Reform of the EU ETS, energy security and price volatility present a cocktail of risk for major energy users, according to British Ceramics Federation chief executive Laura Cohen.
Although wholesale energy prices have been low and relatively stable, Cohen agrees that there is potential for “very high volatility”, given geopolitical uncertainty and local concerns around electricity security in the UK.
“The issue is not just a physical gas or electricity interruption but the possibility of a gas or electricity price spike as well – and prolonged spikes at that,” she says.
Emissions trading risk
However, Cohen believes the biggest risk facing energy intensive industries is reform of the EU Energy Trading Scheme. While the reforms will affect the scheme post-2020, key decisions on its future will be taken this year. The outcome could have significant cost implications.
The main risk is inadequate carbon leakage protection post-2020 reforms. Cohen says that has “very large possible cost increases indeed. Decisions taken this year about the nature of those reforms will have very profound consequences on our members.”
Key concerns around tiering of free allocations could mean “even world class energy efficient installations may possibly have to buy all or most of their carbon [allowances] after 2020,” says Cohen.
That could be compounded by increasing carbon prices in the longer term, particularly if Europe finds its way back to economic growth, as prioritised by the European Commission.
Energy taxes and policy cost protection
The government announced late last year that it had State Aid approval to protect energy intensive industries from the cost of climate change policies. But there are doubts over how many companies will actually benefit as the Treasury seeks to limit the cost.
Arguably, the State Aid guidelines allow the government to protect a much larger pool of companies than currently envisaged. It has set via a challenging electro-intensity test.
Cohen would not be drawn on how many member companies might receive protection, nor government’s approach. However, she admitted that many members would be left at a disadvantage compared to European competitors.
“The type of companies that might benefit are those with an electric arc furnace [operating at] 2,750 degrees C – they will get the compensation. And if they don’t there is something very wrong with the system,” said Cohen.
While the outcome of Treasury’s review of energy taxes remains an unknown, most commentators feel that streamlining the taxes, while potentially reducing administration, is unlikely to result in lower taxes.
Cohen says that the two risks are linked. “The headline [here] is that UK climate related charges remain unmitigated for the bulk of UK industry compared with competitors. And for some, it is the potential increase in climate change levy charges that may result from the business energy taxes review.”
While National Grid plans to rapidly scale demand side response, Cohen says many energy intensive industries, particularly her members, are unable to participate.
“While some members might be able to make a demand side response for part of their process, many operate continuous high temperature processes and will not be able to do so.”
Even those with batch processes will struggle, she believes.
“If you are running a 12-hour batch process at over 1000 degrees centigrade, you will need to run it. You can’t just shut it down half way through,” says Cohen. However, she welcomes the push from National Grid: “We need effective measures for others [i.e other industry sectors] to be able make a significant demand side response to ensure that there is the physical security of supply on the system as a whole.”
Inadequate innovation funding
However, Cohen believes that “significant” technological advancement will be required to achieve the drastic emissions reductions necessary under the Climate Change Act. She outlines a final, more forward-looking risk to consider:
“There is a risk, particularly in a cash constrained government, that there will be inadequate funding for significant radical technology development and implementation,” she says.
“Yes we can continue implementing best available technology, which will help. But to get the really radical emissions reductions necessary under the Climate Change Act we are going to need significant step changes in technology.”
This article was first published in the new Directors’ Energy Report 2016, which outlines the energy risks and opportunities facing businesses in 2016. It also contains full survey data from our poll of 51 directors and senior managers on energy and energy efficiency plans for the year ahead. Download it here free of charge.