Memorandum by the Chemical Industries
1. Securing reliable and competitively priced
energy is essential for the survival of manufacturing in the UK.
Recent increases in UK energy prices have been so severe that
not only high tonnage commodity chemical producers but also lower
volume, high value added speciality chemical companies have been
seriously affected, both directly through their own energy purchases
and by cost pass through. Despite considerable success over many
years in improving the industry's energy efficiency, most recently
under the sector's Climate Change Agreement coordinated by our
Association, energy remains one of the largest input costs, and
the high prices experienced in winter 2005-06 have forced the
cessation or curtailment of many manufacturing activities in the
2. Primary energy supplies should be diverse
in order to minimise both supply and price risks, and to provide
inter-fuel competition. We are very concerned by the projected
growing dependency on gas: we believe that renewable sources alone
will be unable to plug the gap left by closing ageing nuclear
and coal fired stations, and look to both a new generation of
nuclear plants and clean coal technology as a means of providing
baseload power. The alternative use of gas as a raw material for
manufactured products, and its flexibility in use as a domestic
or smaller scale industrial fuel, mean it should as far as possible
be reserved for these purposes.
3. New technologies may need a significant
push to get started. The CIA believes Government should provide
the appropriate incentives to develop early stage technologies.
Although 2050 may seem a long way in the future, it is important
to begin investigating as quickly as possible all the options
which may be able to contribute to a sustainable energy framework.
Money raised through a rationalised system of environmental taxes,
applied on a global basis to avoid competitive distortions, could
provide the source of funds. Long term, alternative technologies
should survive or perish according to the market. We believe that
the Renewables Obligation should be a means of encouraging investment
in renewables, not an ongoing operational subsidy.
4. We would also add that the operation
of the UK and wider European energy markets needs far more urgent
attention. As the European Commission has recently concluded in
its interim report on competition issues there are widespread
problems of concentration in some national energy markets. In
the gas market, the Commission found problems with the vertical
integration of production, wholesale trading, distribution infrastructure
and supply; a lack of transparency in key aspects of market operation
such as transit capacity and storage; and a lack of liquidity
and independent trading in price formation. The UK is affected
by these European problems, particularly because of a lack of
an adequate storage "buffer". High prices for gas then
immediately affect the electricity market because of the dependency
on gas for generation.
5. Nuclear power is generally accepted to
be a very low carbon generation option once constructed. Given
the very large output of power from small amounts of fuel, and
the reliability of output, the CIA believes that nuclear power
would seem to be an essential component of any strategy to provide
reliable, competitive baseload generation while also reducing
emissions significantly. Extension of planned operating lives
of current plants, or building replacements at the same location,
could utilise existing infrastructure and probably simplify planning
issues. Our support is contingent on Government's being able to
ensure that a firm long term policy is in place covering planning,
long term waste storage arrangements and the pre-approval of standard
6. The CIA is in agreement with public statements
from Ministers that have indicated the Government recognises it
will be necessary to manage long term waste for periods well in
excess of the expected lifetime of any commercial company, and
the consequent need for Government to take the role of ultimate
guarantor. It should, of course, ensure that the operators put
aside appropriate funding during the lifetime of a nuclear plant.
7. One of the key commercial hurdles for
promoters of nuclear power is raising capital with a very long
pay back period. The task could be made easier by reducing uncertainty
over planning issues and by early approval of power plant designs.
Government can assist in these matters, both in defining the planning
process and in pre-approval of power plant design. It would further
reduce uncertainty, and in all likelihood increase safety in operation,
if this approved design was not then subject to large numbers
of detailed modifications following further UK scrutiny: UK plants
would then be able to share operating experience with identical
installations elsewhere. Nuclear power should be granted the same
exemptions from carbon taxes or other levies as other renewable
sources. Having a known level of such taxes well into the future
would further reduce the uncertainty of financial returns for
promoters of nuclear power.
8. Politically, it is imperative to win
genuine public backing for nuclear power. The key issue here is
the question of waste, where a satisfactory solution must first
be found. Government should press for the earliest possible resolution
of the decades old debate on encapsulation and long term storage
methods to be adopted. We would expect the Government to identify
and implement an acceptable long term solution for storing existing
waste. We believe it would also help public acceptance if Government
could clearly identify where the costs for cleaning up existing
waste will actually be incurred, distinguishing between early
experimental work, military waste and the different generations
of commercial power plants.
