Energy policy and the EU

Energy policy and the EU How a better deal could bring down the cost of energy and save jobs Matthew Elliott and Oliver Lewis

Business for Britain exists to give a voice to the large, but often silent, majority among Britain s business community who want to see fundamental changes made to the terms of our EU membership. We are independent and non-partisan, involving people from all parties and none. As a campaign, we aim to reflect the views of our business signatories, and the campaign is represented in the media and at events by people with real business experience. By pushing these voices into the mainstream - through quality research, eye-catching campaigns, rapid rebuttals and set-piece events such as lectures and debates - Business for Britain ensures that the British people understand that many UK business people want a better deal from Brussels and are not scared to fight to achieve that change. Alan Halsall (Co-Chairman) Chairman, Silver Cross John Mills (Co-Chairman) Chairman and Founder, JML Daniel Hodson (Honorary Treasurer) Former CEO, LIFFE Matthew Elliott (Chief Executive) Founder, TaxPayers Alliance & Big Brother Watch Neville Baxter Director, RH Development Harriet Bridgeman CBE Founder, The Bridgeman Art Library Dr Peter Cruddas Chief Executive, CMC Markets Robert Hiscox Honorary President, Hiscox Ltd John Hoerner Former CEO, Tesco Central European Clothing Brian Kingham Chairman, Reliance Security Group Adrian McAlpine Partner, Sir Robert McAlpine Jon Moynihan OBE Former Executive Chairman, PA Consulting About the Authors Matthew Elliott led the hugely successful No campaign against the Alternative Vote in the 2011 referendum, founded the TaxPayers Alliance, civil liberties campaign Big Brother Watch and, most recently, Business for Britain. Oliver Lewis is the Research Director of Business for Britain. He has previously worked for Michael Gove and the New Schools Network and has written for The Spectator. Energy Policy and the EU Business For Britain is a Company Limited by Guarantee in England No. 8411261 2

Foreword Is the current EU energy policy working for British business? Five years ago the EU was given the explicit right to pass laws affecting energy markets. Unfortunately the evidence suggests that the EU has not used these powers well. There is mounting evidence that, coupled with expensive domestic policies, the EU s energy policy has created real problems for Britain s manufacturing sector. Poorly designed policy and unrealistic targets have conspired to help push up energy bills. Rising EU regulatory costs have played a role in driving the closure of Britain s industrial capacity. The status quo is, quite simply, untenable. Business for Britain was set up to make sure that our politicians are aware of businesses concerns as we approach a renegotiation of our EU membership. The costs of EU energy policy are obvious and felt by most businesses, but there is little evidence that cross border trade has become easier. Polls, surveys and studies have all show that Britain s manufacturing businesses want to see powers returned to the UK. This paper sets out the challenges facing British business and offers some practical solutions for policy makers as they consider the upcoming renegotiation of Britain s EU membership. There has been little research about the specific impact of EU energy laws on the UK economy. This document aims to rectify this by showing how the EU has not only helped to push up costs but is set to carry on doing so for the foreseeable future. It is clear that, by returning powers, the EU can do less, better. By giving member states the freedom to change energy laws and greater say over how to implement directives, the EU can substantially reduce the cost burden faced by businesses across Europe and can focus on promoting cross border trade. This paper does not take a stance on the climate change debate, nor does it question the need to introduce laws to tackle the issue. What it does do is question how effective EU policy has been. Renegotiation offers a once in a generation opportunity to get a better deal for British businesses. I hope this paper will play a role in setting out what that deal should look like. Matthew Elliott Chief Executive, Business for Britain 3

Acknowledgements We would like to thank the trade bodies that took the time to share their thoughts with us, as well as Ruth Lea, David Lewis, Jonathan Lindsell, John Redwood, Matt Sinclair and others who have offered their advice. Finally, we would like to thank Tim Philpott for his help with the original research. The opinions and conclusions expressed in this paper are ours alone. Energy Policy and the EU 4

Contents Executive Summary 6 1 Introduction 8 2 The rising costs of energy 11 2.1 The growing cost of energy 12 2.2 The future of energy costs 16 2.3 Why are energy prices increasing? 17 2.4 The rising costs of EU energy regulation 20 3 The impact on British businesses 23 3.1 The impact of high energy costs on British business 24 3.1.1 Industry Case study: Metals 26 3.1.2 Industry Case study: Chemicals and chemical products 28 3.1.3 Industry Case study: Paper and paper products 30 3.1.4 Industry Case study: Mineral extraction 32 3.1.5 Industry Case study: Glass products 34 3.1.6 Industry Case study: Ceramics and cement 36 3.2 The threat to jobs from high energy prices 38 3.3 Manufacturing companies are leaving the EU 38 3.4 The impact on energy producers 40 3.5 Changing investment patterns 41 3.6 Increased energy dependence 43 4 Changing the situation 44 4.1 Business leaders believe that powers need to flow back to member states 46 4.2 Promoting cross border trade 48 4.3 Short term fixes not requiring Treaty change 50 4.4 Long term solutions requiring Treaty change 52 5 Conclusion 55 Appendix: The costs of EU energy laws 56 5

