Energy Intensive Industries

Angela Smith Excerpts

Wednesday 4th December 2013 Westminster Hall

[Angela Smith (Penistone and Stocksbridge) (Lab)]

It is privilege to serve under your chairmanship once again, Mr Robertson. I congratulate my hon. Friend the Member for Newcastle-under-Lyme (Paul Farrelly) on his lucid explanation of the case for more Government support for energy intensive industries.

My constituency plays host to Tata Speciality Steels, Naylor Industries plc, which is a ceramics manufacturer specialising in clay pipes, and Wavin, which also manufactures clay pipes and lies a bit further to the west of the constituency. We are home to a paper mill at Oughtibridge, which is unfortunately due to close in 2015, ending a 140-year history of paper making on that site. My constituency is also home to British Glass, and I am very proud about that.

Manufacturing represented 12% of national output in 2011 and 8% of employment. In my constituency, 14% of output was generated by manufacturing, which accounted for 11.8% of local employment. Manufacturing therefore still matters in my constituency and in south Yorkshire. The big manufacturing employers in my constituency, in steel and ceramics, are also high energy users, and it is estimated that about a third of their production costs relate to energy use. My work as an MP is about not only talking up manufacturing and everything that is needed to support it, but making the case to the Government on how they can help to secure cost-competitiveness in a global context. For many such industries, energy costs are a key factor.

What are the facts on energy costs for high-end users? Tata Steel stated on 2 December that wholesale electricity year-ahead prices are 70% and 45% higher than in Germany and France respectively. Policy-driven taxes and levies for the most intensive users were 2.5 and 6.5 times higher than in Germany and France respectively in 2011. The scale of difference is clearly large enough to turn profit to loss and to send out negative signals to potential investors.

[Mr Gregory Campbell (East Londonderry) (DUP)]

On that point, there is a large company in my constituency whose parent company, which is overseas, is constantly reviewing its overheads and the bottom line, which, for many, is the cost structure. Where such companies see the opportunity for reduced costs overseas, there is the serious possibility of their relocating.

[Angela Smith]

I completely agree with the hon. Gentleman. BASF pointed out only a couple of weeks ago that there is a real risk of losing at least 10% of European manufacturing capacity to the US, because of the much cheaper energy costs, but we will not go into that debate this morning.

On taxes and levies, the British Ceramics Confederation has pointed out that the Department of Energy and Climate Change’s analysis shows climate-related charges are already 19% of the base load price, and that will rise to 47% in 2020. The Engineering Employers Federation states that the Government’s estimates indicate that industrial electricity prices will have increased by 70% by 2030. Moreover, Tata Steel is clear that the green levy with the greatest impact today is the renewables obligation, which, along with small-scale feed-in tariffs, will cost £10.50 per megawatt-hour in the year from April 2014, which is an increase of more than 100% in three years. Tata also points out that many steel makers in Europe will either be completely exempt from the charge or have their charge capped at €0.50 per megawatt-hour. There is clearly a serious problem here for such industries in the UK; spiralling energy costs, compounded with myriad taxes and levies, are threatening our ability to compete, even within the EU.

The British Ceramic Confederation points out that, as my hon. Friend the Member for Newcastle-under-Lyme said, some of its manufacturers operate some of the most energy-intensive processes in the UK, and that several companies have already relocated to Germany and France, with electricity costs cited as a key reason. Even more worrying is the real risk that the current tax regime will do nothing to lower emissions globally if, as the confederation suggests, manufacturing focus is encouraged by costs to emerge in less regulated and less energy-efficient factories abroad. Carbon leakage is therefore a real threat. There is a great irony here, because energy intensive industries are making a huge effort to improve energy efficiency and thereby cut their costs. Tata uses 40% less energy today to produce the same amount of steel as it did in 1975. That is a 40% cut in energy costs as a result of its energy efficiency measures. Ceramics industries have been heavily involved in trying to improve their processes. Naylor Industries in my constituency continually strives to reduce costs by improving energy efficiency.

In summary, it is clear that we need reform of the current system of green taxes and levies, because of the risk of losing capacity, either to the EU or elsewhere, with the linked risk of carbon leakage. However, let me be absolutely clear: I have not, as yet, come across one industrialist who disagrees with the principle of green taxation. Everyone understands that a well-designed taxation system has a role to play in stimulating growth of the low-carbon economy, but that process has to be balanced with the critical need to avoid damaging the cost-effectiveness of the industrial base.