9. The CIA believes there is an inherent
strength in having a diversity of primary fuels in the nation's
energy portfolio. There is also an advantage in terms of competitive
risk minimisation by ensuring that the UK mix is not radically
different from that of our principal competitorseven if
markets move against us, at least our main competitors would be
similarly affected. We view with great concern the projected dependency
on imported gas for the greater part of our energy needs. Both
uranium fuel and coal can be more readily stockpiled within the
country than can large quantities of gas.
10. We believe gas is far too valuable as
a feedstock to be used over any extended forward period for large
scale centralised power generation. Its greatest value lies in
its flexibility for both industrial and domestic heatingand
possibly domestic CHP. Nuclear power and clean coal should be
developed for baseload electricity generation.
11. If the UK moves towards steadily higher
import dependence for primary energy, the effect on the balance
of payments will become an important consideration, and the country
will need to sustain industrial sectors capable of generating
exports to pay for energy imports. Despite its international success,
the traded services sector has limited scope for plugging the
gap. Energy intensive manufacturing, typified by commodity chemicals,
relies on reliable, competitively priced energy in order to compete.
With raw materials bought at world prices, and output products
similarly traded as commodities in international markets, companies
must be competitive in the conversion process. Here energy is
usually the major variable cost.
12. Notwithstanding the arguments presented
above, in the short to medium term, given the long lead times
for bringing new nuclear capacity into operation, it appears inevitable
that we shall become more dependent on gas imports. In that case
it is essential (a) to have diverse geographical sources of supply
and (b) much expanded local storage capacity, possibly under control
of a central authority rather than individual suppliers. Recent
bitter experience has taught us that we cannot depend on flows
of gas through interconnecting pipelines: if UK weather is cold
and demand rises, similar or even more extreme weather conditions
are very likely across the Channel, restricting available supplies
for the UK. To provide a prudent level of security for UK consumers,
it is necessary to have adequate quantities of stored gas available
to the UK market without being dependent on its transmission through
pipelines with limited capacity and controlled by operators with
conflicting commitments to other markets.
13. The CIA believes that the best long
term solution is the provision of adequate strategic storage.
This is a public good that will not be funded by the market, as
it will only be required in extreme circumstances, the CIA believes
that its provision requires Government sponsorship, for example
by requiring the current system operator to commission and fill
strategic storage. Examples on the Continent provide a guide to
the levels of strategic storage required. Selling spare capacity
back to the market could help fund the facility, with any outstanding
costs being recovered from the whole market.
14. At a time of increasing reliance on
gas imports it is also essential that mechanisms are in place
to prevent hoarding of capacity in import and storage infrastructure.
The current wording of the Regulated Third Party Access (RTPA)
requirements has not in practice prevented capacity hoarding.
The present RTPA requirements apply to infrastructure operators
who invariably sell capacity to a third party. As the primary
holder has sold all available capacity, there is apparently no
spare capacity to release, and there are no obligations on the
secondary holders to release it. The CIA believes that the regulations
should to be reviewed to ensure that their objectives are better
achieved in practice.
15. There is a connection between the availability
of nuclear capacity and the dependency on gas. The greater the
extent of adoption of nuclear generation, by both the UK and other
countries, the less pressure there should be on gas supplies,
leading in turn to lower gas prices. The reverse could however
apply to the price of uranium.
UK ELECTRICITY DEMAND
16. We do not feel qualified to comment
in any detail on this aspect of the Committee's Inquiry. We would
however note that the energy demands of major chemical process
plants, in common with industrial activities like aluminium smelting,
steelmaking, and the manufacture of pulp and paper, glass, ceramics,
cement and bricks, are greater than we envisage being offered
by microgeneration. However, many such activities already operate
CHP plants (although current high gas prices currently make them
hardly economic) and these can contribute to local requirements
for both heat and electricity beyond their own site boundary.
Head, Competitiveness and Utilities