The government’s attempts to shield energy-intensive industries from higher energy costs brought on by environmental legislation are coming under attack from all sides. Last month, MPs said a proposed £250 million compensation package for heavy users – designed to offset costs from the European Union Emissions Trading System (EU ETS) and carbon price floor – must be altered because it failed to take account of profits made from emissions permit over-allocations.
More seriously perhaps, the EU is considering an investigation into whether energy-intensive user exemptions from the cost of green energy developments – resulting from renewable price guarantees – break the rules on state aid to business. This could threaten UK exemption plans before they have even left the drawing board.
The EU’s move was precipitated by complaints from smaller energy users in Germany, where such exemptions have been in place for many years. Commenting on the possibility of a similar move from small businesses in the UK, a spokesperson for the Department of Energy and Climate Change (Decc) says: “We will be consulting on the scope of the exemption, including who will be eligible, early this year, so we can’t say at the moment who might be exempt and how small businesses may view this.”
As far as smaller UK users are concerned, John Walker, national chairman of the Federation of Small Businesses (FSB), says: “The cost of energy is becoming a make or break issue for small firms, and any policy that is likely to further increase small firms’ energy bills is unw elcome news. The FSB will monitor with interest the scope of Decc’s proposals for the exemptions for energy-intensive industries to see how small firms could be impacted. We believe reform of the electricity market and investment in low-carbon energy generation should not unfairly penalise our members. It needs to go hand in hand with real changes to the retail energy markets to ensure small firms get the fair deal they deserve at the hands of the big six energy companies.”
The Decc spokesperson acknowledges that exempting heavy users would “result in a slight increase in electricity costs for other users, compared to not exempting energy-intensive industries”. However, she adds: “Overall the reforms we are proposing for the electricity market could mean consumers benefit from lower electricity bills by the end of the 2020s, compared to what they would have been otherwise.” She says the full impact on customers will be determined by the scope of exemptions, and that these are expected to take effect when Electricity Market Reform is implemented in autumn 2014.
The spokesperson insists Decc is working closely with the European Commission “to ensure that our policies and any exemptions are compliant with state aid rules”. The UK government has said it is opposed to any European interference, claiming important energy-intensive industries would simply relocate to other countries if exemptions were not made.
The UK government’s green plans include long-term market-related contracts for difference, which will be signed with developers of new green power capacity, providing “a stable rate of return designed to give certainty and support technologies that are further from the market”, according to Decc. The costs will be levied on energy suppliers, which are expected to pass these on to consumers. Exempting energy-intensive industries from these costs will help British firms compete internationally, while supporting global emissions reductions.
Germany’s Bundder Energieverbraucher (Association of Energy Consumers) placed two complaints with the EU last autumn, claiming German exemptions mean its members are unfairly having to foot the whole bill for green capacity expansion. If the EU finds in favour of the German association, it will be an awkward decision for the UK, which has to abide by the same European anti-trust laws, and whose proposed exemption policy is similar to Germany’s.
Europe’s powers include the ability to force national governments to change the law and claim back money from the companies that benefited. However, the EU has not yet committed to a formal investigation, stating that at this stage it is simply assessing the implications in terms of state aid, in particular for electricity repurchasing tariffs and for the exemptions of large-scale energy users, and discussing the issue with German authorities.
While the exemption plan has implications for the price of energy to other consumers, the £250 million compensation package criticised last month does not. Here, the primary aim is to use government money to compensate heavy industry for additional costs from the EU ETS and carbon price floor, produced as generators burn fossil fuels. From 2013, the UK will impose a minimum price of about £16 per tonne of carbon dioxide, well above the current price in the EU ETS of around €7 (£6).
With consultation now complete, Parliament’s Environmental Audit Committee (EAC) has insisted that the plan is altered to avoid compensating energy-intensive industries, when the same companies are making windfall profits from over-allocation of emissions allowances. If the criticism is accepted, any compensation must take into account each company’s surplus carbon allowances before awarding any cash.
Joan Walley, chair of the cross-party committee that produced the report, says: “I welcome the government helping energy-intensive companies cope with additional carbon price rises to stop them moving jobs abroad. But it shouldn’t throw good money after bad by giving compensation to those already making windfall profits from the EU ETS when allowances were allocated free of charge.”
None of the proposed compensation extends to the price difference between natural gas and other fuel types in Europe and elsewhere such as the US – where natural gas is about a quarter of the European price. Faced with such large fuel price differentials, heavy users are already under pressure to move overseas, even without additional costs from green development. As many competitor economies currently show no serious commitment to decarbonise, the UK and other EU energy-intensive industries will be at an even greater disadvantage if they press ahead without exemptions.
If enough big users shut up shop and move to locations with cheaper energy, utilities could see demand for power fall in a UK market already struggling as a result of weak economic growth and Europe’s financial crisis. Although the criticism of exemptions is widespread, even most environmentalists agree that big energy consumers must be encouraged to remain in the country because they provide the industrial capacity needed to support and develop a low-carbon economy.
As the bills for green development across Europe continue to grow (Germany is expected to spend more than £15 billion in green energy subsidies in 2013) the debate over who pays is likely to get still livelier.
Jeremy Bowden is a freelance journalist
This article first appeared in Utility Week’s print edition of 1st February 2013.
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