Select Committee on Trade and Industry Minutes of Evidence

Memorandum by the Chemical Industries Association


  The Chemical Industries Association (CIA) is the major representative body for the UK chemical industry, with some 190 members operating from 325 manufacturing sites nationwide. We welcome the opportunity to contribute to this inquiry.


  The chemical industry is one of the UK's most successful and internationally competitive business sectors, whose products are traded in world markets subject to global competition and generate a contribution to the country's balance of payments in excess of £4 billion annually. With annual gross output approaching £50 billion, the industry accounts for 2.5 per cent of GDP; employs around 230,000 people directly and supports many tens of thousands of additional jobs throughout the economy nationwide; and up to now long term growth has exceeded that for both GDP and manufacturing as a whole.

  The industry is one of the most energy intensive sectors of the economy, accounting for around five per cent of the nation's gas and electricity consumption and is manufacturing's largest consumer of gas and electricity. In addition to its consumption of energy for fuel and power, the industry uses energy as an essential feedstock for the start of many chemical processes, which add value to the basic raw materials. The industry's combined energy and feedstock bill amounts to around £2.5 billion.

  The industry also has an excellent record of improving energy efficiency. Between 1967 and 1990 the output of chemical products more than doubled, while energy consumption per unit output was reduced by almost 60 per cent, and 1998 data shows a further energy efficiency improvement from CIA member companies of 19 per cent since 1990. As part of its ongoing commitment to energy efficiency the CIA has entered a negotiated Climate Change Agreement with the Government to deliver an aggregate improvement in energy efficiency 1990-2010 of 34 per cent. This Agreement will "save" over 1 million tonnes of carbon by 2010, more than any other industrial sector. A significant proportion of the improvement is expected to come from additional combined heat and power (CHP) schemes. (see below)

  Not only is the industry making its own contribution to improving energy efficiency and reducing greenhouse gas (GHG) emissions, it is important to recognise the contribution made to improving energy efficiency by many of the industry's products such as plastics and lightweight materials for use in packaging and transport; coatings and insulation material for reducing heat loss in buildings; fuel additives and catalysts for enhancing the performance of motor vehicles, etc. Polyethylene is an excellent example of a lightweight and energy efficient product, which touches and enhances our lives in many different ways. In the area of distribution, polyethylene packaging means lower distribution costs by delivering more product and less packaging; and fewer trips means fuel saving too. In the past 15 years a major UK producer has reduced power consumption in polyethylene manufacture by 40 per cent per tonne of product with further reductions planned.

  Improvements in energy efficiency come very largely from investments in new plant, equipment, research, technology and education. The industry presently spends some £3 billion annually on new plant and equipment and some £3 billion on R&D. As the Committee will be aware the industry argued vehemently against the introduction of the climate change levy (CCL) on the grounds that it would seriously damage international competitiveness, but would do little to change behaviour, whilst adding significantly to costs, which would absorb funds vital for new investment.


1.   Given the imminent dependence of the UK on energy imports, how can the UK maintain a secure energy supply? What mix of fuels would maximise security?

  What is meant by security of supply?

  From the viewpoint of an industrial consumer this means having confidence in being able to have sufficient amount of energy at competitive prices to undertake existing operations and if necessary to expand. For certain industrial processes unplanned interruptions in energy supply can cause not only loss of production but irrevocable damage to plant and equipment and may be dangerous/life threatening.

  At each stage of the supply chain, from production/generation through supply and distribution, there are risks of disruption and interruption and at every step a key issue is how to ensure sufficient capacity to meet peak demand under various conditions. There is a balance to be struck between security risk and cost. The mechanisms to do this vary and are either the product of market forces or the responsibility of the regulator. (Part of the privatisation and unbundling process has been to expose these risks and costs). In some instances, industrial consumers, for example with gas, have a certain element of choice. Thus by electing to purchase gas at a cheaper price on an interruptible tariff, an industrial consumer accepts the possibility of being interrupted for up to 45 days per year. In full knowledge of this, and at an identifiable cost, they could make provision for alternative supplies. In both the gas and electricity networks there are mechanisms to minimise the likelihood of unplanned shutdowns. For the most part decisions on how to manage the risks are outside the control of industrial consumers although we are pleased to contribute to discussions on regulatory processes and controls.


  With regard to primary energy, we note with interest the Government's concern that an increasing proportion of UK's energy requirements will need to be imported. This is undoubtedly an important issue. It is also important not to forget that the UK has long relied on the benefits of international trade to supply more cheaply goods and services that it could not produce itself or could do so only at greater cost. Our manufacturing heritage is rooted in the principles of free trade and the chemical industry has flourished under this open regime. After the Second World War we gave up all pretence of being self sufficient in food and virtually every activity undertaken in the UK there is an increasing reliance on imports and/or imported expertise. Globalisation now permeates almost all aspects of our business lives and supply chains typically spread across the globe.

