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UK’s Crippling Energy Bill For Industry

April 4, 2016
tags:

By Paul Homewood  

 

Port Talbot Steel Works

 

I want to explore further the effect of high energy costs on the UK steel industry.

 

Last December, the House of Commons Select Committee for Business, Innovation & Skills published a report on the steel industry. It included these two graphs:

 

 

Figure 6: Comparison of European electricity prices for extra large consumers since 2003

Source: DECC, Statistical data set, International industrial energy prices International price comparisons, Table 5.4.4. Note that the definition of extra large user changed in 2007.

 

 

Figure 7: Electricity prices for EU steelmakers 2014 (p/kWh)

Source: Eurostat / DUKES December 2014

http://www.publications.parliament.uk/pa/cm201516/cmselect/cmbis/546/54605.htm

 

These are hugely damning. The Select Committee comments:

 

According to the industry, the price of electricity in the UK for extra large users is the highest in the EU by some margin. Figure 6 indicates that prices for these industrial consumers have risen steadily in the UK since the start of this century and were the highest in the EU in 2014.

Other studies have confirmed that electricity costs are relatively high in the UK for industrial users. Whilst energy costs may not represent a high proportion of total costs, we were told that they nonetheless represented a “significant proportion” and that “the margins are very small, so any disadvantage is magnified”.

Some of these relatively high costs can be attributed to policies designed to combat climate change. The Government estimates that climate change policies have added 18% to electricity prices for the steel industry, falling to 14% after compensatory measures are implemented.

 

We should not be in the least surprised about these figures. After all, DECC were forced to reveal similar numbers in 2014, following a successful FOI. The chart below relates to large, energy intensive industrial users:

 

 

Real 2014 £/MWh 2014 2020

Gas Electricity Gas Electricity
1) Price before policies £22 £64 £24 £71
2) Price impact of policies £1 £16 £1 £42
Of which:



Climate Change Levy £1 £1 £1 £1
Small-scale Feed-in-Tariffs £2 £4
Renewables Obligation £10 £15
Contracts-for-Difference £0 £10
Capacity Market gross auction cost 3Capacity Market gross auction cost 3 £0 £4
EU ETS carbon cost £2 £2
Carbon Price Floor carbon cost £4 £9
Other wholesale price effects of policies -£3 -£3
3) Estimated impact of policies, £ (2) £1 £16 £1 £42
Estimated impact of policies, % (3/1) 3% 26% 3% 59%
Price after policies (1 + 3) £23 £80 £25 £113

https://www.gov.uk/government/publications/estimated-impacts-of-energy-and-climate-change-policies-on-energy-prices-and-bills-2014

 

Note that the cost of climate policies are already adding 26% to the price of power. But worse still, by 2020 current policies are projected to add a suicidal 59%.

Amidst all of the current arguments, it is all too easy to forget that companies like Tata are not just looking at current costings, but also need to consider what things will be like going forward. There is no point taking losses now in the hope of a brighter future, when the UK Government itself is saying energy costs will be even more unaffordable in a few years time.

Add into the equation comments from the Committee on Climate Change that the carbon floor price must increase in leaps and bounds if decarbonisation targets are to be met. Then throw into the mix politicians’ pledges to totally decarbonise the economy, and it is little wonder that Tata see no future for the UK steel industry. (It is worth noting that Tata’s Netherlands operation is to continue – it does not take a genius to work out why)

 

As for the impact of high energy costs, these are higher than often implied. I gather Labour’s shadow chancellor, John McDonnell, suggested that the effect was only “about 1% of total costs”. Such a statement can only come from a politician or bureaucrat, who is only used to spending money from a budget. Cut the budget by 1%, and you simply spend less.

Industry however works to margins, where1% may make the difference a profit and a loss. You cannot simply strip out cost without affecting production as well. Of course you can make efficiency improvements, and this is a constant procedure, but crucially your competitors are also doing the same.

 

According to Tata’s Annual Accounts, power costs account for 2.8% of turnover. 2254 crores equate to about £250 million.

 

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If energy costs are 26% higher because of climate policies, this would be costing Tata about £50 million pa. Although their overall losses are greater, it is clearly logical for them to maximise output at the plants where energy costs are lower.

18 Comments leave one →
  1. Geo-realist permalink
    April 4, 2016 8:18 pm

    The wholesale price of power in March 2016 was around £30-35/MWh rather than the £64/MWh shown in DECC’s table for 2014 so “green” policies are adding at least 50% to the price today rather than only 26%.

  2. Green Sand permalink
    April 4, 2016 8:35 pm

    ‘Of course you can make efficiency improvements…..’

