Energy Intensive Industries

Joan Walley Excerpts

Wednesday 4th December 2013 Westminster Hall

[Paul Farrelly]

I am grateful to be so popular for the first time in many a month. I do not want to make this party political, but one of the lessons the Government seem to have learned from the Labour party’s initiative on energy prices is that we need to have simplicity and to reduce prices for domestic customers. However, the same message needs to be learned in respect of industry across these islands.

As I was saying, the ceramics industry, along with other industries represented here by Members, uses some of the most electro-intensive processes in the UK and Europe. The advanced refractory and technical ceramics manufacturers, which make products that must withstand high temperatures, operate electric arc and indication furnaces at well over 2,000° C, which is getting on for half the surface temperature of the sun.

That brings me to one of the key points I want to make. Several of our major manufacturers in these highly competitive industries have already moved overseas, relocating inside and outside Europe, including in Germany and France—our major European competitors—and they have cited electricity costs as a key reason for doing so. That is happening in not just the ceramics, but other sectors, such as chemicals and steel. We have heard about INEOS, and Members will no doubt want to refer to the steel industry and the experience of Tata.

To take one further example, the German multinational chemical company BASF, which is a major employer near Manchester, just north of my constituency, wrote to me to underline that electricity and other energy costs have been responsible for rendering uncompetitive its 60-year-old Scottish pigments plant at Paisley—the group’s second most energy intensive plant. As a result, that plant will close in 2015, with the loss of another 150 jobs. That is the stark message from the industry about UK competitiveness. Manufacturers now typically pay between £80 and £100 per megawatt-hour in the UK. Some of their German competitors pay nearer to €40—not even £40—per megawatt-hour, which is less than half that price. In France, they pay €50. If nothing is done, and if UK electricity costs rise further, more businesses, investment and jobs here will be put at risk.

[Joan Walley (Stoke-on-Trent North) (Lab)]

I congratulate my hon. Friend on obtaining the debate. Must not we make sure that we can maintain manufacturing jobs in the UK, including in the ceramics industry, and support energy intensive industries, while enabling them to decarbonise? A key difference between the UK and Germany is the fact that in Germany the power sector has been transformed with a move towards clean energy. We must not lose sight of the necessary innovation and the transformation of the energy sector.

[John Robertson (in the Chair)]

Order. I ask hon. Members to keep interventions a bit shorter.

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[Paul Farrelly]

My hon. Friend anticipates the final paragraph of my speech—which is not too far off—with a plea for simplicity and predictability.

Industry’s message about comparative prices and prospective increases is simple. With non-baseload charges rising so rapidly, on top of wholesale price increases, the UK’s energy intensive industries will be at a growing disadvantage, not only compared with international competitors, but because of lower-cost countries internationally that are hungry for their investment. Of course, the fact that the playing field is so far from being level harms UK industry, but it will also do nothing to help with climate change or to reduce carbon emissions, if it means that manufacturing ends up in less energy efficient factories in countries with a laxer view of their environmental obligations. I know that my hon. Friend the Member for Stoke-on-Trent North (Joan Walley) is concerned about such prospects for carbon leakage.

[Joan Walley]

I refer my hon. Friend and the Minister to the report of the Environmental Audit Committee on the energy intensive industries compensation scheme and the issue of carbon leakage. There is a need for proper research on which to base future policy, to provide the necessary certainty.

[Paul Farrelly]

I hope that everyone will put the report on their Christmas reading list and that the Government will take note of the evidence base and the recommendations.

What is to be done? Industry, although deeply concerned, is not totally ungrateful to have had the Government’s ear in recent years. There has been a welcome for the announcement in the Budget that ceramics and other industries would be exempted from the full cost of the climate change levy. I recall that in giving that news the Chancellor paid tribute to his Tea Room discussions with my hon. Friend the Member for Stoke-on-Trent Central (Tristram Hunt), who chairs the all-party group on energy intensive industries. Of course Opposition Members thought that that compliment meant that his political career was done for, but changes since then have happily proved us wrong. The reality is that the tax exemption is hardly what the British Ceramic Confederation calls a game-changer. Welcome though that gesture was, it will save only an estimated 2% of energy costs for ceramics, mineral and metallurgical companies. Similar things can be said about the £250 million package to compensate energy intensive industries in the 2011 autumn statement—relief that was extended in the recent Budget—and about the sentiments behind the exemption, which the industry argues is too limited, from the UK’s new contract for difference charges.

