When Britain’s largest ammonia manufacturer announced plans to close its energy-intensive plant last month, it in part blamed carbon costs.
The facility on Teesside in north-east England, owned by CF Industries of the US, is the latest victim of what British industry has long complained is an uncompetitive environment due to higher carbon and energy prices than elsewhere in Europe.
So the recent decision by the UK government to water down reforms to the carbon market, even if it came too late for the ammonia plant, should act as a fillip to other manufacturers.
The move has seen the cost of emitting one tonne of carbon under the UK’s emissions trading scheme fall from almost £100 a tonne a year ago to about £47 a tonne. In contrast, the EU’s equivalent scheme is trading at around 85 euros (£73) a tonne, having been close to parity with the UK earlier this year and a discount in 2022.
As well as lowering the cost for UK manufacturers to buy allowances to cover their own emissions, the drop in the cost of carbon has pushed energy prices down because gas-fired power stations, which account for the highest proportion of Britain’s electricity generation at just under 40 per cent, also pay less to pollute.
James Huckstepp, BNP Paribas analyst, said lower electricity and carbon costs would give factories and power generators an incentive to increase output in the UK.
“If you’re a steel producer with operations on the continent and in the UK, looking at returning to production now that energy prices have eased, it will make a lot more sense to do so in the UK where you’re going to benefit from those low carbon prices and power prices,” he said.
But UK manufacturers are far from convinced the drop in the cost of polluting is a panacea for their woes.
Energy costs, while well down from their highs at the peak of the Russian gas supply crisis last year, remain almost double their long-term average. Moreover, the premium on British wholesale electricity costs over Germany, for example, has narrowed but prices for this winter in Britain still remain higher, according to consultants ICIS.
Carbon prices are also still above their long-term average, having initially surged during the pandemic. Furthermore, the expectation is that the lower cost of polluting will be temporary, as the UK government, which is due to tighten emission allowances significantly in later years, needs a higher carbon price if it is going to hit its legally binding net zero target by 2050.
“The recent fall in UK carbon allowance price has mitigated the costs Tata Steel is facing under the trading scheme but the costs remain extremely high, equating to tens of millions of pounds per year,” said Pete Quinn, director of sustainability and environment at Tata Steel UK.
Manufacturers said their UK factories still suffer other disadvantages against peers in continental Europe due to extra costs they have to pay on energy bills, notably higher connections costs and levies to pay for green energy policies.
“Network [access] charges and policy costs in the UK are still higher compared to the average in the EU meaning that industrial electricity prices are still not competitive with the European ones,” said Arjan Geveke, director of the Energy Intensive Users Group (EIUG), whose members account for just over a fifth of Britain’s energy usage after transport and households.
Adrian Hanrahan, managing director of Robinson Brothers, a chemicals producer in West Bromwich, said network charges and green levies were “a huge contributing factor” to its energy costs.
Wholesale costs typically account for 60 per cent of industrial users’ electricity bills, with network charges another 17 per cent and low carbon levies 15 per cent. The relatively high proportion of gas in Britain’s generation mix has historically also contributed to higher wholesale electricity prices than in other European countries.
Stuart Johnston, director at Rutland Plastics, a Leicestershire-based, privately owned manufacturer of plastics injection mouldings and a big user of electricity, said the company had had to “absorb a lot of the extra costs” from higher prices over the past 18 months.
Energy has gone from being about 3 per cent of operating costs three years ago to about 10 per cent, he added. It will probably hit 15 per cent in the winter months.
Johnston’s company, like many manufacturers, has hedged its electricity costs so will not benefit from the recent fall in wholesale prices for another eight months when the contract expires. “We don’t feel that we can pass on everything. We are trying to suck it up,” he added.
Certainty on power costs is key to heavy industry’s efforts to decarbonise. “We need to see parity on energy policy cost for manufacturers, otherwise, UK energy-intensive manufacturers will struggle to compete, attract investment, and decarbonise,” said Verity Davidge, director of policy at trade body Make UK.
The longstanding high costs have “damaged the steel industry’s ability to compete and attract investment into new equipment and net zero steelmaking,” added Frank Aaskov, energy and climate change policy manager at trade body UK Steel, which represents one of the most energy-intensive sectors.
Last year, UK steel production hit its lowest levels since the Great Depression of the 1930s and the industry has warned it needs more help to preserve its competitiveness.
The government said a new scheme, dubbed the British industry supercharger, will exempt 300 of the most energy-intensive companies from some of the green levies to help them “lower their energy bills”.
But executives argue more help is needed and ministers have begun exploring a reduction in network access costs as part of the supercharger scheme, just months after energy regulator Ofgem approved an increase in the charge paid by industry.
Separately, Tata Steel and British Steel, the country’s largest steelmakers, are in talks with ministers about financial aid to help them move to greener forms of steelmaking.
“The new [industry supercharger] policies will substantially erode the current price disparity on energy with Europe, although we will continue to need concerted additional actions to drive reductions in wholesale energy prices,” Quinn warned.
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