Soaring energy costs are taking their toll on businesses across the North-East. Deputy Business Editor Kate Bowman looks at the impacts of the volatile market and explores what is being done to address the problem.

FOR many companies in the region, energy bills have more than doubled in the past two years and for some big players, such as car manufacturer Nissan, global chemical company Huntsman and steelmaker Corus, it has meant paying out millions.

The cost is crippling. While some companies can afford to grit their teeth and bear it, for the short-term at least, others are already feeling the devastating effects and are being forced to make redundancies, reduce production or close.

These pressures are being felt by businesses across the UK and companies, organisations and bodies have long been lobbying the Government to address the nation's future energy needs.

The Department of Trade and Industry (DTI) is carrying out an energy review to put in place policies to secure clean and affordable energy for the long-term. The review aims to refocus on the nation's goals to reduce carbon emissions, maintain reliable energy supplies, promote competitive markets and make energy affordable to the poorest.

The UK relies heavily on fossil fuels for energy and is a net importer of gas and fast becoming a net importer of oil. With this in mind, the DTI is keen to promote competitive markets in the UK and overseas. In its review summary, it states that progress in introducing truly open energy markets in the EU has been slow over the past three years.

Dr Stan Higgins, chief executive of the North-East Process Industry Cluster (Nepic), which represents 350 chemical and pharmaceutical companies in the region, says it is the present volatility of the market that is causing the problems.

He said: "It is not just about prices. If everybody else is paying the same price then we'd be happier, but they are not. It is about competitiveness and having stability in pricing, otherwise you get peaks and troughs that create havoc with purchasing.

"The price of gas might be X amount yesterday, Y today and it'll be Z tomorrow. Companies don't know what price they should be paying - it's all over the place. There is supposed to be a free market in Europe, but there isn't, because the control is in the hands of just a few companies. It is a ridiculous situation where in winter they were not releasing gas to the UK market, despite the fact we were paying inflated prices.

"Britain should be creating more of its own power. The more energy producers we have in the UK the more we will have a free market. We are buying gas and electricity from Europe because we haven't got enough of our own capacity - it is a dire situation."

One of the priorities laid out in the energy review is to ensure a reliable energy supply for the long-term future.

Alan Hall, regional director of the engineering employers' federation (EEF), says: "The Government has got to fix the stability and continuity of energy supply so that the market performs in a much more satisfactory way than it has been doing.

"There is no reason to think that this present situation is going to ease in the next 12 to 18 months. There is a high demand for energy generally and the prices would not have peaked so much had it not been for the fact that we are no longer able to rely on our own resources. We are now relying more on our cousins on the Continent and our attempt to tap into their markets is giving the results we are seeing. The Continental market is much more restrictive and less flexible and many companies are tied into long-term contracts that have huge penalties tied to them if they pull out.

"This market situation has to be addressed by Government. It is putting manufacturers at a competitive disadvantage because companies on the Continent are not experiencing as many problems as we are here.

"We believe that there has to be a good energy mix in the future and that means using coal, gas, renewables and nuclear power. I can't see us running without a nuclear option."

At the time of the 2003 Energy White Paper, Our Energy Future - Creating a Low Carbon Economy, the building of nuclear power plants was seen as an unattractive option. The review will reconsider the role of nuclear electricity generation, which provides nearly 20 per cent of the UK's electricity needs.

Dr Higgins believes the answer to a free market and stable pricing lies with more power stations

"The Government policy in the past put a stop to building nuclear power stations, but it realises now that the situation has to change. We do need to utilise renewable energy, like wind, but it will never be enough. It will only ever be a very small percentage of the energy produced. In reality, for every nuclear power station we would need thousands and thousands of wind farms," he says.

"The government is saying that it's going to have to change and it is already gearing up the industry to help them with the next generation of nuclear power stations, which many people believe is inevitable."

Present high energy prices are having huge impacts on companies across the North-East. Steelmaker Corus said in March that its energy bills were £20m higher in the first quarter of the year compared with last year, while Nissan's combined gas and electricity bill is expected to double from £7m in 2004 to about £14m this year.

Dr Higgins says: "Some companies in the North-East are paying millions more this year than last year for their gas. For many, the cost has more than doubled and in some cases, companies have gone from being profitable to not being profitable. Companies are gritting their teeth and trying to get through it, but it is not an easy time and, in the long-term this cannot be sustained.

"If you look at pharmaceutical manufacturing in the North-East the energy and power input to the product was eighth, ninth or tenth on the list of costs, now it is second or third. So the price of the product goes up and, in some cases, rises above what it would cost to make elsewhere - that's when you find work moving elsewhere. My worry is that we run out of time with some of these companies. People can't afford this situation - it is crazy.