Executive Summary Energy prices in the European Union are among the highest in the developed world, comparable to Asian countries like Japan and Korea. Medium sized industrial consumers in the EU pay about 20 per cent more for electricity than companies in China, about 65 per cent more than companies in India and more than twice as much as companies based in the US and Russia. In recent years the EU has passed a number of targets, setting demands on what proportion of each member state s energy mix should come from renewables and have demanded investment into biofuels. This paper agrees with the Government that the EU should just set one target for reducing emissions and that member states should be free to devise their own policies to meet this target. Europe s high energy prices undermine efforts to combat climate change as Europe could become increasingly dependent on imports from other countries, countries which do not comply with the same high environmental standards that European firms do. The high costs of energy (both gas and electricity) are being felt keenly by British manufacturing, especially the Energy Intensive Industries such as metal founding, ceramics and glass manufacturing. This paper calculates for the first time that rising energy costs threaten up to 1.5 million jobs in the energy intensive sector alone, with 363,000 of these jobs being at high risk. High energy prices don t just affect businesses; in 2012-13 alone the National Health Service spent about 630 million on energy. There is a pressing need to review existing EU laws, and to see whether particularly burdensome laws can be repealed or modified. Leading trade bodies and British manufacturers believe that there is an urgent need for much more flexibility and a review of existing EU energy laws. Environmental groups like Friends of the Earth have noted that EU energy regulation has not made an effective impact on emissions, leading them to call for member states to have a greater role in shaping energy laws. Policy makers should seek to reduce the EU s regulatory burden instead of considering protectionism or subsidies. Such a new deal would not just benefit the UK but the whole EU. Based on British Government figures, this paper calculates that EU energy regulations will cost the UK economy between 86.6 billion and 93.2 billion (net). Despite this high cost there is little evidence from European Commission figures that this regulation has significantly promoted cross border trade. Were the UK to opt out of the Renewables Target alone energy bills for Energy Intensive Industries could fall by up to 7 per cent. Energy Policy and the EU 6

These costs look set to only increase as the EU makes greater use of its new powers to legislate over energy. While this paper doesn t dispute that UK policies have, independently, driven up the cost of energy, it is clear that the EU s role in driving up the cost of energy is substantial. New research in the report shows that EU policies currently account for up to 9 per cent of the cost of energy for Energy Intensive Industries. By 2030 this could rise to just under 16 per cent. High energy bills are not found in other major economies. Between 2005 and 2012 the gas price index for the EU increased by 35 per cent and the electricity price index increased by 38 per cent. In the United States by contrast the gas price fell by 66 per cent and the electricity price fell by 4 per cent, due in part to shale and in part to other factors. Expensive energy bills, along with other factors, are already having a negative impact on the UK s economy. The share of manufacturing in the UK s GDP has fallen from 19 per cent in 1997 to 10 per cent today. According to existing research, half of the UK power stations earmarked for closure in 2020 have been forced to close because of the demands of the EU s Large Combustion Directive (2001/80/EC). This is estimated to cost the UK 11GW in capacity, raising serious concerns about security of supply. These figures do not include the impact of the upcoming Industrial Emissions Directive which will, in all likelihood, close down even more energy generating capacity in the coming years. By 53 per cent to 38 per cent British manufacturers, who are much more dependent on energy than other business sectors, believe that the costs of EU membership outweigh the benefits. A majority want powers returned. This paper does not take a stance on the need for environmental legislation or targets for carbon emission, in many respects the global shift towards green technology and the decreasing costs of clean energy will encourage investment in green technology regardless of the decision of policy makers. Instead it attempts to provide an analysis of the impact of recent EU energy laws and asks if there is a more cost effective way of securing a transition to a greener economy by giving member states the power to determine their own way of meeting the EU s targets without subjecting firms to over-regulation. 7

