Memorandum by the Chemical Industries
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
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 riskthe 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
(a) Continue to work towards free trade in
(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
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
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
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
ANNEX, PLANNING AND RENEWABLES: IMPLICATIONS
FOR MEETING THE TARGETS, PAPER PRESENTED BY GAYNOR HARTNELL, FOR
CONFEDERATION OF RENEWABLE ENERGY ASSOCIATIONS, AT CREA CONFERENCE
"REGIONAL PLANNING TARGETS: RATIONALE, PROGRESS AND PRACTICAL
IMPLEMENTATION", 22 MARCH 2001, not printed.