Wood Panel Industry

– in Westminster Hall at 4:30 pm on 28th June 2006.

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Photo of Martyn Jones Martyn Jones Labour, Clwyd South 4:30 pm, 28th June 2006

I am grateful for the opportunity to debate this issue. First, congratulations are in order to the Department of Trade and Industry and the Government on giving such high priority to energy issues and the question of Britain's future energy provision. In this era of increasing emissions and climate change, taking steps now to reduce the negative effects of our energy consumption has never been so important.

Today, I want to draw attention to an aspect of our energy policy that I believe has been overlooked and which has the potential to inflict serious damage on one of the greener industries in the UK. The renewables obligation, introduced in 2002, requires all commercial electricity suppliers to generate a specific and increasing proportion of their energy from renewable energy sources.

A supplier can demonstrate compliance with the obligation by the redemption of renewables obligation certificates, which are issued to accredited generators for each megawatt-hour of eligible generation. Alternatively, suppliers can pay a buy-out price, originally set at £30 per megawatt-hour but subsequently adjusted in accordance with the retail prices index. Renewables obligation certificates can be traded and provide a financial incentive for generators to reduce their dependence on fossil fuels. It is laudable that the renewables obligation is stimulating the growth of the renewable energy market and encouraging Britain's more conventional electricity generators to consider alternative technologies and methods as well as contributing financially to their development. I understand that the renewables obligation has been particularly successful in driving the development of onshore wind technology.

An unintended consequence of the obligation and the financial support that it offers to electricity generators is that it threatens the survival of the UK's wood panel industry by introducing subsidised competition for the same timber resources that are the lifeblood of that industry. Panel producers use as raw material timber-based materials including sustainable forest products, sawmilling products such as chips and sawdust and post-consumer recycled wood to produce chipboard, oriented strand board and medium density fibreboard, or MDF, which, as you might remember, Mr. Cook, was popularised by the BBC's "Changing Rooms" in the DIY boom of the late 1990s. On the other hand, you might not remember.

Aside from DIY, the main markets for the industry's products are furniture production and construction, and with a turnover of more than £650 million the UK's eight manufacturing facilities produce nearly 3.5 million cu m annually. Together, UK wood panel manufacturers supply between 70 and 80 per cent. of our national market. It is a high-volume, capital-intensive industry, and it directly and indirectly employs about 7,000 people, several hundred of them in my constituency at Kronospan.

Next to the sawmill industry, wood panel manufacturers are the largest consumers of wood raw materials sourced from UK sustainable forestry and reprocess some 90 per cent. of available recycled wood into boards, promoting carbon storage while preventing a reusable resource from going to landfill. Those timber-based raw materials are in greater demand than might be imagined since the introduction of the renewables obligation. Some UK generators have turned to the same timber products as a valuable source of biomass fuel. In fact, I was on a Welsh Affairs Committee visit in Aberthaw power station when we were considering energy in Wales, and I saw mounds of perfectly clean sawdust being burned in the power station, mixed with coal.

Other fossil fuels can also be used in conjunction with wood and sawdust. In return, the power stations get renewables obligation certificates that, as I described earlier, can be sold on to other electricity providers at a higher price than producing the electricity itself offers. It is a profitable way of generating electricity and the UK energy industry has caught on. The award of renewables obligation certificates to coal-firing generators has risen by 392 per cent. in the past two years and now represents one fifth of all certificates that have been issued.

The point is not the use of fuel, which has gone on since mankind inhabited caves, but the provision of financial support for the use of a raw material that is known to be essential for use in product manufacture by a generating technology that is not new and in which relatively little investment is required for co-firing. The issue, therefore, is about scale and the potential for wood-supply distortions as a consequence of co-fired power stations moving towards an increased use of UK-sourced wood.

One study funded by the Minister's Department shows that, with the aid of subsidy, co-fired power stations have acquired the potential to outbid the panel industry in the price that it can economically pay for its wood raw material. That potential also exists with purpose-built, biomass power stations, but to a lesser degree. Such competition has the effect of forcing up the price, which on the one hand may provide a needed benefit for forestry, but which equally erodes the competitiveness of wood processing industries.

The wood panel industry operates on low margins and is subject to significant foreign competition, so its ability to pay more for that resource is therefore limited. It is also struggling at the moment with energy prices, as are many energy-intensive industries. If the wood panel industry and, potentially, other wood-processing industries were to be forced out of business, the consequences for the forest-based supply industry and downstream users could be severe.