1 Introduction European Energy Intensive Industries must decide whether to invest in Europe or abroad, in countries with much more promising market dynamics. The European Commission 1 This statement, made in the first half of 2014, was a long-overdue acknowledgement by the European Commission of the problems that many manufacturing companies in the European Union (EU) face today. For several years an increasing number of manufacturing firms have been warning national governments and European lawmakers that their industries are having to reconsider their future in Europe because of the ever increasing cost of energy. This is a growing problem which has stemmed, at least in part, from badly designed EU policy. There are many factors that have created problems for Britain s Energy Intensive Industries, ranging from global economic shifts to ever-increasing improvements in technology. The answer to these problems does not lie in seeking to protect industries from these trends but in identifying and removing the unnecessary burdens that stem from poorly thought out legislation. This paper looks at whether current EU policy actually improves cross border trade or whether it simply adds an extra burden to British and European companies. It has a deliberately narrow focus, looking at the impact of energy related legislation on both energy producers and Energy Intensive Industries; the firms who have the most to lose from bad energy laws. Over the last ten years European regulation has had a detrimental effect on British industry in many different ways, placing an upward pressure on energy prices but failing to substantially improve cross border trade in energy products. Over the last few years the UK, along with the rest of Europe, has seen the retail price of energy go up. The reason, at least in part, seems to be that the focus of EU legislators is not on reducing the cost for industry but instead on overly ambitious political objectives. Many EU rules seem to have failed to promote cross border trade, but have added to the (already substantial) administrative burden. The British Government has already recognised the role of the EU in driving up energy costs and adding administrative burdens to British businesses, with the Prime Minister s Red Tape Taskforce warning in October 2013: High energy prices, additional charges on business, onerous record keeping, and unnecessary bureaucracy all make it harder for our companies to compete in global markets. EU rules cannot be allowed to undermine the competitiveness of European business. Where EU rules place EU firms at a competitive disadvantage, they must be tackled rigorously and speedily in order to free up our businesses to help create growth and jobs. Cut EU Red Tape: Report from the Business Taskforce 2 Energy Policy and the EU 1 European Commission Communication, Energy Prices and costs in Europe, COM(2014) 21, p. 12, 29 January 2014, found at <http://ec.europa.eu/energy/doc/2030/20140122_communication_energy_prices.pdf> 2 Cut EU red tape: Report from the Business Taskforce, 15 October 2013, found at <https://www.gov.uk/government/ publications/cut-eu-red-tape-report-from-the-business-taskforce/> 8

In a recent letter to the President of the European Commission, José Manuel Barroso, the British Prime Minister, David Cameron, also made it clear that the EU needed to avoid placing a regulatory burden on British businesses: It is essential that we avoid regulations or targets that will force member states away from their least cost decarbonisation pathway or undermines a level technology playing field. David Cameron, Letter to the European Commission 3 This paper seeks to highlight and calculate the impact of EU legislation on energy producers and users. This paper does not attempt to argue that the EU has been the main driver of energy prices, it cannot be disputed that UK Governments have, in some areas, gone considerably further than the EU in introducing expensive policies. Both unilateral UK action and a tendency to goldplate EU directives means that UK policy has, historically, accounted for the bulk of, though not all, regulatory energy costs. However this should not cloud the fact that the EU does play a role in driving up the cost of energy and has introduced expensive policies. Some excellent research has been done to highlight how successive British Governments have driven up energy prices, both via their own initiatives and by goldplating EU directives. Unfortunately relatively little research has been done on how the EU specifically is exerting an ever increasingly role in driving up the cost of energy. What is even more concerning for many British businesses is that this rise in energy bills is not being felt everywhere. In other major economic areas, in particular the United States, the last few years have seen a marked decrease in energy prices as restrictions on accessing new types of energy, especially shale gas, have been reduced. The research below shows that many energy intensive firms are now considering moving to areas where there are lower energy costs, a decision which would have a devastating effect on jobs in the UK. Those firms who can t relocate face the prospect of closure, with the same disastrous effect on employment. While expensive energy has had a particularly corrosive impact on the manufacturing sector (especially the Energy Intensive Industries such as petrochemicals, metal founding, ceramics and glass manufacturing) it is worth remembering that high energy costs don t just affect businesses; in 2012-13 alone the National Health Service spent about 630 million on energy. 4 Something needs to be done to help Britain s manufacturers; however this report very firmly believes that the answer does not lie in subsidy or protectionism, but in devolving decision making powers back to the member states. Policy makers should aim to reduce the regulatory burden faced by energy producers and users. European leaders, in particular the Prime Minister David Cameron, have emphasised the need to simplify EU rules and targets in order to reduce energy bills. There may be a case for the EU to set an emissions target - a target derived from the United Nations Framework Convention on Climate Change (UNFCCC) - but there is no need for the EU to micromanage member state s energy policies. 3 Letter from D. Cameron to J.M. Barroso, 4 December 2013 4 TaxPayers Alliance, Research Note 133: Energy and Water Bills in the NHS, 21 November 2013, found at <http://www.taxpayersalliance.com/nhsenergyandwater.pdf> 9

