British steelmakers have experienced a significant deterioration in their competitive position relative to European counterparts regarding electricity costs, with the premium paid over French steelmakers climbing to nearly £30 per megawatt hour according to industry group UK Steel. This represents the highest differential recorded in three years and reflects broader challenges facing the UK manufacturing sector.
The cost disparity stems from the UK’s heavy dependence on gas for power generation, particularly important for electric arc furnace steelmaking used in cleaner production methods. Market mechanisms result in wholesale gas prices determining electricity costs across all generation sources, including renewables. Recent geopolitical tensions involving the US, Israel, and Iran have contributed to surging global gas prices after Iran restricted access through a key shipping strait in response to military action. By contrast, France benefits from lower electricity costs driven primarily by nuclear power generation, while Germany relies substantially on coal.
The electricity cost gap carries significant implications for UK manufacturing competitiveness, particularly given that approximately 75% of British steel exports, valued at roughly £3 billion, are destined for EU markets. The gap with France had narrowed to £18 per megawatt hour in the previous year following a three-year decline, though it remains well below the £153 peak reached in 2022 during the global gas crisis triggered by Russia’s invasion of Ukraine. The differential with Germany stood at approximately £12 this year.
UK Steel director general Peter Brennan has advocated for direct government price subsidies as the primary solution, proposing a price cap estimated to cost approximately £51 million annually. Under this mechanism, the government would cover costs when prices exceed the cap while receiving payments when prices fall below it. The government previously removed most policy-driven costs from industrial electricity bills during the preceding year and has framed reindustrialization as a national priority.
Separately, the government announced workforce development initiatives across eight designated growth sectors, including defence, construction, and professional services, designed to create over 100,000 employment opportunities primarily for young workers. A government representative stated that recent measures would reduce electricity bills by up to 25% for manufacturing businesses and deliver approximately £1 billion in annual savings for highly energy-intensive operations.
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