When the coalition Government released its manifesto earlier this year, one of its key concerns was energy. It announced a push to increase its EU-set renewable energy targets from the already ambitious 20% by 2020, at a time when the UK produced just 2% of its energy from renewable sources.
Meanwhile, high energy users were signing up to the carbon reduction commitment energy efficiency scheme, designed to make organisations more energy- efficient while reducing carbon emissions. For the energy-intensive industries, such as paper-makers, additional costs incurred by such policies mean more pressure on profits at an already tough time.
The concern is shared by all in the paper industry as energy costs start to creep up again, while the volumes of paper collected for recycling are down because of the recession. The closure of the Bridgewater Paper mill earlier this year as a result of “onerous” energy costs suggests a worrying future, but the sector sees this as an individual case rather than an omen.
Global manufacturer UPM has a paper mill at Shotton in Flintshire, north Wales. Head of energy and utilities Andrew Bronnert says: “The Government’s policy to get energy-intensive users using less energy is obviously a good thing. But it matters how the Government implements policy. So, if it invests in industry [such as through renewable obligation certificates (ROCs)] it’s a good thing, but if it’s a penalty, its benefits are neutral.”
Situated in Kent, Aylesford Newsprint owns a newspaper and magazine paper mill. Commercial manager Andrew Perkins explains: “If the policies make us less competitive, it will just move industry out of the country. If that’s the effect of the targets, the UK Government will fail. Anything that adds to the costs of production has got to concern businesses.”
A recent report supported by the Confederation of Paper Industries (CPI), the Energy Intensive Users Group and the Trades Union Congress found that, excluding the EU Emissions Trading Scheme (EU ETS), the impact of electricity-based charges will increase total electricity bills by 15-22% by 2020 and gas bills by 20-22% by 2020. Totalling these costs along with the EU ETS will mean companies could see a total energy bill increase of 18-141% by 2020.
“If the policies make us less competitive, it will just move industry out of the country. If that’s the effect of the targets, the UK Government will fail”
These increases in charges are already being seen and are worrying the sector. CPI head of energy and environmental affairs Stephen Freeman believes the current situation is “ironic”, adding: “If a company is looking at the renewable heat incentive, for example, it wouldn’t be able to invest in a renewable heating system to benefit from the scheme - it does not have the money to pay for it because it is paying excessive energy costs, in part caused by Government policies.”
A significant concern has been the EU’s cap and trade scheme, ETS, implemented in 2005. It aims to decrease companies’ emission outputs against 1990 levels. For the current phase until 2012, each member state had to develop a national allocation plan, setting an overall cap on the amount of total emissions allowed from all those covered by the ETS.
Each organisation was given a certain number of free allowances, with each allowance equalling one tonne of CO2. At the end of the year, organisations reconcile their allowances against actual emissions and, if they have exceeded the emissions covered by their free allowances, they must buy more on the market. Those with surplus allowances can sell them. In the past, an allowance has cost a company as much as €30 (£25) each but are now closer to €12.
The third phase of the scheme, which comes into effect in 2013, aims to reduce emissions by 20% by 2020 from 1990 levels. But secretary for energy and climate change Chris Huhne, along with France and Germany, recently pushed the EU to increase the target to a 30% emissions reduction by 2020. They also proposed that 100% of allowances would be auctioned, meaning there would be no more free allowances.
According to Freeman, the impact of this on the industry would have been significant. But regulations disallowing the EU from imposing these costs on energy-intensive sectors legally deemed at risk of ‘carbon leakage’ - when a company moves to another country that does not have carbon reduction policies to avoid these costs - will continue to receive some free allocations. The CPI successfully argued the case for this for the paper and pulp sector.
While the carbon leakage battle is won, the methodology for calculating allowances is not yet finalised, and decisions during the next few months “will have a drastic impact on the paper industry in Europe”, Freeman believes.
“Currently, all paper mills receive allowances based on their historic emissions. In Phase III there are no free allowances for electricity generation, and the ones given for heat use will be based on the 10% most efficient paper mills anywhere in the EU,” he says. “On that basis, we estimate that mills will only receive between a third and a half of the allowances they will need - the balance will have to be purchased either from Government auctions or via the secondary market.”
Freeman adds: “It puts a higher price on carbon but the danger is that it drives business outside Europe. You will be able to say that emissions emitted in the UK have come down, but then the carbon will just be embedded in imports because we still need the material. The move outside the UK wouldn’t happen immediately because companies have spent so much on their mills already for them to do so, so they wouldn’t close them down. But if it ended up being too expensive, it is possible a paper company would cease to invest and improve the mill, which is key to the future of the industry. Instead they would turn their attentions elsewhere, so the UK would lose out.”
Many paper mills in Europe now have their own energy from waste (EfW) or combined heat and power (CHP) plants to produce their own power. Both Aylesford and UPM Shotton have their own renewable energy facilities, and Saica’s planned cardboard mill will have a CHP facility too. Palm Paper’s mill does not have such a facility yet.
A spokesperson for Saica tells MRW: “There is a clear tendency in the paper industry to look for their own power generation or work in close partnership with power generation companies. We have taken the decision to install a CHP plant and EfW boiler because we think this is the best solution to cope with our electricity and steam demands. In this way, we are getting a very high yield from the natural gas that will be the only fuel used at the mill.”
Aylesford and UPM’s facilities are powered on the waste sludge or ink residue produced by their recycling processes. UPM owns its facility, which is powered by 150,000 tonnes of ink residue mixed with 250,000 tonnes of other biomass. This provides a third of all its electricity needs.
“Obviously, it does require a huge amount of investment,” explains Bronnert. “But it seems all paper mills will have to look at renewable energy facilities to stay competitive.”