    Takes the same amount of energy to melt/heat a tonne of steel anywhere on the 3rd rock. Yes, for nit pickers, there are ambient effects but basically if you are paying 30% more for your energy you pay at least 30% more to melt/heat your tonne of steel. No heat transfer system in large steel manufacturing processes can be 100% efficient.

    The amazing point is successive governments (including officers) have deliberately chosen to impose these increases on UK industries. I find it is unrealistic to believe they could not foresee the consequences. Or maybe, just maybe, they are incapable of understanding it takes the same amount of energy to melt/heat a tonne of steel anywhere on the 3rd rock?

    Makes you wonder…. education, education, education….?

  3. April 4, 2016 10:24 pm

    To Green Sand: but they do of course foresee the consequences.Cast your mind back to early last year when United Nations spokesperson Christiana Figueres stated that the upcoming Paris COP21 meeting of all the worlds Govt”s was the best chance to de-idustrialise the Western Nations.On cue,various Green groups persuaded Cameron,Clegg,and Milliband to sign a pledge to ensure that the neccessary agreements were made.
    While not much that was legally binding came out of COP21 in Paris,nevertheless Cameron is pressing on with what is required of him .
    I do find it unsettling that it is a Conservative Govt.that will be the death knell for our once Great Britain.

    • Green Sand permalink
      April 4, 2016 11:02 pm

      avro607

      This once Conservative Party agent has long lost faith with present day politicians of any hue. They have too easily followed the majority of the electorate into the world of ‘virtual reality’ and in some cases, this case, actually led the way.

      Bread and circuses…..

      PS my mind goes back well before last year, this rot was embedded decades ago, and in 2008 it gave politicians their dream. A necessity for tax growth and via a simple life giving molecule (CO2). Was Miliband that bright? Nay, just jumped the spin.

      PPS in a previous life I played cricket at the Avro Lancaster Club! Very good days!

  4. Joe Public permalink
    April 5, 2016 7:18 am

    Surely Germany, with a greater % of renewables than the UK, should be worse affected?

    • April 5, 2016 7:26 am

      But they also have a greater % commitment to supporting their industries, as well as much more enlightened unions. Tata tried to cut costs in the UK last year by ending the final salary pension scheme for existing workers, but the unions stopped it by threatening strikes.

    • April 5, 2016 10:11 am

      They took the decision to pass most of the cost onto domestic users, effectively subsidising large energy users

      • April 5, 2016 4:37 pm

        Actually, to be more precise, German industry also pays full whack, but there is exemption for large energy users

  5. April 5, 2016 7:22 am

    Meanwhile, Scum of the Earth are trying to get Aberthaw coal-fired power station closed down, if the govt wants to save the very nearby Port Talbot steel works it needs to send one of those investor signals that greenies love to talk about and support Aberthaw, including a commitment to support the refurbishment of the plant when required.

    http://www.walesonline.co.uk/news/wales-news/one-europes-most-polluting-power-10160318

    • Joe Public permalink
      April 5, 2016 12:14 pm

      The report omits the essential phrase “Some of the time”

  6. April 5, 2016 11:38 am

    Closing Scunthorpe steelworks ins’t going to help the kids lungs, my lungs here in Indonesia/Borneo/Malaysia Singapore.

    Here Schools were closed for many days In Sept/Oct due to the annual haze
    which happens 2 times a year (2016 phase 1 haze, not here yet).
    (10s of millions of people ens up wearing face masks)

  7. April 5, 2016 4:17 pm

    Business rates for the steel industry are also higher in the UK than elsewhere.

    Scotland may offer a rates holiday to some firms.
    http://news.scotland.gov.uk/News/Steel-business-rates-relief-2240.aspx

    Wales may have left it too late.
    http://www.walesonline.co.uk/business/business-news/cuts-business-rates-cards-help-10394252

  8. April 7, 2016 9:43 am

    DECC have so far refused to publish their revised impact analysis for 2015 (presumably out of embarrassment) but they do not dispute UK policy costs have risen markedly since 2014. EIUG’s estimates show Feed-in-Tariffs are now costing over £4/MWh, Renewables Obligation over £15/MWh, Carbon Price Floor over £10/MWh and Capacity Market around £3/MWh. Total policy costs (including CCL and ETS, less wholesale effects) are now around £34/MWh. This suggests UK industrial electricity prices are currently around 65-80% higher than they would have been in the absence of these policies.

  9. December 5, 2016 4:43 am

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Trackbacks

  1. UK’s Crippling Energy Bill For Heavy Industry | The Global Warming Policy Forum (GWPF)
  2. RIP British Heavy Industry: Killed By The Green Death
  3. RIP British Heavy Industry: Killed By The Green Death | The Global Warming Policy Forum (GWPF)

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