UK steel electricity costs hit three-year high

The UK steel industry is facing its most challenging electricity cost environment in three years, with a significant premium over its European counterparts.1 This disparity, exacerbated by soaring global gas prices, threatens the competitiveness and future investment in the sector.

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The UK steel industry's electricity cost crisis

The UK steel industry finds itself in a critical position regarding electricity costs. Analysis by UK Steel reveals that the premium paid by British steelmakers over their French rivals has surged to almost £30amegawatt hour (MWh), marking its highest level in three years. This substantial cost difference places immense pressure on an industry vital to the UK economy.

A competitive disadvantage

High electricity prices directly undermine the UK steel industry's ability to compete internationally. Peter Brennan, director general of UK Steel, highlighted this challenge, stating, "British steelmakers are being asked to compete with one hand tied behind their backs." He added that despite government action, UK electricity prices remain "vastly higher" than European and global competitors, and "the gap with France is getting worse." This competitive disadvantage impacts not only current operations but also future investment and broader reindustrialisation efforts in the UK.

The role of global gas prices

A primary driver of the escalating electricity costs for UK steelmakers is the nation's reliance on gas for power generation. Global gas prices, particularly following geopolitical events such as the US-Israeli war on Iran, directly influence wholesale electricity costs in the UK. Even cleaner steelmaking methods, such as electric arc furnaces, are not immune, as their electricity supply remains tied to these volatile wholesale gas prices. The UK's wholesale electricity price is largely set by gas power plants, making the industry highly vulnerable to fluctuations in the global gas market.

Benchmarking against European rivals

The stark contrast in electricity prices between the UK and its European neighbours is a persistent issue for the steel industry.

The French contrast: a £30 MWh premium

The premium British steelmakers pay over their French counterparts has reached almost £30amegawatt hour (MWh), a three-year high. This gap had narrowed to £18 per MWh last year but remains significantly below the £153 per MWh peak seen in 2022 during the global gas market crisis following Russia's invasion of Ukraine. Electricity prices in France are predominantly influenced by its nuclear power generation, offering a more stable and often lower-cost energy source compared to the UK's gas-dependent system.

Broader European price disparities

While the gap with France is particularly acute, UK steelmakers also face higher electricity costs compared to Germany. The difference with Germany stood at approximately £12 per MWh this year. These disparities are crucial, as the EU represents the main market for about 75% of exported British steel, valued at approximately £3 billion.

Understanding the drivers of high costs

The reasons behind the UK's elevated industrial electricity costs are multifaceted, stemming from its energy generation mix and specific policy frameworks.

UK's gas-dependent power generation

The UK's energy market structure means that the wholesale price of gas often dictates the price of electricity, even from sources that are cheaper to produce, such as wind or solar power. This reliance on gas-fired generation makes the UK particularly susceptible to global gas price shocks. In contrast, countries like France benefit from a significant nuclear energy base, while Germany still relies heavily on coal for a portion of its electricity generation, leading to different price dynamics.

Impact on electric arc furnaces

Electric arc furnaces (EAFs) are a cornerstone of modern, cleaner steelmaking, offering a pathway to decarbonisation for the industry. However, their operation is highly electricity-intensive. As the UK steel sector aims to electrify through investment in new EAFs, competitive electricity prices become even more critical. The current high electricity costs, driven by gas prices, directly impede the economic viability of this transition.

Policy and network charges

Beyond wholesale prices, policy and network charges contribute significantly to the overall electricity bill for UK businesses. While government measures have aimed to reduce some of these costs for energy-intensive industries, the impact has been limited.

Economic impact and government response

The high cost of electricity has profound implications for the UK steel industry and the wider economy, prompting various government interventions and industry proposals.

Threats to competitiveness and investment

The persistent electricity price gap threatens the profitability and long-term investment in UK steel. High prices depress profit margins and make the UK a less attractive location for investment. This directly impacts the government's ambition to reindustrialise Britain.

Current government support initiatives

The UK government has introduced several schemes to alleviate the burden of high electricity costs on manufacturing businesses. A government spokesperson stated that efforts are underway to reduce electricity bills for manufacturing businesses, "cutting costs for hundreds of our most electricity-intensive businesses by around £1 billion per year". They also mentioned reducing electricity bills by up to 25% for over 10,000 manufacturing businesses.

Industry calls for subsidies and price caps

Despite government action, UK Steel argues that direct subsidies are the only immediate solution to help steelmakers. The lobby group has proposed a price cap, estimating an annual cost of about £51 million. This mechanism would involve the government paying the difference when prices exceed the cap, with the industry repaying if prices fall below it.

Beyond subsidies: a vision for energy abundance

While subsidies offer short-term relief, a sustainable future for UK steel requires a fundamental shift in the energy paradigm.

Challenging the scarcity narrative

The prevailing narrative of energy scarcity, which has dominated for decades, often leads to a focus on rationing and managing limited resources. However, this perspective overlooks the potential for systemic change. Instead of accepting high energy costs as an unavoidable reality, there is an opportunity to challenge this scarcity mindset and advocate for a future where energy is abundant and affordable. This approach moves beyond incremental fixes, seeking to transform the underlying energy system.

Rebuilding the energy system for affordability

Achieving truly affordable energy for industries like steel necessitates rebuilding the energy system from scratch. This involves accelerating investment in grid capacity and connections, strengthening clean energy generation (including nuclear and renewables), and reforming the marginal pricing model for electricity. By creating a system that delivers terawatt-hours of the cheapest, cleanest energy possible, the primary operational cost for energy-intensive industries could be significantly reduced, fostering a more competitive environment.

Long-term solutions for industrial power

Long-term solutions for industrial power extend beyond direct subsidies. They include facilitating greater use of Corporate Power Purchase Agreements (CPPAs) to secure predictable prices for clean power, enabling behind-the-meter and private wire solutions for on-site generation, and expanding access to carbon capture, utilisation, and storage (CCUS). These measures, combined with ongoing energy market reforms, can reduce grid dependence, lower network costs, and mitigate exposure to energy price volatility, ensuring a more stable and affordable energy supply for UK steel.

Securing the future of UK steel

The future of the UK steel industry hinges on decisive action to address its energy cost disadvantage.

Advocating for systemic change

The current crisis highlights the urgent need for systemic energy market reforms. While government support schemes are welcome, they are often reactive and may not address the root causes of the problem. Advocating for a long-term strategy that prioritises energy abundance, through significant investment in generation and infrastructure, is crucial. This approach would not only benefit the steel industry but also contribute to the broader reindustrialisation of the UK and enhance overall economic competitiveness.

The path to sustainable competitiveness

The path to sustainable competitiveness for UK steel lies in transforming energy from a significant cost burden into a strategic advantage. By moving towards an energy system that delivers abundant, affordable, and clean power, the UK can empower its energy-intensive industries to thrive, invest, and innovate. This visionary approach ensures that British steelmakers can compete on a level playing field globally, securing jobs and contributing to a robust, modern industrial economy.

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