Energy Intensive Industries

Paul Farrelly Excerpts

Wednesday 4th December 2013 Westminster Hall

[Paul Farrelly (Newcastle-under-Lyme) (Lab)]

I thank Members and the Minister for attending this early-morning debate, which appears on the Order Paper with the catchiest of titles: “Cumulative electricity tax burden for energy intensive industries”—truly a headline writer’s dream. Their presence speaks volumes for the importance industry gives this issue. I have been approached in the corridors this morning and in the past two days by people who cannot be here, but who are closely following the issue because they have had representations from their local manufacturers, too.

I and other colleagues applied for the debate at the urging of the British Ceramic Confederation, which represents tableware firms and brick and tile makers in my area—north Staffordshire—and across the country. Indeed, on Friday, I am visiting one of them—Ibstock Brick, in Chesterton, in Newcastle-under-Lyme—to view first hand its £20 million investment in brand-new kilns, which use the Etruria marl in the company quarries just a couple of miles away in Knutton and Silverdale, in my constituency. The fact that we are having this debate is also due in no small part to the urging of my hon. Friend the Member for Penistone and Stocksbridge (Angela Smith), who has been cracking the whip for not only her local industry, but the sector.

The debate is very timely. It comes not only as energy prices for domestic customers have taken centre stage following the price-freeze initiative introduced by my right hon. Friend the Leader of the Opposition, but just a day before the autumn statement. The ceramics industry has lobbied the Chancellor of the Exchequer and the Minister hard for measures to tackle rising energy costs. It is not only the ceramics industry that has done that, but the glass, steel and chemicals industries—all sectors that describe themselves as highly energy intensive industries. In short, they are the cream of the UK’s manufacturing industry. We will no doubt learn tomorrow whether their pleas have fallen on deaf or, hopefully, receptive ears.

When it comes to my local ceramics industry and the potteries, I am more used to hearing cries of anguish over gas than electricity, because gas mostly fires the kilns. Only last week, 13 Members with ceramics interests, from across the parties and across the country, signed a joint letter to the Select Committee on Energy and Climate Change ahead of its session last Thursday on gas storage. A delegation of us also recently met the Minister to raise issues along the same lines on behalf of the industry. In our representations, we questioned the Government’s recent decision not to involve themselves in actively encouraging more storage to tackle gas price volatility and future security of supply. We were pleased that the Committee’s members took those concerns on board in their questioning of key representatives of the gas industry last week.

The debate is about the cost of that other staple and crucial energy source: electricity. On average, the ceramics industry uses more gas, but quite a number of our manufacturers employ some of the most electro-intensive processes in the UK and, indeed, Europe.

[Mr Brian H. Donohoe (Central Ayrshire) (Lab)]

I congratulate my hon. Friend on securing the debate. Three of the five biggest users of energy are located in Scotland, so he will understand my interest in this subject and, in particular, in the effect of Government policy. These industries are not able to get the grants available to their competitors in mainland Europe, which is leading to the possibility of job losses. Does he accept that the Government need to do more in those circumstances?

[Paul Farrelly]

I totally agree. Without a level playing field, the issue is not just the possibility, but the reality of job losses, not least in Scotland, and I will come to that shortly.

[Derek Twigg (Halton) (Lab)]

Before my hon. Friend comes on to Scotland, may I congratulate him on securing the debate? He is very knowledgeable on this matter. Is he aware that the INEOS ChlorVinyls plant in Runcorn uses electrolysis to manufacture chlorine? As a consequence, about 70% of the production costs on the site are accounted for by electricity. Some 1,800 people are employed on the site, so it is important that this matter be resolved. Is it not important that the Government look at the carbon floor price?

[Paul Farrelly]

I thank my hon. Friend for that intervention. I know the INEOS plant on Merseyside—it is an ex-ICI plant—very well, because two of my cousins from the extended Irish side of my family work there. Like all Members, I have had representations from INEOS, which is a major employer in my hon. Friend’s constituency. The company made exactly the same point—that 70% of its costs go on energy, so if we are substantially out of line with our competitors in Europe and the world beyond, it suffers a considerable disadvantage.

[Neil Parish (Tiverton and Honiton) (Con)]

I thank the hon. Gentleman for securing the debate. Germany has methods of subsidising high energy use-based steel, because it has high green taxes. The trouble is that the unforeseen consequences of our green taxes—they were, in all fairness, started by the previous Government—are mounting for industry. If we are to carry on with green taxes on bills, we must find a way to help these highly energy intensive industries; otherwise, we will export our business abroad.

[Paul Farrelly]

I thank the hon. Gentleman for what is the third intervention. I will come to the comparative prices in Germany, which has long had a strong green movement. In the past, it has also had the benefit of wide-ranging, simple schemes, not least in respect of coal, something that affected my constituency years ago. One of the things I want to come to later is the complexity under which our industry has to suffer.

[David Simpson (Upper Bann) (DUP)]

I thank the hon. Gentleman for giving way—he is a very popular individual this morning. One of the issues I have received the most lobbying on in my constituency is green taxes. We have the second-largest manufacturing base outside Belfast. The Government have promised to make business easier and more competitive and to remove bureaucracy, but we need to do something about this issue, because our manufacturing industry is not competitive out there, and we need to keep our jobs in the UK.

[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.

--- Later in debate ---

[Paul Farrelly]

That was one of my hon. Friend’s shorter interventions, Mr Robertson. Her constituency, Stoke-on-Trent North, includes Burslem, the mother town of the potteries. She is the Chair of the Environmental Audit Committee and will be sadly missed when, as she has recently decided, she retires at the end of this Parliament. I totally agree with her; what we need is a balance. What I want to show today, in the light of the pleas from industry, is that we have not got it quite right yet.