  We recognise the importance of considering security of supply from political and terrorist risk—the need to take into account circumstances over which the EU, GATT and WTO have no control and the need to have an appropriate mix of energy sources. However, as a member of the EU, we believe it is important for the UK to work as much as possible within the framework of a much broader security of supply network rather than operate in isolation, which might be prejudicial to optimum market solutions. Nevertheless, there will be remain areas, including market failures, where it will be necessary to act independently in order to protect our own domestic interests.

  As the EU energy markets become increasingly interconnected and hopefully more liberalised it will become more difficult for the UK to pursue policies in isolation. In the short term, we note there are some major differences to be resolved in detailed policy measures in the UK and on the continent including energy taxation and emissions trading.

  At international level our key messages to Government are:

    (a)  Continue to work towards free trade in world markets.

    (b)  Play a full part in EU energy policy and continue to urge full liberalisation of the EU energy market.

    (c)  Ensure that the full rigours of competition policy are bought to bear on the operations of the interconnector and ensure that the operations of any additional interconnectors do not work to the disadvantage of the UK.


  CIA believes that the best way of ensuring sufficient capacity to meet demand is to ensure that as far as possible we have liberalised and competitive markets where various elements such as energy transport, flexibility and risk are separately identified and costed, both the demand and supply sides are active, and participants have access to information and choice. Where competition cannot be delivered effectively, regulation should be kept simple and should be free from Government interference.

  UK has taken a strong lead in liberalising energy markets, and, through a combination of unbundling assets, competition and regulation, has moved towards more cost reflective pricing of energy. There is still some way to go on this.

  However, notwithstanding our preference for competitive markets and independent economic regulation, we recognise the large number of factors bearing on energy policy and the need for some Government involvement (see below).


  We believe that full security of supply implies a range of alternative fuels as well as alternative sources, supply and delivery mechanisms. There needs to be flexibility and choice. The ideal may be only partly realisable in practice and may be prohibitively expensive. It would be more appropriate to consider the concept of maximum security at acceptable cost. We do not prescribe an optimum mix of fuels. CHP with up to 80 per cent efficiency has an important contribution to make. However given the increasing use of gas in power stations and greater linkages between gas and electricity prices, we would be concerned if there were an over-reliance on gas. We consider the mix should include nuclear and renewables (see below).

2.   Is there a conflict between achieving security of supply and environmental policy? What is the role for renewables, and combined heat and power schemes?

  Each stage of the energy supply chain has implications for the environment and the extent to which these environmental considerations are made explicit and costed varies considerably. Thus reducing the CO2 emissions from fossil fuels may be compared with the environmental/health considerations surrounding nuclear generation and the disposal of nuclear waste. Similarly the location of overhead transmission wires and siting of the wind farms on land have important environmental implications. A proper economic evaluation of the various options including costing out the environmental externalities may show that security of supply and environmental policy are not in conflict. This may be especially so if there were a trend towards more localised energy supplies and networks, making more use of renewables and combined heat and power.


  We accept that renewable energy has potential to contribute a significant proportion of the UK's future energy supplies, but are concerned about the high costs of bringing some of these technologies on to the market. The mechanism chosen in the Renewables Obligation (RO) will progressively add to the average price of electricity as the proportion of renewables that electricity suppliers are obliged to purchase rises. Also we have serious doubts whether renewables will be able to deliver sufficiently cost effective large-scale options although solar and wind generation should be able to contribute greatly to a more decentralised/local systems. The mechanisms selected by the PIU to track cost reductions in renewables technologies should prove to be adequate. However, as the costs of renewable technologies reduce, the buyout price of £30/MWH proposed in the RO consultation should also reduce or at least be subject to review rather than an automatic uplift in-line with the RPI as the amount of renewable energy ramps up from 3 per cent in 2002 to 10 per cent in 2010.

  In the past the fossil fuel levy was used as a mechanism to help fund the development of both renewables and nuclear generation. Whilst we are not in favour of penalising existing energy consumers any further for the development of future generation, we are concerned that the proposed arrangements for RO disadvantages the nuclear option, which already suffers under the massive burden of unfavourable public opinion.

  We are pleased that this review will open up a proper consideration of nuclear power. Much more needs to be done to tackle effective handling and disposal of nuclear waste, but this should not prejudice an objective assessment of its potential within the energy portfolio. Another key problem will be how to fund the long-term investment needed for new nuclear facilities.


  CHP is of major importance to the chemical industry, and accounts for some 30 per cent of electricity consumed by the industry. The industry makes more use of CHP than any other manufacturing sector (accounting for around 27 per cent of CHP capacity) principally because its operations frequently require heat as well as power and are ideally suited to this form of technology. Use of CHP has made a significant contribution to past energy efficiency gains by the chemical industry and is projected to account for 20 per cent of the projected improvement between 1998 and 2010 included in this Association's CCA agreement.

  CIA shares the Combined Heat and Power Association's concern that whilst the Government has identified CHP as the most cost effective way of reducing CO2 emissions, there appears to be a significant gap between the Government's commitment to this technology and the policies that will achieve it. In particular, NETA militates against CHP generators who either spill onto the system or cannot supply all their electricity needs, resulting in a high risk premium and additional costs, which is putting the Government's own climate change objectives in jeopardy. Also, whilst CHP is exempted from the CCL, in reality the levy remains payable on any power sold from a CHP system via a third party, denying off site consumers the incentive to choose CHP. In addition eligibility of "good quality" CHP for enhanced capital allowances has been restricted by the Treasury's reluctance for arrangements to apply to leased plant, which is one of the most common forms of financing for CHP installations.

