British manufacturers have long complained that high electricity prices make it hard for them to compete with rivals in Europe, the US and China, putting domestic jobs at risk.
As ministers draw up a new industrial strategy, businesses ranging from steel to petrochemicals say addressing electricity costs must be a priority.
How high are the UK’s industrial electricity prices?
Industrial consumers in the UK faced an average price of £258 per megawatt-hour including taxes in 2023, according to the latest available data published by the UK government based on figures from the International Energy Agency.
That is the highest rate of any country of the mostly-Western oil importing nations that comprise the International Energy Agency members.
While 2023 energy prices were inflated by the tail-end of record rises, which was worsened by Russia’s full-scale invasion of Ukraine in the previous year, UK prices have almost always been above the IEA median since 1979.
China and India are not members of the IEA. But the agency’s data suggests a similarly stark gap with them as well: UK prices for energy-intensive industries reached $187 per MWh in 2024, compared with $62 per MWh in India, $70 per MWh in China and just $45 per MWh in the US.
The Chinese gap has widened since 2019, when the UK was paying $94 to China’s $56 per MWh.
Why are Britain’s prices high?
The retail price paid by most consumers is made up of the wholesale price, with taxes and other levies added on top.
Wholesale prices in Britain in recent years have tended to be slightly higher than the EU average and far higher than US equivalents.
One reason for this is that electricity prices in many markets are set by the most expensive source of power generation needed to meet demand, which in Britain is typically gas-fired power plants. In other countries this can be hydropower, nuclear or coal instead, which can be cheaper. US gas is also cheaper than the UK’s because of its rich onshore resources.
Gas-fired power stations in the UK, the EU and some US states also have to pay for their carbon dioxide emissions. In Britain there is a top-up “price floor” on top of the regular rate that is currently £50 per tonne.
In an analysis for the Financial Times, carbon consultancy Veyt estimates that a typical British gas-fired power plant emitting 0.4 tonnes of carbon dioxide per megawatt-hour of electricity produced faces carbon costs of £26.70 per MWh.
What about the other charges?
Costs also include levies to subsidise new wind and solar farms — such as the contracts-for-difference scheme that has helped get the UK’s offshore sector off the ground, as well as costs to pay to run and maintain electricity cables.
A typical large industrial consumer would pay £178 per MWh for electricity excluding VAT, according to analysis from Cornwall Insight covering 2024-2025. Of this, low carbon levies, including payments for backup power supplies, account for £53 per MWh, and network costs account for £23 per MWh. The Climate Change Levy, a tax aimed at making businesses more energy efficient, accounts for another £8 per MWh of that bill.
Many European countries offer more generous exemptions to these levies for heavy electricity users than in the UK. Germany also removed some environmental levies from electricity bills and is paying for them through state funds instead.
“In the policy choices that we’ve made, it’s been towards the consumer paying for the transition,” said Caspian Conran, political economist at consultancy Baringa.
Britain’s geography and climate also means it has focused on relatively costly offshore wind for its clean power push.
How much of a problem is this causing?
Industry has long warned that high electricity and gas costs will force them to cut production, shut up shop or move abroad.
“Across manufacturing, when we ask our members, what are your biggest challenges, they always say, first skills, second energy costs,” says Verity Davidge, director of policy at trade group Make UK.
Sir Jim Ratcliffe, chair of the chemicals giant Ineos, has blamed high energy and carbon prices for “squeezing the life out of the sector”.
On Thursday, CBI director-general Rain Newton-Smith told the trade body’s annual dinner there was “not a business in the room untouched” by high energy costs. “This is an anchor on our ambition,” she added.
Data from the Office for National Statistics said last month that the output of UK energy-intensive industries such as paper and petrochemicals was at its lowest level since at least 1990.
Will prices fall?
Wholesale prices are likely to decrease as more renewable electricity sources are brought online and the number of hours during which gas sets the price decreases.
A government paper in March last year indicated this number of hours in which gas sets the price could fall to as low as 5 per cent in the mid-2030s.
Aurora Energy Research estimates wholesale electricity prices will fall from an average £113.10 per MWh from over the period 2020 to 2024, to £79.30 per MWh in 2025-2029, and £77.70 per MWh in 2030-2039.
However, this is likely to be offset at least in the short term by increases in levies to pay for investment in new low carbon generation and electricity networks.
The Office for Budget Responsibility last year forecast that the costs of the government’s flagship contracts-for-difference scheme to support renewables would rise from £2.3bn in 2024 to £3.1bn in 2029-30.
Separate analysis by Aurora, published in January, found that “total consumer costs” for the electricity system would be more expensive during the 2030s under a scenario in which the UK government reaches its target of developing a “clean power” system by 2030 than under Aurora’s “central” scenario. This sees a slower pace of decarbonisation, which Aurora views as more realistic.
The extent to which these costs feed through to industrial consumers would depend on whether they are exempt from any of those costs.
What might the UK government do about it?
The government is in the middle of reforming the electricity market to try and make it more efficient, and to bring wholesale prices down.
It has rejected the idea of splitting it into one market for gas-fired power and another for renewables, but is considering splitting it into different regions with prices settled locally.
To try and reduce costs for the largest electricity users, the former Conservative government set up the British Industry Supercharger scheme in 2024 that exempted eligible energy-intensive users — about 370 businesses — from low carbon levies, and allows for a 60 per cent reduction in network costs.
There is also a grant programme worth £500mn in total for factories to switch to clean power and improve their energy efficiency.
The government is expected to make the Supercharger scheme more generous alongside the new industrial strategy. But trade groups want them to go further in order to help more businesses.
Make UK wants the government to remove levies from industrial electricity bills and guarantee manufacturers an electricity price of £56 per MWh. This could mean higher costs for other users or taxpayers.
Under Make UK’s proposed scheme, manufacturers would pay back the difference if the actual wholesale price is lower than that.
The government 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.
“We are already bringing energy costs for key UK industries closer in line with other major economies through the British Industry Supercharger — saving businesses £5bn over the next 10 years.”
