GETTING TO ZERO
“The green industrial revolution is a big risk for UK factories that make cars and steel, and for workers in the UK’s oil and gas industry. The Government must work night and day to secure the green factories of the future, or there’s a risk that we’ll lose industrial jobs forever. We need to make the UK an attractive place to invest in green factories. This means cheaper energy, lower business rates, cash incentives, a carbon border tax to stop offshoring, and more.”
The race to Net Zero is rapidly changing the world around us. Drivers are buying electric cars in record numbers, offshore wind farms are generating power right around the UK’s coast, and nascent technologies like low-carbon hydrogen are set to revolutionise British industry.
These changes bring disruption. British factories that cannot adapt to new market pressures face closure, causing job losses in high-carbon industries that cannot easily be replaced. This would exacerbate the long-term decline of British industries and cause political challenges too, because British factories are often concentrated in precisely the communities the Government wants to level up, creating both a policy challenge in turning around these areas’ economic fortunes and a political challenge in maintaining the confidence of left behind communities.
But this disruption also bring opportunity. Businesses and entrepreneurs can develop and scale new low-carbon technologies. British towns, cities and regions can build new industrial clusters. And schools, colleges and universities can train up a skilled workforce prepared for future-facing industries.
The North and the Midlands are uniquely exposed to the challenges and the opportunities from the Net Zero transition. Risks abound, from car manufacturers in the West Midlands, to steel producers in Scunthorpe and South Wales, and high-carbon industries in Teesside and Humberside. But there are huge opportunities too, already seen in Nissan’s investment in electric vehicles in Sunderland, Siemens’ offshore wind turbine factory in Humberside and the ongoing redevelopment of the huge Teesworks site under the leadership of Tees Valley Mayor Ben Houchen.
Geographically, some parts of the UK have significant natural advantages for manufacturing, including access to ports and proximity to some of the best offshore wind resources in the world. Other areas, particularly the West Midlands, have fewer geographical advantages, so a more concerted Government effort will be needed to secure factories and green industrial jobs, such as in the manufacture of electric vehicles.
Realising the opportunities of Net Zero to create green industrial jobs in places like the Red Wall should be a core mission of this Government. To overcome the risks, and to seize the opportunities, the Government will need a detailed and joined up strategy. This report sets out such an approach.
Demand for products
Firms want to know with a reasonable degree of certainty that they can sell their goods. In the past, the Government has adopted “local content” policies, which encourage companies to buy from UK factories. This gives investors in UK factories more certainty over future orders. The United States, under the Biden Administration, has put in place increasingly aggressive local content policies to secure investment in factories.
A stable investment environment
In nascent sectors like carbon capture, utilisation, and storage (CCUS), a stable investment environment is particularly important, because these technologies will initially rely on subsidies and regulations to make the business model viable. The UK’s twice-cancelled competitions for CCUS significantly harmed investor confidence in the UK.
Cheap energy
Energy is a large part of the operating costs of green industries, especially for energy-intensive industries like steel.
Low fixed costs
High fixed costs are particularly challenging for energy-intensive industries like steelmaking, which typically operate on low margins. Unlike taxes on profit (e.g. Corporation Tax), taxes like Business Rates raise the fixed costs of all businesses, including those that are operating on low margins or are currently losing money.
International competition
Businesses need a level playing field, especially in relation to carbon pricing, and predictability when it comes to emissions trading.
Cash incentives
On top of the above fundamentals, firms are attracted to locate factories based on incentives from governments which reduce their upfront investments.
Land availability
Any firm looking to relocate needs an appropriate site. Finding an appropriate site is particularly challenging for industrial developments, which are often large and require specialist infrastructure such as ports.
Connections to the electricity grid
Green factories need high-powered electricity connections, for example for electric arc furnaces.
Skilled workers
On skills, there is lots that the Government can do to increase the supply of skilled workers, as outlined in Onward’s 2021 report, Qualifying for the Race to Net Zero. In this report, we highlight the barriers faced by workers transitioning into green industrial jobs, for example from the oil and gas industry to the offshore wind industry.
Offering targeted tax breaks for companies investing in green factories, including cutting business rates.
Providing cheaper energy costs for heavy industries, matching prices on offer in France and Germany.
Changing rules in renewable energy competitions to help UK-based manufacturers by securing demand for their products.
Matching cash incentives offered by the US and the EU for companies to build battery “gigafactories” and other green factories.
Stopping UK steel producers being undercut by competitors in places with lower environmental standards, like China and India, by introducing a carbon border tax and banning imports of the highest-carbon goods.
Demand for products
Firms want to know with a reasonable degree of certainty that they can sell their goods. In the past, the Government has adopted “local content” policies, which encourage companies to buy from UK factories. This gives investors in UK factories more certainty over future orders. The United States, under the Biden Administration, has put in place increasingly aggressive local content policies to secure investment in factories.