3.   What scope is there for further energy conservation?

  We believe there is considerable scope for energy saving within the UK economy, and as we argued in our submission to Lord Marshall's review, industry accounts for some 30 per cent of UK CO2 emissions but is closely followed by domestic and transport sectors. Whereas energy intensive industries have a commercial incentive to minimise energy expenditure they have largely borne the brunt of the Government's climate change measures. This is especially disturbing since a joint study by the Association for the Conservation of Energy and the Centre for Environmental Technology at Imperial College indicated some years ago that the scope for reducing CO2 emissions by 2010 by introducing cost effective energy efficiency measures in the domestic sector was over twice as large as in industry (see introductory remarks for the chemical industry's contribution to energy conservation).

  Notwithstanding the importance of introducing measures to avoid and reduce fuel poverty, we believe much more could be done to make final consumers aware of the full costs of energy consumption. For example, in the UK electricity prices are skewed more favourably towards final consumers than on the Continent. There is a strong case that domestic consumers should pay for the additional capacity required to meet demand peaks for electricity rather than industrial consumers with flat loads. It could be argued that if domestic consumers had to pay the full energy costs of having a cup of team at the end of "Eastenders" they would switch on the kettle a little earlier. At the same time more sophisticated technology could be employed to adjust domestic loads and help flatten the peaks in individual households so that the need for additional capacity is minimised.

  We believe there is more opportunity to heighten public awareness of the relative energy consumption of consumer products and durable goods through better labelling. Much has already been achieved through improve insulating standards and building specifications and no doubt these could be taken further.

4.   What impact would any changes have on industrial competitiveness and on efforts to tackle fuel poverty?

  Having indicated above the importance of free trade and international competitiveness for the chemical industry, it is essential that we have access to secure supplies of energy and feedstock at prices, which enable us to continue to compete effectively and sustainably in world markets. Contrary to the conclusion that might be drawn from Ofgem's review of NETA's first three months, large UK industrial electricity consumers still face a price disadvantage compared with many European based competitors and with those in the USA. Similarly the UK is at a comparative disadvantage on gas prices, and relative to continental competitors. This is a complete reversal of the position we were in before the Bacton-Zeebrugge Interconnector started a couple of years ago.

  We fought vigorously to secure exemptions and rebates under the climate change levy, and we are very concerned that further developments in UK and European Climate Change legislation should not place additional burdens on our international competitiveness. Most recently we have reiterated these concerns in our response to the proposed Renewables Obligation and proposed mechanisms by which the impact on large consumers could be minimised.

  We remain very concerned that competitiveness should not be overridden by other considerations. We are particularly concerned that political factors should not result in higher weightings being given for social and environmental objectives. There are a number of striking examples of this for example the reduction in VAT rates for domestic fuel and heating in 1997, and the industrial and commercial focus of the climate change levy.

  We acknowledge the importance of alleviating/avoiding fuel poverty but are not convinced this is best achieved within the remit of the regulator. We consider that there may be more appropriate routes to address this through the social security system.

5.   Is any change of Government policy necessary? How could/should Government influence commercial decisions in order to achieve a secure and diverse supply of energy?

  We consider the broad thrust of the Government policy to liberalise energy markets to be correct. We have supported unbundling of markets and increased transparency, but we are concerned that the regulated markets should not become too complex.

  We also believe that of all the privatised former nationalised industries, energy represents one of the more successful areas. In exchange for direct ownership and control the Government now exercises its control at arms' length, and through regulation.

  We accept that the regulatory system and mechanisms must provide for existing market needs as well as facilitate longer-term energy policy objectives. It is right that Government sets these, but we believe the regulator's responsibilities should focus on economic and competitive aspects of the market and should not be used to deliver the Government's environmental and social policies.

  Market operators need to be able to plan ahead and need a minimum of Government interference.

  We very much welcome the Government's review. In recent years there has been too much conflict/paradox in Government energy policy, viz NETA and CHP, the constraint of new gas-fired power station consents. One of the suggestions to emerge during discussions is the possibility of creating a strategic agency rather like the previous Department of Energy, which would bring together various Government departmental considerations and consult with other bodies to provide a necessary and ongoing strategic overview on energy policy. We see some merit in this.

  However, we are sceptical about how seriously to take this review and to what extent the Government has already made up its mind before hand. This is exemplified by the publication of the Government's Renewables Obligation proposals in the middle of the review, with plans to introduce its plans as early as possible in the New Year. It would have been more credible to have had the strategic review as the starting point, with appropriate policy measures following on from strategic recommendations.

  We are concerned about the present separation of responsibilities between offshore and onshore and the proper resolution of conflict between the interests of the oil and gas producers and downstream consumers. We feel that it would be more appropriate to have one body with over-arching responsibility so that for example issues of onshore-offshore capacity can be properly integrated.

October 2001


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