talking about long-term businesses taking long-term decisions. If the Government believe that throwing a carrot towards a business for 12 months makes a difference—well, obviously it makes a difference to its cash flow in those months, but it will make no difference to its strategy. Uncertainty does make a difference in the wrong direction.

I welcome the fact that the UK Green Investment Bank is majoring in investing in industrial energy reduction, as well as renewable technology, and I welcome the renewable heat incentive, which should help. The regional growth fund has put money into such businesses—most recently, £9 million went into a huge project at Sabic in my constituency, which will result in the petrochemical cracker being able to crack gas. I am pleased about the Tees valley city deal, which I helped to push for and even construct. It will get carbon capture and storage around Teesside, which I still regard as the No. 1 location for investment in carbon capture and storage for industries outside the energy sector, although we have the energy sector as well.

[Alex Cunningham]

I am grateful to my new hon. Friend for giving way, and I believe that that is the central issue on Teesside. Will he join me in congratulating the industrialists on Teesside who, despite being competitors, have come together because they know that the future is about investment in carbon technology?

[Ian Swales]

I agree with the hon. Gentleman. Such a technology will create an infrastructure that will benefit all those sectors, and they do not compete that much with one another. The Tees valley can be a hotbed of competitive steelmakers, chemical producers and so on. Strategically, the country should get on with that.

All hon. Members have mentioned the importance of energy-intensive industries. They are important to the economy, to the development of green industries—let us think of the amount of steel involved in tidal power—and to the security of the country. We should not kid ourselves when we count carbon. In a debate a while ago, the hon. Member for Warrington South asked, “Is the carbon for my Volkswagen car mine or the Germans’?” We are kidding ourselves if we think we are doing the right thing by de-industrialising this country, exporting jobs and importing carbon. That is one point on which I depart from the hon. Member for Newcastle upon Tyne Central.

[David Mowat]

I agree with the sentiment the hon. Gentleman expresses, but I do not recall saying that. I have a Volvo, not a Volkswagen, so I might have talked about Swedish carbon.

[Ian Swales]

I think he mentioned Volkswagen in the context of chiding the Germans for their carbon emissions. I made the point that a big manufacturing exporter such as Germany is probably bound to have higher carbon emissions on a production basis.

It looks as if I will be fighting the hon. Member for Newcastle upon Tyne Central for the first copy of Hansard tomorrow, because I, too, must leave the Chamber, to join the Government’s rail electrification taskforce. I apologise in advance to the Minister. I will look closely at her remarks tomorrow.

[Angela Smith (Penistone and Stocksbridge) (Lab)]

It is a pleasure to follow the hon. Member for Redcar (Ian Swales). I pay tribute to my hon. Friend the Member for Stockton North (Alex Cunningham) and congratulate him on securing this important debate. I echo his comments on the relative emptiness of the Chamber. To emphasise the point, the relative emptiness is not because Parliament does not recognise the importance of carbon taxes and energy-intensive industries, but because all hon. Members are aware of the huge constitutional issues we face. Many of our colleagues are in Scotland trying to save the Union, and I pay tribute to them for doing so.

The debate has included one contribution from an east midlands Member and three contributions from north-east Members. I shall try to balance that by giving the perspective of the manufacturing sector in Yorkshire and the Humber, which is one of the most important manufacturing bases in the country, alongside the north-east, the north-west and, importantly, Scotland. A conservative estimate is that at least 800,000 people work in energy-intensive industries in the UK. I will call them “foundation industries”—I do not like the term, “energy-intensive industries” and “foundation industries” is a much better description. Foundation industries are critical to the whole of our manufacturing base. Included in those 800,000 are the supply chains built around the key industries.

We are entering an era of shortening our supply chains—the production and supply of components for other industries are being re-shored in the UK, which is welcome. If we look at the supply chains of BAE Systems, one of our most important manufacturing companies, it is immediately obvious how well balanced the company and its supply chain are in the country. Its impact is felt not only in the north-west in Barrow-in-Furness and Warton, but throughout the country, particularly in Scotland, Yorkshire and the Humber and the broader north-west.

That illustrates an important point about Scotland. Manufacturing in Scotland is important not only to the Scottish economy but to the whole UK economy. The shortening of the supply chains and the building of stronger supply chains in our country is making the integration of our manufacturing base more important than it has ever been in our industrial history. From that point of view, UK manufacturing is stronger together, just as the UK is better together with Scotland. That point in the debate is often overlooked. All the talk is of the pound and everything else, but it is important not to forget that if we are to rebalance the UK economy, manufacturing is the best point at which to start because it is already well balanced. Manufacturing in Scotland is an integral part of that.

[Ian Swales]

The hon. Lady is right. One of the most important foundation chemicals is ethylene. There is a pipeline between the north-west of England to Teesside and then Scotland. That pipeline helped in the recent Grangemouth dispute.

[Angela Smith]

My hon. Friend the Member for Stockton North made the point about shale gas, which gives us the potential to supply a good, domestic feedstock for the chemical industry. It would be more efficient and better for us all round for that feedstock to be delivered throughout the UK, rather than having borders between Scotland and England. That is an obvious point, but it is important to put it on the record.

