The Green Transition: Nerves of steel
Weekly analysis of the shift towards a new economy.
Dear Readers,
A (very belated) Happy New Year from the Spotlight on Policy team, here with a great new edition of the GT to brighten up your dry January.
Rachel Reeves staked her political reputation (as well as the all-important figures for departmental budgets) on her ability to locate the giant lever labelled “economic growth” somewhere in Number 11. Boxing herself in against further tax rises and more borrowing, the Chancellor’s ability to deliver much-needed, sustained fiscal injections for ailing public services was staked on accelerating economic activity and boosting Treasury revenues with an altogether rosier GDP outlook.
But the former Bank of England economist is discovering the nature of best laid plans: growth is proving just as elusive under Labour as it was under the Conservatives, and it’ll take more than a couple of speeches about “planning”, “supply-side reform”, or “partnerships” to jolt us out of more than a decade of secular stagnation that has plagued us since – give-or-take – the 2008 crash.
Global bond markets are having a hissy fit. Britain is left in particular muddle as inflation remains a worry, growth slows, fiscal headroom evaporates, and employers freeze hiring and investment plans as confidence declines and new payroll taxes bite.
All this, of course, is bad news for green industrial policy and the net zero transition, which will require public and private investment on an almost unprecedented scale. Since Labour came to office, humiliating job cuts in traditional, manufacturing industries have made more headlines than a much-vanuted “green industrial renaissance”: the closure of Grangemouth oil refinery; rescues of Harland and Wolff by the Spanish state; and continued job losses and existential crises across the UK steel industry.
The latter, totemic sector, is the subject of a great guest piece this week on how a reformed energy market and local pricing could lend a lifeline to a steel industry that is continually beset by sky-high energy prices. It’s author, Jack Richardson, is Octopus’s head of policy, and was formerly an (apolitical) policy advisor to the Energy Secretary, as well as previously heading up the Onward think tank’s work on energy. Safe to say he know his stuff.
Lets get right into it.
Nerves of steel
Last week, the government’s new Steel Council met for the first time. Its purpose? To forge a steel renaissance in the UK through modernisation and decarbonisation.
Backed by a £2.5 billion rescue fund, the Steel Council will advise on a new Steel Strategy, which aims to prevent recurring crises in the industry and to facilitate the continuation of British steel production by modernising the sector.
But if this is to work, electricity markets also need modernising, because steel production requires affordable electricity. Without competitive electricity prices, British steel mills and other energy intensive industries will stop operating altogether, compounding an already bleak economic situation.
Steel is essential to modern life. We each use around 200kg per year. It’s irreplaceable in construction, automobiles, home appliances, infrastructure, shipping – very few cogs in the global economic machine aren’t touched by steel.
But making it requires an incredible amount of energy. The energy traditionally came from burning coal, the dirtiest of the fossil fuels. Just two furnaces, in Port Talbot and Scunthorpe, account for about 2.5 per cent of the country’s greenhouse gasses. Or at least they did until Port Talbot temporarily shut down last year to make the switch from coal to an electric arc furnace.
While some have claimed the switch is simply down to net zero mandates, the truth is that Port Talbot’s owners, Tata, decided that changing to an electric furnace (which already produce 70 per cent of American steel) was the best bet for a profitable future.
But there’s a problem. Electric furnaces need lots of cheap electricity, something Britain doesn’t have right now. Our industrial electricity prices have tripled since 2010. They are now the highest in the world.
Why? One reason is that high, volatile international gas prices influence our electricity costs. So we need to decrease our reliance on gas imports, which is happening: wind power has just overtaken gas as the UK’s lead generator and the government plans to go much further.
Another factor that inflates day-to-day energy prices is government levies and taxes on electricity, which perversely make cleaner electricity more expensive than fossil fuels. (Spotlight’s sustainability correspondent Megan Kenyon wrote last year about how so-called “green levies” are higher for electricity than they are for gas). It must be noted, however, that the government is exempting steel mills from these levies, even though they still have negative effects on smaller customers and everyday consumers.
Thirdly, our energy system is broken. Consumers now pay billions extra each year through “balancing costs” to turn off wind and solar farms when they produce too much energy, which is difficult to store, and pay gas plants extra to turn on their “dispatchable” sources when there’s a shortfall.
If we’re to maintain a domestic steel sector in the UK, we urgently need to update our market rules, which are designed for yesteryear’s coal-powered grid. Modernising the grid by applying “local pricing” will reduce energy waste and lower prices in every part of the country. It will make the system easier to manage, which is why it’s supported by the independent energy system operator.
Our market currently has a single, nationwide zone with one electricity price. Every person and business pays the same – the highest price possible. If the same were true in housing, everyone would be paying central London rents. This is a killer for any kind of energy-intensive business, including steel.
In contrast, local pricing splits the market into more zones, with prices reflecting local energy supply and need. This would encourage companies to build new power plants and wind farms where they’re actually needed, which doesn’t happen with our current system. Today, there is only reward for building a wind farm or power plant wherever they might extract the most rent from a conked out system, rather than where they’re useful.
New steel production investment might be drawn to Scotland, which would have among the lowest electricity prices in Europe thanks to its bountiful wind energy. Existing steel mills in England and Wales would get the bill cuts they need.
Local pricing is already used in Norway, Sweden, America, Canada, Italy, and New Zealand’s electricity markets very successfully. Northern Sweden’s £71 billion industrialisation plan, which includes new steel production, is possible because of local pricing and cheap, green energy.
It’s in fact a very old, simple idea: reduce distance to cut transport costs. During the industrial revolution, steel mills next to coal pits undercut their competitors because the cost of their fuel was lower. The nationwide zone doesn’t have that basic principle.
This is life and death for our steel sector. The government is compensating industry for high energy prices by removing its green levies, and then is paying for it by taxing household energy use. But without reform the compensation will quickly be gobbled up as balancing costs rise.
This will force household bills higher, contrary to the government’s promises, and electricity costs will be unbearable for steel producers once again. Compensating for high electricity prices by taxing households’ electricity is not a long-term solution.
A renaissance in British steelmaking is possible if we follow Sweden’s example and use local pricing. The government must prioritise cutting electricity costs for the public and businesses, including big steel mills. Otherwise, the rapid decline of our manufacturing base won’t cease. To keep, let alone modernise, our steel mills, we must first modernise our electricity market.
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