UK steel energy premium hits three year high amid global gas surge

British steelmakers face their most significant energy cost disadvantage against European competitors in three years, driven by a spike in global gas prices following the conflict involving the United States, Israel and Iran. Analysis by the industry lobby group UK Steel indicates that the premium paid by the British sector over its French counterpart has climbed to nearly £30 per megawatt hour. This represents the highest level of disparity in the past three years, reversing a trend of gradual improvement seen in previous periods.

The surge in costs is attributed to the UK’s continued reliance on gas for power generation, which is essential for cleaner steelmaking processes such as electric arc furnaces. The current market structure dictates that wholesale gas prices determine electricity costs, even for energy generated by cheaper sources like wind or solar. The closure of the Strait of Hormuz by Iran in response to the bombing campaign has exacerbated the situation, causing global gas prices to soar. In contrast, French electricity prices are largely influenced by nuclear generation, while German prices remain affected by coal usage.

This pricing gap is particularly acute for the UK because the European Union serves as the primary market for British manufactured goods, with approximately 75% of exported steel, valued at around £3 billion, destined for the continent. Although the disparity with France had narrowed to £18 per megawatt hour last year, it remains well below the £153 peak recorded in 2022 during the energy crisis triggered by Russia’s invasion of Ukraine. The gap with Germany has also decreased slightly this year to roughly £12.

Under the current administration, most government-imposed costs on heavy industry electricity bills were removed last year. However, further reductions are seen as challenging in the short term without establishing more renewable energy capacity or providing direct subsidies. Peter Brennan, director general of UK Steel, argued that direct subsidies are the only viable option to assist steelmakers. The group has proposed a price cap mechanism estimated to cost £51 million annually, where the government covers costs above a set level and the industry contributes if prices fall below it.

Brennan stated that British steelmakers are competing with one hand tied behind their backs, noting that despite government action, electricity prices remain vastly higher than those of European and global competitors. He emphasised that rebuilding British manufacturing is impossible while forcing steelmakers to pay substantially more for electricity than their rivals.

Separately, the government announced measures on Monday to support over 100,000 workforce opportunities across eight key growth sectors. These jobs plans aim to assist young people in finding work, focusing on professional services, defence and construction. Similar initiatives for financial services, clean energy and life sciences have already been unveiled, with plans for advanced manufacturing and the creative industries expected to follow. A government spokesperson stated that the measures tackle industry’s primary concern by reducing electricity bills by up to 25% for over 10,000 manufacturing businesses and cutting costs for hundreds of the most electricity-intensive firms by around £1 billion per year.