17 January 2012

Running out of energy

Uk manufacturers say they are buckling under soaring utility bills and punitive green policies. Max Gosney asks energy minister Charles Hendry what a government waxing lyrical over growth is going to do to help out

Nothing will grow without a plentiful supply of energy. It's a basic biology lesson lost on a government vowing to kick-start UK manufacturing while at the same time hiking up utility costs through punitive green policies. "Yes, but we have to build a new infrastructure," responds energy minister Charles Hendry, the man at the helm of government energy policy. "If we don't, the first people who will suffer are industrial users. They will be the ones who have their supply interrupted... There is a price for security of supply but it's nothing like the price of insecurity."

So, we have short-term pain at the promise of long-term gain. Carbon floor pricing is a classic example. The scheme means business will be billed a minimum of £16 per tonne of CO2 emitted from 2013. The move, says Hendry, is vital for bringing certainty to UK carbon prices and spurring investor confidence in our energy market.

But for manufacturers it's another profit-draining overhead. A quarter of factories were hit by hikes of over 10% in energy bills in a year, according to WM's Energy Report (March 2011). Keep the hostility up and UK business will either go abroad or bankrupt, many warn. It's a doomsday scenario for ministers as much as manufacturers, reassures Hendry. "It would be madness to drive companies out of the country, to then go and manufacture somewhere else. Their carbon emissions would go up, we'd have lost the jobs and would have to re-import the products."

The government has got the message according to Hendry. While Westminster won't veer from a pledge to cut carbon emissions by 80% by 2050, some aid will be offered to the sector. The autumn statement tabled a £250m energy rebate from 2013 for energy-intensive manufacturers. "The measures are designed to protect some of those companies which are strategically important to the UK and are most affected by high prices." Step forward target companies in steel, chemical and aluminium who'll qualify for rebates. For all others – no matter how sapping the energy demands of their manufacturing process – there appears to be little relief.

"We do still have some of the cheaper energy prices in Europe," assures Hendry. Figures suggest otherwise, with UK manufacturers paying the fifth highest electricity prices in the EU according to DECC. Yet the statistics are distorted without factoring in energy efficiency, says Hendry. "If you look at the cost per unit we're still cheaper than most. But if you look at how many units we consume, we're less energy efficient than other countries so we end up using more."

It's an observation rather than a criticism, he insists. "People occasionally say that when we're talking about energy efficiency we're berating people, we're being condescending and they've done it already." The government's real intention is to spur further energy-saving gains, the minister adds. "Last year we decided to cut our carbon footprint at DECC by 10%. Without spending anything at all, just by involving all our staff, we've cut it by 20%."

Hendry will find a similar story at many manufacturing sites. Seven in 10 businesses cut bills last year through an energy-awareness programme, according to WM's Energy Report. But, while manufacturers and ministers might be kindred spirits in their commitment to cutting unnecessary energy use, that's where the entente cordiale ends.

Site managers rile over perceived double standards in energy policy. Take feed-in tariffs. The scheme sees businesses pick up windfalls for generating their own green electricity. Great idea and a catalyst for boosting take-up of low carbon activities – so why announce a cut in the payback for solar energy generation by up to 50% in October? "Clearly if you offer people a 10-15% return on investment they're going to pile into it," says Hendry. "What we've seen is a much greater rate of growth for installing solar technology in particular than anticipated... We were right to look at that cost because I can't justify why people's electricity bills should be artificially high to pay wealthy investors their rate of return."

The continuity in energy policy that manufacturers crave is not always a good thing, explains Hendry. You can have a stable regime, he says, but it may constantly deliver poorer results. "We had a stable regime but it wasn't getting the investment we needed, but nobody can say it wasn't stable." The laissez-faire approach has left the UK with a legacy of ageing coal-fired power stations and nuclear plants, according to Hendry. "We have to make up for lost time – decades of under-investment. The last nuclear plant was consented 25 years ago."

The coalition's remedy is to lure £200 billion of investment in energy market infrastructure, reveals the minister. "If we want to get investment in new nuclear, renewables, or carbon capture and storage, then people have to know where the price of carbon is." Hence measures like the climate change levy and carbon floor pricing. The UK's strategy is to deliver secure, affordable, low carbon energy. Hendry denies the term is an oxymoron. "No, it isn't at all," he replies. "We all know gas and oil prices are unpredictable – over the long term we can be pretty certain they're going up. If we get people to reduce our dependency on importing hydrocarbon, we'll get a better deal for consumers."

Nuclear power will be central to achieving that aim and Hendry is refreshingly open on the fact. "We have been actively removing barriers to investment in new nuclear. I believe we are one of the most interesting places in the world for new nuclear development." Eight sites are proposed by 2025. Fears over an energy shortfall in the interim are misguided, he says. However, there are no immediate signs of the UK breaking its dependence on imported gas from the Middle East and Russia.

And so the UK is set to become a rather eccentric looking energy producer. Much of our focus will be on green-friendly technology like turbines while most of our power comes from a new wave of nuclear power stations. The future promises more sustainable, cheaper domestic energy. The conundrum is that significantly fewer manufacturers will be left to enjoy it should current utility price trends continue.

the grassroots verdict
WM took the minister's comments to a frontline manufacturer to get the grassroots verdict on government energy policy proposals. Here's what Richard Brown (right), operations director at Hi-Tech Mouldings, had to say

"The manufacturing Industry in the UK has been at the sharp end of energy cost rises for a long period of time. However, the energy minister appears to ignore this fact and prefers the standpoint that 'we still have some of the cheaper energy prices in Europe'.

"The proposed new initiative to help energy-intensive industries with a package of financial support in a bid to 'keep industry and jobs in Britain' totally ignores the impact that SMEs have on the economy and the debilitating effect that energy and raw material costs have on our businesses.

"Long-term energy security is important but we are saddled, in the UK, with past government legacy and inaction in the area of improving our energy infrastructure. There has been much rhetoric in the past about the direction we should be heading in. However, without clear leadership and a focused energy strategy we are still on the starting line, reliant for gas and coal from the Middle East and Russia and with a number of our utility companies now under foreign ownership lacking new investment.

"Charles Hendry is saying nothing different from what we have heard before and where previous governments have failed to deliver: why then does he believe the coalition can make a difference? The answer is not provided.

"The government initiative on feed-in tariffs via wind and solar solutions was a positive incentive, however this incentive was 'hijacked' by investment companies who recognised that by utilising industrial sites for their installations a good return could be made. As soon as it became apparent to the government that the initiative was flawed, they changed the rules to save face. It's yet another example of a poorly-thought-through energy strategy that was used to gain positive headlines.

"In summary, the energy minister's performance in the interview is mediocre. True to form as a politician, he has sidestepped the issues and ignores the needs of the manufacturing sector that is the backbone of the economy.

"Delays in investment in our energy infrastructure, and delays in implementing mechanisms to deliver, mean that we run the risk of not achieving our energy security goals ahead of other countries. If this happens, the drift of manufacturing to other economies will occur. It leaves the question: does the government have a methodology to solve the issue or is it all mythology to grab the headlines?"

What's your verdict on the Charles Hendry interview? Tell us by emailing mgosney@findlay.co.uk

Author
Max Gosney

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