Select Committee on Trade and Industry Written Evidence


Memorandum by the Chemical Industries Association


  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 UK.

  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 designs.

  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 competitors—even 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 heating—and 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.


  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

March 2006

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