UK Steel Industry Grapples with Higher Energy Costs Than Europe: An In-Depth Analysis, September 2025

The United Kingdom's steel industry is confronting a significant challenge: energy costs that are substantially higher than those faced by its European competitors. This situation not only impacts competitiveness but also directly influences production decisions and investments in green technologies within the sector. This in-depth bulletin will meticulously analyze the causes, implications, and potential solutions to this pressing issue.

1. The Energy Cost Landscape: UK vs. Europe

UK steel producers are paying up to 50% more for electricity than their counterparts in France and Germany. Specifically, average electricity prices for 2024/2025 in the UK hover around £66 per MWh, compared to £50/MWh in Germany and £43/MWh in France. This disparity is estimated to impose an additional electricity cost burden of £37-50 million annually on the UK steel sector.

The primary reason for this price gap lies in the UK's reliance on natural gas for power generation, which inflates wholesale electricity costs. While environmental levies contribute less to UK steel's energy bills compared to other countries, wholesale prices—heavily influenced by expensive natural gas—remain the dominant factor driving up costs. Furthermore, UK steel producers receive only 60% compensation for network charges, significantly lower than the 90% provided in France and Germany, meaning network charges are up to ten times higher for the UK industry.

2. Far-Reaching Impacts on the Steel Sector

High energy costs have had, and continue to have, substantial impacts:

• Investment Decisions: Elevated energy costs adversely affect investment decisions, particularly in greener production technologies. For instance, ArcelorMittal abandoned plans to convert two plants in Germany to carbon-neutral production due to high energy costs, despite available subsidies. This illustrates how energy prices directly influence green transition investments.
• Production Cost Structure: Energy accounts for 20%-40% of total steel production costs, making these energy price differences critically important for the economic survival and competitiveness of UK steel manufacturers.
• Global Competitiveness: The pressure from high energy costs exacerbates the UK steel industry's vulnerability to global overcapacity and less ambitious trade policies, compounding challenges beyond energy itself.
• Transition to Green Technologies: The UK steel sector anticipates doubling its electricity consumption as it shifts towards electric arc furnace (EAF) production, which consumes approximately 0.5 MWh per tonne of steel. For sites converting from blast furnaces to EAF, electricity use could nearly quintuple, making affordable electricity even more essential for future competitiveness.

3. Government Policy and Support

The UK Government has introduced some relief schemes, offering 60% compensation for network charges and exemption from certain renewables policy costs. However, these schemes remain less generous than their European equivalents.

Policy recommendations and industry calls include:

• Market Reforms: Industry leaders have called for market reforms akin to France’s ARENH system (which regulates access to nuclear-generated electricity at stable prices).
• Accelerated Renewable and Nuclear Development: Accelerating the development of renewables and nuclear power would reduce reliance on gas and, consequently, wholesale prices.
• Continued Support: The Energy Crisis Commission recommends continued support via schemes such as the British Energy Supercharger and the Industrial Energy Transformation Fund, along with targeted initiatives like a Green Steel Innovation Fund to support the sector’s decarbonization and competitiveness.
• Industrial Strategy: The UK government is expected to address industrial energy costs in its upcoming industrial strategy announcement, planned for mid-2025, aiming to improve support and reduce price disparities.

4. Conclusion and Outlook

In summary, UK steel producers face significantly higher energy costs than their European peers, primarily due to expensive wholesale electricity prices driven by natural gas dependence and lower network cost compensation. This gap affects competitiveness, production choices, and green investment decisions, fueling calls for government intervention through enhanced subsidies, policy reforms, and support for cleaner energy generation to lower the costs and enable the sector’s sustainable transition.

References:

• UK Steel. (2025). Industrial Electricity Prices – Barrier to growth and competitiveness.
• ECIU. (2025). Steel industry energy bill up by £1.8bn due to gas crisis – analysis.
• Carbon Brief. (2025). Factcheck: Why expensive gas – not net-zero – is keeping UK electricity prices so high.
• Tokio Marine HCC. (2025). UK Metals Sector Report 2025.
• GMK Center. (2025). Electricity prices in Europe showed mixed trends in June.
• Solar Power Portal. (2025). UK Steel: high electricity prices hindering move to greener tech.