Energy
Energy costs remained a key concern for the sector in 2011 as commodity price increases passed through to customers. All Members reported higher energy costs, with increases of up to 60% in the extreme. While a serious concern, the cost of raw energy is essentially global in nature, meaning increased costs are faced by competitors irrespective of location. Indeed 2011 saw massive political pressure on the UK’s ‘Big Six’ energy suppliers, with the spotlight being trained on their propensity to pass through increased costs quickly, while being much slower in passing through price cuts.
Looking ahead, the oil market remains tight, while by contrast the gas market is quickly evolving with new supply lines and reserves starting to reach markets. Indeed the future of gas is subject to intense debate as the potential of new sources starts to be realised, with prices in North America falling quickly. One of the roles for CPI in 2012 will be to lobby for a continued fair gas market in Europe and resist attempts by the gas industry to index its prices to oil.
European policies still strongly support the development of renewable energy, though increased attention on the cost to customers seems finally to be having some impact with the scale of subsidy under review. However, the UK Government remains committed to lead the way in carbon reductions with the required subsidy covered mainly through increased energy bills.
As in previous periods of energy uncertainty, attention has focused on energy efficiency and this will continue to be a key issue in 2012 as new targets are set for the next phase of the sector Climate Change Agreement.
European Union Emissions Trading Scheme
A major success for Energy Intensive Industries (EIIs) is an acceptance at European level that additional carbon costs imposed within the European Union will have an impact on international competitiveness. This means that under the European Union Emissions Trading Scheme (EU ETS), free allowances for heat use will continue to be received, though not for electricity use, with the level of allowances set by benchmarks using historic production levels.
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Assessing and verifying data to set free allocations from 2013 was a major piece of work during 2011, with indicative allowances now largely set. The overall outcome sees the sector likely to be around one third short of its actual needs each year, meaning another level of additional cost.
Carbon Price Floor
While the Government joined in the criticism of the large energy companies, it has been far more reluctant to accept the impact of its own policies in leading to higher energy costs.
With many of the older coal and nuclear power plants coming to the end of their lives, the need to replace a high proportion of the generating fleet means large investment costs over a number of years, with higher bills for users of grid electricity seemingly inevitable.
The Government is determined that new generation will be predominantly low carbon, with policies being devised to drive investment. The Renewable Obligation is currently under review, reflecting the quickly changing realities of policy cost; the dramatic cuts to support for small scale solar photovoltaics has highlighted how uneconomic and unaffordable some technologies actually are.
Of particular concern are the Carbon Price Floor (CPF) proposals through which a new tax - Carbon Price Support (CPS), will be imposed from April 2013. CPS will be levied on the fossil carbon content of fuel used to generate electricity. The ‘innovative’ tax is designed to guarantee a minimum price for carbon in the UK, made up by a combination of the cost of the EU ETS allowance plus the new CPS. While this additional cost is intended to provide higher returns for owners of low carbon generation plant and so encourage new investment, the additional income will ultimately come from users of grid electricity through higher costs. As a UK only policy, this quickly increases the cost of CO2
from £16
per tonne in 2013 to £30 per tonne by 2020. The impact will be to guarantee high carbon prices in the UK that are likely to be higher than elsewhere in the European Union. With no global agreement on carbon savings these costs will be much higher than those faced
Paper - the sustainable, renewable choice
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