I can foresee an industrial policy question in Paper 2 in 2024

 This article has some good elements for you to consider - should government intervene? Is it operating joined-up policy, or is it pulling in different directions to achieve different objectives? Plenty to mull over:

Britain’s new gigafactory is our entry into the global league of the EV revolution

Rishi Sunak must now ensure cheap power to meet the voracious energy needs of lithium battery plants

AMBROSE EVANS-PRITCHARD20 July 2023 • 7:15pm

Bad industrial policy is to waste public money propping up declining companies that can no longer compete on world markets. That is a bottomless pit.

The imputed £500 million subsidy to build Tata’s gigafactory for battery cells is nothing of the kind. 

It is laying the infrastructure base for a rising industry, akin to building a road or installing fast broadband. It also heads off the risk of punitive tariffs on EV exports to Europe due to local content rules in the Brexit trade deal.

Britain needs 100 gigawatts (GW) of battery capacity by 2030 and double again by 2040. The 40 GW Tata plant in Somerset, and Nissan’s 7.5 GW expansion in Sunderland, take us only a quarter of the way.

Simon Moores, head of Benchmark Minerals Intelligence, told Parliament’s battery hearings that it would require £5bn of state funding to draw in the necessary £15bn of private investment. 

“Traditional economic models do not work in this. This is a brand new industrial revolution,” he said.

Without the Tata plant as a downpayment, and the ecosystem that comes with it, the UK would have lost its footing altogether in the global switch to EVs, with little to replace the existing 200,000 jobs in combustion engines and linked supply chains. 

“Embedded manufacturing that we have now would drift away, model by model,” said Jeff Pratt from the UK Battery Industrialisation Centre.

The UK slid down the protectionist slope in the 1970s trying to save Coventry’s car industry. The unhappy saga ended in the nationalisation of British Leyland amid strikes, ‘Friday afternoon’ lemons, and a shipwreck of debts. 

The British Motor Corporation, Rootes, Standard-Triumph and Vauxhall had together been the world’s biggest exporters of cars as recently as the 1950s. The industry employed 5pc of the UK’s workforce. One can understand why successive governments could not bear to let it wither away. 

The carmakers thought Britain’s accession to the European Community would revive export sales by enabling longer production runs. Instead it was the coup de grace. It took fifteen years of hard slog and Japanese reinvention to come back from near death.

The British Leyland error today would be to scrap the UK’s sales ban on petrol and diesel cars in 2030 and try to hang on to the old order, inevitably at some point with public money and in defiance of market forces. 

That would be a certain recipe for national economic ruin, quite apart from the immense damage to the UK’s moral reputation.

“Ten years ago it wasn’t clear whether electrification would win or not. Today it is absolutely as clear as death and taxes that the auto industry is going electric,” said Andy Palmer, former chief executive of Aston Martin.

There is no turning the clock back. 

Global sales of EVs have risen 58pc over the last year. China is on track to reach eight million in 2023. Sales in Europe have risen 66pc, increasing the EV share from 10.7 to 15.1pc, despite Volkswagen bungling its pricing policy. 

New emissions standards in the US are forcing a step-change and so is the $7,500 EV tax credit under the Inflation Reduction Act. The first million EV sales took 60 months, the second took 17 months, the third took six months.

The trajectory is following the classic S-Curve of disruptive technology. The US think tank RMI thinks EV sales will reach 90pc in China and 70pc worldwide by 2030. “It’s exponential, global, and this decade,” it said.

British chemists were pioneers of lithium-ion batteries. The UK had every chance of leading as EVs took off. 

But somewhere between 2017 and early 2023, the British government dropped the ball. It pushed through the most aggressive fossil car ban in the OECD bloc without taking steps to secure strategic minerals as China launched a global land grab, and without nurturing the EV supply chain. 

“We laid down the law but we have not followed through with what UK industry needs to do to get there,” said Jeremy Wrathall, founder of Cornish Lithium.

Westminster seemed to think business could do it all alone. The EU and the US made the same mistake, but twigged earlier to the danger. 

The Tata deal comes in the nick of time and starts to close the gap. It is also a shot in the arm for a much-maligned UK economy that is not doing as badly as the global nomenklatura proclaims.

