Delivering competitive industrial electricity prices in an era of transition

Following the Government’s recent strategies on industrial decarbonisation and hydrogen, the Aldersgate Group have today launched two major publications from UCL and Frontier Economics calling for a more detailed policy framework to drive low carbon investment in heavy industry. 

The UCL policy briefing “DELIVERING COMPETITIVE INDUSTRIAL ELECTRICITY PRICES IN AN ERA OF TRANSITION” summarises and updates the detailed insights and policy recommendations described in our previous report for the Aldersgate Group, ‘UK Industrial Electricity Prices: Competitiveness in a Low Carbon World’ published in February 2018. While the 2018 report focused on 2016 data, this briefing examines data for 2019.3 Key changes to electricity prices, their drivers and future prospects are examined, and policy recommendations to moderate prices and drive convergence.

Based on significant engagement and case studies from several industrial sectors, these two papers present tangible solutions to accelerate the decarbonisation of UK heavy industry in a way that will drive innovation, increase competitiveness, and create jobs across the country. 

Heavy industrial sectors like steel, cement, glass, and ceramics are essential to the UK’s economic prosperity, contributing £170bn to the UK economy and directly employing nearly 3 million people across the country. As the UK transitions to a net zero economy, heavy industrial sectors will be fundamental to providing the building blocks for low carbon infrastructure, goods and services. They also have a unique opportunity to develop new competitive advantages and expand into new markets during the net zero transition. 

Despite some welcome commitments in the Government’s Industrial Decarbonisation Strategy and Hydrogen Strategy, a more comprehensive and ambitious plan of action is urgently needed to deliver cuts from industrial emissions at the pace and scale demanded by the UK’s net zero target. 

Backed by extensive engagement with industry representatives from manufacturing sectors such as steel, cement, glass, ceramics and chemicals, today’s publications put forward specific recommendations to scale up innovation, roll out supporting infrastructure and accelerate low carbon investment in industrial clusters and dispersed sites (Frontier Economics). They also feature proposals to tackle the investment and competitiveness barrier created by high industrial electricity prices, which is slowing down efforts to electrify and decarbonise parts of industry (UCL).

However, the UK has significantly higher industrial electricity prices than European competitors. With electrification key to industrial decarbonisation, delivering low cost and low carbon electricity is essential. Seizing the opportunity provided by the rapidly declining policy costs of renewables must be a priority. 

Key recommendations from this policy briefing include:

1. Maintain an efficient framework to accelerate investment in the cheapest forms of mature renewable energy such as onshore wind, accompanied by a predictable, rising carbon price to reduce investor risk. Offshore wind should be further supported with investment in surrounding supply chains and infrastructures such as ports.

2. Establish an integrated approach to network development, funding, and pricing. Independent Future System Operator Objective(s) should include more coordinated oversight of future generation and network developments, to minimise costs and facilitate the power sector’s transition to zero emissions.

3. Support continued growth of interconnection (through Ofgem’s cap-and-floor revenues system) and offshore grid development and reduce friction in electricity trade. Each 1GW of interconnection capacity can reduce UK wholesale electricity prices by 1-2%, by making low cost, low carbon imports available and increasing variable supply and demand. The government should seek to restore UK participation in the day-ahead electricity markets with neighbouring EU countries, the absence of which is estimated to result in £45 million in lost trade in 2021.

4. Establish a market for long-term, zero carbon and tradable electricity contracts, grounded in the declining cost of unsubsidised renewable electricity sources. These contracts would mitigate the indirect costs of carbon prices, and the volatility of fossil fuel prices.

5. Investigate options for moving some policy costs from electricity prices to gas prices over time, with interim competitiveness support for major gas users unable to electrify or transition to low carbon fuels in the short term. This will incentivise electrification and more evenly distribute the costs of the low carbon transition, while ensuring industry has the appropriate support to remain competitive.

6. Improve scrutiny and transparency of reported electricity price data. In order to effectively assess the degree to which electricity prices faced by UK industrial consumers are changing, both over time and relative to international competitors, reliable data is crucial. As part of Quality Assurance we recommend a review of how this data is requested, collected, and reported by BEIS

Michael Grubb, Professor of Energy and Climate Change at UCL Institute for Sustainable Resources, said:

“The UK electricity system has already undergone part of its low carbon transition. Thanks in large part to carbon pricing, coal is no longer significant – and that in itself reduces the impact of carbon costs on UK electricity prices. But industry is still carrying the legacy cost of building up renewables, which are part of the larger energy transition. Those costs could be spread more evenly, and in particular, reforms are needed to ensure that industry can benefit both from access to the now-cheap renewables, and from smoother participation in the capacity market.” The UK electricity system has already undergone part of its low carbon transition. Thanks in large part to carbon pricing, coal is no longer significant – and that in itself reduces the impact of carbon costs on UK electricity prices. But industry is still carrying the legacy cost of building up renewables, which are part of the larger energy transition. Those costs could be spread more evenly, and in particular, reforms are needed to ensure that industry can benefit both from access to the now-cheap renewables, and from smoother participation in the capacity market.”

 Paul Drummond, Senior Research Fellow at UCL Institute for Sustainable Resources, said: 

“Historic investment in the deployment of renewable energy technology, and the substantial reductions in cost it produced, now presents the UK with a clear opportunity to both reduce the high electricity prices faced by energy-intensive industries relative to many of continental neighbours, and emissions reduction through increasing electrification. The government must make sure a clear, long-term policy architecture is in place to encourage investment in increasingly subsidy-free renewables and grid interconnection, and effective and efficient markets in electricity trade and system balancing.”

Key Findings
The key findings of these reports were discussed at a launch webinar on 9 September from 9.30am to 11.15am, featuring presentations from Matthew Bell at Frontier Economics and Michael Grubb at UCL, as well as contributions from a multi-sector business panel. 

Links

• Key recommendations can be found in The Aldersgate Group’s report, commissioned from Frontier Economics, Accelerating the decarbonisation of industrial clusters and dispersed sites. Press release and report downloads are available here
• The Aldersgate Group’s briefing, commissioned by UCL, Delivering competitive industrial electricity prices in an era of transition, is available here

UCL Authors

• Michael Grubb
• Elsa Barazza 
• Paul Drummond