Electricity costs put UK steelmakers in worst position in three years against EU rivals

British steelmakers pay nearly £30 more for each MWh of electricity than French competitors because Britain is more exposed to gas prices. Gas is important in UK power generation, and the wholesale gas price sets the electricity price across the market. A recent surge in global gas prices therefore raised British electricity costs sharply.

France has a different generation mix. Its nuclear reactors mainly determine electricity prices, so French industry is less directly tied to the gas market. The UK’s system can also price electricity from cheaper sources, including wind and solar, using the higher gas-linked wholesale price.

The difference matters because steelmaking needs large amounts of electricity, especially as producers use electric arc furnaces for cleaner production. The gap was about £18 per MWh last year, but has now reached almost £30. UK Steel says this leaves British producers at a serious competitive disadvantage in European markets.

A megawatt hour, or MWh, measures electricity consumed over time. One MWh equals 1,000 kilowatt hours. The unit is useful for industry because factories consume electricity in very large quantities. Steel plants can therefore face substantial extra costs even when the difference per unit looks modest.

A £30-per-MWh gap means a plant using 10,000 MWh would pay £300,000 more than a comparable French plant, assuming all other costs were equal. That example shows how quickly the difference grows. Steelmaking is particularly exposed because electric arc furnaces use electricity to produce the intense heat needed to melt steel inputs.

The article describes the current gap with France as almost £30 per MWh, compared with £18 last year. It also remains below the £153 gap recorded in 2022. Even so, UK Steel argues that the premium weakens British manufacturers competing in European export markets.

An electric arc furnace, or EAF, is an industrial furnace that uses an electric arc to create heat and melt steel materials. It is important for cleaner steelmaking because it can operate using electricity instead of relying on the same fuel-intensive methods used in some traditional production routes. The article identifies EAFs as crucial to cleaner steelmaking.

The furnace requires substantial electricity because melting steel needs extremely high temperatures. Its operation also involves powerful equipment running at industrial scale. That makes the electricity price a central production cost. Every increase in the price of each MWh feeds directly into the cost of producing steel.

This creates a particular problem for British producers. UK electricity costs are almost £30 per MWh higher than France’s, while the UK is trying to expand industrial production. If EAF-based steelmaking grows, Britain will need either cheaper electricity, more renewable supply, or support that prevents high prices from undermining competitiveness.

Electricity markets often use the cost of the last generation needed to meet demand to establish a wholesale price. In the system described here, gas-fired power can determine that price. This means the market price is not simply the average cost of every generator producing electricity.

Consequently, electricity from wind or solar can receive a price shaped by gas even though those sources cost much less to produce. When gas becomes more expensive, the effect can spread across the market. Businesses then pay more for electricity regardless of which source physically supplied their power.

This mechanism is especially important for Britain because the country relies heavily on gas for power generation. It helps explain why British industrial electricity prices rose when global gas prices surged. The government has removed many policy-related charges, but UK Steel says further help may require faster renewable development or direct price support.

The article links the price surge to the US-Israeli war on Iran and Iran’s closure of the Strait of Hormuz. The closure came in response to Donald Trump’s bombing campaign. Because the conflict disrupted a major route connected with global energy markets, analysts and UK Steel linked it to soaring global gas prices.

Those higher gas prices mattered directly in Britain. The UK relies on gas for a significant part of electricity generation, and its market uses the wholesale gas price to determine the wider electricity price. The increase therefore affected electricity from other sources too, including wind and solar power.

British steelmakers felt the result through a much larger cost gap with France. UK Steel estimates that the premium has risen to almost £30 per MWh, the highest level in three years. The episode shows how an international energy shock can quickly weaken the position of electricity-intensive British industries.

Electricity costs depend partly on which fuels dominate a country’s generation system. France’s prices are mainly determined by its nuclear reactors. Nuclear generation therefore gives France a different price-setting structure from Britain’s gas-dependent system. Germany, meanwhile, still relies heavily on coal, despite its pollution.

These differences help explain why Britain’s industrial electricity prices do not move in the same way as its European rivals’. In Britain, gas can set the wholesale price even when cheaper wind or solar power is also generating electricity. France’s nuclear-heavy system is less directly tied to that gas-linked mechanism, while Germany’s coal use shapes its own market mix.

The current gap is almost £30 per MWh against France and about £12 against Germany. The comparison matters because the EU is a major destination for British manufactured products. About 75% of exported British steel goes there, worth about £3bn.

Building more cheap renewable generation could reduce Britain’s reliance on gas when electricity is produced. It would change the country’s generation mix and could reduce exposure to global gas shocks. The article cautions that expanding renewables is difficult in the short term, so this approach is more structural than immediate.

Direct subsidies would provide faster help to electricity-intensive businesses. UK Steel proposes a price cap estimated to cost about £51m a year. The government would pay the difference when prices rise above the cap, while industry would pay the government if prices fall below it. That would limit companies’ exposure without simply removing market prices.

The government has already removed most policy costs added to heavy industry’s electricity bills. It also says bills will fall by up to 25% for more than 10,000 manufacturing businesses. The choice is therefore between changing supply over time and supporting industrial prices more directly now.