Industry leaders, politicians and business influencers across the Tees Valley have today joined forces to warn Government that any changes to the current UK gas transmission charging system could have “catastrophic” consequences for jobs and investment in the area.
In December 2019, the independent UK Energy regulator, Ofgem, announced plans to overhaul the UK’s gas transmission charging structure from 1 October 2020 to comply with new EU regulations.
In a significant departure from the existing regime, a large proportion of revenue recovery would be shifted from capacity-based to commodity-based charging.
The large-scale manufacturers, that chose Teesside as their home, currently receive a tariff relief due to their proximity to the North Sea and the few kilometres of the national pipeline system that gas must travel.
Also known as the short-haul tariff, it seeks to avoid inefficient by-pass of the National Transmission System by large sites located near to entry terminals. The formula to calculate short-haul charges is derived from an estimate cost of laying and operating a dedicated pipeline.
A move away from this current system will cost energy intensive process industry firms, close to terminals such as those in the Tees Valley, millions each year and impacting their ability to remain competitive.
These changes with add to the significant financial challenges already faced by industry including tariff uncertainty, compliance with EU waste incineration, wastewater directives and plastic packaging tax.
Previous calls by industry participants to introduce a more appropriate charging mechanism reflecting the costs associated with operating the transmission system for short-haul consumers have been ignored.
The impact of the proposed changes on key industries is especially difficult at a time when the UK’s supply chains are facing significant operational challenges related to the Covid-19 pandemic.
Should these changes become effective from October 2020, industry may be forced to seek alternative solutions in the form of a private gas pipeline to remain competitive and remove the risk of operations potentially locating elsewhere in Europe.
The North East is home to the largest single cluster of process, chemicals and energy companies anywhere in the UK, and the second largest in the whole of Europe.
Together the multinational companies, that call the North East their home, manufacture 50 per cent of UK foundation chemicals and a third of UK pharmaceuticals – bringing more than £2.1 billion of value to the region each year.
They are the industry of industries, employing 39,000 people locally. Tens of thousands of jobs within the region’s downstream chemical-using industries – including healthcare, electronics, automotive and textiles – rely on its continued success too.
Philip Aldridge, CEO, NEPIC: “As an industry we must remain competitive to ensure our long-term future – and seek certainty in uncertain times. These proposed changes only bring more uncertainty and additional significant costs to Teesside manufacturers that they can ill afford at a time when they are most vulnerable due to the current economic climate.
Government support is vital to the long-term viability of this important industry. We are an industry that underpins thousands of businesses and jobs, and that can make change for the good, and ensure we leave the environment in a better condition for generations to come. Our foundation industries must be protected, or we risk losing the downstream industries which depend on them.”
Alex Cunningham, Stockton South MP : “This is not protecting the interests of a group of a significant tranche of gas consumers in the north east of England – firms that make a substantial contribution to the national economy in terms of the export value of the products they make.
Driving through this change to meet EU regulations after we have left the EU, seems illogical, especially given the severity of the regional impact for key manufacturing industry. It is an investment that regional industry shouldn’t need to make, cannot afford and that doesn’t benefit anyone – including the domestic consumer, to meet legislative deadline that doesn’t even apply post Brexit.”
Andrew Large, Chair, Energy Intensive User Group: “Ofgem are out of step with other regulators such as the Environment Agency, who have taken a much more pragmatic view of the pace of regulatory change during the pandemic. Moreover, the Ofgem proposals are botched. What is being introduced is only part of the package of reforms, and there is a consensus of a need to make other reforms as well, including a replacement for the current Shorthaul tariff. It is unreasonable for Ofgem to proceed in the middle of a pandemic with only half a reform, which is going to have such damaging effects on the competitiveness of energy intensive businesses. “
David Mitchell, Senior Energy and Climate Change Executive, Chemical Industries Association: “It will lead to a massive increase in charges for many of the largest industrial users of gas who are key to decarbonising energy, transport, food supply chains and chemicals. Industrial consumers simply need a fair and equitable charging structure that recognises the alternative options that they have. The impact of driving through this change will be disproportionate from both a regional and sectoral perspective”.
Nomi Ahmad, Head of Sembcorp Energy UK: “We have invested in Teesside for the long-term and are doing everything we can to develop Teesside into the UK’s leading low carbon energy and industrial cluster – bringing in more foreign investment and creating more jobs. But if Ofgem decides that we should be paying a lot more to use the UK gas pipeline system then this will jeopardise not only growth plans for Teesside but the existing businesses as well.
When industry, local and central Government are all working together for the future of Teesside it’s so disappointing that Ofgem do not seem to understand the broader economic pressures on industry. Right now they are a major source of uncertainty for businesses and future investors. We have to get Government, industry and Ofgem together to find the right solution that will ultimately benefit energy consumers. Ofgem cannot continue working in its own policy silo.”