24. In 2001 the high cost of energy paid by UK steel
manufacturers relative to that paid by their international competitors
was identified as an inhibition to competitiveness in what is
a very energy-intensive industry.
Since then, liberalisation of the UK gas and electricity markets
has reduced wholesale prices to the point where they are broadly
competitive with the rest of the EU. We were told that, welcome
though these changes had been, their beneficial effects had been
reduced by the introduction of the Climate Change Levy in April
2001 and, more recently, the Renewables Obligation.
For the EEF, Ian Rodgers made the point that, unlike some other
energy-intensive industries, the steel sector is subject to a
Climate Change Levy of 20% on its energy usage.
The recently-imposed Renewables Obligation on electricity suppliers
had already resulted in an increase of 4% in electricity costs
to the industry, which would rise to 10.4% by 2010.
The point was made to us that steel producers in other countries
were not affected by such extra charges.
In a supplementary memorandum the DTI estimated that the cost
of the Obligation to consumers would be an increase of 5% on average
electricity prices in 2010 compared to 1999 prices.
The department acknowledged that energy intensive industries would
have to meet greater than average price rises. It said that the
Government will consider the impact of the proposed EU Emissions
Trading Scheme on the Climate Change Levy, but pointed out that
the emissions trading scheme had yet to be agreed.
25. The EEF also told us that the potential effect
of the environmental measures set out in the Government's Energy
White Paper would be to increase industrial electricity prices
by 25% and gas prices by up to 30%.
Such costs would not be incurred by steel companies in developing
countries or in those countries which are not signatories to the
Kyoto Protocol. Even within the EU there were differences in the
way such environmental targets were being set. It was suggested
that the Government should consider adopting the approach of the
German Cabinet, which had agreed a proposal for special treatment
for energy-intensive industries whose competitiveness was threatened
by higher electricity prices as a result of the Government's green
energy policy. The DTI has explained to us that the German approach
to increasing the use of Renewables is more prescriptive, less
market-oriented and more expensive than the market-driven approach
adopted in the UK. In the DTI's view, this "high level of
Government intervention, which is incompatible with our liberalised
and competitive market, is unnecessary in the UK."
26. We have commented in other Reports on the
potential impact of the higher energy costs incurred by UK industry
as a result of the Climate Change Levy and the Renewables Obligation,
and do not think it necessary to rehearse old arguments. Nevertheless
the Government should reconsider the scope and future merit of
the Climate Change Levy well in advance of the full operation
of the EU emissions trading scheme in 2008. While it is important
that internationally-agreed objectives for environmental protection
are achieved, the UK contribution towards those objectives should
not have an adverse effect on UK competitiveness.