Timber supply is not something that can be quickly or easily increased. I am informed that on paper there should be more than enough wood available in the UK to supply both the existing industries and the developing wood fuel market. Much of the potential biomass is not, however, either economically or physically available due to ownership, terrain and infrastructure issues. Furthermore, most combustion plant is restrictive as to the specification of fuel that can be burned.

The statistics that we have on wood availability show that there is already tightness in the supply of sawmill product. As a consequence, price rises have been incurred and wood panel producers are reporting lower than average availability of small roundwood. In that context, it is worth noting that Drax Power, for instance, has been sourcing wood from the Kielder forest, a key source of supply for wood panel producers. There is little scope for the amount of wood types quoted earlier to expand in the present climate, and importing wood for wood panel manufacturing is not an option. We will end up importing wood panels, to the detriment of our industry and our balance of payments.

I understand that co-firing has been supported in order to stimulate the development of the energy crop market, which is an extremely commendable aim but, unfortunately, to date it has been less than successful. In the absence of significant volumes of energy crop on the ground, and with questions being asked about the sustainability of importing biomass fuels for co-firing, what biomass fuel would generators turn to?

The wood panel industry fears that, as suggested by the terms of reference of the co-firing review, if co-firing were to be encouraged further to provide a greater contribution towards renewable energy objectives, the potential would be there for the rapid demise of the wood panel industry because there would be a period before sufficient energy crop was available when demand for timber would outstrip supply. It is an esoteric point, but it is essential that the Government grasp it because of the dire consequences for the industry if they do not.

I will not dwell on the environmental case, but although co-firing with biomass might be more environmentally sustainable than sole reliance on fossil fuels, it still pollutes more than alternative sustainable technologies. Co-firing is also extremely inefficient, with combustion efficiencies only 33 to 37 per cent. when co-fired with coal. Co-firing is marginally cleaner than reliance on fossil fuels, but not so green that UK energy policy can afford to turn the lights out on a responsible and environmentally conscious industry such as the wood panel industry.

On support mechanisms, the renewables obligation had an objective to support the development of new technologies, which is surely not a claim applicable to co-firing. Although it is understood that the RO has failed in a number of respects, I ask whether it is an appropriate mechanism for the support of co-firing, especially as the energy sector could receive substantial benefit from carbon credits awarded under the EU emissions-trading scheme. To compound the problem, in the future if the large combustion plant directive encourages co-fired power stations to convert to 100 per cent. biomass, demand for UK wood waste supplies could far outstrip supply. Without substantive action taken now, the wood panel industry's days are numbered.

The current strain placed on the wood fibre market could be alleviated considerably by reducing the general obligation for biomass combustion in co-firing, and at the same time removing barriers and further incentivising energy crops such as short-rotation coppice or miscanthus. More energy crops would mitigate against the potential crisis faced by the wood panel industry and further incentivise existing energy generators to convert to sustainable sources of biomass. It is clear that energy crops must be encouraged if energy generators and the wood panel industry are to co-exist.

There are a great many possible solutions to the problem that would allow the renewable energy sector and the wood panel industry to flourish alongside one another. Providing push incentives for the supply side of the equation as well as pull incentives is worthy of consideration. In terms of broader biomass policy, I am told that many millions of tonnes of biomass currently go to landfill, and I wonder what consideration is being given to using that discarded material as a fuel.

As I said, one of the UK's leading wood panel manufacturers is based in my constituency. Kronospan employs 670 people in very good jobs and has the largest single site in the UK. In 1999, it won the Queen's award for environmental achievement in industry and during the past five years improved its own energy efficiency by 20 per cent.

The impacts are beginning to be felt. Indeed, for the first time since the company has been at the site—some 29 years, I believe—it had to stop for four days over Christmas. Normally, it is a 365-day operation. Although there may be technical or other reasons why decisions may be made that some co-fired generators will not burn wood, there is no restriction in policy terms to prevent the scenarios that I have alluded to from occurring. Without a thorough examination of the issues and a review of the co-firing rules in the renewables obligation, the Minister's undertaking to minimise the potential for a negative impact on co-firing and other industries that use biomass as feedstock is not achievable, and the 670 jobs at Kronospan might well be lost, along with 6,500 others nationwide. That is as needless as it would be regrettable. What is most evident is that whatever the Government do, they cannot do nothing.

