Briefing prepared for energy intensive industries debate in Westminster Hall on 24th November 2021
Across Europe, gas prices have risen rapidly throughout 2021 due to increased global gas demand as economies recover from the pandemic, and lower gas supply from Russia. This in turn has impacted electricity prices due to greater use of gas for generation while wind generation has been low.
However, the price increases are considerably higher in the UK than elsewhere.
In 2021 gas prices have risen as high as 275p/therm ($30/mmbtu) and are now nearly 2.5 times what they were at the start of June 2021 and 5 times what they were this time last year. This is an unprecedented and extraordinary rise in prices.
In April, UK electricity prices rose to £50/MWh (compared to just £30/MWh the year before), before soaring above £100/MWh in August. September saw UK wholesale prices and price volatility explode to levels not seen for decades, with hourly prices peaking at £2,500/MWh. Even more worryingly, the monthly average UK wholesale cost reached £200/MWh – almost double French & German averages of £110/MWh.
On top of this wholesale price difference, the ongoing policy cost (the additional components that make up the full delivered electricity price) disparity has also increased. UK Steel have reported that the overall delivered price gap compared to the EU rocketed to £109.30MWh in September (taking exemption and partial compensation schemes into account, which are not universally received by UK energy intensive businesses).
The Impact on Energy Intensive Industries (EIIs)
UK gas intensive industries exposed to international competition are being impacted by the widest gap in gas prices ever seen, relative to manufacturers beyond the EU. The rise in gas prices in September 2021 caused UK fertiliser sites to switch off, interrupted production at some sites and impacted the profits of all. It also put considerable inflationary pressures down the supply chain.
Whilst gas and electricity prices have stabilised to some degree, they remain extraordinarily high. As the weather gets colder, it is expected that the UK will continue to experience high and frequent spikes in energy prices leading to further production stoppages and long-term damage to vital foundation industries. As businesses struggle to pass through cost increases of this scale to downstream consumers and hedged energy positions unwind, a growing number of businesses are pausing or minimising production.
Higher industrial electricity prices also impact sectoral decarbonisation options for those using gas. A systemically higher UK electricity price would be a substantial barrier to any investment in electrification or electrolytic hydrogen.
Additional carbon costs have also significantly increased, most sharply in the UK scheme where UK Emissions Trading System prices are now considerably higher than in the EU scheme and where we still face the unilateral cost of Carbon Price Support (CPS) that is passed on in energy bills, while other major competing economies still have negligible carbon costs.
EU Responses to Autumn Energy Crisis
A number of European countries have already reacted to the dramatic rise in energy prices:
- In Spain, there have been tax cuts including extending an existing suspension of a 7% power generation tax through year-end. The Special Electricity Tax is being cut from 5.1% to 0.5%.
- The Italian Government has pledged over €3bn to eliminate renewable levies on gas for industry and electricity for SMEs.
- The Portuguese Government has announced a minimum 30% reduction of network charges for industry.
While these European countries have experienced less dramatic price increases than the UK, their Governments have acted both swiftly and decisively. In contrast, the UK Government continues to consider what action, if any, it will take to shield EIIs from these extraordinary price increases.
What We Need
Action is required by BEIS and Ofgem in the short term to reduce the price disparity in the UK compared to our competitors in the EU and beyond, and in the long term to address the fundamental issues with the structure of the UK energy market, that loads disproportionate cost onto EIIs.
In the next few months, and following the widespread collapse of energy suppliers, Ofgem need to redistribute £1 bn (and rising) of costs relating to supplier of last resort arrangements. Any loading of this cost onto EIIs will further undermine their competitive position and must be avoided.
In the long term, the UK Government has stated its intention to rebalance policy oncosts from electricity onto gas. As a result, there is growing concern about cost disparity with the EU as a consequence of Ofgem’s gas transmission charging review, Climate Change Levy, and the proposed shift to volumetric charging within the Green Gas Levy. Until there are viable, locally available and competitively priced low carbon alternatives to gas for EIIs, adding costs to gas will further impact international competitiveness.
Short term and long term actions required by BEIS and Ofgem are set out below.
Short term action required:
- Introduce Winter Cost Containment Measures on gas, electricity and carbon prices to ensure that those most exposed to these costs can continue to operate this winter and compete internationally through the immediate cessation of uncompetitive policy ‘oncosts’ such as ‘Carbon Price Support’.
- Immediate Action by Ofgem to reduce EII network costs: Ofgem must replicate the network tariff discounts offered to competitor industries in the EU.
- Modifying the Gas Emergency Measures: Government and Ofgem must outline steps to ensure that sufficient gas is available and that the consumer qualification threshold is reduced from £50 million to £1 million per site so that kilns and furnaces can be safely in the event of an emergency or sudden supply disruption.
- Ensure the £1bn+ Supplier of Last Resort Costs do not land on EIIs
Long term action required:
- Provide full relief for historic legacy costs for renewables: a 100% exemption from RO, FiT and CfD costs for all EII sectors, including those not currently in receipt of relief.
- Full relief from indirect carbon prices (ETS and CPF) for all EII sectors, including those not currently in receipt of relief.
- Don’t rebalance oncosts from electricity to gas: provide an EII exemption from Green Gas Levy and other forthcoming policy costs aimed at decarbonising gas supply until low carbon cost- competitive alternatives are available.
The EIUG represents the UK’s Energy Intensive Industries (EIIs) including manufacturers of steel, chemicals, fertilisers, paper, glass, cement, lime, ceramics and industrial gases. Together these industries make up over 12% of non-domestic electricity demand, 8% of non-domestic gas demand and 10% of total UK emissions of carbon dioxide. EIUG members produce materials which are essential inputs to UK manufacturing supply chains, including materials that support climate solutions in the energy, transport, construction, agriculture and household sectors. They add an annual contribution of £29bn to UK GDP, supporting over 210,000 jobs directly and 800,000 jobs indirectly around the country.