Industry concerns mount over UK 'triple whammy'

Warnings to government are mounting across the process industries about its taxation policies, particularly its carbon price floor policy (see panel, opposite page) and tax hikes on the oil and gas sector. Ineos, for example, has informed the government that its chlorine plant in Runcorn could become uneconomical under the sudden introduction of the proposed carbon floor price.

The warning is just one of a series emerging from energy-intensive sectors of the process industries. Another to speak out has been Tata Steel, which is facing similar problems and is planning closures and a large number of redundancies.

The Carbon Budget obliges the UK to cut emissions by more than almost any other country in the world, putting prime minister David Cameron and his energy secretary Chris Huhne firmly in the spotlight. Legally binding targets for a 50% cut in greenhouse gas emissions (c/f 1990) by 2025 and an 80% reduction by 2050, will, they claim, put the UK at the forefront of the global low-carbon industry.

Meeting these targets will require huge investment in wind, solar and wave power, which are the most costly and, in the case of wind, unsightly of renewable energy options. It will also mean the UK removing fossil fuels from its energy mix more quickly than any other industrialised economy.

The problem with the Carbon Budget is that it fails to properly address the impact of these measures on energy costs and, most worryingly, the competitiveness of UK industry against counterparts in not-quite-so-low-carbon countries, such as India and China.

Concern is clearly greatest among energy-intensive industries, particularly chemicals, steel and paper. The Chemical Industries Association (CIA), for instance, estimates that the Carbon Budget could raise energy-related costs already the highest in Europe from 10% to more than 100% of profits for many companies.

Echoing the views of many across the process industries, Steve Elliott, CIA chief executive, believes that without effective transitional support measures, many industrial businesses will be wiped out.

“If the measures are half-hearted, manufacturing jobs and companies who are delivering low-carbon solutions will be ripped out of the industrial heartlands of the UK, with very little prospect of new businesses being attracted to invest,” Elliott warned.

The CBI, too, has voiced concern that UK energy and tax policies are putting too much cost pressure on energy-intensive sectors and undermining investor confidence in these industries.

Speaking to business leaders, politicians and energy suppliers at the CBI energy conference, director-general John Cridland noted that over the last 12 months the government has hit industry with the Carbon Reduction Commitment (CRC), Carbon Floor Price and the recent hike in oil and gas tax.

“At a time when rebalancing of the economy needs UK manufacturing to be playing a bigger role, energy-intensive industrial users need more help. But the Budget unilaterally increased their cost base,” said Cridland.

Meanwhile, as the CRC has seemingly changed from encouraging energy efficiency to becoming just a cost and a complex scheme the business group leader said: “The government should axe the CRC as it stands. If it wants a green tax, it should do the job properly.”

With regard to the carbon floor price, the CBI is concerned that even if the price of carbon in the EU ETS (Emissions Trading Scheme) rises, as is the case now, the carbon floor price will not necessarily fall correspondingly, and risks tipping energy-intensive industries over the edge.

“The CBI supports the carbon floor price in principle, but we have to see exemptions for those industries most at risk those very industries that are a critical part of our low-carbon economy,” said Cridland. “Therefore, we propose a rebate-based exemption linked to the energy-intensive industries’ work on energy efficiency.”

According to Cridland, heavy energy users want to do their bit and reduce their emissions, and many are already doing so. What they need, however, is help to use renewable heat, energy from waste and more of the innovations already out there.

Equally important, said the CBI leader, is the need to give the energy industry and investment community greater certainty. Action is needed to encourage investment and unblock the planning system, but Cridland remains to be convinced that this summer’s Energy White Paper will deliver.

Graeme Philp, chief executive of the trade body GAMBICA, which represents the UK’s instrumentation, control, automation and laboratory technology industries, has responded to the government’s carbon budget by calling for a tax credit system to encourage investment in energy saving technology. He says the government should address carbon reduction in such a way that business in the UK remains on an equal footing with the rest of Europe.

“The Carbon Budget contained a lot of very sensible ’what’, but not enough ’how’,” said Philp. “Energy-saving technology is Europe’s biggest energy resource. I believe that creating the right environment for businesses to learn about its implementation should be a prime carbon objective.”

According to the GAMBICA boss, the goal should be a sustainable manufacturing economy that both reduces the UK’s carbon footprint and re-establishes its engineering industry on a global footing. Government, he added, should work more closely with trade bodies who offer expertise in energy saving, particularly as much of the manufacturing sector currently operates using ageing equipment.

“Encouraging the replacement of this equipment with energy-efficient alternatives should be high on the government’s agenda,” Philp concluded.

On another positive note, the process sector has an opportunity to help shape current and future energy legislation in the UK, by responding to the government’s Red Tape Challenge.

The ’challenge’ was launched in April 2011 with the aim of engaging with different industries to gather feedback on current UK legislation. The ultimate aim of the government exercise is to simplify the regulatory landscape for businesses.

David Cockshott, director of industrial and commercial markets at npower, has described the initiative as “a unique opportunity on an unprecedented scale” for business to have a say on energy legislation. He urged companies to get involved and make their voices heard.

“This type of opportunity to influence legislation does not come along everyday and we urge businesses of all shapes and sizes to take the time now to have their say on the energy policy of the future.”

An updated ’activity survey’ by Oil & Gas UK claims the government’s 2011 Budget will scupper at least 25 projects, accounting for more than one billion barrels of oil and gas and £12 billion of investments, and will shorten the lifespan of 20 producing fields by up to five years.

The research shows that companies will continue with most of the projects to which they are contractually and commercially committed. However, investment earmarked for projects considered likely to go ahead over the next 10 years has fallen by 30% to £23 billion.

Since the Budget, the oil and gas industry’s top priority is to seek engagement with the Treasury to try to reduce the negative impacts of the tax change on future investment, according to Malcolm Webb, chief executive of Oil & Gas UK. His group’s report highlights the need for new and extended field allowances, improved taxation strategies and a more predictable fiscal regime to re-build investor confidence.

“If these projects do not go ahead, over time, the UK will lose out not only on the creation of around 15,000 jobs across the UK, but also on oil and gas production equating to over a year’s domestic supply,” said Webb, noting that energy imports worth £50 billion would be required to fill the gap.