Our energy intensive manufacturers are important in their own right; I know that because I come from a family who have been involved in steel making for at least four generations. Such manufacturers are even more important given that the industries that we are talking about have a key role to play in providing components for the low-carbon economy—a point often overlooked by critics of the industries. Technical ceramics are used for nuclear, wind and solar generation. Clay pipes are 100% recyclable and have an incredibly long life. It takes 1,000 tonnes of steel of six different grades to produce each offshore wind turbine. The steel exterior for the Nissan Leaf electric vehicle was developed and produced in the UK by Tata Steel. Last but not least, the polyurethane foam insulation developed by BASF saves 233 tonnes of carbon over its lifetime for every tonne used in its production.

As my hon. Friend the Member for Newcastle-under-Lyme asked, how should the Government act to remedy the problem? It is worth listing the array of schemes in play, or due to come into play soon: the climate change levy; small-scale feed-in tariffs; the emissions trading scheme; the renewables obligation; the carbon floor price; the energy company obligation; the carbon reduction commitment; and contracts for difference. We also have the aggregates levy and the landfill tax, but both are well embedded, and nobody would touch them. I might not even have included all the schemes on that list, but the point is made.

For industry, the green tax landscape is burdensome in two key ways: there is the cost, and the bureaucratic tangle involved in ensuring compliance. For example, one business in my constituency employs a full-time, highly skilled individual simply to ensure that it meets all its obligations on green tax. The Government have committed to the red tape challenge; this is a clear red tape challenge that needs to be dealt with. That individual could be employed to improve energy efficiency in the plant instead.

I repeat: what is to be done? Industry has a few ideas and key demands. First, it wants a level playing field for European and non-European competitors on climate-related taxes and levies, to ensure that world-class companies in the UK can remain internationally competitive. EEF pointed out that an assessment of that could take place within the context of the fourth carbon budget review.

Secondly, industries need to see the detail of the promised exemption of ceramics and other industries from the full cost of the climate change levy from next year. The autumn statement would be a good opportunity to provide that detail, as well as detail about how the Government will negotiate a way through without falling foul of state aid rules. In addition, the expected change in guidelines means that the Government have an opportunity to exempt such industries from the renewables obligation and small-scale feed-in tariffs. EEF and the British Ceramic Confederation make reference to the impact of those two taxes on their members. Industries also want the £250 million package moulded around the ETS and the CFP to be in place for the duration of the latter policy, until 2030, and they want the value of that compensation linked to the upwards trajectory, as my hon. Friend pointed out. The contract for difference worries energy-intensive industries, too. They look for comprehensive exemption for industries, so that they can remain competitive.

Finally, both the steel and ceramic sectors point out that the Government could do a great deal for their members if capital allowances were increased for a wider range of energy-efficient technologies, so that a much higher proportion of the green taxes raised went back into such investments. I could also make the point about including a wider range of industries in the state aid guidelines. It is incumbent on the Government to ensure that they make that case to the EU.

The Government face a bewildering range of choices. They ought to consider two more radical proposals before making up their mind. Perhaps we need a consolidation of all the taxes and levies, or to simplify the system, to reduce the bureaucratic burden on our manufacturing companies and make it easier to work out what the cost burden should be and how best to compensate industries that are at risk of losing that competitive edge. Transparency and good environmental tax design could be achieved simply by revising and reforming the complexity of the current regime. I would like to hear the Minister’s comments on that.

Perhaps we could scrap the carbon floor price altogether—let us just get rid of it. It is a unilateral tax that is projected to pull in more than £2 billion for the Treasury by 2020, but it threatens to undermine the competitiveness of our key industries.

[John Robertson (in the Chair)]

Order. I ask the hon. Lady to bring her remarks to a close.

[Angela Smith]

Of course; thank you, Mr Robertson. The Minister needs to be clear today about the choices that the Government are prepared to make in response to the demands that I have just outlined. Indeed, the Chancellor needs to be clear in his autumn statement tomorrow that the political will to protect our energy intensive industries is there. We need to hear that. Our manufacturing base demands that. Industries deserve that. More than anything else, our country desperately needs to hear the Chancellor give us that message tomorrow, and the concrete proposals that will deliver a level playing field for energy intensive industries in the UK.

[John Robertson (in the Chair)]

Unfortunately, we lost a lot of time with the previous speaker. I now impose a limit of seven minutes. That may go down, depending on interventions. I ask Government Members not to look at the clock opposite them for guidance, as it is not working.