Select Committee on Trade and Industry Appendices to the Minutes of Evidence


Supplementary memorandum by the Chemical Industries Association

  The material below follows the Chemical Industries Association's oral evidence to the Committee on 20 November 2001, answering the two substantive questions posed by the Committee that day.



  Three years ago, when the CIA was campaigning against the worst implications of the Climate Change Levy, we collected data from a sample of high load users operating similarly-sized chemical plant throughout Europe and the USA. This showed the UK to have a significant competitive disadvantage.

  Unfortunately, we do not have sufficient chemical industry data available to make a similar up to date comparison. However, using non-specific industry data for Europe, and indicative data for a large US chemical operator, it is clear that the UK competitive position has improved.
CountryLarge Industrial User p/kWh *
(Oct 2001)

* (Source: Energy Advice—large industrial = 80MW, 60 per cent load factor)

  Comparative data for Europe shows UK to be middle of the range. Information from member companies confirms that UK prices have fallen as a result of Neta, although large users have lost some of the previous demand-side benefits which have reduced the value of the improvements. Continental prices also declined in anticipation of greater liberalisation, but are now tending to rise again, reflecting slow progress, increasing environmental taxation and provisions for renewables.
Comparative data for large chemical manufacturer operating in US and UK*
19971998 19992000Jan-Oct 2001
US Index6755 7085110
UK Index100100 100100100

*p/kWh basis

  Indicative data for the US and the UK shows a progressive narrowing of the US advantage 1998 - 2000 and a reversal of competitive advantage in 2001. This reflects a number of factors including exchange rate movements, the US energy crisis and Neta


  As for electricity, we do not have up-to-date comparisons for large European chemical sites. Such data that we do have are for smaller sites, using gas for heating and steam-raising rather than as a chemical feedstock. This confirms the general picture presented below for all industry indicating that the UK is relatively favourably placed.
CountryLarge Industrial gas user p/therm
(Oct 01)*
Netherlands23.6 (1)

*39.7 million therms/year. Source: Energy Advice

(1) Petrochemical feedstock prices 20.8 (source: Heren)

  However, this is not the full story and is to some extent misleading. Gas prices can be thought of as having an energy component and an add on, where the add on covers transportation and related costs, such as balancing, storage, quality adjustments, administration, invoicing, credit and suppliers' margin. For very large gas consumers (typically chemical feedstock users), this add on element is very small. Price developments more closely reflect movements in the energy component, which in turn relates to the gas spot market. As indicated the table below and in the first accompanying chart, since 1996 the differential between the UK and European spot market for gas has been eroded, and the UK has lost a significant competitive disadvantage. Following the opening of the Bacton-Zeebrugge Interconnector UK gas prices have risen to continental levels. Perversely for periods of time UK spot prices are often higher than those on the continent, which in the face of continuing UK gas exports, is difficult to understand. We therefore await with interest the EU competition directorate's investigation into Interconnector operations.
UK and Continental spot and forward gas prices pence/therm
19961997 199819992000 20012002
UK 12.412.5 11.710.217.6 22.420.8
Continental 18.216.6 14.911.820.4 23.217.0

  Comparisons between the UK and US gas spot markets are illustrated in the second accompanying chart. Between early 1999 and mid 2001, UK had a clear spot price advantage, but this has now passed to the US.


  In CIA's response to the Government's consultation on the Renewables Obligation, we expressed our concerns that the impact on the UK chemical industry could be as much as £15 million/year on top of existing electricity costs rising to as much as £45 million by 2010, depending on how ambitious the renewables targets proved to be and how effective the mechanism in reducing the cost of producing renewable energy. These numbers correspond to 3.3 per cent and 10 per cent of existing electricity purchases by the industry and compare with an estimated net cost to the chemical industry of the Climate Change Levy of £20 million per year.

  We acknowledge that these estimates are top of the range based on using the full buyout price of £30MWh on top of an existing wholesale market price of say £20MWh.—See table below, Scenario A (Electricity companies with no renewables supply will need to pay the full buyout price on top of the cost of their existing supplies). DTI calculations of the additional costs were based on a more conservative figure of £30MWh, (Scenario B) which is the guaranteed buyout price. In reality the average price is likely to be somewhere in between depending on how electricity companies pass through higher costs and rebates and how quickly renewable supplies develop.
Potential costs of Renewables Obligation on UK Chemical Industry, assuming purchased electricity of 15,000GWh and an existing electricity price of £20/MWh
Scenario ABuyout price of £30MWh in addition to existing market price
2002-033%(0.97×£20) + (0.03×£50)-(1×£20) ×(15M) =£13.5M
2010-1010.4%(0.896×£20)+ (0.104×£50)-(1×£20) ×(15M) =£46.8M
Scenario BBuyout Price of £30MWh
2002-033%(0.97×£20) + (0.03×£30)-(1×£20) ×(15M) =£4.5M
2010-1010.4%(0.896×£20)+ (0.104×£30)-(1×£20) ×(15M) =£15.6M

Chemical Industries Association

December 2001

previous page contents

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 27 August 2002