07.12.21

The UK’s uncompetitive electricity costs are a barrier to decarbonisation says new UK Steel report

• UK Steel’s new report, “A Barrier to Decarbonisation”, shows that UK steel producers today pay 61% more for electricity than their competitors in Germany and 51% more than in France. 
• In absolute terms the electricity price gap has grown significantly this year, rising from an average of £20/MWh between 2015-2020 to £34/MWh this year. 
• This means the UK’s disproportionately high electricity prices have cost UK steelmakers an extra £90m this year, and has cost £345m over six years, the equivalent of almost two years capital investment in the sector. 
• Steel production is a highly electricity intensive process – with power accounting for up to 20% of the manufacturing costs of steel and for some is a higher input cost even than labour. As such, increases in the cost of electricity damage competitiveness and are a drain on much needed investment.
• All options available to the steel sector to decarbonise rely on a move to highly electricity-intensive equipment. With some of the most expensive industrial electricity prices in the world, the business case for investment in these technologies in the UK is currently difficult to make. 
• This undermines the ambitious pledges the UK Government made at COP26 including a commitment to “near-Zero” steel production in the UK by 2030 and creating a UK market preference for near-zero steel. 

A new report released today from UK Steel shows the significant electricity price disparity the UK Steel sector experiences compared to its European counterparts, with the sector facing an extra £90m of electricity costs this year compared to what it would be paying in Germany. Over the last six years, the price disparity has cost the sector £345 million. The average annual capital investment in the UK’s steel sector, for comparison, is £200m. 

Steel is an electricity and trade intensive industry. Consistently higher UK electricity prices increase production costs, reduce available capital and deters inward investment, severely reducing the sector’s ability to continue to innovate, modernise and transition towards CO2 free steel production. All solutions for decarbonising the steelmaking process will increase electricity consumption. Converting the UK's blast furnace steel production to hydrogen-based steelmaking could increase electricity consumption by 250%, while a complete shift to electric arc furnace production would increase consumption by 150%. At current power prices it is estimated it would cost almost £300 million extra to run a hydrogen-based steel sector in the UK than in Germany. 

The report makes powerful economic and environmental arguments for the UK Government to implement measures now to level the playing field and provide UK steel producers with competitive power costs. The main recommendations of the report are to: 

• To use the UK’s new independent state aid power to improve the energy intensive industries package, reducing the costs of renewables levies and carbon costs passed through by electricity generators
• Follow the example of the French and German Governments and provide network cost reduction for the most electricity-intensive industries 
• Introduce an Industrial wholesale cost containment mechanism to prevent damaging price spikes emerging in the future.

Commenting on the release of UK Steel’s report, Gareth Stace, Director General of UK Steel, said: 

“The UK steel sector is a big user of power, consuming as much electricity as 800,000 homes annually. We are also highly trade intensive, importing 70% of our steel needs and exporting 45% of everything we make. The UK’s disproportionately high electricity prices have a hugely negative impact on the sector’s ability to compete, trade, attract inward investment and ultimately be sustainable in the long-term. 

“In the last year, the gap between electricity prices paid by UK and European steelmakers has almost doubled costing the sector an eye-watering £90 million in additional costs. This is money that could have instead been invested back into businesses if the UK had a similar approach to industrial competitiveness to its neighbours. 

“The recent public recognition by the Prime Minister that the price gap needs to be tackled is hugely welcome. But the proposed solution of investment in new nuclear will simply not have the immediate impact on electricity prices that the steel sector needs. I hope the Government recognise the need to implement the steps set out in the report in addition to their long-term plans for investment.

“The arguments for doing so are not simply economic but social and environmental. As the report makes clear, the sector will struggle to decarbonise, investing in new, highly electricity intensive equipment, if UK power prices remain this far above those of our competitors. In turn, the long-term future of steel production in the country, and the jobs it provides, rest heavily on our ability to transition to net-zero. In short this is an issue of existential importance of the sector. 

“There is a real opportunity for the Government and industry to work together in achieving our shared Net-Zero ambition and this report sets out the crucial first steps the Government can now take. There are seven easily implementable policy recommendations in this report which would eliminate the price gap and we look forward to working with Government to bring them to reality as urgently as possible” 

The Prime Minister’s remarks on electricity prices can be found here
The COP26 announcement on the ambition for near-zero steel can be found here.

About UK Steel: 
UK Steel is the trade association for the UK steel industry. It represents all the country’s steelmakers and a number of downstream steel processors.

UK Steel Policy Priorities: 
A copy of UK Steel’s current policy priorities as well as key facts and figures about the steel sector can be found here:https://www.makeuk.org/insights/publications/uk-steel-laying-the-foundations-of-a-sustainable-steel-sector   

UK steel in numbers:

• Produces 7 million tonnes of crude steel a year, around 70% of the UK’s annual requirement (annual demand of 10.2MT used rather than 2020 figure)
  
• Employs 33,700 people directly in the UK and supports a further 42,000 in supply chains
• The median steel sector salary is £34,299, 33% higher than the UK national median and 45% higher than the regional median in Wales, and Yorkshire & Humberside where these jobs are concentrated
• Makes a £2.1 billion direct contribution to UK GDP and supports a further £2.7 billion through our supply chain 
• Makes a £1.7 billion direct contribution to the UK’s balance of trade via our exports
• 96% of steel used in construction and infrastructure in the UK is recovered and recycled to be used again and again