Introduction
The UK steel industry is facing an urgent crisis due to high industrial electricity prices, which are 50% higher than those in Germany and France. This pricing disparity is hindering competitiveness, limiting investment, and threatening the long-term sustainability of the industry.
In response, UK Steel, the country’s leading industry association, has proposed a bilateral contract for difference (CfD) mechanism as a viable solution to ensure affordable energy supply. This mechanism aims to:
- Fix electricity prices for the steel sector, ensuring cost parity with European competitors.
- Protect against price volatility, enabling long-term planning and investment in low-carbon technologies.
- Share risks and rewards, with steelmakers paying back the government when prices fall below an agreed threshold.
The CfD proposal is seen as a practical, market-based approach to strengthening the industry, making it more competitive, investment-friendly, and environmentally sustainable.
In this blog, we will explore the electricity cost crisis, analyze the proposed CfD solution, and discuss its potential impact on the UK steel industry and the broader economy.
UK Steel Industry Calls for Capped Energy Prices Amid Trump Trade War
The British steel industry is at a crossroads, grappling with soaring energy prices and the escalating consequences of former US President Donald Trump’s trade war policies. Steel manufacturers in the UK are calling for government intervention in the form of capped energy prices to help them remain competitive with European counterparts like France and Germany.
UK Steel, the leading industry lobby group, has proposed the introduction of a contract for difference (CfD) mechanism to ensure more predictable and affordable electricity costs for industrial users. This measure, they argue, would prevent UK producers from operating at a severe disadvantage due to the country’s disproportionately high electricity prices.
With the global steel market experiencing an oversupply crisis—exacerbated by Chinese exports and US-imposed tariffs—the British steel sector finds itself in an increasingly precarious position. As major producers sound the alarm, the UK government is being urged to act swiftly to safeguard jobs, economic stability, and the long-term viability of the domestic steel industry.
The Energy Price Crisis in the UK Steel Industry
Electricity costs are a major burden for UK steel manufacturers, with prices significantly higher than in other European countries. According to a report by consultancy firm Baringa, UK steel producers pay approximately:
- £68 per megawatt-hour (MWh) for electricity.
- £52 per MWh in Germany.
- £44 per MWh in France.
This substantial difference in energy costs means that British steel products are more expensive to manufacture, putting them at a disadvantage compared to their European counterparts.
Why Are UK Energy Prices Higher?
Several factors contribute to the UK’s higher electricity prices for industrial users:
- Reliance on Gas-Fired Power Generation – The UK heavily depends on natural gas, and global fluctuations in gas prices directly impact electricity costs.
- Limited Access to Cheaper European Electricity – The UK has fewer subsea cables importing electricity from mainland Europe, unlike Germany and France.
- Lower Government Support – The British government provides fewer subsidies for industrial energy users compared to other European nations.
As a result, steelmakers in the UK are struggling to compete with cheaper European imports, leading to potential job losses and the risk of factory closures.
The Impact of US Tariffs on UK Steel Exports
Another major challenge facing the UK steel industry is the 25% tariff imposed by the United States on British steel exports.
How Significant is the US Market for UK Steel?
The United States accounts for around 9% of the value of the UK’s steel exports. With these tariffs in place, British steel manufacturers face reduced demand from one of their largest foreign markets, forcing them to look for alternative buyers.
This situation is worsened by global steel overproduction, particularly from China, which floods the market with cheaper steel products, further driving down prices and making it difficult for UK manufacturers to remain profitable.
Frank Aaskov, Director of Energy and Climate Change Policy at UK Steel, emphasized the urgency of the situation:
“Uncompetitive electricity prices must be addressed to ensure the steel industry can thrive, secure thousands of jobs, and safeguard national steel production as geopolitical turbulence increases.”
Without government intervention, UK steel manufacturers risk losing market share, resulting in job cuts, factory closures, and long-term damage to the country’s industrial sector.
UK Steel’s Proposal: A Contract-for-Difference (CfD) Mechanism
To address the electricity cost crisis, UK Steel is proposing a Contract-for-Difference (CfD) system.
How Would a CfD Work?
A CfD is a government-backed price control mechanism that ensures industrial users have stable electricity prices. Here’s how it works:
- If electricity prices rise above a threshold (strike price), the government compensates steelmakers for the difference.
- If prices fall below the threshold, steelmakers must pay back the difference to the government.
This system provides much-needed protection from market volatility, helping UK steel manufacturers plan production costs with greater certainty.
Benefits of a CfD for the UK Steel Industry
- Price Stability – Steel manufacturers will no longer face extreme fluctuations in electricity costs.
- Greater Competitiveness – A CfD would bring UK energy prices closer in line with Germany and France, reducing the competitive disadvantage.
- Encouraging Investment – More predictable energy costs could attract investment into the UK steel industry, preventing factory closures.
According to Baringa’s analysis, setting the strike price at similar levels to France would add just 17p per MWh to consumer bills, which is estimated to cost the average British household less than 50p per year.
Government Response to the Proposal
The UK government has announced a £2.5 billion investment plan for the steel industry. This funding is intended to:
- Support the transition to cleaner steel production methods.
- Upgrade existing manufacturing facilities.
- Explore alternative solutions to high energy costs.
However, industry leaders believe that reducing electricity prices should be the priority, as high energy costs remain the biggest challenge for UK steel producers.
A government spokesperson stated:
“The government is already bringing energy costs for steel closer in line with other major economies through a package of measures that fully exempts eligible firms from certain costs linked to renewable energy policies.”
While these measures help to some extent, the steel industry argues that a CfD would provide a long-term solution to high energy costs.
The Risk of Inaction: What Happens if No Action is Taken?
If the UK government does not intervene, the consequences for the steel industry could be severe:
- Job Losses and Factory Closures – High costs could force steelmakers to cut jobs or shut down operations, resulting in economic hardship for thousands of workers.
- Increased Dependence on Foreign Imports – If UK steel production declines, the country will become more reliant on imported steel, weakening national industrial self-sufficiency.
- Loss of Competitiveness in Global Markets – UK steelmakers will struggle to compete internationally, leading to further declines in exports and revenues.
To prevent these outcomes, urgent action is needed to ensure UK steel remains a viable industry.
The Future of the UK Steel Industry: What Happens Next?
If the government adopts the bilateral CfD proposal, the UK steel industry could experience a major revival, with:
✅ Lower electricity costs, ensuring competitiveness.
✅ Greater investment in modernization and decarbonization.
✅ Increased job security for thousands of workers.
✅ Stronger global positioning as a green steel leader.
However, if no action is taken, the consequences could be severe:
❌ Further decline in UK steel production.
❌ More job losses and factory closures.
❌ Greater reliance on foreign steel imports.
❌ Missed opportunities in green steel production.
Conclusion: The Need for Government Action
The UK steel industry is at a critical turning point. Without government-backed intervention, rising electricity costs and US tariffs will continue to threaten its survival.
Key Takeaways
- Electricity costs in the UK are up to 50% higher than in France and Germany, making UK steel uncompetitive.
- The 25% US tariff on British steel exports has further weakened the industry, reducing demand from a key export market.
- UK Steel is calling for a government-backed CfD mechanism to stabilize energy costs and provide price certainty.
- The UK government has allocated £2.5 billion for the steel industry, but industry leaders argue that reducing electricity costs should be the priority.
- Without intervention, the UK steel industry risks job losses, factory closures, and increased reliance on foreign imports.
The time to act is now. Implementing a CfD mechanism would provide long-term stability for the industry, safeguarding jobs and ensuring that British steel remains competitive on the global stage.
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