The definition of “foundation industry” varies, but broadly we mean steel, cement and lime manufacturing, chemicals, ceramics, glass and paper. The contribution those industries make to key economic activities such as transport and construction is fairly obvious, but their importance in other ways is often overlooked. For instance, the chemicals industry has contributed to the growth of food manufacturing in this country, and chemicals will continue to be important for agricultural use and in ensuring that we maintain a healthy food production capacity in this country. We thus realise how apt the term “foundation industry” is, as they are key industrial sectors.

At a conservative estimate, those industries make a contribution of roughly £15 billion to UK GDP per annum. Depending on the definition of “foundation industries”, their combined turnover varies between £70 billion and £95 billion per annum. They provide 11% of the UK’s gross value added. Their contribution to UK export capacity is very significant: they contribute at least 30% of our export capacity, but I have read somewhere that it could be as high as 54%. Again, that depends on the definition of “foundation industry”.

The foundation industries have a strong research and development profile, which is often underestimated and overlooked in terms of their importance to the UK. The future of the sectors is dependent on high-quality research and development profiles, on significant investment, and on ensuring that we stay ahead of the game in manufacturing capacity and at the high-value-added end of the manufacturing spectrum.

I pay tribute to the first of the catapult centres developed in the UK—in south Yorkshire, at the advanced manufacturing park at Catcliffe—more than 10 years ago by Yorkshire Forward and others in Sheffield and Rotherham. The park is focused on engineering, particularly steel engineering, and is going from strength to strength. A partnership in Sheffield between Boeing, Rolls-Royce, the university of Sheffield and Sheffield Hallam university is building a brand new factory, Factory 2050, alongside the original buildings, and is now investing heavily in research into nuclear capacity. It is a highly successful venture that provided the blueprint for the Government’s catapult centre strategy.

As a Sheffield and Barnsley MP, I am incredibly proud of the innovative work done in south Yorkshire in using the concept of catapult centres to promote the collaboration between academic institutions and our manufacturing centre to make us world class in innovation and the development of new technologies. Our foundation industries are also at the forefront of work force investment. They have a good record on paying their work force well—these are good jobs—and investing heavily in apprenticeships and ongoing professional development training. The country needs more of that. In many cases, our foundation industries provide a good example of best practice.

My constituency has many foundation industries within its borders. Fox Wire produces world-class cabling for the oil industry and many other applications. Tata Speciality Steels provides steel for the aerospace industry and is at the top end of steel manufacturing in this country. In fact, one reason it is headquartered in my area is that it cannot find elsewhere the skill sets it needs to maintain its position as the best in steel manufacturing. We are very proud of that. In addition to those industries, British Glass is headquartered in my constituency, and I also have cement, paper and ceramic interests, so I represent a range of manufacturing interests.

One of the ceramics companies in my constituency, Naylor, is a family company, not foreign-owned, and has been in existence for more than 100 years. Only this week, it secured six-figure funding towards a £2.5 million project to increase capacity, while reducing energy consumption, at its Cawthorne factory in my constituency, through a combination of smart metering and an in-house plastics reprocessing plant to make use of its own waste on site. There are limits to what can be done to reduce energy consumption, but these are practical, innovative ways of continuing to reduce energy use. In addition to energy efficient lighting, a new energy efficient kiln and dryer has created extra capacity, while reducing energy costs, and led to 30 new jobs. I am proud of Naylor. This superb company is increasing its exports profile and winning awards all over the place, while being dedicated to reducing its carbon footprint—because it makes financial sense. I think the hon. Member for Redcar made this point. The industry is already incentivised to reduce its carbon footprint because it will make business more efficient and cost-effective.

Briefly, Sheffield city region provided some of the funding for that project, which is a tribute to an important element in the ongoing constitutional debate—local decision making. We need some devolutionary thinking on getting investment in manufacturing in the rest of England, never mind the other constituent parts of the UK.

Industry is committed to reducing energy use. For example, Celsa, a recycled steel plant in Cardiff, is one of the most energy and labour efficient plants in Europe, and we have seen significant reductions in electricity consumption by the steel industry in the past 30 years. The figures are startling. I do not have them to hand, but the electricity consumption of steel making in my city has gone down significantly in the past 30 years. On that point, will the Minister respond to the request by steel makers across the UK that the Government reconsider the advanced capital allowances for energy efficiency? The scheme is based on generic lists of technologies and excludes the more specific but often large energy efficiency opportunities that our foundation industries want to engage with. I would be interested to hear whether the Treasury is prepared to reconsider that scheme and take the common-sense approach of applying it to these large-scale energy efficiency projects.

The role of foundation industries in developing a green economy should not be overlooked, as I said in an earlier intervention. I was not saying that we should move faster than the rest of Europe; in some ways, I was making the reverse point. We must be careful not to damage the competitiveness of the foundation industries in this country, precisely because they are critical to delivering the green economy we need, not just in the UK but across European and globally. We know that the foundation industries have an important role to play in developing renewable energies, such as carbon capture and storage, and we know that they play a valuable role in the production of energy-efficient construction materials, particularly in respect of chemicals. The chemicals sector is doing a good job of developing wonderful new materials for use in construction projects, not just for commercial but for domestic building, as I saw when I visited a research project at Nottingham university involving several chemical companies, including BASF. That project is doing impressive work to cut the carbon footprint of domestic building projects and to cut energy costs across the board, especially for home owners.

