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Why high energy costs for production in the UK pose a big threat to net zero

Lack of political support to boost green heating for large businesses threatens UK jobs and economy, studies show

The global gas crisis, which has caused energy bills in the UK to rise sharply, has highlighted for most experts the benefits of cheap, clean energy sources backed by efficient measures and well-insulated buildings to help avoid such surges.

And despite its detractors, the government remains firm in its commitment to renewable electricity as a key part of the solution to enhance the UK’s energy security and reduce costs and emissions in the long run. Last week, it announced plans to speed up the focus on renewables by holding its flagship clean energy auctions annually rather than every two years since, backed by hundreds of millions of pounds.

However, even in the current crisis that is increasing the cost of gas heating, many large UK businesses, manufacturers and energy-intensive industries are struggling to decarbonise their heating supplies due to the lack of available low-carbon and scarce alternatives. government support.

That, at least, is a statement a fresh study this week from consulting firm Cornwall Insight, which warns that without major reform, British industrial and manufacturing firms – a key source of carbon emissions – will struggle to move to zero. And as a result, these firms face rising costs from unsustainable gas supplies in the short term, and risk losing in the long run cheaper, more environmentally friendly operators elsewhere as the transition to net zero accelerates.

The current situation, it is warned, could also lead to so-called “carbon leakage” when manufacturing and industrial needs are sought outside the UK, where energy and labor are cheaper but where environmental and climate standards are potentially weaker.

“These higher costs will make production in the UK unattractive and could open up these sectors for imports from international sites with lower production costs, leading to job losses and economic activity,” the report said.

The report was prepared in partnership with the Confederation of the Paper Industry Confederation (CPI), but emphasizes that many of the issues outlined “can be applied and reflect the experience of other energy-intensive industries” such as chemicals, cement, ceramics, glass and metals.

Much of the problem, it is argued, is that while gas prices are now high almost everywhere, in the UK also electricity prices for large consumers are among the highest in Europe. As a result, businesses have no incentive to invest in alternatives to gas heating – such as electricity or hydrogen – explains Cornwall Insight consultant Tom Andrews, one of the lead authors of the report.

“Decarbonisation of heat is a key element of the UK government’s zero program and has been proposed as a means of reducing emissions while stimulating economic growth,” he says. “However, the lack of political support to reduce the gap between electricity and gas prices makes decarbonisation of heat for energy-intensive companies currently unprofitable.”

Many in the green economy – including Cornwall Insight – have advocated shifting green policy spending, which is now paid through electricity bills at home, to gas bills or, indeed, through general taxation. They argue that the current approach is a fine for the grid, which is much further down the path of decarbonisation than the gas grid, which needs to be pushed harder to reduce emissions.

But while this approach could help increase the cost to households of switching from gas boilers to electrified heating systems – indeed, studies this week show that currently efficient heat pumps may be cheaper to operate than gas boilers – The situation is “more nuanced” for big business and energy consumers, the report says.

This is because some companies are already getting significant exemptions from some major policy costs and taxes on electricity and gas, and thus any reduction in these costs will have “a much smaller impact on the business rationale for heat electrification,” it explains. .

In any case, he points out that because many investment decisions are made on the basis of 25 years or more, any policy cost exemptions are not “banking” enough for large firms to justify investing in more environmentally friendly heating alternatives for such a long time. period, due to the risk of policy change.

Thus, much greater policy action is needed to support big business in the transition from high-carbon gas to low-carbon electricity in the short term or hydrogen in the long run to decarbonize their heat supplies, Andrews said.

“Given that electricity prices are about six to seven times higher than current gas prices, we will need to see a significant reduction in electricity prices and increased policy support to keep operating costs the same and heat decarbonisation realistic. option, ”he says.

So is this a solution? Well, there may be many potential levers that governments and businesses could use in hopes of making low-carbon heating a more attractive investment, but there is not a single silver bullet, the report suggests.

It outlines a number of potential options, including encouraging the use of corporate power purchase agreements (PPAs) that offer a fixed price for energy directly to companies for a period of potentially 10 years, thus protecting against volatile markets even if they offer no discount.

In the long run, grid charging reform could also help reduce the cost of major energy consumers in the UK, which is currently facing the highest electricity costs in Europe, and could change the balance of gas and electricity costs and lift electricity cost policies. bills, as noted earlier.

And perhaps the most attractive proposition is a policy mechanism potentially modeled on difference contracts that have been so successful in cutting costs and expanding wind, solar and other clean energy technologies. The use of such a market scheme will require new legislation and funding from the government, but will provide much-needed financial support and incentives to provide low-carbon heating – such as electric heat, hydrogen or district heating – on a large scale for energy-intensive industries.

“Each of these ideas alone will not be enough to provide a path to decarbonisation for energy-intensive industries,” the report said. “In fact, a number of these measures, working together, can provide a potential solution.”

Clearly, the government is currently facing a serious challenge to insulate businesses and households from the high costs of the current crisis, and to stimulate the transition to lower-carbon heating in the medium and long term.

“We remain committed to the decarbonisation of our energy-intensive industries, providing more than £ 2 billion in assistance since 2013 to make electricity costs more competitive,” the Department of Business, Energy and Industrial Strategy (BEIS) said in a statement. “We are actively supporting innovation to help the industry switch to low-carbon fuels, and help businesses get the initial cost of installing or upgrading industrial equipment on site through the Industrial Energy Transformation Fund of £ 315 million.”

The stakes, however, are unlikely to be higher. According to Andrews, the current market, regulatory and political environment “does not provide great incentives or commercial opportunities for large and energy-intensive enterprises to fundamentally change their main sources of heat production.”

“Without change,” he warns, “any shift from gas to electricity risks risking costs for British businesses in the international arena, potentially increasing imports from those international sites with lower production costs, with a corresponding impact on the UK’s economic output.” “

Major industries and manufacturers are crucial to the UK economy and its transition to pure zero. They directly support 210,000 jobs and provide an economy of £ 29 billion, as well as emitting around 10 per cent of CO2 emissions in the UK and consuming 12 per cent of non-domestic electricity.

However, they face huge energy costs in the short term and have no incentive to invest in lower alternatives to carbon heating – a situation that puts long-term competition in the UK plc at serious risk. Clearly, the right energy policy environment for heavy industry should be a top zero priority for the next decade and beyond.

 

Want to learn more about how going to zero will affect your business? You can now register to participate in the virtual Net Zero Financial Summitwhich will be broadcast live and online on Tuesday, March 29, and will be available to delegates upon request after the event.

https://www.businessgreen.com/analysis/4045208/energy-costs-uk-manufacturing-poses-major-threat-net-zero Why high energy costs for production in the UK pose a big threat to net zero

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