A stable investment environment
In nascent sectors like carbon capture, utilisation, and storage (CCUS), a stable investment environment is particularly important, because these technologies will initially rely on subsidies and regulations to make the business model viable. The UK’s twice-cancelled competitions for CCUS significantly harmed investor confidence in the UK.
Cheap energy
Energy is a large part of the operating costs of green industries, especially for energy-intensive industries like steel.
Low fixed costs
High fixed costs are particularly challenging for energy-intensive industries like steelmaking, which typically operate on low margins. Unlike taxes on profit (e.g. Corporation Tax), taxes like Business Rates raise the fixed costs of all businesses, including those that are operating on low margins or are currently losing money.
International competition
Businesses need a level playing field, especially in relation to carbon pricing, and predictability when it comes to emissions trading.
Cash incentives
On top of the above fundamentals, firms are attracted to locate factories based on incentives from governments which reduce their upfront investments.
Land availability
Any firm looking to relocate needs an appropriate site. Finding an appropriate site is particularly challenging for industrial developments, which are often large and require specialist infrastructure such as ports.
Connections to the electricity grid
Green factories need high-powered electricity connections, for example for electric arc furnaces.
Skilled workers
On skills, there is lots that the Government can do to increase the supply of skilled workers, as outlined in Onward’s 2021 report, Qualifying for the Race to Net Zero. In this report, we highlight the barriers faced by workers transitioning into green industrial jobs, for example from the oil and gas industry to the offshore wind industry.
Offering targeted tax breaks for companies investing in green factories, including cutting business rates.
Providing cheaper energy costs for heavy industries, matching prices on offer in France and Germany.
Changing rules in renewable energy competitions to help UK-based manufacturers by securing demand for their products.
Matching cash incentives offered by the US and the EU for companies to build battery “gigafactories” and other green factories.
Stopping UK steel producers being undercut by competitors in places with lower environmental standards, like China and India, by introducing a carbon border tax and banning imports of the highest-carbon goods.
The report explores barriers to investment in new green industries in detail. For example green industrial projects increasingly use electricity as a substitute for fossil fuels. For example, steel recycling facilities use electric arc furnaces, unlike blast furnaces which use coal to produce new steel (primary steel production). The transition from blast furnaces to electric arc furnaces will therefore significantly increase electricity demand in the steel sector. In addition, new low-carbon primary steel production methods are expected to use hydrogen, further increasing electricity demand if green hydrogen is used.
However, UK energy projects are facing increasing delays to connect to the electricity grid, both for renewable energy generation projects such as wind and solar farms and for demand customers such as data centres. If similar delays are faced by battery gigafactories, then companies may choose to locate their projects overseas. This raises questions about the regulatory regime for grid connections, managed by Ofgem, and whether a more proactive approach to network development is needed to secure green industries. Other issues which may impact on companies’ decisions to invest in the UK are identified in the report.
Time is of the essence
Onward’s analysis shows that the Government has approximately five years to secure investment in factories manufacturing green technologies like electric vehicle batteries and offshore wind turbines. After 2030, European production of mature green technologies like these is likely to level off, significantly weakening the business case to build new green factories in the UK. In addition, steel producers are likely to make significant investments in clean steel technologies this decade. If the UK doesn’t secure this investment then it risks losing its domestic producers forever.
If the Government fails to secure these green factories, then they will go to the UK’s competitors in Europe, the United States and Asia. This would cause the UK numerous problems:
The UK is slipping behind
Over the last decade, the UK developed the world’s largest offshore wind sector, only recently overtaken by China. However, the UK has continually struggled to secure offshore wind manufacturing jobs, with companies preferring to build factories in Europe where governments offered more direct financial support for capital and port infrastructure investment.
The situation improved under the leadership of Theresa May and then Boris Johnson, whose administrations took a more interventionist approach to securing green industrial jobs in the UK. These administrations offered direct financial support for manufacturers, making the UK competitive with countries in the EU, which helped to secure investment in factories for offshore wind, batteries and electric vehicles.
They also de-risked investment in renewable energy projects by expanding the Contracts for Difference scheme, created small funds to support floating wind research and development, and signed industry-specific “Sector Deals”, under which the Government and industry gave tangible commitments to help increase green manufacturing in the UK.
However, this is only the start. The real risks and opportunities on green manufacturing will come throughout the 2020s.
This report is produced as part of our Getting to Zero research programme.
Established a year before COP26, Onward’s Getting to Zero programme is dedicated to developing practical and politically possible ways for the UK to meet its net zero ambitions and lead the world in decarbonisation.
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