562. UK EIIs are facing uniquely difficult challenges to decarbonise, especially as they generally compete in international markets. They are comprised of manufacturers in aluminium, cement, chemicals, glass, steel, paper, and other manufacturer who require a lot of energy to produce their products.
563. The opportunities from the transition cannot be realised without competitive energy prices, measures to mitigate the risk of carbon leakage and Government financial support in innovation and large-scale decarbonisation demonstrations.
"Higher energy prices are one of the main challenges and obstacles to the industrial decarbonisation. . . Security of energy supply is an absolute condition to decarbonise. Without security of energy supply, energy intensive industries are unlikely to have to confidence to make the investment necessary to reach the net zero target.
".The main challenge of carbon pricing is its impact on competitiveness. High UK carbon prices and reduced allocation of free ETS allowances, will increase the risk of carbon leakage and reduce availability of capital to invest in decarbonisation.
".commercialising these opportunities depend on Government putting a stable and regulatory framework in place, providing finance to de-risk large demonstration projects and facilitating knowledge sharing of new technologies and financial products." - Energy Intensive Users' Group and Manufacturers' Climate Change Group397
564. These sectors are facing higher energy prices and higher prices than their competitors. EIIs are particularly susceptible to currently high energy prices; in industrial processes where fuel is consumed for energy, such as boilers and furnaces, fuel costs contribute over ten times as much to the total cost over the lifetime of the equipment as the capital investment costs.398
565. Due to the UK's relatively high reliance on gas for electricity generation and the higher cost of generation from gas (as compared to generation from coal, nuclear or renewables), wholesale electricity prices in the UK have been higher than in key EU competitors such as Germany, France, and the Netherlands. The UK offers relief for some energy intensive businesses; however, the support offered in EU countries is greater, hindering UK EII businesses' international competitiveness.
566. The technologies to decarbonise manufacturers already exists. McKinsey finds that about half of industrial fuel consumption can be electrified with technologies and processes available today. Despite electricity prices doubling since 2020 while gas prices increased fivefold, electricity prices remain significantly higher than gas prices.399
567. International solutions will likely be important for these sectors: a small number of economies import a large proportion of global steel, and fewer than ten countries dominate the world's steel and cement production.400 Taking an active role in establishing the future global market for clean steel in the long run should be one of the UK's ambitions.
568. The Review has heard from EIIs and their concerns over the impact of the carbon price support mechanism, the renewable levies, network charge arrangements and uncertainty over the future of ETS and carbon leakage policy. This is about remaining competitive internationally.
569. Any development of the UK ETS carbon pricing regime should consider the risk of carbon leakage and ensure that sufficient mitigation measures are in place. As set out in Pillar 6, Government should work within the UK ETS Authority to develop a pathway for the UK ETS until 2040. As part of this, the Government should be engaging with EIIs to help alleviate the concerns listed above.