Energy and Climate Change Committee - Draft Energy Bill: Pre-legislitive ScrutinyWritten evidence submitted by the British Ceramic Confederation

Executive Summary

The ceramic manufacturing industry needs secure and internationally competitively priced electricity. The objective of moving to low carbon power generating technologies has to be achieved in a cost-effective manner. All options under EMR will increase electricity wholesale costs markedly. According to DECC figures,1 by 2020 EMR alone will add £10/MWh (in 2010 prices) to the retail electricity prices paid by intensive users. This additional cost further reduces the competitiveness of UK energy-intensive companies.

A number of electro-intensive ceramic factories have already relocated from the UK into mainland Europe because of lower electricity bills in those countries. Unless mitigated, the proposals in the draft bill will accelerate this exodus.

We welcome the principles in last year’s Autumn Statement to help mitigate costs for energy intensive industries. However, even highly electro-intensive ceramics companies will not benefit from compensation for the indirect costs of EU Emissions Trading Scheme (EU ETS). Therefore for the remaining indirect costs aspects of EMR (contracts for difference and capacity market) all energy-intensive industries should ideally be fully compensated. The method used to allocate the funds must be fair and not favour/disadvantage any sector ie by excluding it.

We welcome Energy Minister Greg Barker’s proposal that there should be a comprehensive “Phase Two” energy intensive industry support strategy in the next spending review period. As part of this, we would like to see an increase both in size and scope of the package so a wider range of at-risk activities can be more-comprehensively covered.

Under all credible scenarios, peak demand for gas power generation is likely to continue increasing for at least a decade. Coupled with an increased reliance on imported gas, this is likely to lead to increased gas price volatility and reduced gas security of supply. Therefore the Energy Bill must be widened to embrace gas security of supply in addition to power security of supply.

We would welcome all measures that increase gas (and hence power) security of supply, namely: (i) increased GB gas storage coupled with a Public Service Obligation framework to apply to all gas suppliers and shippers, (ii) development of UK unconventional gas reserves (principally shale gas and coalbed methane), (iii) increased LNG capacity and (iv) increased pipeline import capacity.

Brief Introduction to the British Ceramic Confederation

1. The British Ceramic Confederation (BCC) is the trade association for the UK Ceramic Manufacturing Industry, representing the common and collective interests of all sectors of the Industry. Its 100 member companies cover the entire spectrum of products and materials in the supply chain and comprise over 90% of the Industry’s manufacturing capacity.

2. Membership of the Confederation includes manufacturers from the following industry sectors:

—	Bricks	—	Clay Roof Tiles	—	Clay Drainage Pipes
—	Gift and Tableware	—	Floor and Wall Tiles	—	Sanitaryware
—	Refractories	—	Industrial Ceramics	—	Material Suppliers
—	Abrasives

3. The sector (including its suppliers) employs approximately 20,000 people and generates £2 billion sales. The sector is an active exporter, particularly for industrial ceramics, refractories, clay drainage pipes, tableware and giftware.

4. The industry is energy-intensive (but not energy inefficient). Energy bills/taxes can be up to 30–35% of total production costs. 85% of the energy used is natural gas.

5. We support cost-effective action to secure electricity supply and to move to lower carbon electricity production. We support, in principle, a balanced generation mix of nuclear (including new build), renewables, unabated gas and coal with carbon capture and storage.

Ceramics in Power Generation and Distribution

6. The ceramics sector is a solution provider for the low carbon energy generation and electricity distribution. In the recent European Commission report “Materials Roadmap Enabling Low Carbon Energy Technologies”, ceramic components were acknowledged to be critical in most technology options,2 with applications including wear resistant components for heat pumps/wind turbine bearings and heat resistant components used in the fabrication of solar photovoltaic panels.

Power Price Impacts and Mitigation

7. The ceramic manufacturing industry needs secure and internationally competitively priced electricity. The objective of moving to low carbon power generating technologies has to be achieved in a cost-effective manner. All options under EMR will increase electricity wholesale costs markedly. According to DECC figures,3 by 2020 EMR alone will add £10/MWh (in 2010 prices) to the retail electricity prices paid by intensive users. This additional cost further reduces the competitiveness of UK energy-intensive companies.

8. Rather than acting as a spur, the rising cumulative cost of UK energy taxes acts now, our members tell us, as a barrier to investment, hampers international competitiveness and increases the likelihood of carbon leakage. Most ceramic manufacturing companies operate in highly competitive international markets, meaning there are limits on how much of the cost of moving to low carbon can be passed through to customers. There is no doubt that the cumulative effect of environmental cost and tax burdens on this scale has the potential to destroy UK ceramic manufacturing businesses.

9. A number of ceramic factories have already relocated from the UK into mainland Europe and USA because of lower electricity bills in those countries. Unless mitigated, the proposals in the draft bill will accelerate this exodus.