David Cameron s promise to renegotiate Britain s membership of the EU offers a once in a generation opportunity to refocus the EU and to devolve powers back to the member states. There are important changes which could be introduced to rectify these problems as part of any future renegotiation; changes which will make sure that the UK s voice is strengthened and is protected from new attempts by the European Commission to micromanage the UK s energy policy. Renegotiation must clarify the EU s limited role, give the member states the ability to block poorly thought out EU legislation and should require the EU to demonstrate how all future energy policy proposals consider affordability, international competitiveness and security of supply not just sustainability. It should always be remembered that there are several factors which have driven up energy prices and imposed burdens on businesses, including British laws. Previous British Governments also supported many of the EU s energy policies and sometime even added extra provisions when implementing EU laws but soon noted that the EU s target system made it extremely hard for them to alter policy when circumstances changed. EU laws have clearly played a significant role in driving up the regulatory burdens on energy producers and suppliers as well as Energy Intensive Industries, either by directly adding to a member state s administrative burden, by restricting the options of member state s governments or by simply encouraging poorly thought out policy. This paper focusses on the role of the EU by analysing the various ways European regulation has increased costs for British businesses and the wider UK economy. It is not intended to be a detailed study of energy price dynamics; instead it is an attempt to highlight the impact that EU law has had on both energy producers and on manufacturers in both the UK and Europe. While there is some disagreement, most businesses are clear that a substantial change in Britain s relationship with the EU is needed and that energy policy should be governed by the principle of subsidiarity. Many organisations support legislation to tackle climate change, but believe that current policies are ineffective and expensive. This paper tries to find common ground among the various positions that have been put forward by British business and suggests solutions which are achievable, practical and desirable. Energy Policy and the EU 10

The rising costs of energy 2 The EU has a long history of involvement in energy issues. Despite the fact it was only given the formal power to legislate on energy in 2009, the EU has been involved in energy decisions for many years, developing a de facto energy policy over several decades. This arguably started when the then European Economic Community sought to come to a common position against the Organisation of Petroleum Exporting Countries (OPEC) during the 1973 energy crisis. During the Maastricht Treaty discussions in the early 1990s, proposals for an energy chapter were vetoed and the final wording of the Treaty meant that the EU lacked the legal foundations for energy laws for several years. However, despite this lack of a legal basis, directives were still passed that affected energy markets, notably via initiatives that sought to create an internal market in electricity (Directive 96/92/EC) and gas (Directive 98/30/EC) which were based on internal market or environmental clauses in the Treaties. Other clauses like the Renewables Energy Directive (Directive 2009/28/EC) and introduction of the EU s Emissions Trading Scheme (EU ETS) were based on environmental clauses. It was noted by the House of Lords EU Committee that before 2009 certain European energy laws lacked a specific legal basis. 5 The EU has engaged in a process of market opening in network industries, including in the energy markets. In recent years there has been a succession of new policies introduced by the EU, including measures to complete the Single Market in energy (in July 2007 every EU consumer was given the right to purchase electricity and gas from any other supplier in the EU) and to tackle climate change. More recently, these interventions have become more direct as the EU has sought to realise the aims set out by the United Nations Framework Convention on Climate Change (UNFCCC). Perhaps the most notable example of this recent intervention is the EU s demand that member states meet set targets for shares of renewable energy consumption via the renewable energy targets, with the UK s Renewables Obligation (RO) adapted to become one of the main vehicles to deliver this target. In 2009, the Lisbon Treaty created a new title on energy (Article 194 TFEU) which expanded the EU s legal basis and gave the organisation new powers to pass laws affecting energy policy. 6 For the first time the Treaty made it clear that energy policy is a shared competence between the EU and the member states, stating that the EU was tasked with ensuring the functioning and security of energy supply and promoting energy efficiency, interconnection and renewable energy. The year 2009 also saw the EU introduce the Third Energy Package, which aimed to finally create single markets in electricity and gas. As of July 2014 there were 224 legislative instruments falling under the remit of Directorate General for Energy. 7 These are the inevitable product of decades of both legislative creep and the EU s ambition of integrating Europe s energy markets. There are, at first glance, strong arguments in favour of integrating energy markets, not least to allow energy firms access to larger markets and to improve the UK s energy security. But there are serious 5 House of Lords European Union Committee, The Treaty of Lisbon: an impact assessment: Volume I, p. 221, February 2008, found at <http://www.publications.parliament.uk/pa/ld200708/ldselect/ldeucom/62/62.pdf> 6 The Foreign and Commonwealth Office (FCO) determined that the powers were new in its own assessment of the Lisbon Treaty, found in FCO, A comparative table of the current EC and EU Treaties as amended by the Treaty of Lisbon, January 2008, found at <http://www.official-documents.gov.uk/document/cm73/7311/7311.pdf> 7 DG ENER, Overview of the secondary EU legislation (directives and regulations) that falls under the legislative competence of DG ENER and that is currently in force, found at <http://ec.europa.eu/energy/doc/energy_legislation_by_policy_areas.pdf> 11

