Energy Intensive Industries - time to change the tune?

By Dr Jonathan Marshall, ECIU Energy Analyst

Britain’s energy intensive industries are struggling. Onerous subsidies to fund low carbon energy are increasing the cost of running steel furnaces, ceramic ovens and paper mills up and down the country, forcing some of our shining lights overseas, putting thousands out of work and crippling the economy.

Or so a small but influential faction of lobbyists would have you believe.

Pressure from groups representing the UK’s energy intensive industries has successfully built a narrative that is often repeated in Parliament and the Lords, and makes its way into reports and news stories that can ultimately lead to changes in policy.

The latest example was the recent report from the House of Lords Economic Affairs Committee. Officially, it found that "There is currently no robust and reliable data on whether measures to reduce the UK’s carbon emissions have in fact resulted in... the closure or relocation of energy intensive industries". Which did not stop the report's authors assuming in several passages that high electricity prices have closed industries - and did not prevent its chair Lord Hollick telling the nation on the Today Programme that energy costs are "forcing quite a few companies to take their operations abroad".

The reality is that the UK has recently been following the example of Germany, by exempting heavy energy users from costs of the low-carbon transition. The latest instance of this is a £100 million handout to offset up to 85% of the costs imposed by the Contracts for Difference (CfD) scheme – a policy that encourages investment in low-carbon energy generation. This is on top of a promise to “review opportunities to reduce the cost of achieving our decarbonisation goals in the power and industrial sectors” in the Industrial Strategy green paper – a line delivered to certain sections of the press with enough spin to make even Graeme Swann jealous.

Having secured yet more exemptions from the costs of governmental policies, energy bills of energy intensive companies are now almost entirely composed of the wholesale price of power. Yet, lobby groups and trade bodies continue to push against the tide, opposing the roll out of renewable generators and smart grid technologies that will ultimately bring the wholesale price down.

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Redcar Blast Furnace, Photo by Mick Garratt

Just last week, analysts at Platts found that a sunny March knocked around £2 off the wholesale price of power compared to the same period last year. On top of this, windy weather during the first quarter of the year added another bearish factor to the wholesale market – bringing the cost of electricity down by around 10%. Effectively, this is cash in the pocket for companies heavily exposed to wholesale prices.

These aren’t just short term trends. Running with near-zero operating costs, wind and solar can always undercut thermal power stations when the wind blows or the sun shines. Research shows that the proliferation of renewables cut a cumulative £1.55 billion from wholesale energy costs in 2014 – a figure on the up as capacity continues to rise. A 2015 study found that Germany's renewables build-out had cut 37% from the average wholesale power price in just four years - and was even starting to impact the peak wholesale price. 

Without recent buildout of wind and solar generating capacity, driven by both EU and domestic targets, these falling costs would not have been possible. 

The other irony is that some of the lobbying against renewables would, if effective, risk increasing energy prices. The HoL Economic Affairs Committee found that the average domestic bill rose 58% between 2003 and 2016. Although they spun it in the other direction, the evidence in the report shows unequivocally that the main factor in this rise by far was the increasing wholesale price of gas. Yet the Committee found it appropriate to recommend a path in which the UK maintains reliance on gas.

Of course, there are limits to how far the UK can and should roll out renewables on their own. Maximising their efficiency means also implementing the other components of a smarter and more flexible grid. Interconnectors – cables that link electricity networks in different countries – are a vital part of balancing grids with a high renewable content, and have been forecast to cut up to 2% from the wholesale price for every GW installed. With a hefty 9GW of further interconnection in the pipeline, this should be welcome news to companies that have to keep an eye on energy costs.

Having said this, heavy industry isn’t all rowing against the tide. Energy intensive industries are becoming increasingly excited about the opportunities to monetise demand flexibility, with both turn-up and turn-down DSR schemes now in operation in the UK. An increasingly promising method of balancing the system, DSR is generally supported by both the industries and the groups representing their interests, with an enthusiasm that doesn’t always spread into other areas of the shift away from fossil fuels.

The costs of energy to both homes and businesses is firmly in the spotlight. The government is insistent that the market is not working for households, and is also keen to cut costs for businesses to help shoulder some of the Brexit burden.

But the evidence thus far shows that pressing ahead with the renewable energy build-out and implementing the smart grid vision is likely to be a better strategy than allowing UK to revert back to being the dirty man of Europe.