Examination of Witnesses (Questions 449-459)
Mr Jeremy Nicholson
9 JUNE 2008
Q449 Chairman:
Mr Nicholson, thank you very much indeed for coming. You are familiar,
I know, with Select Committee proceedings. So perhaps you would
be good enough just to give us a bit of background on the Energy
Intensive Users Group and also yourself; an opening statement.
Mr Nicholson: Thank you,
firstly, for the opportunity to allow us to voice some of our
concerns about the target and the way it is being pursued, and
its possible impact on the industrial sector. The Energy Intensive
Users Group is an umbrella group that represents a dozen or so
trade sectors, mostly trade associations such as the Chemical
Industries Association, the Confederation of Paper Industries,
steel producers, brickmakers, aluminium, cement and so on, all
of whom represent industries that operate in international markets.
They have to be internationally competitive, and depend therefore
on secure and competitive energy supplies to stay in business.
They are also sectors that have a strong commercial interest anyway
in energy efficiency, which will not surprise you when you realise
that for a steelmaker, 20-25 per cent of the production costs
might be energy related; for an aluminium smelter, 40-45 per cent;
for the industrial gases and some of the chemical firms, as much
as 70 per cent of their costs are energy based, typically for
the electro intensive firms. So for them, you can see how potentially
small differences in energy prices can have quite a big impact
on their competitiveness, but equally provides them with a very
strong commercial incentive to manage their supplies efficiently.
I should say, our views sometimes diverge, to put it mildly, from
the environmental lobby and occasionally from Government and opposition
too. We accept the need to diversify away from fossil fuels, both
for environmental and economic reasons, partly to reduce concerns
about energy security, but we do not take an ideological view
on energy supply. We do not think any technology should be ruled
in or out on those grounds. In fact, we welcome research and development
to bring as many new low carbon technologies as possible to the
market, and reducing the barriers to their exploitation. However,
we do not accept the practice of setting arbitrary politically
determined targets, whether in the UK or at an EU level, for renewable
energy, or indeed any other technology. We believe consumers'
interests are most likely to be met by allowing the market to
determine the energy mix within a carbon cap. We would also say,
and I do not know whether you would regard this as controversial
or not, but the practice of target setting undermines one of the
cases for market liberalisation that we and the Government are
pursuing elsewhere in Europe, allowing the market the maximum
freedom to determine where our supplies come from, and perhaps
even more importantly internationally, it undermines the principle
that markets should be allowed to reduce emissions at least costs,
and choose the technologies to do so. That is implicitly enshrined
in the EU Emissions Trading Scheme and something that we in principle
are trying to advance internationally, so I hope that might be
one aspect of the debate we might have a chance to touch on this
afternoon. I should say I will not be able to answer in detail
some questions about the potential costs, but I hope I can give
an indication of the possible impacts in the absence of full evidence,
and I hope that if that is not satisfactory, I can give some other
supplementary response on behalf of our members, if there is anything
that remains unanswered.
Q450 Lord Ryder of Wensum: Good afternoon,
thank you very much indeed for your very clear introduction. You
have touched on the EU and UK targets in your introductory words,
I wonder whether you would like to put perhaps some more detail
to them and tell us how achievable you think they are.
Mr Nicholson: I would not use
the word achievable to describe either the UK or the EU targets.
I think one of the difficulties in discussing this whole subject
is we feel obliged to talk in euphemisms. We do it as consumers,
I am sure ministers feel they are obliged to do this regularly
in the course of their work; well, perhaps that is natural, but
I think it is sad when the energy industry and others who should
be perhaps a bit more open about this find that they have to do
so too. So do we, I think for reasons of trying to avoid causing
offence to the environmental movement and others. But sometimes,
targets are not challenging, they are ridiculous, and I think
it therefore falls on those of us who have the freedom to express
those views rather more clearly than some to do so on the record.