questions about the costs which come with such regulation and whether the new laws actually promote cross border trade. 2.1 The growing cost of energy In 2012 medium-size industrial consumers in the EU paid about 20 per cent more [for electricity] than companies based in China, about 65 per cent more than companies in India, more than twice as much as companies based in US and Russia and more than three times as much as Middle Eastern industrial consumers in e.g. Saudi Arabia and United Arab Emirates in 2012 mediumsized industrial consumers in the EU paid four times as much for natural gas as industrial consumers in the US, Canada, India and Russia. The European Commission 8 Natural gas prices for industry in the first quarter of 2012 were on average 241 per cent higher in EU OECD than in the US. Günther Oettinger, European Commissioner for Energy (2010 - ) 9 As the above admissions make clear, today Europe is one of the most expensive areas in the world for energy. European gas and electricity prices, including in the UK, have gone up over the last few years and today are among the highest in the developed world. 10 It is a mistake to talk about an average EU price or EU cost of energy, as there has always been a great deal of variation in energy prices between EU member states. Averaging simply distorts the actual situation and risks obfuscating the fact that other EU countries have lower energy prices than the UK. However when one compares the prices of all available European states to countries from outside the EU it becomes clear very quickly that, despite this variation, European countries are among the most expensive in the developed world for energy and that, while most European states have lower costs than Japan, there are very few comparable to the United States. 11 As Figure 1 makes clear, industries in European countries (pink) have to face high electricity prices, especially when compared to other countries such as the United States (non-eu states coloured in grey). Energy Policy and the EU 8 European Commission Staff Working Document, Energy Prices and costs report, p.202, 17 March 2014, found at <http://ec.europa.eu/energy/doc/2030/20140122_swd_prices.pdf> 9 Question for written answer E-010219/2012 to the Commission Rule 117 Nuno Teixeira (PPE); Answer given by M. Oettinger on behalf of the Commission on 22.1.2013. 10 It is important to note the difference between price and cost. Energy prices refer to the price energy consumers actually pay for a given unit of energy. Energy costs/bills refer to the amount of money consumers have to pay for their energy consumption. Electricity prices and costs have risen for industry across Europe since 2008. More information on prices and costs can be found at <http://ec.europa.eu/news/energy/140129_en.html> 11 It is tempting to attribute US success solely to its large shale gas reserves and nothing to do with policy, however this ignores the fact that the EU enjoys very large shale gas reserves as well, reserves which have been under-utilised, not least because, up until recently, there has been a threat of over-regulation. While it cannot be assumed that UK shale gas will, initially at least, be as cheap as US gas as pointed out by the House of Lords, it is still very important to compare EU prices to the US as investors and manufacturers have already started to move resources and facilities to the US. However shale gas has to be appreciated by a short-medium term answer rather than a long term one. 12

Figure 1: Retail price of electricity for industry in OECD countries (2012) 12 The same is also true of natural gas prices for industry, with European countries facing much higher prices than the United States (see Figure 2). While the UK has one of the lowest gas prices in Europe, it is clear that it is nearly double the price found in the US. Contrasting Europe s high energy prices with those of the United States gives some idea of the problems facing Europe s industries. Figure 2: Retail price of natural gas for industry in OECD countries (2012) 13 While it is clear that the UK enjoys relatively low energy prices compared to many other EU countries (a product, in part, down to liberalised energy markets), it is also clear that, along with other EU countries, Britain s gas and electricity prices are much higher than those found 12 International Energy Association, 2013 Key World Energy Statistics, pp. 42-3, found at <http://www.iea.org/publications/ freepublications/publication/keyworld2013.pdf> Omissions are a result of lack of information. 13 International Energy Association, 2013 Key World Energy Statistics, pp. 42-3, found at <http://www.iea.org/publications/ freepublications/publication/keyworld2013.pdf> Omissions are a result of lack of information. 13

in the US. While this would be concerning in its own right, what is even more concerning is that long term trends suggest that the UK has faced, and will continue to face, rising electricity prices. This can be seen in the rise of British electricity prices (Figure 3) which have more than doubled for non-domestic consumers in the last ten years and the price of gas has nearly doubled as well. Figure 3: Evolution of average electricity and gas prices for non-domestic consumers in the UK in nominal terms (excluding climate change levy) 14 The same trend is also seen when taxes such as the climate change levy are added (Figure 4) which shows that, again, both gas and electricity prices have nearly doubled. Figure 4: Evolution of average electricity and gas prices for non-domestic consumers in the UK in nominal terms (including climate change levy) 14 Energy Policy and the EU 14 The Climate Change levy is a tax imposed on certain energy generating products, including coal and HM Government, Price of fuels purchased by non-domestic customers in the United Kingdom, data found at <https://www.gov.uk/government/ statistical-data-sets/gas-and-electricity-prices-in-the-non-domestic-sector> 14

