Increasingly Noncompetitive Electricity Prices Threaten U.K. Paper Industry

Research conducted by the Confederation of Paper Industries (CPI), U.K., has highlighted a growing disparity in industrial electricity costs between the U.K. and other parts of the European Union, in particular Germany. The U.K. has the second most expensive industrial power in Europe, with grid supplied electricity to U.K. Paper Mills costing almost twice as much as that for German mills.

  

Much of this cost disparity arises from U.K. government taxation and climate change related costs, which now add around £20/MWh of electricity used—adding around a third to the total cost.

This increasing cost of U.K. electricity poses a real risk to the international competitiveness of electro-intensive industries such as paper. According to CPI, "the situation is compounded by the fact that industrial gas prices across the EU (including the U.K.) are roughly double that of some of our global competitors—notably the USA."

  

A package of measures is required to rebuild U.K. competitiveness, but CPI calls on the government to address one particular issue as a matter of urgency—escalating costs of the Renewables Obligation (R/O) and Feed-in-Tariffs (FiTS). "In 2014, the Chancellor promised additional support for electo-intensive industries to offset the cost of these measures. This support needs to be implemented immediately. Without urgent action, more energy intensive installations are likely to close with the consequent loss of jobs and wealth creation," CPI noted.

The research undertaken by CPI compared costs actually paid for electricity by industrial users in the different countries. It used data supplied by Member Companies that operate installations in both the U.K. and Germany and takes actual electricity costs drawn from bills after the application of all relevant charges that affect the price paid.

  

The results reveal that in 2011, the cost of grid electricity in the U.K. was only around 5% more than that actually paid in Germany—a differential that has grown rapidly, so that by 2014 the cost of electricity for U.K. electo-intensive industries had risen to around twice that paid in Germany.

  

A number of contributing factors, CPI pointed out, emerged during its research:

• Differing levels of support for industry. While both Countries have developed polices to support low carbon generation, Germany has acted to protect its manufacturing industry from increased costs to the maximum level allowed under EU rules--the UK has not.   
• Impact of the EU’s Emissions Trading System. The EU ETS applies equally across all member states and both the U.K. and Germany offer support to offset the cost impact on EU approved electro-intensive installations. However, in Germany all papermaking installations are automatically entitled to compensation—in the U.K. an additional Gross Value Added impact test is imposed. 
• Impact of the Carbon Price Floor (CPF). The U.K. alone has imposed an additional carbon tax on generators, which does not apply in Germany—the rate almost doubling in April 2015 from £9.55 to £18.08 (per metric ton of carbon dioxide). Around two thirds of this cost is repaid in compensation to U.K. paper mills that pass the 5% GVA impact test—so leaving around a third of the cost to be met by the industry. The U.K.’s continued dependence on fossil fuels in power generation means that the CPF costs are passed through in all market traded electricity.  
• Taxation negating the potential cost advantage of lower global coal and gas prices. As well as the direct cost impact of CPF taxation, it also serves to deter U.K. generators from taking advantage of global reductions in the price of coal and gas, so driving up U.K. costs and signalling long-term higher prices for U.K. industry.
• Rapidly growing cost of support policies for renewable generation. The cost impact of the RO and FiT increased from around 1.2p kWh to 1.6p kWh in the current year, with further cost increases expected. While the government has promised to address this issue for electro-intensive industries, nothing is expected before next year and it is not clear how many installations will be supported.
• Distribution costs. The National Grid is currently in the process of upgrading and reforming the high voltage distribution grid to cope with increasing amounts of renewable energy coming from areas with little existing generation equipment. These costs are passed through to customers.

David Workman, CPI director general, said that "we can only reverse the decline of papermaking here in the U.K. if industry leaders decide that by investing here in the U.K., they can operate competitively—otherwise the rational decision is to invest elsewhere and export product to the U.K. With energy being one of the key production costs, internationally competitively priced electricity is a prerequisite for a successful industry. Current government policies are manifestly not delivering competitively priced electricity for industrial users—an unsustainable situation in the longer term."

For more information, contact Emma Punchard, director of communications.