Threatened closure of INEOS’s Grangemouth petrochemical plant has been averted following a humiliating climb-down by the employees’ UNITE union and government intervention culminating in £134 million of government assistance.
Closure would have dealt a heavy blow to Scotland’s industry and balance of payments at a time when Scots are considering whether to secede from the UK.
Both Scottish and UK governments, desperate to avoid being found wanting ahead of next year’s referendum worked frantically to reverse the closure decision and mercifully, have succeeded.
INEOS blamed the high cost of energy and ‘feedstock’, the raw material used in production of petrochemical products like plastics, etc. Oil refinery by-products like gas oil or naphtha or, alternatively, heavier fractions of natural gas remaining after methane extraction can be used as feedstock.
But aren’t those costs simply a fact of life? Daily, we hear of gas, electricity and motor fuel prices rising and it’s the same, if not worse, across Europe so why isn’t the Grangemouth plant ‘cost-effective’?
Until recently the same was happening in the United States (US), petrochemical plants were migrating steadily to the Far East where energy and feedstock were, at least, as dear as in the US and Europe but other costs like wages and salaries were much cheaper.
The cost of energy and feedstock were increasing, primarily, because demand for oil and gas was outstripping supply due to rapidly advancing developing world, primarily, China, India and South East Asia.
In the US that trend has reversed, spectacularly, with the advent of copious supplies of ‘unconventional’ oil and gas produced from shale deposits by ‘fracking’ (using high pressure water to ‘fracture’ the shale rock, allowing the trapped gas to be freed and captured).
The price of US gas has dropped by two thirds in five years and companies are scrambling to repatriate petrochemical plants to take advantage of the abundant cheap energy and feedstock.
Alarm had also been raised over the ‘Greenhouse Effect’ associated with rising atmospheric carbon dioxide levels and the global warming and climatic catastrophes postulated to flow from that, resulting in the adoption of the Kyoto Protocol in 1997, which came into force in 2005. Signatory countries agreed to cut carbon dioxide emissions by adopting various strategies like setting targets, investing in renewable energy and reducing energy consumption by a combination of energy-efficiency and punitive taxation.
By the time of the ill-fated Copenhagen Climate Summit in 2009, at which world leaders were expected to agree binding commitments in a new, post-Kyoto, agreement, climate concern had reached fever pitch; and the EU and UK committed to swingeing emissions reduction targets. The UK wrote its targets into law with the passing of the Climate Change Act, 2008 and Scotland followed suit with even more onerous targets.
No consideration was given to how these targets would be achieved or the cost implications. The ‘Planet needed saving’ and no expense or effort would be spared. Others, naturally, would follow our ‘leadership’.
Renewable energy, mainly wind, is uncompetitive and requires subsidy to pay developers twice and three times (on-shore or off-shore) the cost of conventional generation. Energy production from biomass, waste, etc., is similarly rewarded. “Renewables Obligation Certificates” are awarded for renewable energy production which utilities are forced to buy or earn to meet steadily rising targets to avoid fines and public opprobrium from being labelled ‘polluters’.
Renewable energy systems, by their nature, tend to be built in remote areas with poor or no electricity transmission infrastructure which then requires extension and reinforcement at great cost to cope with the new systems.
Special ‘Feed-in Tariffs’ (FiTs) for small-scale renewable energy rewarded developers spectacularly and energy companies were obliged to pay money towards and assist customers to improve the thermal insulation of their homes through the Energy Companies Obligation (ECO) scheme. A rapidly rising ‘carbon floor price’ was also introduced to ‘penalise’ the use of fossil fuels and heavy users of energy like petrochemical plants are directly in the line of fire.
The costs associated with all these schemes are passed to customers via their energy bills which are ballooning as the renewable energy boom continues apace.
Not content with adding these price pressures government has piled Value Added Tax (VAT) at five percent on top and the energy regulator, OFGEM, allows companies a profit margin of five percent of turnover, the result of which is that, not only do utilities have no incentive to reduce costs, they are actually incentivised to supply the most expensive form of energy. The higher utilities’ costs, the greater their profits, hence, their unbridled enthusiasm for ‘saving the Planet’.
Yes, the higher consumers’ bills, the higher the companies’ profits and the higher government’s tax take from VAT, corporation tax and income tax and NI on investors’ dividends and soaring staff levels. Neat.
To put this into perspective, under-fire utilities are now issuing information on the relative contributions of various costs to bills, notably:
- Government environment and social schemes – 8 percent
- Cost of energy purchase – 50 percent
- Delivering energy to customers – 25 percent
- Billing, customer service and IT – 6 percent
- Profit – 5 percent
- VAT – 5 percent
- 13 percent (VAT + schemes) is directly down to government.
- Cost of energy purchase will grow as nuclear and renewable energy industries grow.