The UK s struggles are faced across the whole of the EU: according to the Commission between 2005 and 2011 EU manufacturing saw the highest increase in energy costs relative to the US, China and Japan. 15 According to Commission President Barroso, between 2005 and 2012 the gas price for European industry increased by 35 per cent and the electricity price increased by 38 per cent. In the US by contrast gas prices fell by 66 per cent and electricity prices fell by 4 per cent. 16 The marked difference can be seen in Figure 5 which shows the annual industrial gas prices for the UK and US between 2005 and 2011 and the rising gap that has emerged as US prices have fallen while the UK s prices have continued to rise. Figure 5: End user gas prices for industry 17 And the same trend can be seen in electricity prices (Figure 6) where the UK s prices have increased significantly while US prices have remained static. Figure 6: End-user electricity prices for industry 18 15 European Commission Staff Working Document, Energy Prices and costs report, p.197, 17 March 2014, found at <http://ec.europa.eu/energy/doc/2030/20140122_swd_prices.pdf> 16 European Commission, Energy Priorities for Europe: Presentation of J.M. Barroso to the European Council, 22 May 2013, found at <http://ec.europa.eu/europe2020/pdf/energy3_en.pdf> 17 HM Government, International industrial energy prices including taxes, data found at <https://www.gov.uk/government/ statistical-data-sets/gas-and-electricity-prices-in-the-non-domestic-sector> 18 HM Government, International industrial energy prices including taxes, data found at <https://www.gov.uk/government/ statistical-data-sets/gas-and-electricity-prices-in-the-non-domestic-sector> 15

This divergence is not confined to just the UK. Last year the European Commission came to the disturbing conclusion that almost all member states have seen a consistent rise in consumer prices of electricity and gas and found that certain Energy Intensive Industries (EIIs) had reported gas price rises of between 27 and 40 per cent in the period 2010-12. 19 The same study also concluded that since 2008 electricity network costs have increased by 30 per cent for industrial consumers and that taxes and levies rose by 127 per cent for industry, before exemptions. 20 This was not an isolated study; other reports by the EU have found that between 2008 and 2012 industrial electricity prices (excluding VAT and recoverable taxes) have gone up by about 3.5 per cent per year, although in some countries retail industrial prices have actually increased more dramatically than this. Estonia, Lithuania and Latvia have all experienced an annual increase in prices of more than 8 per cent. 21 Other econometric surveys have also come to similar conclusions. A recent study of the Real Unit of Energy Costs (RUEC) for EU member states concluded that these costs had increased by 47 per cent between 2000 and 2009. Between 2000 and 2009 the UK had an average annual RUEC increase of 4.6 per cent while the EU as a whole saw an average increase of 4.2 per cent (an increase in Real Unit Energy Costs means that the amount of money spent on energy sources to obtain one unit of value has increased). 22 2.2 The future of energy costs What is even more concerning is that it seems these high costs are only going to increase over the coming years. The European Commission has recently warned that European industry s efforts to compensate for higher energy costs... may need to go even further. 23 In a recent report, the International Energy Agency (IEA) warned that electricity and gas costs will remain high for another 20 years. The report has also warned that the EU is likely to lose up to a third of its global market share of energy intensive exports. The IEA has stressed that the gap between the US and the EU is structural. It s not a one-off. 24 There are several factors that the EU is going to have to face over the coming ten years which are going to increase energy costs regardless of policy. Investment is needed and there are concerns that international fossil fuel prices may increase. 25 However, it is also clear that poorly designed EU law will also have a role in driving up the price of energy and the costs for Energy Intensive Industries (EIIs). Energy Policy and the EU 19 European Commission, Energy Prices and costs in Europe, COM(2014) 21/2, p.6, 29 January 2014, found at <http://ec.europa.eu/energy/doc/2030/20140122_communication_energy_prices.pdf> 20 European Commission, Energy Prices and costs in Europe, COM(2014) 21/2, p.6, 29 January 2014, found at <http://ec.europa.eu/energy/doc/2030/20140122_communication_energy_prices.pdf> 21 European Commission Staff Working Document, Energy Prices and costs report, p.9, 17 March 2014, found at <http://ec.europa.eu/energy/doc/2030/20140122_swd_prices.pdf> 22 European Commission, Energy Economic Developments in Europe, pp. 11-25, 2014, found at <http://ec.europa.eu/economy_finance/publications/european_economy/2014/pdf/ee1_en.pdf> 23 European Commission, Energy Prices and costs in Europe, COM(2014) 21/2, p.13, 29 January 2014, found at <http://ec.europa.eu/energy/doc/2030/20140122_communication_energy_prices.pdf> 24 International Energy Agency, World Energy Outlook, data found at <http://www.worldenergyoutlook.org/pressmedia/ quotes/2/> 25 European Commission, EU Energy, Transport and GHG Emissions: Trends to 2050, pp. 47-8, 16 December 2013, found at <http://ec.europa.eu/energy/observatory/trends_2030/doc/trends_to_2050_update_2013.pdf> 16

