The UK’s steel industry is facing a number of pressures.
The collapsing price of steel – which is, in part, being driven by the
‘dumping’ of Chinese steel in European markets – is placing huge
competitiveness pressures on the UK’s steel industry.
However, the UK’s energy and climate policies have exacerbated the problems
faced by the UK’s steel industry by burdening the UK with punitively high
electricity prices.
The costs of energy for steel producers
According to the Centre for Policy Studies, energy constitutes a
significant portion of costs for energy intensive industries. Although grid
electricity accounts for a smaller proportion of operating costs at blast
furnaces specifically, electricity is hugely important for steel operations
in general. This includes electric arc furnaces and a number of downstream
processes that Tata Steel and other steelmakers operate in the UK. Energy
accounts for between 20 – 40% of the cost to produce steel, according to
the World Steel Association.
Warning from the industry about energy costs
This is a situation that industry has been warning the Government about for
a considerable time, and electricity prices are set to increase even
further over the coming decade. For example, last year the manufacturing
body EEF warned that large industrial energy consumers between 2014 and
2020 face a 47% increase in electricity prices.
More recently, EEF highlighted the detrimental impact of the UK’s
unilateral Carbon Price Floor (CPF), which is estimated to cost energy
consumers £23 billion from 2013 to 2020. Furthermore, Liberty Steel has
recently said that high energy costs and insecurity of energy supply in the
UK could force it to move their factories abroad.
How do the UK’s electricity costs compare internationally?
Europe as a whole is suffering from uncompetitive energy prices.
International Energy Agency figures show that average European industrial
consumers pay twice as much for their power as their counterparts in the
United States.
The situation for the UK is even more concerning. Out of all EU member
states, the UK’s energy intensive industries face the highest electricity
prices.
Why are UK electricity costs so uncompetitive?
A series of energy and climate measures have added to the cost of
electricity for industrial users. This includes costs of schemes such as
the EU-wide ETS but also the costs of the Government’s unilateral CPF,
which currently sets a price of carbon that is four times the level of the
EU price. The costs of climate measures are expected to grow for industry,
and by 2030 the impact of these policies will collectively add 66% to the
costs of electricity for industrial users, according to the Department for
Energy and Climate Change.
UK steelmakers are typically paying around £80-90/MWh for their electricity
– of this £14/MWh is attributable to the cost of carbon (EU ETS and the
CPF) and £20/MWh to the cost of renewable subsidies (RO and FITs) (see
Figure 2).
Has the Government tried to mitigate these costs for the steel industry?
The Government has implemented an energy intensive compensation scheme,
which is targeted at steel and other energy intensive groups. There are a
number of issues with the scheme, particularly as it does not fully
compensate industry for the costs of climate measures. State-aid rules mean
that the full costs of climate policies cannot be mitigated and the scheme
does not currently cover all elements of climate policy (see Figure 2).
There is also no guarantee that the compensation scheme will be extended
beyond the spending review period, which offers the industry uncertainty
for the future.
Conclusion
The UK’s steel industry is facing a number of issues, including the
problems arising from the dumping of Chinese steel in European markets at
below cost price. However, the very high cost of electricity is
exacerbating the problems faced by UK steel industries and other energy
intensive industries.
As part of the package of measures for energy intensive industries and
manufacturing in the UK more broadly, the Government should seek a re-think
on energy policy. This should include a review of how climate policies more
broadly are impacting on British manufacturers – rather than pursuing the
comparatively ineffective policy of compensating energy intensive
industries for the costs.
Furthermore, substantial shale production could reduce costs for energy
intensive industries. The House of Lords Economic Affairs Committee was
clear about the danger of delays in shale exploration to energy-intensive
industries.
They said: “if the UK does not develop its shale resources in a timely
fashion, it runs a serious risk of losing the energy intensive and
petrochemical industries which depend on competitively priced energy and
raw materials.” This highlights the importance of ensuring that exploratory
drilling takes place to make a true assessment of the UK’s shale potential.
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