Ruth Lea: The Government's green energy policies are a threat to manufacturing industry

Ruth Lea is Economic Adviser and Director of Arbuthnot Banking Group plc and co-author (with Jeremy Nicholson) of British Energy Policy and the Threat to Manufacturing Industry, which is published today by Civitas.

In a newly released report. British Energy Policy and the Threat to Manufacturing Industry, I - with my co-author Jeremy Nicholson of the Energy Intensive Users Group (EIUG) - discuss the threat of the Government’s energy policies to business, in general, and manufacturing, especially intensive energy users, in particular. The key message from our report is that, whatever the reasoning behind current energy policies, we all need to be fully aware of the potentially damaging economic consequences arising from them. The report has been released by Civitas.

The starting point is energy policy’s close links with climate change policy, which is principally concerned with cutting greenhouse gas emissions, especially CO₂, in order to “tackle climate change”. The economy is being “decarbonised”, at considerable cost, in order to save the planet from dangerous manmade global warming. I shall not discuss the scientific raison d’être behind this strategy here. But I cannot resist commenting on the need for our heroic lead, our sacrifice, to be supported by the large carbon emitters if global emissions are to be “controlled”. We account for less than 2% of the global total – and that’s shrinking. But in the wake of last December’s Copenhagen summit, where the EU was ignored and isolated, this prospect is vanishingly small. China and India are clearly not interested in encumbering their economies with large climate change costs and the jury is still out regarding the US.

The Government has two major legislative commitments concerning carbon emissions reduction. They are more draconian than in any of our major rivals. The first is the Climate Change Act (2008) which includes a “challenging” reduction in carbon emissions of at least 34% by 2020, not least of all because the “easy” cuts have already been made. The EU’s target is just 20% and there was vigorous resistance to the British Government’s recent suggestion that this should be raised to 30%. There are signs of “green fatigue” on the Continent.

The second piece of legislation is the EU’s Renewables Directive (2008), under which the UK has a target of meeting 15% of its final energy consumption through renewable sources. The equivalent figure in 2005 was less than 1½%. As a consequence, the share of electricity generated from renewable sources is officially projected to rise from the current 5½% to around 30% by 2020. Few commentators believe that this target is achievable. But even if it were achievable, it would prove costly. The BERR-commissioned Pöyry Report (2008) on the costs of hitting the renewables targets showed the UK was uniquely disadvantaged within the EU because we started from such a low renewables base and our “renewable source” of choice for generating electricity was wind-power. Wind power is intermittent, requiring expensive conventional back-up, and expensive, especially offshore.

There are already three mechanisms by which green energy costs are being imposed on customers: the Renewables Obligation, the EU’s Emissions Trading System and the Climate Change Levy. Two years ago BERR estimated that such green policies had already added 21% to the average business electricity bill, damaging cost competitiveness, and incidentally had added 14% to domestic bills, worsening fuel poverty. In July 2009, DECC released some updated estimates. DECC calculated that the de facto “climate change energy surcharge” would add 55% to industrial electricity bills by 2020 as a very minimum, possibly as high as 70%, compared with “only” 21% in 2008. These are staggering “surcharges”. 

To my knowledge no other country is so comprehensively shooting its businesses in the foot – especially its energy intensive industries. As the economy emerges from the economic crisis of 2008-2009, it is widely assumed that the private sector, in general, and the manufacturing sector, in particular, will significantly contribute. Indeed the OBR’s post-Budget forecasts are implying that the private sector will have to grow by 5-6% for 2011/12 to 2014/15, as public spending is cut back. Their forecasts show that much of the growth is expected to come from an improvement in the trade balance, which is disproportionately reliant on the success of manufacturing industry.  

Under these circumstances it is politic to ensure that business, in general, and manufacturing, in particular, are supported by policies that sustain them rather than undermine their competitiveness. This is not a case of special pleading for subsidies for manufacturing industries. It’s about ensuring competitive level playing fields for British industry.

But the energy “surcharges” already quoted will inevitably mean some businesses, especially energy intensive using manufacturing plants (steel, glass and ceramics, bulk chemicals, industrial gases, paper, aluminium and cement) will be unviable in Britain. These businesses will simply “migrate” to more favourable regimes, of which there will be many. The direct contribution of energy intensive industries to GDP is around 1% according to the EIUG which is, in its own right, significant. And the businesses tend to be particularly strong in the regions.  But their economic significance is far greater than their direct contribution because they facilitate and support dependent British “downstream” industries which would probably migrate if they migrated.

The “INEOS Chlor” plant in Runcorn is a good example. It produces chlorine and caustic soda, using the most advanced “hi-tech” technological processes. But it is an energy-intensive business and vulnerable to high energy costs. The “downstream” industries range from PVC, soaps and detergents to sewage treatment. If this plant closed, much of the rest of the chemicals industry could disappear too.

The primary chemicals industry and the other energy intensive industries are sometimes dismissed as “sunset” industries as if they had no place in Britain’s modern “post-industrial age” economy. But this betrays ignorance. Apart from being “state of the art” in their fields, they are wealth and job creators and we need them.

Now I’m aware the Government is actively developing “green” industries which are intended to drive growth forward. But, in an era of fiscal retrenchment, the wealth and job creating outcome of these policies is even more uncertain than it was before. Remember “a bird in the hand is worth two in the bush”. Let’s not destroy what we already have.