The British Government has already begun to warn British businesses to expect an increase in their energy costs and has warned medium-sized users of energy to expect cost increases of between 15-21 per cent higher as a result of both EU and UK policies. The Department for Energy and Climate Change (DECC) has provided a breakdown of how bills are going to increase over the coming few years which is summarised in Table 1. 26 Table 1: Estimated gas and electricity costs for medium-sized business users 27 2013 2020 2030 Average gas bill 520,000 540,000 560,000 Average electricity bill 1,070,000 1,360,000 1,570,000 Average energy bill 1,590,000 1,900,000 2,130,000 What makes this even more concerning is that, as shown above, this increasing burden is not being felt in other major economic areas, putting British industry at a disadvantage. The International Energy Agency has warned that the price gap between Europe and the US is here to stay, warning that: Lower energy prices in the United States mean that it is well-placed to reap an economic advantage, while higher costs for energy intensive industries in Europe and Japan are set to be a heavy burden. International Energy Agency 28 Why are energy prices increasing? 2.3 There are numerous factors which drive up the price of energy and drive up the costs for Energy Intensive Industries (EIIs): wholesale fossil fuel prices, market structure, the state of existing infrastructure are just some of the factors which intertwine and shift the price of energy to varying degrees on a day to day basis. 29 While working out the exact effect of each of these drivers on energy prices is not within the remit of this paper, it is worth noting that there is also a growing consensus that EU policy has played a small but significant role in driving up EIIs energy bills, a role which is growing. Despite the EU s claims that the rise in costs is mostly driven by external factors, including rising fossil fuel prices and the taxes and levies set in the member states, the European 26 Non-CRC participant, counting impact of climate change policies, data found at <https://www.gov.uk/government/ uploads/system/uploads/attachment_data/file/172923/130326_-_price_and_bill_impacts_report_final.pdf> 27 Non-CRC participant, found in Estimated impacts of energy and climate change policies on energy prices and bills, found at <https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/172923/130326_-_price_and_bill_ Impacts_Report_Final.pdf> 28 International Energy Agency, World Energy Outlook 2013 Press Release, found at <http://www.iea.org/newsroomandevents/ pressreleases/2013/november/name,44368,en.html> 29 Factors that have been highlighted by other studies range from the economic climate to the accessibility of fuels to the impact of legislation (both European and British). In the gas market for example there is a concerning lack of suppliers and gas prices are still often indexed to oil prices. The sheer number of factors that can influence energy prices and the complex way these factors interact means there remains a serious lack of credible and comparable information on what actually finally determines prices and costs of energy for different consumers. There are also factors which influence the global energy markets, such as the impact of subsidised coal in China. 17

Commission has itself acknowledged that its policy has had an impact on energy costs, stating that its policies will ensure a sustainable energy sector in the long run, with acknowledged higher costs in the short term 30 Various studies by the European Union, British Government and various think tanks have also begun to highlight specific EU laws that are causing problems either by increasing the regulatory burden or by driving up costs. In a recent report, an analyst at Oxford University s Institute for Energy Studies warned: The cost of Europe s clean energy policies has also risen, and will rise further, as a result of the Commission s proposals, made in January 2014, for EU energy and climate change targets. Institute for Energy Studies, Oxford University 31 In a recent major study, the Department for Energy and Climate Change (DECC) identified two EU policies that are having a particularly harmful effect and have pushed up energy bills: the EU Emissions Trading Scheme (EU ETS) (combined with the UK Government s Carbon Price Floor) 32 and the Renewables Obligation (RO). The RO (which is due to be replaced) was created independently by the British Government but has since been adopted to comply with the EU s renewable target, despite the UK s developing hostility to the idea of a renewables target. 33 In addition, the Government s Red Tape Task Force was told by several companies that there were significant problems with the Emissions Trading Scheme Regulation, Energy Efficiency Directive and Energy Performance of Buildings Directive. 34 It is possible to calculate the cost of the two most expensive EU energy policies: the EU ETS and RO. DECC has provided detailed breakdowns of the impact (and predicted future impact) of individual climate change policies on energy bills. This allows us to, at least for these two policies, calculate the impact on UK Energy Intensive Industries (EIIs). While the CPF is not counted as an EU cost in this report, experts who spoke to the authors did point out that the CPF was introduced because of the perceived failure of the EU ETS to deter energy producers away from fossil fuels. While DECC figures show that many costs stem from the UK, it is also clear that the cost of the EU ETS and RO is increasing with time. Via this new analysis it soon becomes clear that, on their own, these two measures are going to have a growing impact on EIIs over the coming fifteen years. For EIIs, these two policies account for 9 per cent of the cost of energy today and will account for just under 16 per cent of energy bills by 2030. Energy Policy and the EU 30 European Commission, Energy Prices and costs in Europe, COM(2014) 21/4, p.2, 29 January 2014, found at <http://ec.europa.eu/energy/doc/2030/20140122_communication_energy_prices.pdf> 31 D. Buchan, Costs, competitiveness and climate policy: distortions across Europe, p.5, April 2014, found at <http://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/04/costs-competitiveness-and-climate-policy.pdf> 32 Department of Energy & Climate Change, Estimated impacts of energy and climate change policies on energy prices and bills, p.29, found at <https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/172923/130326_-_price_ and_bill_impacts_report_final.pdf> 33 For more information please see House of Commons Library, The Renewables Obligation, found at <http://www.parliament. uk/briefing-papers/sn05870.pdf> 34 Cut EU red tape: Report from the Business Taskforce, 15 October 2013, found at <https://www.gov.uk/government/ publications/cut-eu-red-tape-report-from-the-business-taskforce/> 18

