An industrial strategy that might actually help industry
29 July 2016
Greg Clark, the UK’s new Secretary of State for Business, Energy and Industrial Strategy, seems to be taking the final element of his title seriously. His surprise announcement that the UK government will conduct a new review into the proposed Hinkley Point C nuclear power station project shows that Theresa May’s new cabinet understands that joined-up thinking in industrial policy will be vital in securing the country’s economic future post-Brexit.
Clark said on his appointment that he had been “charged with delivering a comprehensive industrial strategy”. The EEF, the trade body for manufacturers, said the changes demonstrated a “new, serious purpose”, while the CBI said it had long called for an industrial strategy.
The previous business secretary, Sajid Javid, was an advocate of free markets and a sceptic on the issue of government industrial strategies. He had to change his tune on this, however, when Tata Steel announced in March that it was considering pulling out of the UK, putting 15,000 jobs at risk.
Javid rushed off to Tata’s headquarters in Mumbai, subsequently announcing a package of sweeteners for the group if it kept its UK operations open, including a multi-million pound loan.
For the process industries, a key element of any future industrial strategy will be energy costs.
Britain currently has the highest in Europe, mainly because of deeply damaging decisions taken by previous governments. In the UK, manufacturers face significantly steeper green levies than in most other European countries. Germany, for example, exempts its own industry, recognising the importance of low energy costs in the continuing good health of its manufacturing sector.
In a report entitled ‘Crisis – What Crisis?’ issued in April 2016, the UK Petroleum Industry Association (UKPIA) said that the crisis facing UK steelmaking was symptomatic of much wider issues, mirrored across the whole industrial fabric.
“Government has a role to play in recognising the current and future contribution of industry and in enabling its potential and ability to operate. In particular, the issue of higher costs and the effect of the cumulative impact of environmental and other regulations must be thoroughly considered,“ the report said.
The number of UK oil refineries has fallen from 10 in 2009 to seven in 2016, with competition from countries with markedly lower industrial energy costs a major factor in those closures, UKPIA said.
Tata Steel confirmed that energy costs were a major consideration in the decision to review its UK operations. It said those costs were 25% higher than those in Germany and 50% higher than in France.
The previous Chancellor, George Osborne, did announce a tax rebate for companies facing higher energy prices in 2011, but this fell foul of EU state aid regulations and has yet to be introduced.
So any future UK industrial strategy needs to look closely at the green levy component in energy prices. These include the Carbon Price Floor and the Renewables Obligation, as well as the Climate Change Act, which commits the UK to far more stringent carbon emission targets than most other countries.
On a planet-wide basis, the existing system can even increase carbon emissions. As our own plants close because of high energy prices, we will have to import more from countries whose industries are often far more polluting than our own.
The other area that the Government needs to review urgently is the cost of future electricity generation, and this brings us to Hinkley Point C, due to be built by the UK subsidiary of French state-owned utility Électricité de France.
The agreed strike price for energy generated at the Somerset plant is £92.50 per megawatt hour (MWh), annually adjusted for inflation and fixed for a period of 35 years. This compares with a current price of £38.45.
Jim Ratcliffe of Ineos, which has 44 chemical plants and refineries around the world and is a major consumer of electricity in 10 countries, is in a privileged position to comment on this issue.
Speaking to The Times recently, he said that Hinkley’s strike price would destroy British industry.
"Forget it," Ratcliffe said in another interview with the BBC in 2013. "Nobody in manufacturing is going to go near £95 per MWh."
Meanwhile, the Finnish company Fennovoima has signed a contract with Rosatom of Russia to build a 1200 MW nuclear power plant at Pyhäjoki in northern Finland which will deliver electricity at no more than €50 (£41) per MWh.
Finland is committed to a nuclear future despite its unhappy experience with the Olkiluoto 3 nuclear power station, currently 9 years behind schedule and the subject of a bitter multi-billion euro legal dispute between Finnish utility TVO and the consortium building the plant, which includes French nuclear engineering group Areva.
One of the major problems at Olkiluoto 3 has been the construction of Areva’s EPR reactor design, which is also implicated in serious delays and cost over-runs at EDF’s Flamanville site in France. EDF is planning to use EPRs at Hinkley.
And as if price and design issues were not sufficient to discredit the Hinkley proposals, many industry observers have questioned the involvement of a state-owned Chinese group, which has a 33% stake in the project.
Security experts are worried the group’s involvement could give access to computer systems that would allow China to shut down Britain's energy production.
Chinese military hackers have been involved in many attempts to steal confidential information in Europe and the US and in early July, US media reported that 10 million Android phones had been infected with malware linked to a major Chinese company, which could not have been developed and distributed without official sanction.
So the new UK government has two immediate ways in which it can address the energy issues that will be a vital component of any future industrial policy - firstly by significantly reducing the effect of green levies on industry and secondly by scrapping the monstrous white elephant that is Hinkley Point C.
If they take these steps, Greg Clark and his Cabinet colleagues will have the profound gratitude of many in the process industries, and will have put in place strong foundations on which to base a future industrial strategy that will enable the UK’s manufacturing sector to consolidate and expand.