Photo of Margaret Hodge Margaret Hodge Minister of State (Industry and the Regions) 4:42 pm, 28th June 2006

I congratulate my hon. Friend Mr. Jones on securing this debate on behalf of his constituents. I know that he has pursued the issue with great vigour and has had meetings with Ministers and officials in my Department about it.

The debate highlights the tensions and potential conflicts that can arise when we pursue priorities for energy policy and sustainability alongside what I have responsibility for, which is maintaining and encouraging the continuation and development of our manufacturing base. I shall try to respond to some of the issues that my hon. Friend raised, particularly the concerns that the wood panel sector has about the impact of co-firing on the cost of its raw materials. We must consider those issues in the context of the tension between our broader sustainability agenda and our manufacturing policy.

The wood panel industry is important. In preparing for the debate today, I learned a great deal about it. Its contribution is growing, because it provides a sustainable solution to many of our problems. Wood panels are used in a range of the Government's capital projects, whether housing, hospitals or schools, and as individual consumers we use wood panels in our homes. We therefore want to maintain the British base. The wood panel industry has undertaken a great deal of good work in modernising its construction methods, and we want to hold on to that. For example, it has been involved in initiatives such as prefabricated building modules for housing, which now make a considerable contribution to the housing market, accounting for an 8 per cent. share. The timber frame sector is helping to produce housing more quickly and at a better cost using the engineered beams to which my hon. Friend referred, which are made from chip and oriented strand board and offer structural components that can compete directly with steel and concrete. That is all good stuff that we want to hang on to. Combined with chipboard decking, that offers an off-site manufactured flooring solution, which is becoming increasingly popular and is now the material of choice for carpeting, flooring, decking and shuttered applications, so a lot of good stuff is going on.

Let us consider the wood panel industry in the round. It makes a significant contribution to the United Kingdom economy. Its turnover is nearly £1 billion, with a gross added value of £275 million. My hon. Friend said that 7,000 people are employed in the industry; the figure that I have is 6,000, but the number of people involved is certainly substantial. We are conscious that increasingly the industry is having to compete. We import more than we export—we import about £800 million worth of goods and we export £100 million of goods. That gives us some idea that the cost pressures arising from reasonable developments in sustainable energy can have a big impact and provide a genuine threat. I recognise that from what my hon. Friend has said.

Why are we in the present situation? Our drive to ensure a sustainable economy has led us to look for new ways in which to provide sustainable energy. We are striving to achieve not only a sustainable innovative and productive economy that delivers high levels of employment and manufacturing activity, but a society that promotes sustainable communities and personal well-being. We want that to be delivered in ways that protect and enhance the physical and natural environment and use our resources and energy as efficiently as possible. We need to reconcile those competing objectives and build them as interlinked ambitions.

Economic growth is obviously as vital today as it has always been, but we face new environmental challenges. They become particularly potent in the global world as many other countries expand their industries at a time when the global environment is struggling to cope with the impact of existing economic and manufacturing activity. In that context, undoubtedly our consumption of natural resources throughout the world is unsustainable. We need to be more far-sighted in respect of the solutions to the environmental challenges that we face.

In that context, recycling inevitably plays a major part in the solution. Wood is a versatile product. It has economic value; it is used in buildings, where the panel industry plays its part; and, when it is finished with, it can be recycled, re-used or burned and the energy recovered. In addition, the wood industry sustains jobs. We are therefore considering competing uses of jobs, wood as a source of sustainable energy and wood providing the products that we want and need.

Let me draw attention to our commitments under "Kyoto and Beyond" in respect of the threats of environmental change. As my hon. Friend will know, we set ourselves the tough target of reducing carbon emissions by 20 per cent. by 2010. In our 2003 energy White Paper, we flagged up the important role that biomass can play in that. We expect that it may become one of the largest contributors to our renewables generation mix. Through our policies, that is what we are hoping to use to meet the target of 20 per cent. of electricity produced from renewables by 2020. In our response to the report of the Royal Commission on Environmental Pollution on biomass as a renewable energy source, which was published in 2004, we agreed that biomass has the potential to make a significant contribution to the reduction of carbon dioxide levels, if it is substituted for fossil fuel in the generation of heat and electricity.