What further things would those vital industries like from the Minister today and from the Chancellor, if not tomorrow, then in the future? One thing is further news on practical implementation, without state aid complications, of the climate change levy exemption. Looking further ahead, they would like the compensation package that has already been announced to be linked to the carbon price floor, so that it remains for the duration of the policy, and so that its value will reflect the trajectory of the price floor, if that continues. The industries would also like a widening of the contract for difference exemptions, so that there will be help for more companies than the estimated 10% of the ceramics industry that it is thought will be helped. They would certainly like a bigger helping hand in relation to Brussels. There was dismay, a fortnight ago, in the ceramics, glass and cement industries at the discovery that they would be excluded from compensation under the EU emissions trading system, even though highly electro-intensive processes are employed in the sector.

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[David Mowat]

I thank my hon. Friend for that intervention. To wrap up, in terms of our position on Europe, I believe we need to cut carbon. It is important, and I am not a sceptic on that stuff. My difficulty is with the idea that we have to cut carbon unilaterally. We are responsible for 1.5% of the world’s carbon emissions. We produce two thirds as much carbon as Germany per capita, and per unit of GDP. That is similar to Holland and lower than the average in the EU, yet we are pushing ahead with unilateral actions that come with a severe price. We need to think hard about that when we negotiate our way through this maze.

The points that have been made about complexity are absolutely spot on. Myriad complexities have built up in the attempt to keep a diverse set of technologies available, and those complexities are really mindboggling.

I have put points to Labour Members about solar, about their party’s position on the decarbonisation target and about the opportunity this afternoon to vote according to their feelings on an amendment that would increase electricity prices further in the UK. I will also make a few points to the Minister, which he may wish to address. We should look at our tendency to act unilaterally, hemmed in as we are by the Climate Change Act and the fourth carbon budget and all that goes with it. I ask that we get away from EU directives on renewables and the rest. Yes, Germany is big on renewables, but it has far higher carbon emission levels than we do because it burns so much coal, and because it is building 10 more unabated coal-fired stations.

[Joan Walley]

Is it not the case that Germany is having to rely on a greater amount of coal now, in the short term—

[John Robertson (in the Chair)]

Order. We will move on to the next speaker.

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[The Minister of State, Department of Energy and Climate Change (Michael Fallon)]

I am very grateful to the hon. Member for Sunderland Central (Julie Elliott) for giving me a little extra time to enable me to try to respond to some of the very good points made in the debate. I hope that, if I do not respond to them all, hon. Members will allow me to write to them on the points that I have missed out.

This has been a good debate. It has not just been a good-natured debate. I think that it has been a reasonably constructive debate and it is certainly a very important one. I congratulate the hon. Member for Newcastle-under-Lyme (Paul Farrelly) on instigating it and attracting such a good attendance on both sides of the House. He raised a number of points. He asked about our engagement with the industry. He will know that last month I met Staffordshire Members with the British Ceramic Confederation. I have also met representatives of BASF, which he specifically mentioned, to hear their particular concerns. We are always ready in the Department to continue to meet representatives of those industries that are most affected.

The hon. Gentleman raised the issue of gas storage. I know that he disagrees with our decision not to subsidise large-scale storage reservoirs, but there are fast-cycle gas storage plants being completed. Two have been completed already. Two more are due to be completed next year. That will double our gas deliverability. I do not accept that the decision not to subsidise gas storage makes any major contribution to that debate.

The hon. Gentleman asked about the position of refractory ceramics. My officials have visited some of those electricity intensive sites, and we are considering the case for including them within the carbon price floor compensation. He tempted me to speculate, in advance of the autumn statement, on the carbon price floor. I simply cannot do that. The carbon price floor is a matter for the Treasury, as he knows. What I can say is that, obviously, the Department for Business, Innovation and Skills is very much aware of concerns across industry about the level and the trajectory of the carbon price floor, and we certainly ensure that our views are known in the Treasury.

The hon. Member for Penistone and Stocksbridge (Angela Smith) made several points. She compared prices with those in France, but I ask her to reflect on the fact that France enjoys a huge amount of base load nuclear power. I hope that she will welcome the decision to replace our nuclear fleet and to invest in such base load nuclear power, a decision that was too long delayed. She also made some important points about simplifying the schemes. I am completely with her on that, and I will refer in a moment to what we have done in that regard.

My hon. Friend the Member for Warrington South (David Mowat) reminded us of the need to be competitive, and he spoke of the success of shale in the United States. I reassure him that we are encouraging the search for shale in the United Kingdom. A dozen companies are prospecting, and more applications to drill are coming in. I expect the search for shale to accelerate over the next few months. He usefully reminded us that we all bear responsibility for the way in which we vote in this House, and several of us have voted in favour of climate change objectives. Indeed, we have the opportunity this afternoon to vote down an amendment that would increase energy prices for industry and business.

