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The UK’s Energy Intensive Industries need Lower Electricity Prices, not more Taxpayer Compensation

    The closure of SSI’s steel plant in Redcar along with the further announcement of job losses at Tata Steel has focused minds on the future of the UK’s energy intensive industries, which support 600,000 jobs and account for around 4% of the UK’s economy [link].  The Government has blamed a series of external factors, including the 50% fall in the price of steel over the last year, for the UK’s struggling steel industry. It is undoubtedly the case, however, that Government measures that have increased the cost of electricity for industry are also contributing to the decline of UK energy intensive industries more broadly. Energy constitutes a significant portion of the costs for these industries, accounting for between 20 – 40% of the cost to produce steel [link].

    Europeas a whole is suffering from uncompetitive energy prices. International Energy Agency figures show that average European industrial consumers pay twice as much for their power as their counterparts in the United States[link]. The situation for the UK is even more concerning. Out of all EU member states, the UK’s energy intensive industries face the highest electricity prices (see figure 1).

    Figure 1: EU Member State Electricity Prices for Large Industrial Users


    Source: Eurostat and EEF

    This is a situation that industry has been warning the Government about for a considerable time, and electricity prices are set to increase even further over the coming decade. For example, last year the manufacturing body EEF warned that large industrial energy consumers between 2014 and 2020 face a 47% increase in electricity prices [link], creating an unfavourable environment for any prospective investors in UK energy intensive industries. More recently, EEF highlighted the detrimental impact of the UK’s unilateral Carbon Price Floor (CPF), which is estimated to cost energy consumers £23 billion from 2013 to 2020 [link].

    The Government’s response to the problem of punitively high electricity prices has been to offer energy intensive firms taxpayer compensation, both for the costs of the CPF and renewable energy subsidies. This is merely a temporary sticking plaster to the problem.

    Last Friday the Government convened a Steel Summit to discuss new ways that it can help boost competitiveness. Ministers should come forward with proposals to reduce electricity prices for all of theUK’s energy intensive firms. In the short term Ministers should, for example, consider scrapping the CPF – a burden that is solely faced byUKmanufacturers – along with a continued push to bear down on the costs of renewable energy subsidies.

    In the medium term, substantial shale production could reduce costs for energy intensive industries. The US’ shale boom has led to very competitive electricity prices. As a result, USemployment in energy intensive manufacturing will grow by more than 1 per cent a year until 2020 [link]. Although the potential of shale in the UK is not comparable to the US, the House of Lords Economic Affairs Committee was clear about the danger of delays in shale to energy-intensive industries. They said: “if the UK does not develop its shale resources in a timely fashion, it runs a serious risk of losing the energy intensive and petrochemical industries which depend on competitively priced energy and raw materials [link].

    To summarise, the Government needs to tackle urgently theUK’s uncompetitive electricity prices instead of offering yet more industry compensation from the pockets of taxpayers. It is time to deal with the cause of declining competitiveness rather than merely tackling the symptom.  

    Daniel joined the Centre for Policy Studies as Head of Economic Research in November 2015. He was promoted to Deputy Director in March 2017. Prior to joining the CPS, he worked in research roles for a number of parliamentarians.

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