The UK downstream sector faces an uphill battle to attract investment in the low-carbon fuels needed for Net Zero unless the UK Government creates a more business-friendly environment, according to UKPIA analysis.
Our research shows that the UK is facing energy costs that are hundreds of millions of pounds more than our close competitors in the US and Europe. The UK is also facing significantly higher costs from the UK Emissions Trading Scheme (ETS) compared to equivalent schemes in competitor countries. And we are falling behind in providing the business incentives needed to attract investment from international companies, with the Inflation Reduction Act looking like a huge draw to US investments.
The knock-on effects of not making the necessary changes to policy could see the UK missing out on the retention of thousands of jobs. It could even lead to increased overall emissions as UK consumers are forced to buy higher carbon fuels imported from abroad.
Our industry experts compared the costs facing UK refineries with those in competitor countries and regions such as the EU and the US Gulf Coast states.
The analysis shows the carbon costs associated with the UK ETS have been consistently higher than competitors in the EU, US Gulf Coast states as well as in China, South Korea and New Zealand. UK gas is around twice as expensive as key US states such as Texas and higher than those in North West Europe. And the story is similar for electricity, where UK industry faces higher costs than countries such as France, Germany, Netherlands and Belgium.
Overall, the cost of operating the six UK refineries could be up to double that of our US Gulf Coast competitors and tens of millions a year higher than EU countries. UKPIA is therefore calling on UK Government to take the following steps so the UK can attract the investment needed for Net Zero:
• Develop a carbon pricing policy that ensures UK manufacturers are not disadvantaged against higher-carbon imports;
• Recognise that all decarbonisation technologies that can be used at scale will be vital to achieving Net Zero. In particular, the role of low-carbon fuels should be acknowledged and supported with targeted incentives;
• Pursue a stable policy and fiscal environment that makes the UK competitive internationally.
The UK was one of the first countries to make Net Zero a commitment in law. However, the nation is now at risk of being left behind internationally in sectors such as refining as other countries implement robust and well-funded policies to deliver industrial decarbonisation.
If the UK does not develop the strong business environment there could be major knock-on effects for investment in decarbonisation technologies such as hydrogen, Carbon Capture Usage and Storage (CCUS) and Sustainable Aviation Fuels (SAF). The country could miss out on the business growth opportunities offered by Net Zero technologies and security of supply could be put at risk by reliance on additional imports.
Ultimately, a failure to attract investment could put the future of the downstream oil sector at risk along with the 300,000 jobs connected to it across the length and breadth of the country.
The downstream oil sector - which covers the refining, distribution and marketing of oil products throughout the country - is vital to the UK’s economic activity and energy security. It aims to play a central role in enabling Net Zero by leading the development and deployment of decarbonisation technologies.
But UK industry competes in an international marketplace, where investment decisions are made on the comparative merits of global projects. Our analysis suggests investments will be made abroad instead of here in the UK unless government takes action.
Over the last year, we have seen that the sector can respond to the loss of supply from Russia by increasing domestic refining output as well as sourcing from other locations. This option won’t be available to us in future if the UK fails to attract the investment it needs for its refineries to thrive. But with the right policy support, the whole of the downstream sector could flourish, and the UK achieve its Net Zero ambitions in a way that benefits both the UK and reduces global emissions.
