UK industry weighs up impact of carbon support on electricity demand

Energy suppliers and experts have expressed conflicting views over the extent to which energy bills and carbon price support will impact the UK’s heavy industry, potentially diverting production to countries with less onerous energy costs and cutting demand from energy intensive users in the process.

Some market participants have argued that the potential shift of energy intensive production away from the UK could have a significant softening effect on power demand in the coming years, which would act as a bearish driver for far curve UK wholesale electricity contracts.

According to the Digest of UK Energy Statistics published by the Department of Energy and Climate Change (DECC), heavy industry made up 26% of total power demand across the UK during the whole of 2013, the most recent year for which figures are available.

The industry types included in the category are engineering, iron & steel, paper, food, and chemicals.

And one energy consultancy specialising in the procurement of energy services for businesses believes that the rising cost of energy bills over the longer term exacerbated by emissions related taxes could cause an exodus on a scale sufficient to noticeably dampen power demand.

“Demand will continue falling off a cliff,” said Inspired Energy risk analyst Andrew Curry.

“We’ve been in discussions with a large multinational, which is shifting production of certain products to other countries, with a view to shutting UK facilities.

“If things don’t change, they will move,” Curry said, adding that the sentiment has been echoed by other industrials.

Sceptical

However, one trader for another supplier was more sceptical of a widespread flight in the face of rising energy costs.

“We are seeing the opposite,” he said. “We have lots of Chinese investors buying up property and we are supplying power to them. These are offices that were otherwise unused,” he said.

Figures from DECC do however suggest that industrial power demand tapered off during the course of 2014, with figures across the first three quarters of the year revealing reduced demand comparative to the quarters in 2013.

UK manufacturing activity also reached a three-month low in December, according to figures from the Markit/CIPS Purchasing Managers’ Index released earlier this month.

But the UK manufacturers’ organisation EEF has warned against overstating the dissatisfaction of its members with current energy costs, despite harbouring clear concerns that the UK’s carbon price floor in particular is hampering competition with other EU markets.

“It’s inconceivable that any company would leave purely over energy prices,” said EEF’s senior energy policy advisor Richard Warren. “We’re not anticipating any large-scale move of production any time soon,” he added.

Warren added that despite this April’s doubling of the UK’s carbon price support rate – a top-up tax to the EU’s emission trading system imposed on fossil-fuelled power generators that has added a premium to forward wholesale power contracts – 70% of energy intensive industries are shielded from these costs through compensation.

Too high

But yet Warren believes the increase in carbon price support to £18.08 (€23.34)/tonne CO2 equivalent (tCO2e) in April is too high when compared to the costs paid by European power generators through the emissions trading system.

The December ’15 EUA Benchmark was trading at just €7.30/tCO2 on Wednesday afternoon.

And a survey conducted by EEF of its members last July revealed that 53% of UK manufacturers believed an increase in electricity bills of 50% until 2020 would have a “noticeable impact” on competitiveness.

25% of respondents said they would even consider investing in facilities outside the UK.

But Warren added that the likely dampening of peaks prices in the coming years as more flexible generation enters the system through capacity payments will act as an added incentive for producers to stay put.

Market sources have also cited increased deployment of energy efficiency measures, technology and public awareness as an expected bearish influence on domestic power demand over the next few years. Henry Evans