That does not mean that we should not be looking at ways of rendering
renewable energy more commercially viable, subsidising it perhaps
where necessary, and certainly in an efficient way, and certainly
reducing barriers to its exploitation. But I think the EU has
done itself no credit in making such a public commitment to a
target which I think few in the energy industry or outside, even
in the green groups actually, starting from a current position,
believe is achievable. It certainly is not for the UK. The thought
that we are going to go from 2 per cent to 15 per cent of our
energy in the next eleven and a half years, more particularly
5 per cent of our electricity to perhaps somewhere between 35
and 40 per cent of our electricity in that timeframe, or shortly
beyond, is not realistic, and I hope perhaps as a result of your
Committee's efforts and others that we might reach the stage soon
where ministers and the energy industry can be a bit more open
about that. Lord Ryder of Wensum: You have been clear again,
thank you.
Q451 Lord Rowe-Beddoe: Thank you,
Mr Nicholson. Yes, so let us speculate, however, for one moment.
Let us assume that the EU 20 per cent target is achieved. How
would that affect you, do you think, in your association, the
members of your association rather more particularly?
Mr Nicholson: Firstly, I think it is
theoretically possible that the EU target could be met. I suspect
the political and economic consequences of doing so might be rather
dramatic, but at least it is theoretically possible, unlike the
UK target, which is, I think, practically, as well as economically,
impossible. Part of the answer to that depends on how that target
is met, or at least how we move towards it, because some aspects
of that target might not actually be delivered by 2020. The Severn
Barrage, for example, within the UK, if it ever comes about, might
be delivered rather later than that. I am sure you will have read
or had drawn to your attention the important piece of work done
for BERR by Pöyry Consulting on the potential costs of meeting
this target, not just to the UK but to the EU as a whole, and
they are talking about lifetime costs in the order of €259
billion to achieve the target, under the most optimistic scenario,
namely that there are not any undue barriers to exploiting technologies
where they are feasible, there are no particular problems with
grid access or back-up, that the technologies are just deployed
in the most geographically sensible location, as opposed to those
determined by Government national subsidy policies, and that it
is done in the most efficient way as far as timing is concerned.
Now all of those things are somewhat in doubt, to put it mildly,
and they also presuppose that there is free trade in renewable
energy across the European Union. Well, we do not have free trade
in gas or electricity across the European Union at the moment,
we have something approaching it, and indeed I recall giving evidence
to your Committee a couple of years ago about the slow progress
of liberalising the energy markets. This is doubly difficult with
renewables, because there is a plethora of national support policies
that in practice make it very difficult to trade renewables across
national boundaries, even assuming there is a capacity to do so
across the networks, which as I am sure you are aware in many
cases there is not. So all of that suggests to me that the costs
of attempting to meet this are likely to be on the higher side
of estimates rather than the lower, much though as we would wish
it otherwise. Certainly Pöyry Consulting's cost estimates
suggest that for the UK, we might be talking about an impact four
or five times as great in financial terms as is caused by the
Renewables Obligation currently, which at the moment is costing
consumers around £1 billion a year, and adding just over
£3 per megawatt hour, increasing annually, to our electricity
bills. That is about 5 per cent of the cost of supply to an industrial
user. Now I do not know whether pro rata the same impact would
apply from the renewables support policies that might emerge as
a result of pursuing this target across Europe. But certainly
a cost impact four or five times the size, when renewable subsidies
are already accounting for around 5 per cent of our bills, and
we have to pay a climate change levy, albeit at reduced rate for
the intensive sectors, and we have the impact of the EU Emissions
Trading Scheme as well, which is morally a very good thing, but
that is adding another £12 per megawatt hour or so to our
power prices too, and therefore the competitiveness impact has
to be seen in the context of tax and emissions trading hitting
power prices at the same time. All of this, of course, is happening
at a rather unfortunate time as far as the consumer is concerned
when, irrespective of the environmental agenda, the market is
driving energy prices up anyway.
Q452 Lord Rowe-Beddoe: Your assumption
therefore is that energy produced by renewable sources is going
to be more expensive than currently?
Mr Nicholson: That is true as a generalisation.
It is not universally true that renewable energy is expensive,
of course. Large scale hydro, where it is feasible, is probably
the cheapest source of bulk energy that we have. There are environmental
constraints as to the extent it can be exploited, of course. Certain
forms of biomass and energy from waste again can be highly cost
efficient, although there are limits to what can be done in scale.
