UK’s Crippling Energy Bill For Industry
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
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|
|1) Price before policies||£22||£64||£24||£71|
|2) Price impact of policies||£1||£16||£1||£42|
|Climate Change Levy||£1||£1||£1||£1|
|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|
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.
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.