Clean steel is a prize that the UK cannot afford to let slip from its grasp, argues Wilf Lytton, Associate Fellow at the leading centre-right think tank, Bright Blue. To secure the opportunity for change, governments must do more to incentivise investment in green steel production.
Green steel is an indispensable building block of the net zero future we are heading towards, and the UK’s steelmakers are poised to play a leading role in producing it. The Government too has signalled its intent to decarbonise the sector quickly and cost-effectively with plans to “align existing [industrial] policy with net zero and invest in critical shared infrastructure”.[i] These plans build on analysis published by the Climate Change Committee, which presents a clear case for bringing emissions from the UK’s iron and steel industry close to zero by 2035[ii] to meet the UK’s interim carbon budgets. Doing so will be of strategic value to the UK as markets become increasingly climate-regulated, and will also help secure new investment and skilled jobs in UK manufacturing.
Yet, the promise of a net zero future does not guarantee the role of UK steelmakers in delivering it. Indeed, having lurched from one crisis to another, optimism of a green future within the industry is fragile: a decade of overcapacity in the sector has depressed steel prices globally, wiping out UK steelmakers’ margins, while the recent US-China trade war and uncertainties around Brexit undermined UK exports. As the Covid-19 pandemic began to bite in the first half of 2020, steel demand dropped, forcing plants to cut production, furlough workers and take on mounting debt. Now, with energy prices at several times average levels[iii], many UK steelmakers have again been forced to suspend production and face losing market share to rivals in Europe and elsewhere where foreign governments have already moved to insulate their industries from the energy price spike.[iv]
If the entire UK steel sector is to decarbonise within the next 15 years, steelmakers will need to move quickly to transform their business models and invest in new technologies. This will be much harder to achieve so long as the sector remains on a crisis footing. Therefore, it is vital that emissions policy goes hand in hand with addressing the structural challenges facing the sector to avoid delaying the net zero transition.
Having acknowledged the need to “change the policy landscape to overcome these issues”[v], the focus of government efforts in the near-term should be on creating a policy landscape that supports business models for UK green steel production – that is, steel produced without emissions, using clean energy and high recycled metal content. Recently-announced policies are laying the foundations of a UK green steel sector with the Industrial Energy Transformation Fund, Industrial Decarbonisation Challenge, and Clean Steel Fund to support the development of homegrown green steel technologies. However, we now need to go further and bring those technologies into full-scale deployment.
However, three key challenges need to be solved before green steel can become a commercial success in the UK. First, the country’s steelmakers must be able to compete on a level playing field, both internationally and within the UK. Second, steelmakers will need access to low-carbon infrastructure in order to produce green steel. And finally, there will need to be markets for green steel.
The creation of a level playing field that addresses competitive distortions in energy costs, carbon and trade policy is vital to rebuilding confidence in the sector and supporting investment in UK steelmaking. The transition to green steel will see steelmakers rely increasingly on low-carbon electricity – both directly in the smelting of steel and indirectly through hydrogen production. UK steelmakers have historically faced higher electricity prices than their counterparts in other parts of the world[vi] and, if UK steelmakers are to remain competitive, managing energy costs must form an essential plank of industrial and energy policy going forward. Regulations that govern carbon pricing and trade will also need to be geared towards encouraging the cleanest forms of steelmaking. The Government’s Industrial Decarbonisation Strategy nods to reform of the UK Emissions Trading Scheme (ETS). The design of benchmarks in particular will be an important tool for incentivising the least polluting modes of steelmaking. To be an effective instrument, carbon pricing will also need to be reflected in UK trade policy to account for the embedded carbon of imported goods and ensure equal treatment of the carbon content of products sold in the UK.
The level playing field principle should also apply domestically, taking account of the geographic diversity of steelmaking sites across the UK. In developing low-carbon industrial clusters, policy must not neglect the sizable portion of UK industry that operates outside the five or six industrial clusters identified in the Government’s Net Zero Strategy[vii] (NZS). Managing the net zero transition at dispersed sites which represent approximately half of industrial emissions will be critical to the overall success of the NZS.
Second, production of green steel will depend on access to affordable electricity and hydrogen. As one analyst observed, “the scale of investment needed in accompanying [low-carbon energy] infrastructure will ultimately dwarf the needs of steel plants themselves”.[viii] The 5GW of low-carbon hydrogen by 2030 proposed in the Government’s Hydrogen Strategy marks a step in the right direction, but the quantities required by the steel industry alone to decarbonise will far exceed this amount. Greater clarity is also needed over the amount and cost of hydrogen that will become available to the steel industry, specifically over the next decade.
Finally, the market for green steel products is undeveloped and, to date, consists of a limited number of companies and buyers clubs with differing levels of commitment and varying definitions of green steel. Earlier this year, the Government announced that firms bidding for large contracts will need to have a credible plan to reach net zero in order to be considered[ix], expanding on the 2020 review of public procurement guidance set out in The Green Book. As part of the tender process, the Government might also consider the environmental credentials of suppliers to bidding firms that might otherwise have limited incentives to decarbonise. The Competition and Markets Authority (CMA) also recently launched a consultation on the role that competition law can play in supporting net zero. These initiatives are encouraging and can be complemented by other measures to stimulate demand for green steel.
With COP26 underway, the UK will have an opportunity to work with international partners who share our ambition for clean steel in developing protocols for trade and carbon taxation, bringing green steel closer to becoming a commercial proposition. As such, we urge the Government to commit to delivering a fossil free UK steel sector by the mid-2030s, in line with the CCC’s projections for the least-cost pathway to meeting net-zero emissions across the whole economy by 2050. This will provide an unambiguous direction of travel for the sector and a timeframe against which other policies can be measured, while signalling to markets globally that the UK is committed to green steel.
Wilf Lytton is an Associate Fellow at Bright Blue. This essay is from the ‘Prospectus for GREENSTEEL’ published by the GFG Alliance. Views expressed in the rest of the prospectus are those of the authors, not necessarily those of Bright Blue.
References
[i] HM Government. (2021). IndustrialDecarbonisation Strategy p20
[ii] Climate Change Committee. (2020). Sixth Carbon Budget
[iii] BBC. Energy prices: Steel boss says government offers no solution
[vi] Reuters. Factbox: How is the EU responding to record-high energy prices?
[v] HM Government. (2021). Industrial Decarbonisation Strategy p19
[vi] MakeUK. (2021). UK Steel Electricity Price Report
[vii] HM Government. (2021). Net Zero Strategy: Build Back Greener
[viii] Mission Possible Partnership. (2021). NET-ZERO STEEL
[ix] HM Government. Firms must commit to net zero to win major government contracts (2021)