In January, EV exports to Europe will require 50-60pc of local or EU content for batteries to avoid tariffs. The terms will tighten further in 2027. 

Neither side is ready but Brussels is still playing tough, calculating that it is sufficiently far ahead with 30 gigafactory projects (some will fail) that it could peel away Britain’s EV industry in much the same way as it has tried to peel away chunks of the City. 

The Tata deal levels the playing field. 

Furthermore, it disproves the defeatist myth that the UK is too small to compete with the alleged hand-outs of the EU’s green deal. 

The Commission does not have real money, and whatever it has must be spread across 27 states. The vast headline sums are aspirational, mostly reliant on national governments and on leveraging private investment. 

Spain lost the bidding war with Britain for the Tata factory, even with EU funds.

The UK has the advanced chemical and engineering companies, and top-notch universities, needed to sustain a world-class EV industry. The British Geological Survey says it has Europe’s biggest lithium deposit near St Austell.

Cornish Lithium thinks it can extract large amounts of lithium from geothermal brine with a zero carbon footprint and at competitive cost. 

Lithium start-ups are sprouting up in the north. They may struggle to match the costs of Chilean lithium from the Atacama – mostly locked up already in long-term contracts with Asian buyers – but they could eliminate the geopolitical supply risk.

The missing link is cheap power. Lithium battery plants have voracious energy needs. “It is our greatest competitive disadvantage,” said Konstanze Scharring from the UK car lobby (SMMT).

It ought to be an urgent national priority to roll out cheap wind power as fast as possible, each watt replacing a watt of imported gas. 

Yet the Government’s overshore expansion has hit a wall. Some 5 GW of agreed wind farms are blocked because the Chancellor imposed a 45pc windfall tax on renewable companies just as they were struggling with a 30-40pc surge in turbine costs. 

Vattenfall this week cancelled the 1.3 GW Norfolk Boreas array. “It simply doesn’t make sense to continue the project,” said chief executive Anna Borg

Unlike the oil and gas industry, wind companies were denied a tax deduction against fresh investment. Which bright spark in the Treasury thought it a good idea to reduce the future supply of energy in the middle of an energy crisis? 

Rishi Sunak has redeemed himself this week with the Tata coup. At least the UK has a fighting chance of saving its car industry. Now he must convince the world that he has a credible plan to slash energy costs. Without cheap power he can kiss goodbye to everything else.

Impact of a windfall tax (as I said all along...)

 

JULIET SAMUEL

Treasury idiocy is killing North Sea energy

Ministers privately admit that hastily extending the windfall tax was a mistake and its true cost is now becoming clear

Juliet Samuel

Wednesday May 24 2023, 9.00pm, The Times

Share

Save

David Duguid well remembers the Burns Night he spent in Baku, Azerbaijan. On the hunt for haggis, he had to criss-cross the city from shop to shop. The marvel, perhaps, is that he was able to find any at all, let alone 13 tins. But, as he says: “You go anywhere in the world in oil and gas and you’ll hear Scottish accents.”

For how much longer will this be true? Duguid is now a Tory MP representing Banff and Buchan, a rural region heavily reliant on North Sea oil and gas. Despite historically high prices, the industry he joined decades ago is under siege and the future of its next generation of workers is in doubt. The downturn is being driven by a rash of taxes and political attacks. Banks have stopped lending. Britain’s oil and gas industry, one of our prime economic assets and an employer of 150,000 people on good salaries, is being systematically strangled.

Climate activists have had the industry in their sights for years and their campaigns have taken a toll. But it is the recent rounds of poorly designed windfall taxes, and warnings by Labour that it will stop all “new investment” in fossil fuels, that have really sent the industry into a tailspin. Nine in ten capital projects in the North Sea are now on hold. The largest of them is the Rosebank field, where work was due to start extracting 300 million barrels of oil. Activity in new fields is at a 40-year low. Investment has cratered to the point where future production will be below even what is required by the Climate Change Committee’s preferred “pathway” to net zero.