How can we achieve those objectives and reconcile them? We need to expand the biomass industry. We have set ourselves targets and, to achieve them, we need to increase the amount of energy cropping by as much as 125,000 hectares, not including crops that might be developed for transport use—biofuels, biodiesel and the like. With colleagues in the Department for Environment, Food and Rural Affairs, we are actively encouraging the development of biomass crops and directly supporting the planting of short rotation coppices using willow and miscanthus—a species of woody, perennial grasses that came from Asia. The Government agreed with the royal commission that an integrated approach is needed to ensure that our industrial, agricultural and environmental policies cohere effectively to ensure maximum, optimum benefits from our biomass energy.

The renewables obligation, to which my hon. Friend referred, was introduced in 2002. It provides a substantial market incentive for all eligible forms of renewable energy by providing support for biomass in the form of renewables obligation capital grants for biomass heat and power generation, planting grants for establishing energy crops, set-up costs for producer groups to harvest and market biomass, and certificates that can be claimed under the renewables obligation if biomass is co-fired with coal. By the end of 2004, generation from renewable sources eligible under the renewables obligation stood at 3.1 per cent. of the UK's electricity supply. In the 2003 energy White Paper, we committed to review the obligation in 2005-06. That review is not a fundamental rethink of our renewables policy but an opportunity to look at amendments to improve the effectiveness of the obligation in certain areas. We published a preliminary consultation document, setting out the Government's proposed policy, on which we sought stakeholders' views in March 2005. We followed that with a statutory consultation document, published in September 2005, in which we set out our proposed policy and sought views on the specific changes.

One outcome of "Renewable Obligations", the DTI review, was the lowering of the biomass purity requirement from 98 to 90 per cent to bring more waste woods, which are currently sent to landfill, to be burned. That seems wasteful—my hon. Friend said that he had seen clean materials going into landfill—but I am told that biomass material goes to landfill because it is too contaminated for either processing into other products or burning. However, I shall look again at that matter, because it is an important means by which we could try to make progress. As my hon. Friend knows, interest in co-firing has exceeded the 10 per cent. cap that came into effect in April this year. There is also growing interest in clean coal and carbon capture and storage, which form a significant part of our long-term generation mix. We are looking again at co-firing as part of the ongoing energy review. We are focusing on the potential contribution that it can make to our energy policy goals and the level of support that it will require. I am conscious that that may create additional problems for my hon. Friend and the industry that he seeks to support in the debate today.

We understand the importance of investor confidence in the renewables obligation. We have said that a careful assessment of the impact of any changes on other renewable technologies and other biomass-using industries will be a key factor in that review. I can give him that commitment. When we have published the energy review, which is on course to be published in July before the recess, we will make a high-level statement on co-firing. If we decide to propose changes in respect of co-firing or any of the other matters, we will have a full consultation. I urge my hon. Friend to discuss the matter further with the Minister for Energy.

The Wood Panels Industry Federation has made a significant contribution to the energy review and representatives have met the Minister for Energy. My hon. Friend the Member for Clwyd, South has also met and consulted officials from the renewable policy and development section of the Department of Trade and Industry and voiced the concerns that he has expressed today about co-firing. Those views will certainly be taken into account. We are trying to take a tough set of decisions to reconcile our objectives, as I hope he appreciates.

We are also talking to our colleagues at DEFRA in a biomass taskforce and trying to put together what is described as a biomass action plan, to grow that industry. We hope to publish that document next year. Clearly, if we can improve that part of our policy, that will help us to reconcile the manufacturing and the sustainable energy objectives for which we are striving.

DEFRA has also been looking into the use of non-food crops for more sustainable improved homes; it will publish the findings of that study in November. There will always be a conflict, as I am sure my hon. Friend appreciates, between balancing all the aspects of our economic, social and environmental ambitions. It would be unreasonable to prejudge the outcome of the consultations, but I hope that I can reassure my hon. Friend that the concerns raised by the industry, many of them through him, are being listened to. I assure him then we come to implement policies flowing from the energy review, the effects on the wood panel sector will be taken into account. I hope that in that context, my hon. Friend can engage with the Department, and with relevant Ministers, to ensure that he can continue to protect an industry and a factory in his constituency that undoubtedly makes an important contribution not only by providing local people with jobs, but by providing more modern ways of construction, which are themselves sustainable, so meeting one of our objectives.

Question put and agreed to.

Adjourned accordingly at three minutes to Five o'clock.