The short version
- British steelmakers face an electricity cost premium of nearly £30 per megawatt hour compared to French competitors, the highest level in three years.
- The disparity stems from the UK's market structure linking power prices to wholesale gas rates, which have spiked due to geopolitical instability involving Iran and the Strait of Hormuz.
- Industry lobbyists argue that direct subsidies are necessary to close the gap, while the government points to recent bill reductions as evidence of its reindustrialization strategy.
British steel manufacturers are facing their most challenging competitive environment in three years regarding energy costs, according to new analysis. The financial premium that UK firms pay for electricity compared to their counterparts in France has climbed to nearly £30 per megawatt hour. This widening gap places significant pressure on the sector at a time when the government is actively promoting industrial growth and manufacturing revitalization.
The surge in costs is largely attributed to recent geopolitical developments involving military conflict between the United States, Israel, and Iran. These tensions led to the closure of the Strait of Hormuz, causing global natural gas prices to spike sharply. Because the UK electricity market sets wholesale power prices based on the cost of gas generation, even renewable sources like wind and solar are priced higher in this system. This structural dependency has left British industry vulnerable to international fuel market volatility.
In contrast, European competitors benefit from different energy mixes that insulate them from these specific gas-driven shocks. France’s electricity pricing is primarily determined by its extensive nuclear power infrastructure, which operates independently of gas markets. Germany, while still relying heavily on coal for a significant portion of its generation, also faces different cost dynamics. Consequently, the UK steel sector finds itself at a distinct disadvantage when competing in the European market, which absorbs approximately 75 percent of British steel exports valued at around £3 billion.
The current disparity represents a notable deterioration from recent trends. Over the previous three years, the gap between UK and French electricity costs had been narrowing, reaching £18 per megawatt hour last year. While the current premium is substantial, it remains well below the peak of £153 recorded in 2022 during the energy crisis triggered by Russia’s invasion of Ukraine. Similarly, the cost difference with Germany has decreased slightly this year to approximately £12, suggesting that the UK’s position relative to some neighbors is improving even as it worsens against France.
Energy expenses have long been cited by businesses as a primary barrier to investment and expansion in Britain. For political leaders aiming to reindustrialize the country, high power costs present a formidable obstacle. The reliance on gas for power generation is particularly problematic for modern steelmaking processes that utilize electric arc furnaces, which are essential for cleaner production methods. Without affordable electricity, the transition to greener manufacturing techniques becomes economically unviable for many firms.
Industry representatives argue that market mechanisms alone will not resolve this issue in the short term. Peter Brennan, director general of UK Steel, has stated that direct government subsidies are the only viable option to level the playing field. The lobby group has proposed a price cap mechanism estimated to cost £51 million annually. Under this plan, the government would cover costs when prices exceed a set threshold, while the industry would repay funds if prices fall below that level.
Critics within the industry contend that British manufacturers are effectively competing with one hand tied behind their backs. Despite previous government actions to remove certain policy-related costs from heavy industrial electricity bills under Prime Minister Keir Starmer, the fundamental price disparity remains vast. The argument is that rebuilding British manufacturing cannot succeed if domestic steelmakers continue to pay substantially more for power than their global competitors.
The government maintains that it is addressing these concerns through broader industrial strategies. Officials announced new measures designed to create over 100,000 workforce opportunities across eight key growth sectors, including advanced manufacturing and defense. A spokesperson highlighted efforts to reduce electricity bills by up to 25 percent for more than 10,000 manufacturing businesses and cut costs for hundreds of intensive users by approximately £1 billion per year.
While the administration points to these financial interventions as proof of its commitment to reindustrialization, the structural issue of energy pricing remains unresolved. The gap between UK power costs and those in nuclear-heavy France continues to widen due to external geopolitical factors beyond domestic policy control. Whether future investments in cheap renewables or direct subsidies can effectively bridge this divide remains a central question for British industrial policy.
As plans for financial services, clean energy, and life sciences are rolled out, the steel industry watches closely. The effectiveness of current support measures will likely be judged by whether they can mitigate the impact of volatile global gas markets on domestic manufacturing competitiveness. Until the underlying energy market structure changes or significant subsidies are implemented, UK steelmakers may continue to struggle against European rivals with more stable power costs.
Sources behind this briefing
Go to the original reporting
- The Guardian World↗Electricity costs put UK steelmakers in worst position in three years against EU rivals
