CPI is pleased to sponsor new research by independent experts Cornwall Insight that further considers the operational economics of switching from gas to electricity to generate industrial heat in UK paper mills. Electrifying heat is a key industrial decarbonisation technology (assuming zero-carbon electricity), but it can only work if switching to electricity is economic.
The new report is an update of the 2022 analysis taking into account the relative changes in energy costs, the impact of government policy changes, and technological improvements in heat production. The original report concluded that making heat from electricity was substantially more expensive than making heat from natural gas; and with internationally expensive UK industrial electricity, the economics simply didn’t work.
This updated report concludes that for most sites, electricity remains substantially more expensive than gas and that the new government needs to reduce the cost disparity if electrification is to take off.
Since the first report:
- Delivered cost. The cost of both electricity and gas have substantially increased, with the cost disparity between the two sources of energy now around four times (from six times at the time of the previous report) – still far above a level where electricity can be a cost-effective substitute for gas.
- Policy changes. Around 300 electro-intensive companies are expected to benefit from the ‘British Industry Supercharger’ that removes or reduces a number of policy and network-related costs from their electricity bills. For these sites the cost disparity falls to around two and a half times, meaning that simply switching from gas to electricity remains uneconomic.
- Heat Pumps. Since the original report, technology for industrial heat pumps has continued to evolve meaning that for installations in the Supercharger programme, electrification begins to look like an economic proposition. However, the technology is still developing, with higher temperature operating units struggling to reach a CoP above 2.5 needed to equalise the input cost for Supercharger supported sites. When added to the inevitable concerns about reliability (for a new technology) and the major changes needed to the papermaking operation (to cope with lower pressures and reduced operating temperatures) the report concludes that industrial heat pumps are not yet ready to be widely deployed, but with capital support and improved commercialisation they could be a realistic decarbonisation route in the medium term. Critical will be capital investment support (noting that equipment being replaced will not always be at the end of its commercial life) and confidence that affordable electricity will continue to be available through the Supercharger programme.
- Grid connection issues. While not the focus of this research, the report notes that developing a new electricity grid (to cope with increased electricity demand) and enhanced site connections (to cope with increased demand at sites that decarbonise by electrification) is a huge barrier already delaying a number of projects that require increased electricity use. And of course, industrial electrification further increases the demand for zero carbon electricity if the decarbonisation intent is to be delivered.
The report goes on to recommend a number of measures that policy makers should explore:
- Direct capital support for heat electrification via direct funding or the tax system
- Rebalancing policy levies away from electricity bills or creating new levy exemption such as by further developing the Supercharger programme
- Supporting the technological development and deployment of industrial heat pumps
- Using the ETS, CCL, and CCA schemes to incentive electrification
- Explore the provision of government-backed Heat Contracts for Difference
- Urgently address the upgrading of the electricity grid and enhanced site connections
Steve Freeman, CPI Director of Energy & Environmental Affairs, commented:
“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, CPI Director General, added:
“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.”
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.
“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.”
CPI previously worked with Fichtner Engineers to publish research focused on how increases in the use of electricity adds considerable pressures to the national grid, requiring major upgrades to the distribution network and specifically upgrading supply connections into industrial sites. This report can be viewed here. You can view the original Cornwall Insight report here.
ENDS
Contact for further information
In the first instance, please contact: Elisse Hare | [email protected]
Notes for Editors
CPI is the leading trade association representing the UK’s Paper-based Industries, comprising paper and board manufacturers and converters, corrugated packaging producers, makers of soft tissue papers, and collectors of paper for recycling.
CPI represents an industry with an aggregate annual turnover of £13 billion, with 56,000 direct and a further 59,000 indirect employees.