British Glass is developing new trading standards and is keen to see glass play its part in developing a green economy, and new glass technologies are being developed all the time. Let us not forget either that wind turbines require a lot of steel in order to help reduce our carbon footprint and produce green energy. The steel industry also points out that the development of the lightweight vehicles we increasingly see on our roads is largely down to work by the steel industry to reduce the weight of construction materials. The foundation sectors are doing a great deal of work to develop the green economy, but the costs being incurred by our industries as a result of our carbon-intensive industrial past must not be forgotten.

We are now paying the clean-up costs of an industrial legacy that has left many of our environments badly degraded. As an example, the water industry in Yorkshire has to pay out millions of pounds a year to clean up the water collected from a catchment that is badly degraded—by peat degradation. The water must go through multiple processes to remove the peat before it can be put into our catchment and our networks. A great deal of work is involved, and we have to recognise that the industry is paying the costs of carbon pollution in the past. That should not be overlooked when we reflect on the arguments in favour of transitioning to a green economy. It is very short-sighted to argue that the green economy is not important to our future; it quite clearly is.

Let me move on directly to the impact of carbon taxes and levies on our foundation industries. My hon. Friend the Member for Stockton North made the point, which should be reiterated, that Tata Steel, for instance, has estimated that year-ahead wholesale electricity prices are 70% and 45% higher than in Germany and France respectively. That is driven in large part by policy-driven taxes and levies for the most intensive users; those were 2.5 and 6.5 times higher than in Germany and France respectively in 2011.

The British Ceramic Confederation has pointed out that DECC’s own analysis shows that climate-related charges are already 19% of the industry’s base load price, which will rise to 47% in 2020. The manufacturers’ association EEF has stated that the Government’s own estimates indicate that industrial electricity prices will increase by 50% by 2020 and 70% by 2030. Moreover, Tata Steel is clear that the levies with the greatest impact today are the renewables obligation and the carbon price floor. The company also points out that many of its steel competitors in Europe will either be completely exempt from many of the levies or have their charges capped.

As far as I am concerned, the Government’s recognition of the damage inflicted on our manufacturing sector by the carbon price floor is most welcome, but why on earth they introduced the floor price in the first place remains a mystery. As I say, we welcome their acknowledgment in this year’s Budget of the mistake made. The proposals laid on the table represent something of a step forward in resolving the issues, but they do not resolve all the issues related to the imposition of the carbon price floor in particular on our sectors.

The 2014 Budget announced that the carbon price floor would be frozen at £18.08 from 2016-17 to 2019-20, saving all UK business an estimated £4 billion over three years. The Government will review the carbon price floor beyond 2020, once the impact of the reform of the EU emissions trading scheme is clear. They are extending existing compensation for CPF and ETS for 2019-20 and we of course have the compensation package in place.

It is my understanding, however, that the compensation package is underspending, so the Minister, who until a moment ago was busy on her mobile phone, might like to concentrate on providing an explanation of why the Government are underspending on their compensation package to industries that desperately need to see it delivered. She needs to explain, too, why it continues to be the case that the UK does not appear to be punching at its weight when it comes to making the case to Europe that more of our foundation industry sectors should be included in state aid guidelines. [Interruption.] I am sorry, but the Minister should realise that this is not a laughing matter.

We need to know why the Government are not working harder to make the case to Europe that more of the sectors affected by the carbon floor price should be included in European state aid schemes. That is at the heart of this debate. Sectors such as ceramics make intensive use of electricity—use of the electric arc furnace is not confined to the steel industry; it is used in ceramics, too—yet the ceramics sector has been almost entirely excluded from the compensation on the table at the moment. The Government should explain that, or at least make a commitment to ensure that that unfairness in the compensation schemes on the table is removed as soon as possible.

We need to see a commitment to introduce the announced mitigation measures for the renewables obligation as soon as state aid approval has been granted by Brussels. As I said, we also need to see a commitment to ensuring that the sectors included in state aid are extended as soon as possible. We need an approach that gives specific consideration to premier league energy-efficiency projects, or incentive schemes such as the enhanced capital allowances that I mentioned. We need to see UK support at the October European Council meeting for including the principle of the continuance of robustly protecting the competitiveness of the sectors most at risk at the level of best performance. We need to see, too, a commitment from the Government to support the industrial strategies developed by the foundation industries, such as the chemistry growth partnership and the developing UK metals strategy.

Finally, I want to hear the Minister’s response to the argument that a consolidation of the taxes and levies on the table at the moment would be a sensible way forward. A significant number of taxes and levies are being placed as a burden on our foundation industries. Indeed, one company in my constituency has to employ a highly skilled individual full time just to deal with compliance with the range of levies and taxes that need to be delivered year on year. The Government need to think again about the impact on industry of having to work through so many different schemes and so many different levies year on year. Nobody is arguing against the principle of carbon taxation—