Britain has the highest industrial electricity prices in the G7, a cost businesses say makes it impossible to compete internationally and risks “deindustrialising” the UK.
Electricity prices are driven by wholesale fuel prices, particularly natural gas, but include taxes and “policy costs” that business groups, including Make UK and the CBI, want the government to cut.
Sky News understands the issue is a “live discussion” within government as ministers finalise the government’s industrial strategy, due to be published next week.
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So what are the options, and why are prices so high in the first place?
How much does UK business pay for electricity?
Industrial electricity prices in 2023 were 46% higher than the average of the 32 members of the International Energy Agency, a group that includes EU and G7 nations that, between them, account for 75% of global demand.
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UK businesses paid an average of £258 per megawatt-hour, according to IEA data – higher than Italy (£218), France (£178) and Germany (£177), and more than four times the £65 paid on average in the USA.
While wholesale prices have been driven up in the last five years by external factors including post-pandemic demand and the Ukraine war, this is not a blip – UK prices have been consistently above the IEA average for decades.
Why are prices so high?
The main determinant is exposure to wholesale gas markets. Gas underpins the UK grid, reliably filling the gaps renewables and nuclear sources cannot fill. Crucially, gas also sets the price in the electricity market even when it is not the primary source of energy.
The UK market uses a “marginal pricing system”, in which the price is set by the last, and thus most expensive, unit of power required to meet demand at any one time.
That means that while renewable sources, initially offered at a cheaper price, may provide the majority of power in a given period, the price for all sources is set by gas-fired power stations providing the balance of supply.
Industrial electricity bills are lower in markets that are less exposed to gas. In France, gas sets the price less than 10% of the time because its fleet of nuclear power stations underpin supply.
What makes up electricity bills?
The biggest single element of electricity prices is wholesale gas costs, which make up 39% of the bill, according to industrial supplier SEFE.
The next largest element is “network costs”, charges imposed for using, maintaining and expanding the grid, which account for 23%. Operating costs are 2%, with VAT adding a further 20%.
The remaining 16% of electricity bills is made up of “policy costs”, levies and payments introduced over the last two decades to subsidise the construction of renewable power capacity, primarily wind power.
Increasing renewable supply and storage to reduce exposure has been the long-term solution favoured by successive governments. Sir Keir Starmer‘s administration has a target of shifting to a “clean power” grid by 2030 and achieving net-zero carbon emissions by 2050, a target Kemi Badenoch describes as “impossible”.
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Some energy-intensive industries (EII), such as chemicals, steel, and cement, already receive support, with a 60% relief on network charges and a reduction of around 10% from the British Industry Supercharger fund, which the government is considering increasing.
What does business want?
Business groups are calling for these policy costs to be lifted and shifted into general taxation, calculating that a 15% reduction in prices would give them a chance of competing more equitably.
Make UK say cutting policy costs would cut 15% from bills, and is also proposing a “contract for difference” for manufacturers’ electricity, a model borrowed from the renewables market.
Under the plan, the government would guarantee a “strike price” for electricity 10% lower than the wholesale price. When prices are higher, the taxpayer would refund business, and when they are lower, industry would pay back the difference.
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Make UK estimate the cost to the exchequer of £3.8bn. They believe it will be cost-neutral courtesy of increased growth. The alternative, they say, is an uncompetitive manufacturing sector doomed to decline.
“We need to see the government remove those costs in the industrial strategy,” says Make UK chief executive Stephen Phipson.
“We believe it will be cost-neutral because of the benefit to the economy of retaining manufacturing in this country. If we don’t see it happen, we will risk deindustrialising the United Kingdom.”
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A government spokesperson said: “Through our sprint to clean power, we will get off the rollercoaster of fossil fuel markets – protecting business and household finances with clean, homegrown energy that we control.”