"The process industry is massive in the North-East and is crying out for help with these energy problems. Without the industry, this country can't pay its way. In the North-East, the process industry contributes £8.8bn to the economy - if that goes, then the North-East will look like a desert in economic terms."

There are also fears that rising energy costs are already having a negative impact on inward investment by major companies.

A spokesman for global chemical company Huntsman says: "As the price of UK energy rises, competitiveness of energy-intensive industries in the UK suffers. Moreover, foreign businesses are being deterred from investing here because of the comparatively high cost of energy."

Huntsman, which employs 1,500 people in the North-East, is one of the top ten industrial consumers of energy in the UK and has seen its energy costs rise to more than £60m a year.

"In the past three years, the price of a year's natural gas and electricity in the UK has more than trebled and it is our strong view that market factors have not justified the extent of such significant increases in price. UK industry is suffering by a staggering estimated £3bn to £7bn per year in additional energy costs.

"Huntsman understands that this is a very important, high-profile issue that the Government is taking seriously. We believe it is imperative that action is taken now."

* How is your company adapting to higher energy costs? Contact Kate Bowman on (01325) 505097.

Energy choices the UK must make in the future

FOSSIL FUELS: Coal, oil and gas are all fossil fuels that provide a huge amount of the world's total energy demands, including heating, transport and electricity. The fuels are burnt to heat water to generate steam to drive turbines.

Advantages: A large amount of electricity can be generated at one power station; stations can be built in many locations; transporting the fuel is relatively easy.

Disadvantages: Burning fossil fuels produces carbon dioxide, which contributes to global warming; fossil fuels are not renewable; demand can outstrip supply.

NUCLEAR: Nuclear power is generated using uranium. It provides nearly 20 per cent of the UK's energy needs. That figure is forecast to fall to seven per cent by 2020 as most of Britain's nuclear power stations are scheduled to close in the next 20 years. The Government's energy review will look at the possibility of building nuclear power stations. France is the world's most intensive user of nuclear electricity, where more than 70 per cent of electricity is nuclear-generated. Other major users include Ukraine, South Korea and Japan.

Advantages: Zero carbon emission; reliable access to uranium; produces high amount of energy from a relatively small amount of fuel; produces little waste.

Disadvantages: The waste it does produce is very dangerous and must be sealed and buried for many years; a lot of money has to be spent on nuclear power plant safety.

WIND: Wind power is generated when the wind turns a rotor, which turns a generator to produce electricity. More than 500MW of wind capacity was installed last year - twice the amount in 2004.

Advantages: Wind is a free and renewable source of energy; produces no waste; land beneath can be used for farming.

Disadvantages: Not reliable source; people find wind farms unsightly; can be noisy.

TIDAL: The tidal movements of water can be used to turn turbines to provide energy. The largest tidal power station, and the only one in Europe, is in the Rance estuary, in northern France.

Advantages: Energy supply is reliable; no waste; once built it is not expensive to maintain

Disadvantages: Only generates energy for about ten hours a day when tide is flowing in or out; could have damaging effects on the ecosystem; expensive to build.

Another option would be to have offshore turbines using the same principle as a wind farm, only underwater.

SOLAR: Solar cells convert the sun's rays into electricity. Potential to build solar power stations.

Advantages: solar energy is free; no waste.

Disadvantages: Only works during the day; unreliable source; expensive to build.

Where the damage has been done

* Chemicals company Terra Nitrogen suspended ammonia production at its Billingham plant in November after gas prices hit a record £1 a therm. At the time, it was cheaper for Terra to import ammonia than it was to make its own.

* Street lighting manufacturer Transmission and Lighting, part of the Balmer Lindley Group, announced the closure of its North-East site in January, with the loss of about 100 jobs. The group blamed increased costs and energy prices for the closure of the factory on the Newton Aycliffe Industrial Park, County Durham.

* Brick maker Dyson Refractories closed its factory in West Hunwick, County Durham, with the loss of 50 jobs. The group blamed overseas competition, rising energy prices and a fall in orders.

* Elementis Chromium, in Eaglescliffe, Teesside, announced 114 redundancies earlier this year and closed one of its kilns after blaming high energy costs for continued losses at the plant.

* Circatex, in South Shields, South Tyneside, ceased trading in March, with the loss of about 200 jobs. It blamed high energy costs and a loss-making contract.

* Nestle Rowntree announced in March it was cutting 275 jobs in York and Newcastle, blaming energy prices and a competitive market.

* Glass manufacturer Potters Ballatini, in West Auckland, County Durham, stopped production for three months over the winter because of energy costs.

* Engineer William Cook Defence, in Stanhope, County Durham, moved to night production to save energy.