The Economic Viability of Decarbonisation by Electrifying Heat

A new report from Cornwall Insight, sponsored by the Confederation of Paper Industries (CPI), has outlined the challenges that energy intensive industries (EIIs) face in decarbonising their heat supply, typically natural gas-powered, when seeking to switch to grid-supplied electricity. This new report – Addressing the Cost of Electrification – provides a refreshed perspective on an earlier 2022 report of the same name, reflecting updated market and policy positions that influence the commercial dynamics of electrification. While this report hones in on the experiences of the paper industry, many of the challenges highlighted here are common to other EIIs.

Several policy developments have progressed since the previous paper, some complete and some newly emerged, including:

1. The February 2023 announcement of the British Industry Supercharger (the Supercharger) and the November 2023 announcement of six-year Climate Change Agreements (CCAs), which offer significant CCL taxation discount on electricity bills for some installations, including most EII. – For eligible consumers, the Supercharger is potentially gamechanging development in terms of enabling electrified heating via heat pumps.

2. Further commitment to the rebalancing of levy costs between electricity and gas in the Powering Up Britain Energy Security Plan, committing to a clear approach to gas and electricity rebalancing.

3. Decisions and implementation of network connection and charging reform through the Targeted Charging Review Significant Code Review, though further work is underway through DUoS SCR and TNUoS Task Forces.

4. Far-reaching change through the Review of the Electricity Market Arrangements (REMA), a root and branch review of the GB wholesale energy market. These changes have marginally improved the environment for the electrification of heat. However, they do not move the dial, with the best-case scenario marginally supporting deployment of heat pumps for installations benefiting from Supercharger support, and all others suggesting gas remains the cheapest energy source. In high capital, risk averse manufacturing exposed to imports, it remains likely that alternatives to gas are still not viable without additional support.

Going forward the key measures we suggest policy-makers explore are:

1. Direct financial support in making capital outlay for electrified heat, to bridge the gap between the capital cost of conventional and new low-carbon assets.

2. Tax breaks on equipment for electrification, to facilitate the investment in capital assets.

3. Interlinkage with existing schemes, such as Climate Change Agreements and UK Emissions Trading Scheme exemptions.

4. Prioritising access to network connections for users who are seeking additional capacity to enable electrification of carbon-intensive processes like heating.

5. Subsidy support for low-carbon heat, perhaps on a Contract for Difference basis versus the cost of the current gas technologies

6. Widening access to the British Industry Supercharger for installations which decarbonise their heating.

Tom Andrews, Senior Consultant at Cornwall Insight said:

“The updated report highlights progress on the path to the electrification of industry, with favourable policy changes and cost reductions in relevant technologies making electrifying heat more commercially attractive. However, significant barriers still hinder widespread adoption.

“Electrification of industry is essential and indeed inevitable as the UK strives to decarbonise – unabated use of gas is simply not compatible with the UK’s net zero goals. However, businesses face a number of challenges, such as unbalanced levies, delays to access grid connection upgrades, and a lack of capital support making the switch to electric from gas uneconomical. Ultimately the figures are not adding up for businesses already struggling with the tough economic landscape.

“We must also consider the long-term implications of such a slow move away from gas. If the past two years have taught us anything, it is that low gas prices cannot be relied upon, and market volatility will always leave consumers vulnerable to price spikes. If we are to protect UK industry long-term, decisive action to remove the barriers to industrial electrification will be crucial. Businesses should not be forced into a false choice between economic viability and environmental sustainability.

“For a more stable and sustainable future, we need to see a smother path to electrification. When implemented strategically, electrification of heat supply has the potential to be a more economic and sustainable solution for businesses, and the wider UK’s energy system.”

Steve Freeman, Director of Energy & Environmental Affairs, at the CPI said:

“Today’s report highlights progress in building the economic case for electrification, with Supercharger supported sites now accessing lower cost electricity, that together with development in Industrial Heat Pumps, begins to make electrical heat generation look feasible, assuming reliable technology, capital support and suitable access to the grid. However, for the vast majority of sites not in the Supercharger programme, the cost differential is still too high an economic hurdle.

“Delivering an environment where electrification is economic is not in the hands of industry and action is still required from Government.

“In reality, decarbonisation will be delivered by a combination of the ideas discussed in the Sector Roadmap, and not electrification on its own. However, electrification is identified as the key technology for a number of sites and the current fleet of installed CHP Plant also play an important role in supporting the National Grid. This analysis is a sobering look at the economic implications of a drive for electrification and a wake-up call to policy makers and politicians that major changes are needed to the operation of the UK electricity system if electrification is to become a viable decarbonisation technology.”

Andrew Large, Director General, at the CPI said:

“Our sector decarbonisation roadmap shows that we understand how the sector can decarbonise, but we need support through the Transition to a Low Carbon economy. Simply allowing the costs of energy in the UK to remain higher than elsewhere and to increase even further, is a receipt to move production to places with lower energy costs outside the UK.

“If the Government is to succeed in growing a decarbonised manufacturing base, then simply expecting high prices to trigger change won’t work because the alternatives are not currently viable. We hope this report adds to the understanding of policy makers and highlights actions needed from a new government of any political make-up.”