Not all of them have equally glowing environmental credentials
as far as CO2 reduction is concerned. The problem with evaluating
the cost of something like wind is it is not a single cost. I
do not just mean whether you do it onshore or offshore, but wind
at 1 per cent of the energy mix has a trivial impact on balancing
costs and security of supply. Wind at 15-20 per cent has very
considerable costs associated with it, and therefore, there is
a non-linear relationship there. So it is wrong to generalise
and say it is either expensive or cheap, it depends on the scale
on which you are doing it. Unfortunately, the sort of scale we
are talking here implies very large exploitation of wind which
is problematic actually from a security of supply point of view.
So we should not generalise to the extent of saying renewable
energy and the subsidies that might have to go with it will necessarily
be very damaging but it is the scale that causes the problem here.
Q453 Lord James of Blackheath: Mr
Nicholson, quite early in your comments you indicated a deep degree
of scepticism as to the achievability of the target. I wonder
if you could define that more closely for us; whether that is
a scepticism on behalf of the entire membership of the association
that you are working with, or whether it is in fact related to
the overall achievability for the United Kingdom without reference
to the mix of different energy sources presumably needed, because
some will be needing a huge dependence on electricity and others
on fossil fuels. I have never heard of a foundry that could run
on electricity.
Mr Nicholson: You are right, there is
a difference of exposure to this within the Energy Intensive Users
Group and our members. Some proportionately buy very little electricity
and use natural gas as a feedstock. Actually, it is not obvious
for them what renewable alternative they have in producing fertiliser,
a certain amount of biogas perhaps, but by and large, there is
no alternative to what they are currently doing. Others are highly
electro intensive; in fact, even in the steel sector, the electric
arc furnace operators are highly electro intensive. They are not
buying much in the way of fossil fuels, but they are consuming
a lot of electricity, so there is a range of exposure there. It
is true that all up to a greater or lesser extent are concerned
about the costs arising from this. It is not true to say that
they are prejudiced against renewables. Some take advantage of
them; there are aluminium smelters that have a direct interest
in hydro production themselves, some co-fire biomass in coal fired
power stations which are part of their autogeneration and so on.
One or two as a small part of their energy mix have wind turbines
and other facilities on their industrial sites. So there is not
a philosophical objection to this, there is a practical and economic
one as to what this would mean for a firm that requires secure,
24-hour baseload supplies, and is highly exposed to international
competition, and this accounts for a very, very large proportion
of their production costs.
Q454 Lord James of Blackheath: Mr
Nicholson, is there any way in which your organisation can monitor
the extent of success in using renewable fuels, and guide your
membership to the point where some part of it gives up a dependence
on fossil fuels to release those fuels which are more necessary
to other parts of your membership and get a better balance into
the use of fuel within the economy overall?
Mr Nicholson: Is this a suggestion that
natural gas might be best used as a feedstock rather than necessarily
as a generating fuel?
Q455 Lord James of Blackheath: They
seem to have more flexibility in many ways, and you yourself talked
about the possibility that wind might be successful. Wind is likely
to drive electricity, and you might have a lesser demand on electricity,
and I am wondering whether any part of your user base could be
given up in order to free up more of the valuable and scarcer
fuels as we use instead, something of which we can make a surplus,
and whether we should be directing policy that way?
Mr Nicholson: I think in a sense the
market is starting to drive in that way anyway. A number of people
thought that gas supplies were going to remain relatively cheap
compared with coal, for example, and that we could merrily, without
any great intervention, see a continuation of the dash for gas,
this would result in the benign situation that prices would be
kept under control and emissions would go down simultaneously.
If only we were in that situation; we are not, and for international
reasons, we are not going to go back to it. The market is trying
to diversify away from gas, in power generation in particular,
but of course there are constraints on what it can do in the short
term. In the medium term, we are locked into it. In the long term,
we have the option of diversifying away to nuclear and eventually
to coal with carbon capture, and I guess there is no reason to
expect that renewables will do anything other than grow within
the mix. Our concern is about the effect of trying to artificially
grow that proportion, beyond what the technologies can currently
sustain.
Lord James of Blackheath: Thank you.
My Lord Chairman, I would welcome a supplementary later if time
permits.