10. All energy-intensive industries should be fully mitigated from the costs associated with all four pillars of EMR: (i) contracts for difference (FiT CfD), (ii) capacity market (CM), (iii) carbon price floor (CPF) and (iv) emissions performance standard (EPS). We welcome the decisions taken in the 2011 Autumn Statement to help mitigate indirect cost impacts arising from the CPF and have actively participated in the recent DECC/BIS Call for Evidence.4 The £100 million compensation is a welcome first step, however, only a handful of ceramic sites may benefit from CPF mitigation if state aid is granted. The package of measures also included compensation for the indirect costs of EU Emissions Trading Scheme (EU ETS). However many sectors (including ceramics) have been excluded from this element as their European sector as a whole does not qualify. Consequently, even the most electro-intensive ceramic manufacturing processes (which are amongst the most electro-intensive manufacturing processes performed in the UK) will not derive any benefit from indirect EU ETS pass through compensation. Therefore for the remaining indirect cost aspects of EMR (FiT CfD and CM) all energy-intensive industries should ideally be fully compensated. However, since the size of any compensation fund is likely to be limited, compensation should be targeted to ensure the most electro-intensive processes are fully compensated. The method used to allocate the funds must be fair and not favour/disadvantage any sector ie by excluding it.

11. Compensation for the existing Renewables Obligation should also be addressed.

12. We welcome Energy Minister Greg Barker’s proposal that there should be a comprehensive “Phase Two” energy intensive industry support strategy in the next spending review period. As part of this, we would like to see an increase both in size and scope of the package so a wider range of at-risk activities can be more-comprehensively covered.

Security of Gas and Power Supplies

13. Gas will have a critical role in power generation both in the short term (to meet core demands and fill gap that will be created by the closure of oil-fired, coal-fired and nuclear plant) and the long term (balance demands associated with wind intermittency).

14. Under EMR, annual demand for gas could fall as investment in new nuclear, renewables and coal with CCS are incentivised. However new nuclear will be slow to come online and most of the renewable capacity will be wind requiring close to 100% backup from gas-fired generation, so the draft Bill will not reduce future peak demand for gas for power generation. Under all credible scenarios, peak demand for gas power generation seems likely to continue increasing for at least a decade.

15. Indigenous gas production (UK Continental Shelf) is in long term decline and therefore power generation will become increasingly dependent on largely imported gas supplies (European pipeline gas and LNG).

16. Increased peak demand for gas coupled with an increased reliance on imported gas is therefore likely to lead to increased gas price volatility and reduced gas security of supply. This has profound implications for all gas users (domestic and industrial) including our members. Therefore the Energy Bill must be widened to embrace gas security of supply in addition to power security of supply.

17. We would welcome all measures that increase gas (and hence power) security of supply, namely: (i) increased GB gas storage, (ii) development of UK unconventional gas reserves (principally shale gas and coalbed methane) (iii) increased LNG capacity and iv) increased pipeline import capacity.

18. In the medium term, we consider additional GB gas storage together with the introduction of a Public Service Obligation (PSO) framework to apply to all gas suppliers and shippers will provide the highest supply security and hence the lowest price volatility since: (i) gas is physically held where it can be called upon, (ii) holding a larger volume provides a larger contingency and (iii) storage is located within our national boundaries and so is less susceptible to external factors. Our members and Board recognise that this “insurance” will result in an increased cost for all consumers but it is likely to be better than other alternatives.

19. The draft energy bill needs to incorporate incentives to attract the necessary new investment in GB gas storage at an affordable cost for industrial consumers.

20. Longer term, we would strongly welcome the development of UK unconventional gas reserves (shale gas and coalbed methane).

Feed in Tariff Contracts For Difference

21. BCC provided qualified support for the initial proposal of a FiT with CfD as an appropriate mechanism to incentivise the necessary market investment in low carbon generation (including renewables and new nuclear). However, we are concerned that their complexity may render them difficult to work in practice, may distort the market unfairly and may result in higher bills.

22. With regard to FiT with CfD, there remains a significant lack of detail regarding tariff design, the reference price against which payments will be made for the different forms of generation, counterparty risks and differences between intermittent and baseload generation. We would welcome the opportunity to be involved in further developing the proposal for FiT CfD.

23. As part of the further developing its FIT CfD proposals, the Government should publish a full impact assessment on the competitiveness of energy intensive industries.

24. Revenue streams associated with future tariffs must be predictable in order to give investors confidence in the market place.

25. We are concerned that FIT CfDs may have a significant impact on the wholesale cost of electricity.

26. FIT CfD should have positive implications for the availability of secure long-term industrial supply contracts. For example, there are opportunities for electricity suppliers to return the support of Government and industrial consumers in a similar way to the French Exeltium long-term contract option (at approximately €40/MWh).

Capacity Market

27. The goal of any capacity mechanism should be to ensure that there are sufficient physical assets to provide the required capacity at all times. A large proportion of generation will need to be flexible gas-fired capacity to support the planned increase in intermittent wind generation.

28. End consumers are going to pay for reserve capacity via higher bills. We ask that the market mechanism is designed to attract the necessary investment capital at an affordable cost for industrial consumers.

29. The capacity market should not reward generation that already receives support through the Renewables Obligation or proposed FIT CfDs.

30. In addition to generation technologies, providers of capacity include demand side response (DSR). Although DSR may be possible in some manufacturing sectors, we believe that only a small percentage of ceramic manufacturing companies (typically those who operate batch production processes) may be able to offer electricity DSR. Electricity is used to control all kilns, irrespective of the fuel used for firing.

July 2012