[David Mowat (Warrington South) (Con)]

rose—

[Paul Farrelly]

I see the hon. Gentleman is straining at the leash.

[David Mowat]

I shall be as quick as I can—and I, too, congratulate the hon. Gentleman on obtaining the debate. The topic of Germany has been raised, and we should all understand that its emissions are higher than the UK’s per capita and per unit of GDP—by about 30%. Germany has more renewables than we do, but burns far more coal and will not go along the route that we have taken so unilaterally and quickly.

[Paul Farrelly]

The hon. Gentleman makes the point very simply; we must look at things in the round when we consider reform of the system. I want to explain that industry wants reform to be simple and far-reaching, to permit competition with big companies that enjoy great support in Germany.

We are all familiar with the concept of fuel poverty—elderly people or less well-off families spending significant parts of their income on keeping warm. That concept could, strange as it may seem, equally be applied to some of our major manufacturers. Energy can account for up to a third of all costs in the ceramics industry and up to 70% of costs for major chemicals manufacturers, as we have heard. Big international price discrepancies matter, and will matter more if prices continue their inexorable rise. Like the household bills that we have put under the microscope in recent weeks, the price that industry pays for electricity also breaks down into three main components. One is the wholesale cost, which is rising. Another is climate-related charges. Hon. Members will have to bear with me while I go through a short list of what they include: the carbon price floor, the EU emissions trading system charges, the climate change levy, the renewables obligation, small-scale feed-in tariffs and, to be added to that bevy of burdens in the future, contracts for difference under electricity market reform. The third component is transmission charges, which are also increasing ahead of inflation, and which also include climate-related costs in the form of subsidies for offshore wind and other intermittent renewables.

I do not want to torture hon. Members and the Minister into torpor and total submission, but I shall give a couple of examples, provided by the British Ceramic Confederation, of the present and future impacts on industrial electricity prices of some of the carbon taxes and climate levies. Today, without climate change policies, the baseline electricity price that is being paid is about £70 to £71 per megawatt-hour. The climate change policies add £4 to £14 to that, so the cost rises to between £75 and £85. It is reckoned that, in 2020, which is not so far off, on top of a forecast base of £79 per megawatt-hour, the policies in question will add £15 to £35 or so; and in 2030, with the same forecast base, the cumulative effect of carbon tax and levies will, it is estimated, add £25 to £55, taking the price of electricity beyond £100 per megawatt-hour, to a top-of-the-range £130.

[Alex Cunningham (Stockton North) (Lab)]

My hon. Friend referred to the bevy of burdens on energy intensive industries. When I talk to the likes of INEOS and GrowHow, in my constituency, they say they want certainty and simplification, which is surely the way forward, and a long-term policy, so that they know what is coming in five and 10 years.

[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.

[Mr Donohoe]

I am grateful again to my hon. Friend for giving way. I have had many representations from the glass industry about its being excluded. There is a highly successful glass factory in my constituency, but its concerns are so great that it is bound to lose jobs as a consequence of being excluded from compensation. Does he agree?

[Paul Farrelly]

I certainly do. As I move to the final page of my remarks, I have some brief comments on the glass industry that reflect my hon. Friend’s concerns.

What the industry wants most of all, however, is a radical change of approach to stop our international competitiveness from being eroded further and even faster. The carbon price floor has inflicted pain on the industry for no discernible benefit, and its dream scenario would have the Chancellor abolish it entirely tomorrow. As with the measures affecting household bills, energy intensive industries would also like to see new climate-related charges, such as contracts for difference, paid from general taxation, because the nature of their businesses are such that they cannot protect themselves against such charges.

Other hon. Members will no doubt want to talk about industries other than ceramics, but before I let them, I will just say a few words about glass, which is another staple industry that is crying out for help. British Glass tells me that, since the UK climate change agreements took effect at the turn of the millennium, half of UK glass manufacturing sites have closed, with some 3,500 jobs lost. Despite the difficulties, it is still a £1.7 billion a year industry, employing 7,000 in the UK, but because it faces rising costs through rising green taxes and being ineligible for the EU help that my hon. Friend the Member for Central Ayrshire(Mr Donohoe) referred to, it fears that yet more jobs will go. We will then simply import more glass, which is bad for our balance of payments.

[Derek Twigg]

My hon. Friend makes an important point. Energy intensive industries form a large part of our manufacturing base. All parties have said that they want to protect and, naturally, improve manufacturing. Otherwise, we will end up importing many more goods. That is why it is vital that we take radical action to ensure that our manufacturing industry is promoted and protected.

[Paul Farrelly]

I entirely agree. From my 12 years as a Member of Parliament, my experience is that—I hope the Minister can change this mindset—the UK’s generally laissez-faire approach to industry, as well as its studious approach to implementing directives, means that we, in effect, give less support to our manufacturers than France, Germany, Italy and other leading nations give theirs.

I want to end with a plea to the Minister, which I am sure will fall on receptive ears as I know him to be intensely practical. If the Government are not minded to be as radical as the industry wants, the industry would certainly like more simplicity, which is a particular plea from BASF and the chemicals industry. End the plethora of levies by merging them into a single carbon tax, with the existing rebate scheme under the climate change agreements, to cut costs and bureaucracy and to reduce the mind-boggling complexity around green taxes and levies that often reduces Members of Parliament to complete confusion.

Thank you for listening, Mr Robertson. I look forward to contributions from colleagues and to the Minister’s response.

[Several hon. Members]

rose—