The hon. Member for Scunthorpe (Nic Dakin) asked me about the working of the ETS compensation scheme, which has paid out some £18 million to 29 companies, including Tata Steel, in respect of several plants in the constituencies of hon. Members who are present: the hon. Members for Middlesbrough South and East Cleveland (Tom Blenkinsop), for Scunthorpe, for Central Ayrshire (Mr Donohoe), for Rutherglen and Hamilton West (Tom Greatrex), for Llanelli (Nia Griffith) and for Penistone and Stocksbridge, and my hon. Friend the Member for Warrington South. Those payments are flowing. They are backdated to January, and they will be made quarterly from now on. I will say a little more about the working of the scheme in a moment.

My hon. Friend the Member for Rugby (Mark Pawsey) championed the cement industry in his constituency, as I would expect him to. We recognise the pressures that that industry faces, which is why we have announced the exemption for mineralogical and metallurgical processes from the climate change levy. We are examining the case for the inclusion of cement and some ceramics—those that have come forward with evidence—in carbon floor price compensation.

The hon. Member for Llanelli spoke about energy efficiency, which is extremely important, and she also made an important point about local content. It is our intention to require, under contracts for difference, supply chain plans in respect of major contracts. Not only will that make those involved examine how they can drive up local content, but it will enable us to see more clearly where the local content is. I hope that she will welcome that measure.

The hon. Member for Sunderland Central suggested that the failure to set a decarbonisation target was somehow delaying investment. The House voted down the setting of a decarbonisation target in June, since when we have seen a wave of investment: not only the signing of the first new nuclear station in a generation but the introduction of a series of projects under our intermediate final investment decision enabling regime. She asked me what we were doing in respect of the Commission. My right hon. Friend the Secretary of State has regular discussions with the Commissioner. My right hon. Friend and I regularly go to Brussels to pursue cases such as CPF compensation, and we try to build support among other member states.

The hon. Member for Penistone and Stocksbridge made one of the most important points of all, namely, that there is a balance to be struck between green taxes, which the House has generally supported under successive Governments and which some of us have voted for, and ensuring the competitiveness of our industries. That can be a difficult balance to strike, and we are tackling it in two principal ways. We are helping to incentivise energy efficiency in industry and households, which several hon. Members described as important, and we are helping to relieve some of the short-term pressures on industry.

[Joan Walley]

Does the Minister agree that climate change agreements are an important way to incentivise clean power and meet decarbonisation targets?

[Michael Fallon]

I agree with that, and I will come on to climate change agreements later. The Government cannot control the volatility of global fossil fuel prices, but we can help industry to exploit energy efficiency potential, which will reduce the impact of rising prices. Some of our incentives are financial ones. The climate change levy is a tax on business energy use, and the EU emissions trading system is a cap-and-trade mechanism based on the emissions of energy intensive industries. The scheme is forecast to save the equivalent of 3,100 megatonnes of CO₂ by 2020. To complement the EU ETS, we have a domestic scheme, the carbon reduction commitment energy efficiency scheme, which targets large non-energy intensive organisations. That is predicted to save the equivalent of 4,800 gigawatt-hours per year, which is greater than the annual energy use of all households in Manchester.

In addition to those financial incentives, we are working to incentivise industry through several other mechanisms. Climate change agreements, which the hon. Member for Stoke-on-Trent North (Joan Walley) referred to, are aimed specifically at energy intensive industries. They provide a discount on the climate change levy of 90% for electricity and 65% for gas, in exchange for commitments to achieve energy efficiency. She is right to remind us that they are a good example of an area in which Government and industry can work together to agree achievable objectives. More than 50 energy intensive sectors have negotiated agreements under the latest phase of the scheme, which are expected to result in an 11% energy efficiency improvement across participating sectors by 2020. Looking ahead, we have recently consulted on the new energy savings opportunity scheme, which will help larger businesses to identify energy efficiency measures that will result in average bill savings of £50,000 to £60,000 per year. Subject to legislation, the first audits under the scheme will be undertaken by December 2015.

The second leg of our reforms is the recognition of the competitiveness problems faced by some industries as a result of their energy costs, which lies at the heart of today’s debate. Rising electricity prices are a real concern for many businesses, which see them as a barrier to growth. The commitments to tackling climate change that the House has voted through have contributed to increases in those bills. That is why we have set aside up to £400 million to offset some of the costs of energy and climate change policies for the most energy intensive industries.

As we move to a low-carbon economy, it is vital to ensure that the more energy intensive industries are not placed at a competitive disadvantage in Europe or across the world, and they are not forced to consider relocating to other countries. Not only would that have a negative impact on our economy, but it might result in our exporting emissions to countries that are not strongly committed to cutting carbon emissions. Many energy intensive businesses are located in areas that have been hit hard by the economic downturn, so we have to ensure that we give them the best support available.

I have spoken about the energy contingency scheme. We continue to engage closely with the Commission on the carbon floor price, to obtain the necessary state clearance. Both packages are aimed specifically at the electro-intensive industries. It is important to highlight—