Figure 7: Estimated average energy bills paid by an energy intensive user consuming 100,000MWh each of gas and electricity (2012 prices) 35 It is important to note that, while this information provides a good quantification of the costs of the two main planks of EU energy legislation, it should not be seen as a definitive figure for the additional burden placed on Energy Intensive Industries by the EU. The figure does not include other, less significant, EU policies and in addition there is a good chance that the UK would have introduced similar policies had it been outside of the EU, although the costs would likely have been much smaller (see Section 2.4 for more details). What the above graph does show however is that the two main planks of EU energy policy are exerting an increasing burden on EIIs, though it would be wrong to claim that they are the sole problem. While this paper does not take a stance on the need for environmental legislation or the question of the need to reduce carbon emissions, it is also worth noting however that organisations like Friends of the Earth have condemned the EU ETS as being ineffective in combating climate change. 36 The upward pressure that the EU is exerting on energy costs is now acknowledged by most commentators. As recently noted by The Economist: European industries pay three to four times more for gas and over twice as much for electricity as American ones (who benefit from cheap shale gas). 37 American newspapers have also warned that US policy makers should not aim to copy the EU; in a recent editorial the Washington Post argued that We ought to take note of what s happening on the other side of the Atlantic across Europe, the price of retail electricity has soared by 20 per cent over four years, thanks to the European Union. 38 35 Please note that the CPF is counted as a non regulatory cost. For consistency highest cost estimates were used for all policies in 2020 and 2030.Estimated impact of regulations on wholesale prices are counted as non-regulatory cost. For more information, see DECC, Estimated impacts of energy and climate change policies, p.86, March 2013, found at <https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/172923/130326_-_price_and_bill_ Impacts_Report_Final.pdf> 36 Friends of the Earth Europe, The EU Emissions Trading System: failing to deliver, found at <http://ec.europa.eu/clima/ consultations/articles/0005/registered/9825553393-31_friends_of_the_earth_europe_en.pdf> 37 Europe s energy woes, The Economist, 25 January 2014, p.32 38 Editorial: European Union cooling to global-warming costs, Washington Times, found at <http://www.washingtontimes. com/news/2014/jan/27/editorial-cooling-to-windmills> 19

2.4 The rising costs of EU energy regulation This massive tide of red tape also means higher administration and manufacturing costs which in turn acts as a gigantic brake upon the entrepreneurial spirit. Owner of a medium-sized manufacturing business based in East England In addition to applying upward pressure on energy prices, EU energy laws also place a significant regulatory burden on British firms. There is mounting evidence that the UK has been particularly badly hit by the compliance costs that have stemmed from EU energy laws, in part down to the UK s failure to secure exemptions or tendency to go beyond minimum EU requirements. The consequences of complying with a mounting complex regulatory burden has been noted by firms with high energy demands: The EU s stringent hazard based / precautionary approach to regulation can cause serious implementation problems for companies. British Ceramic Confederation 39 It is possible to calculate the cost of EU energy laws by looking at detailed HM Government Impact Assessments (IAs). These are official documents produced by departments to accompany new regulations, stating how far the specific recommended policy meets the Government s objectives and to calculate the potential costs and benefits. While there has been a noted failure by the Government to place all the IAs in one repository (previous attempts to compile such a collection have had notable omissions) it is possible to select a large sample which includes as many relevant IAs as possible. Our methodology for both selecting relevant IAs and analysing them can be found in the Appendix. The EU and British Government both claim that these directives bring benefits which often outweigh the costs, but this claim has been widely disputed, not least by Open Europe. 40 There is a lot of evidence to show that the benefits have been exaggerated: for example the ETS Impact Assessment said the benefits were dependent on a scenario where EU action is pivotal in achieving a global deal. 41 Clearly this was a flawed assumption. In other IAs the projected benefits are based on an attempt to quantify predicted improvements in the environment. By looking at the total cost to British business via these IAs we can start to get an idea of the total cost of EU regulations, with a detailed breakdown of the costs and benefits provided in Table 2. Energy Policy and the EU 39 British Ceramic Confederation, Response to the call for evidence on the Government s review of the balance of competences, 17 January 2014, p.1. 40 Open Europe, Top 100 EU regulations cost the UK economy 27.4 billion a year and costs outweigh benefits in a quarter of cases, 21 October 2013, found at <http://www.openeurope.org.uk/content/documents/pdfs/131021top100regulations.pdf> 41 Government Impact Assessment of the EU Climate and Energy package, found at <https://ukccsrc.ac.uk/system/files/ publications/ccs-reports/decc_cb_90.pdf> 20