Q456 Lord Walpole: I know you started
on this one, but let us continue: given the nature of the industries
you represent, what role do you see for them in energy efficiency
measures to help meet EU targets, and as a supplementary I would
like to ask you: when do you think, at the sort of production
level they are now, their energy consumption will actually start
to fall?
Mr Nicholson: Well, I assume, if I might
answer that last point first, that by energy consumption falling,
you are talking about an energy efficient response rather than
a demand destruction response or a relocation of industry to other
parts of the world.
Q457 Lord Walpole: No, purely efficiency.
Mr Nicholson: Yes, I assumed as much,
but thought there would be no harm to put that on the record,
because nobody wants to achieve our environmental aims by transferring
our liabilities on to someone else's balance sheet.
Q458 Lord Walpole: Absolutely not.
Mr Nicholson: I fear that we are up against
diminishing returns in the intensive sectors as far as energy
efficiency is concerned. There may be improvements in carbon efficiency,
particularly in respect of the electricity supplies on which they
depend, but of course these industries have always had a commercial
interest in keeping their energy bills down, much more so than
either business generally or most of us as domestic consumers,
unless, I would say, we live in fuel poverty, and there there
is a very strong commercial incentive to keep power bills down,
unfortunately sometimes at the expense of the health of those
concerned. So we are tempted sometimes to say that the energy
intensive sectors are kind of the fuel poor of the industrial
sector. We do tend to manage these things quite well, and there
has been a steady history of energy improvement even within those
sectors recently, and I think we have seen evidence of this from
those sectors covered by climate change agreements, who have probably
made more energy efficiency savings than perhaps some others.
I think therefore the scope for energy efficiency savings, both
proportionately and in aggregate, is higher in the less intensive
sectors and in some parts of domestic supply, and I do not think
we have really fully exploited that at all. Of course, it takes
a while for the public and for non-intensive businesses to catch
up with fuel price rises that are rising anyway from the market,
quite apart from signals that may be imposed on top from Government,
but I have no doubt that there are plenty of boardrooms that are
concerned about managing energy efficiency costs now that were
not as concerned two or three years ago. Now you posed the question
how important is this in terms of hitting the renewables target
as a whole; well, plainly, if energy consumption is either lower
than it is now or at least has not grown by as much as it otherwise
would, the practicality of hitting that target or something close
to it becomes that much greater, so we certainly should not let
up on energy efficiency. In fact, for economic reasons, irrespective
of climate change, it makes good sense to do so in any case. I
would raise a note of caution here: the history of energy efficiency
improvements has not gone hand in hand with a net reduction in
aggregate energy use historically, and there are wonderful academic
arguments as to how much energy efficiency savings might be realised
in practice, some of it takes the form of compensatory increases
for comfort taking and so on, but I think it would be unwise to
rely too much on an energy efficiency saving at a micro level,
resulting, you know, megawatt for megawatt, in an energy efficiency
saving at an aggregate level, because history tells us it is not
that simple. It is worth pursuing, it may make the renewable target
that much more realistic, but it is not a substitute, I am afraid.
Q459 Lord Walpole: I think this Committee,
it must have been this Committee, a few years ago went to have
a look at a cement manufacturer. I mean, even at that stage, they
were using what you might call second-hand car oil and old tyres
and things then, which I really was very impressed by. They cannot
really go very much further than that, can they?
Mr Nicholson: That is my fear, either
in terms of their direct carbon input or indeed the energy use
per tonne of product, and if you think of a process like aluminium
smelting, well, there is a chemical equation, that some of you
here may well be very familiar with. Given a tonne of bauxite
or whatever it is and a tonne of finished product, you are going
to require a certain amount of energy to convert one thing into
another, even in theoretically perfect laboratory conditions.
You are never going to go below that target. The alternative,
I guess, is to find a substitute product, ultimately, but that
is not terribly easy when it comes to something like steel, on
which just about every process depends. So I think we have to
be realistic about how much more we can carry on tapping the intensive
sectors that have done so much to improve efficiency there, and
we are therefore into a rather more problematic area of how do
you deal with service industries and much more atomised businesses,
not all of which have energy management departments or board interest
in this that perhaps the firms that our members represent do.
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