Energy Intensive Industries

John Robertson Excerpts

Wednesday 4th December 2013 Westminster Hall

[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.

[John Robertson (in the Chair)]

Order. I ask hon. Members to keep interventions a bit shorter.

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[Several hon. Members]

rose—

[John Robertson (in the Chair)]

Order. We have five speakers and a limited amount of time. If hon. Members stick to around eight or nine minutes, everybody will get their fair share. Keep interventions as short as possible.

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[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.

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[Joan Walley]

Is it not the case that Germany is having to rely on a greater amount of coal now, in the short term—

[John Robertson (in the Chair)]

Order. We will move on to the next speaker.

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[Nic Dakin]

Absolutely. I am aware, Mr Robertson, that other hon. Members want to contribute to the debate, so I will close by reinforcing the need for urgent action now. The autumn statement tomorrow provides a real opportunity for the Chancellor to deliver support for our foundational industries, so that they are here today, here tomorrow and can be a confident part of our future.

[John Robertson (in the Chair)]

Order. I thank the hon. Gentleman for that. I am sorry that I must reduce the time for the last two speakers to six minutes each. I call Neil Parish.

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

It is a pleasure to speak in this debate, and I thank the hon. Member for Newcastle-under-Lyme (Paul Farrelly)—

[John Robertson (in the Chair)]

Order. I called the wrong speaker. Did you stand up, Mr Parish?

[Neil Parish]

Yes. As you called me, Mr Robertson, I thought I would hold forth.

[John Robertson (in the Chair)]

I am sorry. I call Mark Pawsey.

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[Tom Blenkinsop]

I want to raise an important point in relation to the need for a plan. Today we have heard that Lotte at Wilton has announced that it is to close a plant, with the loss of 70 jobs, in the area next to my constituency. I remember when that plant went into administration in 2009 and NEPIC, the North East of England Process Industry Cluster, under the regional development agency, got Lotte, a South Korean company, in to purchase the plant and it got going again in April 2010. What we want, as my hon. Friend the Member for Stoke-on-Trent South (Robert Flello) said, is a rounded—all-round—plan in relation to how regions function, what type of regional investment we have and what—

[John Robertson (in the Chair)]

Order..

[Julie Elliott]

I thank my hon. Friend the Member for Middlesbrough South and East Cleveland (Tom Blenkinsop) for his comments. He gives another example of how missed the regional development agency is in the north-east—in our region.

It is right that the Government are taking steps to help energy intensive industries that must adapt to the EU emissions trading system and the carbon floor price. We do not want to see the UK’s carbon emissions just shifted overseas. However, if we are to meet our emissions targets and avoid catastrophic climate change, we need to reduce those industries’ carbon emissions.

Energy intensive industries are an important part of our economy, accounting for 4% of gross value added, and 125,000 people are employed by them directly or in their supply chains. Many energy intensive industries are at the forefront of the low-carbon economy, producing the mechanisms that we need to develop our low-carbon industries. That was set out in great detail by my hon. Friend the Member for Penistone and Stocksbridge. However, like all sectors of our economy, this one must decarbonise if we are to meet our crucial emissions targets. The transition to low-carbon power generation will keep energy prices down in the long run. The alternative is to remain at the whim of unpredictable yet ever rising gas and electricity prices.

As the EEF, which was formerly the Engineering Employers Federation, has pointed out, if the Government were serious about the transition to a low-carbon economy, with innovation and green jobs at the centre of that transition, they would be supporting research and development. We question why research and development on energy as a percentage of Government R and D spending is comfortably less than the OECD average. However, the bigger problem is the Government’s counter-productive, counter-science and counter-business decision not to adopt a 2030 power sector decarbonisation target, which was supported by the EEF, which represents many companies in this area. That decision, or rather non-decision, is scaring away investment, costing green jobs and jeopardising our future energy security.

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[Michael Fallon]

I agree with that, and I will come on to climate change agreements later. The Government cannot control the volatility of global fossil fuel prices, but we can help industry to exploit energy efficiency potential, which will reduce the impact of rising prices. Some of our incentives are financial ones. The climate change levy is a tax on business energy use, and the EU emissions trading system is a cap-and-trade mechanism based on the emissions of energy intensive industries. The scheme is forecast to save the equivalent of 3,100 megatonnes of CO₂ by 2020. To complement the EU ETS, we have a domestic scheme, the carbon reduction commitment energy efficiency scheme, which targets large non-energy intensive organisations. That is predicted to save the equivalent of 4,800 gigawatt-hours per year, which is greater than the annual energy use of all households in Manchester.

In addition to those financial incentives, we are working to incentivise industry through several other mechanisms. Climate change agreements, which the hon. Member for Stoke-on-Trent North (Joan Walley) referred to, are aimed specifically at energy intensive industries. They provide a discount on the climate change levy of 90% for electricity and 65% for gas, in exchange for commitments to achieve energy efficiency. She is right to remind us that they are a good example of an area in which Government and industry can work together to agree achievable objectives. More than 50 energy intensive sectors have negotiated agreements under the latest phase of the scheme, which are expected to result in an 11% energy efficiency improvement across participating sectors by 2020. Looking ahead, we have recently consulted on the new energy savings opportunity scheme, which will help larger businesses to identify energy efficiency measures that will result in average bill savings of £50,000 to £60,000 per year. Subject to legislation, the first audits under the scheme will be undertaken by December 2015.

The second leg of our reforms is the recognition of the competitiveness problems faced by some industries as a result of their energy costs, which lies at the heart of today’s debate. Rising electricity prices are a real concern for many businesses, which see them as a barrier to growth. The commitments to tackling climate change that the House has voted through have contributed to increases in those bills. That is why we have set aside up to £400 million to offset some of the costs of energy and climate change policies for the most energy intensive industries.

As we move to a low-carbon economy, it is vital to ensure that the more energy intensive industries are not placed at a competitive disadvantage in Europe or across the world, and they are not forced to consider relocating to other countries. Not only would that have a negative impact on our economy, but it might result in our exporting emissions to countries that are not strongly committed to cutting carbon emissions. Many energy intensive businesses are located in areas that have been hit hard by the economic downturn, so we have to ensure that we give them the best support available.

I have spoken about the energy contingency scheme. We continue to engage closely with the Commission on the carbon floor price, to obtain the necessary state clearance. Both packages are aimed specifically at the electro-intensive industries. It is important to highlight—

[John Robertson (in the Chair)]

Order. We must move on to the next debate.