• Aberdeen could lose standing in energy sector due to ‘hostile political environment’

The North Sea is critical to British energy security. Oil and gas supply more than two thirds of our overall energy. Wind and solar, despite all the hoo-ha, supply less than 10 per cent and cannot be relied upon in the wrong weather. About half our oil and a third of our gas is produced in the North Sea. So running it down simply means the UK will have to import more, which is both riskier and more carbon-intensive.

Despite this, the industry has been recklessly treated as a cash cow for years. A tipping point has now been reached with the latest so-called windfall tax, introduced last autumn in Jeremy Hunt’s frantic post-Truss fix-it job. The government’s first windfall tax had been set to expire in 2025. But in November, apparently without much thought, the tax was raised and extended to 2028. The new timeline means it will now capture almost every new project due to start in the coming years, even if oil and gas prices fall. It is no longer taxing windfalls, but is imposing a punishingly high cost on doing business.

The impact is striking. The UK’s biggest producer, Harbour Energy, wound up paying an effective tax rate of 100 per cent last year. Without the extra tax, its profits would have risen eight-fold. As it was, during a bumper year for all its rivals outside the UK, it barely broke even. It soon put all its British projects on ice and started talking about job cuts — precisely what campaigners for the tax told us wouldn’t happen.

Even this isn’t enough for them. Labour has vowed to close down “loopholes”, otherwise known as incentives to invest, if it gets into power. This would be the seventh major change to this tax regime in 20 years, in an industry that thinks in decades. Norway, whose successful windfall tax has been cited so often, has changed its regime just once in that time (to make it more generous during Covid). And Oslo suspends the tax when prices fall below a certain level. As a result, Norway has saved Europe from freezing and is finding ever more supplies. The UK, by contrast, has become an investment pariah. One after another, corporate presentations to shareholders are emphasising a shift away from Britain towards other, more stable political environments, like West Africa.

• North Sea Transition Authority gives green light for 20 carbon storage sites in UK waters

All of this at a time when Europe’s energy crisis is still very much unsolved. Prices may have fallen for now and yes, we made it through last winter because the weather was average and Chinese demand was still in lockdown. But what about the coming winter, and the one after that? The plan, insofar as there is one, is to rely on more imports from the United States or Middle East, which means being at the mercy of global gas markets — while Britain wrecks its own production prospects and fails to open more storage capacity so we can stockpile.

Nor will the levies bring in much revenue. Investors fear they’ll wipe ten years off the life of the industry and bring forward decommissioning costs, which the government is obliged to help fund. Overall, this will cost the Treasury money.

If all of this were actually good for the planet, one could perhaps make some argument in its favour. But it is likely to cause a significant rise in global carbon emissions. If UK production falls, Britain will be forced to buy more European gas and Europe will in turn burn more coal and import more carbon-intensive gas by ship. If the North Sea infrastructure is dismantled, a key part of Britain’s net-zero plans will become much harder. Carbon capture, the burial of CO2 emissions, will require the North Sea’s gas chambers, its pipelines, rigs, terminals and workforce. Instead of nurturing this supply chain, the people in it and their specialist skills, the government is presiding over a mass exodus of talent.

Does any of this sound perverse and shocking? Well, it’s no shock to the government. In private, ministers and their advisers readily admit they acted in haste and messed up the whole thing. They know they could alleviate the damage with relative ease, by applying a price floor to the tax and increasing investment allowances.

This wouldn’t eliminate the threat from Labour policy, but it would at least change the status quo and force the opposition to deal seriously with the trade-offs when it gains power. Yet despite quiet reassurances to the industry, March’s budget came and went without news. Ask government insiders why and they squirm. “The politics are difficult,” they whisper. “It doesn’t play well.” In other words, our government is knowingly engaged in an act of economic vandalism purely for the sake of short-term political gain. It is sacrificing both Britain’s energy security and the climate because “standing up to Big Oil” sounds good in focus groups.

A few weeks ago, the country was appalled to learn that Russia had been sending spy vessels around the North Sea in a possible precursor to sabotage. The truth is that Moscow needn’t bother. If the government has its way, North Sea industry will soon be in irreversible decline. Who needs the FSB when you have the Treasury?