- Cost of the additional grid infrastructure associated with renewable energy will grow.
- Cost of keeping shale gas in the ground will grow.
- Halving the cost of delivered electricity, as things stand, would halve utilities’ profits.
The economic crisis of 2008-9 and the impending closure of ageing nuclear plants and coal-fired power stations due to EU emissions regulations have brought matters to a head. The UK is faced with investing hundreds of billions of pounds to meet energy demand and its own, unilateral, climate change legislation.
Just as the cost implications of the climate change legislation are coming home to roost consumers’ income has been severely constrained for several years, in many cases frozen and levels of fuel poverty and ‘extreme fuel poverty’ (energy costs more than ten and twenty percent of household income, respectively) are soaring. The predicted outcry is in full swing and politicians and the media have ‘lighted’ on the utilities, accusing them of ‘profiteering’.
True, there’s greed but utilities are by no means entirely to blame. Their managements are arguably performing well, ‘playing the game’ (mostly) by the rules set by politicians and regulatory authorities.
Politicians are thus faced with a ‘trilemma’ of their own making. They must balance their penchant for ‘Planet-saving’ with the necessity of ‘keeping the lights on’ while somehow keeping energy ‘affordable’.
It’s worth reiterating, ‘a trilemma of their own making’. Unlike the classic trilemma, ‘Rock, Paper, Scissors’, this one is self-inflicted by politicians’ own unilateral climate change legislation – which they have the power to repeal at any time.
Developments in climate science clearly show future climatic risk has been overstated. Observations of actual global temperature have demonstrated that predictions from computerised climate simulation models have exaggerated the imminence and severity of ‘climate change’.
Meanwhile, nearly thirty thousand excess winter deaths occur, annually, in the UK; fuel poverty is a serious, growing concern, more worrisome by far than global warming whose alleged damaging effects the recent IPCC AR5 climate report admits are unlikely to appear this century.
Climate concerns thus fall before both affordability and security of supply. Security of supply, in turn, falls before affordability – it’s no good ‘the lights being kept on’ if we have to switch them off because we can’t afford them. The ‘trilemma’ is resolved, the order of priorities is clear: affordability; security of supply; de-carbonising our economy.
But what of the rising international gas price, that’s why our bills are going up, it’s going to overtake the cost of renewables and make them cost-competitive,…isn’t it?
No, like the US, the UK (and the EU) has vast reserves of unconventional gas, the problem is political; exploiting them would lead to gas and electricity prices falling as in the US, leading to on and offshore wind becoming up to four and six times the price, respectively, of conventional electricity, leaving our politicians looking even more foolish than they do now.
So the threatened closure of INEOS petrochemical plant was avoidable yet, given the prevailing political, statutory and regulatory circumstances, inevitable.
Worldwide, petrochemical companies are ‘upping sticks’ and heading to the US for the abundant cheap energy and feedstock and should the reprieved Grangemouth plant eventually close, it would come as little surprise were INEOS to follow suit.
As it stands, Grangemouth employees have been forced to swallow a package of measures designed to narrow the labour cost differential between operating in the West and the Far East and their UNITE union has been humiliated.
In the absence of cheap energy and feedstock INEOS has few options to maintain the competitiveness and hence, viability, of its plant other than to bear down on labour costs and as has transpired, obtain subsidy.
The first great irony is that the US, the ‘Great Satan’ of green fundamentalists, who never signed Kyoto, is reducing carbon dioxide emissions faster than anyone else (currently back to 1994 levels) due to the shift from coal to gas while the ‘Jolly Green Giant’ of the EU, Germany, is planning to build twenty three coal-fired power stations.
The second, bitter, irony is that, not only have energy costs spiralled upwards due to actions taken a few miles away in Edinburgh, significant reserves of shale gas and coal bed methane lie a stone’s throw from Grangemouth, begging to be exploited.
Holyrood must shoulder its share of blame and there are, at least, signs of repentance. Alex Salmond, nothing if not pragmatic, is visibly more restrained in his climate demeanour these days however the Liberal Democrats, in the vanguard of ‘climate change warriors’, continue to force the pace set by Ed Milliband. Ed Davey, Energy and Climate Change Secretary, has agreed to pay twice the going rate for a new ‘old nuclear’ plant with the profits going to France and China for thirty five years and is working hard to delay development of unconventional gas in the UK.
Cheap gas, after all, would be ‘unhelpful, embarrassing’.
Alan Reid, Westminster MP for Argyll and Bute, a competent, diligent MP is, nonetheless, a party to the immensely damaging policies imposed by Ed Davey and the Lib Dem hierarchy.
Note 1: The image at the top – of the Grangemouth petrochemical plant, was taken in 2006 and is by ‘John’, – reproduced here under the GNU Free Documentation licence.
Note 2: The graph above in the text is reproduced from this article from the US Energy Information Administration [EIA]